It’s a hallmark of modern-day life in our globalised world that we expect to receive our products as quickly and as cheaply as possible.
Business owners and managers of supply chains have responded to this expectation with a supply chain principle known as “just in time” (JIT) to improve efficiencies and reduce costs.
JIT is designed with a primary goal in mind: to reduce the lead-time and costs associated with delivering a product. Meaning manufacturing and delivery structure is based on a commitment to ensure the customer’s expectations of timeliness, quality and delivery are always met.
The JIT approach is used broadly in today’s supply chains by SMEs – particularly e-commerce companies – as their margins tend to be slim, so efficiency and costs are key.
JIT allows each company in the chain to only manufacture what the next company in the chain requires and orders, using their resources only for what has been agreed and paid for. This approach mitigates the risk of holding stock that might not be used, as these goods may decrease in value.
JIT enables companies to reduce the cashflow disadvantage through raw materials and/or intermediate products catching dust in warehouses, reduce inventory cost, reduce labour costs and increases the efficiency and quality of the supply chain.
This method is in contrast with the “just in case” or JIC method of production.
JIC occurs where companies have a large inventory to minimize the probability that they cannot meet the market demand and will sell out of stock. The best way to think of this is to consider companies like Amazon, who stock almost everything.
JIT is cost-efficient through eliminating labour costs and waste by not simply holding stock that is waiting to be used, but it has its disadvantages.
JIT optimizes supply chains in theory, but
JIC has a high-cost upfront but it may give companies a more ‘reliable’ reputation.
One possible way to close the gap is to have manufacturing companies or stock close to where the customer is located by making use of strategic gateways.
This approach, which effectively shortens the supply chain, is a common occurrence within the European Union (EU), and the benefits are likely to increase further as Brexit goes ahead.
Similarly, the effects of COVID-19 have exposed the weaknesses in global supply chains and made the case for relocation of local supply hubs to shield business from future international shocks.
It’s also important to consider and compare the tax position of your company in each country or location. This includes reviewing potential benefits from a VAT and customs perspective in relation to import regimes, which can have a significant effect on your bottom line.
There is something to say for using either JIT or JIC methods when designing your approach to supply. There really is no “one-size-fits-all” approach for businesses, and companies need to consistently review their processes as their business grows, shrinks or relocates.
However, given recent global events, every business should reconsider whether its current supply chain set up is the right one – and that means right for now but also for the future.
Will your business be protected from shocks like coronavirus, economic downturns and restricted international travel, or is it time to reconsider your operational approach?
Darryl Daisley, Executive Director, Pitcher Partners Perth