Does COVID-19 mark the return of just in case inventory management?

One thing COVID-19 has shown us is that the existing supply chain model, while not necessarily broken, is extremely fragile.  It can easily be disrupted by events that occur globally or at a local level.  The COVID-19 pandemic is perhaps the most dramatic example, but others include extreme weather, terrorism, political upheaval, tariff wars and cyber-attacks; and the longer and more complex the supply chain, the greater the risk of disruption.

Just in Time

Techniques such as Just in Time (JIT) and Lean are widely used across industry, as methods of reducing inventories.  Raw materials, components and sub-assemblies are ordered only as needed – against customer orders – to produce finished products.  This can significantly reduce inventory costs and free-up capital that would otherwise be tied up in stockholding, but to be successful depends on a responsive, robust and highly integrated supply chain.

Modern supply chains, especially where OEMs have diversified their supply base, have generally proven resilient to most short-term shocks, albeit sometimes at significant cost.  Tariff wars between the USA and China are estimated to have increased manufacturing costs in 2019 by over 15%; at a more localised level, a ransomware attack on Tier 1 aerospace supplier in France, ASCO Industries, brought production to a halt last June and resulted in 1,000 employees being laid-off for over a month, causing costly disruption to the company and its customers and suppliers; in Germany, low water levels on the Rhine last summer meant that river barges could only be loaded to a maximum 50% capacity, resulting in a short-term decline in supply and a surcharge to customers to cover higher shipping costs.

These examples highlight the fact that a JIT supply chain will come under strain if there is even a relatively low profile disruptive event, while a major global crisis such as COVID-19 can result in a sudden and dramatic collapse in critical supplies.

A case for ‘just in case’?

The JIT and lean manufacturing methodologies clearly work, most of the time.  On their own, however, they are not enough to guarantee complete supply chain resilience.

Consequently, as we emerge from the COVID-19 pandemic, many industrial businesses will be taking a fresh look at each stage in their supply chains and inventory management.

One area that may as a result come back into fashion is a return to Just In case (JIC) strategies, where companies hold large inventories to reduce the risk from fluctuations in supply and demand.  This approach may provide a buffer against uncertainty and disruption but as noted above comes with considerable cost penalties.

A new supply chain model

In practice, what’s likely to evolve is a combination of JIT and JIC.  This approach has been adopted in the past, but in future we’re going to see it become far more popular, where diversified supply chains with multiple sources and supply routes are combined with local stockholdings.  For OEMs, this arrangement will be extended still further as they partner with local suppliers that have specialised sourcing capabilities for the provision of critical parts and materials, plus the ability quickly to switch-on and upscale manufacture locally in both low and high volumes.

This arrangement gives OEMs the ability to balance factors such as cost and risk, with the ability both to smooth out fluctuations in short-term supply and to protect themselves from the effects of sudden, unexpected or extended disruption to supply chains. 

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