The Problem with Just-In-Time Inventory

By Logan Wamsley

According to a recent study from commercial real-estate firm CBRE, nearly 96% of existing space in the U.S. is currently in use, and large companies are working quickly to adapt to a new but uncomfortable reality: space, where it can be found, is expensive. For today’s manufacturers, it’s not uncommon to pay up to 30% on annual inventory carrying costs — or even more for highly sensitive inventory. This includes proper storage and handling costs, as well as inherent depreciation and opportunity costs. Space that could be used for machinery and production expansion instead in some cases must house inventory that way not see a return on investment for five, 10, and in the case of the healthcare industry even 20 years.

Such struggles are not new; in fact, they stretch back nearly a half century. Pioneered by Toyota, manufactures and retailers alike facing these market realities adopted a “just-in-time inventory” logistic system, which prioritizes inventory acquisition only when absolutely necessary to maintain production schedules. The benefits of this strategy are obvious: companies can easily maintain their balance sheets with minimal upfront costs needed, all while maximizing limited on-hand inventory space.

A just-in-time inventory philosophy doesn’t just include inventory; it can expand to all aspects of business, including even labor costs. Cost-cutting remains a priority at all times. At times this can prove lucrative in terms of maximizing costs and company efficiencies, but at other times it poses problems.

“Just-in-time is hard to implement in practice because a lot of companies are going for efficiency and they mistakenly think of the line workers as a cost rather than a source of problem-solving,” says Senthil Veeraraghavan, a professor of operations, information, and decisions at the Wharton School of the University of Pennsylvania. “They get into this situation of cutting costs, cutting staff, cutting inventory, bringing it down as close as possible to zero,” he says. “Firms then suffer problems because they have lost experienced workers who could solve those problems.”

In today’s market, however, the reality is times have changed. In order to function, just-in-time inventory strategies operate on a few key assumptions. One, for example, is that the status quo of the global supply chain remains, or at least within certain parameters (ebbs and flows of market conditions are always expected).

Today, however, the extremes of the global chain are simply too drastic for that assumption to remain intact. A global semiconductor shortage driven by escalating demand and raw material shortages plagued the market in 2019, 2020 and 2021 saw the COVID-19 pandemic, and now 2022 sees the bloody conflict instigated by Russia on Ukraine. Ports remain extremely congested, costs have skyrocketed due to now 7% inflation, inventory lead times have gone from a matter of week to some cases well over 12 months. Successful just-in-time models do offer a degree of flexibility regarding crisis response, but in 2022 we have long moved beyond crisis and now speak in terms of “crises”. A new model is needed, one that maintain the on-hand capital and cost control without the drawbacks.

For such a model to work, however, the core emphasis on space efficiency must be addressed and maintained. This is why Partstat offered customized long-term storage solutions for inventory as part of our suite of Inventory Ownership Solutions. Even for inventories part of a 30-year productions schedule, Partstat will store them in our industry-leading storage facilities in Orlando, FL and ship them as needed by the customer. While this mirrors a just-in-time model, the difference is in ownership; with an Inventory Ownership Solution, you own the inventory, which all but bypasses the need for dealing with unpredictable lead times or price increases.

In today’s market, it’s time to rethink how you do business.