The Drawbacks of Just-in-Time Inventory, and How Today’s Supply Chains Must Evolve
A vast majority of OEMs, especially large-scale OEMs, over the last two decades, have settled into using a just-in-time delivery model with regards to inventory acquisition. On many levels, such a situation makes sense; just-in-time delivery models allow the OEM to maintain their working capital and cash flow until a purchase becomes necessary, while minimizing the task of providing inventory storage — and the inventory carrying costs, insurance costs, and administration fees that come with it. Additionally, it also provides OEMs a degree of flexibility, allowing them to continually interact with a variety of distributors and negotiate the best possible price regarding apples-to-apples components.
Such a model does come with a handful of drawbacks, however.
The Risks of Just-in-Time Inventory
For example, just as it allows for flexibility when sourcing inventory, it also means that the OEM in question becomes dependent on the state of the market at any given time. In a particularly volatile market, which has been seen most recently with order delays resulting from the COVID-19 pandemic, this means that OEMs could be placed in a position where lead times across all distributors and component manufacturers suddenly escalate. Without any viable alternatives, this could cause significant production issues. If a component transitions toward obsolescence, the OEM might also be placed in a situation where they would have to choose between making a last time buy — which requires a long-term storage infrastructure they might not have — or finding an alternative distributor who might place significant price markups on the high-demand, low-supply component.
“Markets have changed dramatically over the last year, and we’re seeing more clients under tremendous pressure from a variety of areas try and navigate issues such as product demand, supply chain risk, liquidity, and even debt liquidity,” said Partstat Founder and CEO Dennis Menefee. “These pressures are forcing our customers into a difficult dilemma — how to preserve cash and secure enough inventory to not have a negative impact on revenue. This is a task our clients are finding increasingly difficult.”
Every inventory acquisition strategy comes with its pros and cons. The key for a successful supply chain is to develop a strategy that strikes a balance between the two extremes. This means taking advantage of the benefits a just-in-time inventory strategy allows, but also having a strategy in place for slow-moving inventory that must be held for extended terms.
The New Supply Chain
This is precisely what Partstat inventory ownership solutions offer OEMs. Partstat has the ability to make large, bulk purchases of critical inventory for their customers, allowing them to effectively avoid sacrificing any upfront capital. Until the inventory is needed, Partstat will store the inventory in its industry-leading facilities while handling any associated costs that come with it.
“We like slow moving critical inventory, and our solution allows you the ability to significantly de-risk your supply chain so you can focus on your core business,” said Menefee. “We’re proud to be changing the landscape around inventory and offering a unique solution to our customers and partners, who now have the opportunity to match critical inventory to revenue over a multi-year period and use their cash for a positive economic return.”
Just-in-time inventory for several years has been the path forward for many manufacturers, but the realities of today’s market are forcing supply chains to evolve and consider the long term as well as the short term. The inherent risks of the post-COVID landscape demand it.