Just-In-Case Inventory Management

Risks and costs are on the opposite end of the inventory management spectrum. A focus on cost reduction will increase the risk of stock-out and production inefficiencies, whereas more risk management results in higher inventory costs. When a company prioritises risk reduction over costs, it is likely to adopt Just-In-Case inventory management. What is Just-In-Case production and how does it work? In today’s explanation, you will find out.

What is Just-In-Case inventory management?

To ensure there’s always stock available when needed, companies often employ Just-In-Case inventory management.

A company's production is closely tied to its inventory. A low level of inventory puts a business at risk since it might run out of raw materials for production, resulting in a loss of sales. Just-In-Case inventory management maintains stock at a higher level so that there is no disruption in production and products are delivered on time. In case of sudden demand increases, a large inventory also allows the business to produce more goods and generate more income.

JIC is often used for products with a large, ongoing demand. For example, medicines at hospitals are made with the JIC production to meet the constant need of patients.

The opposite strategy of just-in-case inventory management is Just-In-Time (JIT) inventory management. This is the strategy where the business minimises costs and waste by holding just enough inventory for production.

How does Just-In-Case inventory management work?

The main purpose of JIC is to reduce the risk of stock-out due to unreliable suppliers, natural disasters, or poor transportation systems. It also saves the company from penalties for late deliveries and loss of sales.

To ensure stock availability, JIC companies have to reorder the stock before it reaches the minimum level. The reorder point should cover enough stock for production while waiting for the new order to arrive. It is calculated by multiplying the average daily usage with the lead time, plus safety stock.

$\mathrm{Reorder}\mathrm{point}=(\mathrm{Average}\mathrm{daily}\mathrm{usage}\mathrm{x}\mathrm{Lead}\mathrm{time})+\mathrm{Safety}\mathrm{stock}$

Lead time is the number of days between ordering and receiving inventory. Safety stock is the excess inventory to avoid stock running out completely.

The optimal quantity of inventory to minimise ordering and holding costs is called Economic Order Quantity (EOQ). It can be calculated with the following formula:

$\mathrm{EOQ}=\sqrt{\frac{2\mathrm{x}\mathrm{D}\mathrm{x}\mathrm{S}}{\mathrm{H}}}$

Where:

• D is the Demand for the period

• S is the Cost of planning an order

• H is the Holding cost per unit

In Figure 1, you can see the Saw-Tooth Inventory Diagram that depicts the reorder point, lead time, order quantity, and safety stock.

Figure 1. Saw-Tooth Inventory Diagram - StudySmarter

Initially, it starts with the maximum level of inventory, which decreases over time as the business sells its products. To avoid stock running out, the company has to place a new order before the inventory reaches the minimum level - the lowest level of stock to be kept at all times, also known as safety stock. The reorder point takes into account the amount of stock needed for production while waiting for the new batch of goods to arrive. It is calculated by multiplying the lead time with the average daily usage.

Advantages and disadvantages of Just-In-Case inventory management

There are both pros and cons associated with JIC:

Just in Case Inventory Management: Advantages

Just-In-Case emphasises the importance of having a lot of stock in reserve. This can bring about many advantages for both manufacturers and consumers:

• Lower risk of stock-outs: Late deliveries or a sudden surge in demand can cause a shortage in stock. Without excess inventory, businesses run the risk of not having enough raw materials for production. JIC is one way to keep buffer stock and allows the production to run smoothly without disruption.

• More flexibility to meet customer demand: Businesses with JIC adapt to abrupt changes in customer demand. For example, an ice-cream business with surging sales in the summer months can place a larger quantity of ice cream cones and other ingredients to keep up with production.

• Higher customer satisfaction: Having more inventory means that the business can produce and deliver goods to customers more quickly. This can contribute to a higher level of customer satisfaction.

• Lower ordering costs: By keeping a large inventory of goods, the company can place new orders less frequently and reduce ordering costs.

• Bulk purchase discount: Businesses can negotiate lower prices per unit with a large quantity ordered, leading to purchasing economies of scale.

Just in Case Inventory Management: Disadvantages

While keeping a lot of stock allows businesses to produce goods quickly and meet the demand, it can give rise to many inventory issues.

• Higher storage space: A large inventory means a lot of storage space is needed. This can incur more inventory costs for the businesses.

• A higher amount of cash tied up to stock: With JIC, businesses need to set aside a substantial amount of cash to pay for suppliers. This may result in a lack of capital to invest in other projects.

• Loss of freshness: JIC production can’t be applied to the production of perishable goods such as fruits, produce, or meat since these ingredients will lose their freshness if kept in stock for too long.

• Risk of inventory waste: Unsold goods become waste that needs to be disposed of. Since most discarded goods end up in landfills or incinerators, this can cause a lot of environmental issues.

A hybrid model of Just-In-Case and Just-In-Time inventory management

Neither just-in-case nor just-in-time inventory management methods are not perfect, as the reduction of the inventory risks or the reduction of costs tends to come at the expense of the other. A business can maximise benefits by combining the two strategies in a hybrid model - to adopt JIC or JIT whenever it sees fit.

JIC can be applied to products that have a high sales volume and constant demand. Meanwhile, items that are less popular and often sold in small batches can be managed with a JIT system.

The adoption of the hybrid model and Just-In-Case and Just-In-Time inventory management requires accurate demand forecasts, as these will allow the business to order a low enough inventory to save costs of continued production.

In conclusion, Just-In-Case is an effective inventory management method to help businesses to cope with sudden changes in demand and avoid stock-out. However, it also comes with the risk of higher storage expenses and waste of unused inventory. One way to adopt JIC with fewer costs and waste is to combine it with the JIT inventory management system. JIC can be used for high-demand items, whereas JIT is typically adopted for lower-demand, made-to-order products. A more accurate demand forecast is key to the success of this hybrid model.