Many manufacturers are realizing the benefits of lean manufacturing within their facilities through application of lean concepts and principles. They understand the importance of eliminating waste and practicing the JIT (Just-in-Time) philosophy. But has the time come where JIT inventory levels should be increased to JIC (Just-In-Case) inventory levels considering the current volatility of the economy? You'll find the answer hidden deep within your supply base.
In a lean manufacturing environment, inventory is considered one of the seven major wastes. It can be defined as any material over and above what is currently required and/or in process. The ideal situation in a JIT environment is piece per process, which equates to one piece delivered, one piece processed and one piece shipped. All inventory held over and above this quantity is regarded as waste. Although this concept may be viewed as the ideal situation, it's not very practical for most, if any, companies.
Due to the impracticality of operating under the ideal situation, inventory is carried. This inventory must be kept to a minimum to avoid excess storage requirements, carrying costs, increased material handling and risk of obsolescence, among other things. Realistically, just about every company will have to carry inventory. This inventory may be kept as sub-assemblies, finished goods and/or raw components. The finished goods and internal sub-assemblies are not the major areas of concern. These inventory levels are within your control and should be set based on the level of customer service and on-time delivery you wish to provide your customer. The real concern lies within your raw component inventory levels. This is where your highest risk resides for potentially missing customer shipments, or worse yet, shutting down your customer.
In the past few months, many small companies (as well as some larger ones) have been forced to close their doors for good. If you've been a victim to this type of situation you probably understand the need for JIC inventory, as you've felt the effect a primary supplier shutdown can have on your delivery performance. Or maybe it was a secondary or tertiary supplier that caused you to shut down? Either way, the ultimate effect could be devastating to your business. If you haven't done so yet, it's time to take a look at your inventory strategy and review your just-in-time levels.
In order to understand the greatest area of concern or highest risk potential in your company, consider the following questions; how well do you know your first, second and third tier suppliers? Are any of them at risk of closing their doors and catching you off guard? Have you looked at their financial health lately? Maybe it's time you get to know them a little better. A small ripple in an upstream process can have a major effect downstream. For example, a tier three supplier that provides heat-treating for your bolt supplier can cause major disruptions down the pipeline if they go out of business unexpectedly and there are no other heat-treating companies in the vicinity. In this case, it might be a good idea to carry a few weeks inventory (or as much stock as it may take for you to recover from a critical situation) of this small, relatively inexpensive part, to protect yourself until you get a chance to evaluate your risk potential with this supplier. You will need to dig deep into your supply base, deeper than your primary suppliers, to understand how solid their foundation is. A small investment made on a visit to a supplier or sub-supplier could help you avoid much higher future costs due to shutting down a customer.
Start by reviewing some of your more vulnerable suppliers. If you are in the automotive industry, start by checking the financial health and stability of suppliers that you share with North American automakers. Many suppliers that rely on these O.E.M.'s for their bread and butter may soon find themselves looking elsewhere for business if they haven't already. Once you've chosen your starting point, you need to determine how much JIC inventory you should carry.
In order to determine how much to carry and what inventory to focus on, ask yourself these questions; how difficult is it to find replacement parts? How long does it take to get customer approval to move tooling? How much testing is required if a new supplier is needed in an emergency situation? How long can you delay shipping before it affects your customer relations? How much space will be required to carry enough stock in case of emergency? These questions should start to take you down the path towards determining your on-hand inventory levels. Your planning strategy and rules should also help determine which components are at the greatest risk based on lead-time and commodity type.
If you are going to carry JIC inventory, you will want to carry it on small, inexpensive parts, but they may not be the parts that hold the highest risk. A shelf item may not be of great concern if another company down the road is selling the same part, so consider that fact when you develop your own risk potential chart and focus on your most critical suppliers first. Allow yourself enough time to react to moving a tool, or some equipment, to a new supplier.
Remember, this is a temporary solution to a temporary problem and I strongly encourage you to address this as quickly as possible. It would be extremely expensive to carry JIC inventory for every part, so the decision needs to be made as to which parts are the most critical. Your carrying costs may increase in the short term so consider this like an insurance policy; nobody wants to pay for it but they sure are glad they did when it comes time to cash in on it. I am a huge advocate of lean manufacturing and the JIT philosophy so the sooner you understand the situation of your supply base and get back to JIT, the better.
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