Inventory Optimization through an Agile Supply Chain

How JIT Inventory Management can Improve Your Supply Chain

Just-in-time (JIT), as a broad management philosophy, seeks to eliminate waste from any activity that adds costs without adding value through the right production, in the right place, at the right time. 

JIT systems focus on reducing unproductive times and inefficiency of the production process for the continuous improvement of processes and product and service quality. Companies produce goods and services as needed and continually improve the value-added benefits of operations. Companies that follow JIT system operate with very low inventory levels and maintain a close relationship with suppliers, minimizing excess inventory and inventory costs. JIT production requires JIT supply. JIT supply and production can only be obtained if there is a relative stability of demand in the short term, for example one month. Just-In-Time manufacturing logistics focuses on three areas: 

1. reducing the number of suppliers
2. using local suppliers
3. improving supplier relationships

Just-in-Time manufacturing has a profound influence on supply chain management. The JIT approach to materials control is based on the belief that a process should only work with demand coming from the end consumer. The supply chain can be seen as a chain of customers, where each link in the chain is coordinated with its neighbors by JIT signals. This principle is a Pulled System where parts are pulled through the chain only in response to the end consumer demand. This contrasts with a Pushed System in which products are made whenever resources (human, materials and machines) are available in response to a central plan or a pre-established schedule, regardless of whether the next process needs them at that moment.

How Quick Response (QR) Applies JIT to Supply Chains 

Quick Response (QR) combines a number of tactics to improve inventory management and efficiency while accelerating inventory flows. When fully implemented, QR applies JIT principles throughout the entire supply chain, coming from raw material suppliers through last customer demand. Efficient Consumer Response (ECR) is the QR response and combines various logistical strategies in an effort to improve competitiveness by reducing supply chain waste. The Vendor Management Inventory/Vendor Managed Inventory (VMI) Strategy emphasizes the responsibility for replenishing a customer inventory with the vendor who manages the entire process.

Requirements of the Agile Supply Chain Model

To optimize inventory management, Agile Supply Chain Model must have 4 dimensions:

1. Market sensitivity: This means the supply chain can read and respond to real demand. Most organizations are forecast driven and not demand driven. In other words, because they have little anticipation to the market through real data about customer needs, they are forced to forecast based on past sales or transfers and convert those forecasts into inventory. The Efficient Consumer Response (ECR) and use of Information Technology to capture data directly from demand and from point-of-sales are now transforming the skills of the organizations to listen the voice of the market and respond directly to it.
2. Virtual: Using Information Technology to share data between buyers and suppliers is, in effect, the creation of a virtual supply chain. A virtual supply chain is information based rather than inventory based. Conventional logistics systems are based on the paradigm that seeks to identify optimal stock quantities and their spatial distribution. Complex formulas, algorithms, and inventory analysis support this inventory-based business model. Contrary to this, since we have visibility of demand through shared information, the premise on which these formulas are based is no longer valid. Electronic Data Interchange (EDI) and the Internet allow partners in the supply chain to act on the same data. For example, real demand rather than being dependent on the distorted and noisy image that emerges when orders are transmitted from one step to another in an extensive chain.
3. Integrated Processes: Information sharing among supply chain partners can only be fully leveraged through process integration. The integration of a process is composed of: the collaborative work between buyers and suppliers, partnership in the development of products, common systems, and information sharing. This form of cooperation in supply chain processes is becoming increasingly prevalent in companies focused on managing their core competences and outsourcing all other activities. In this new world, greater dependence on suppliers and alliances with partners becomes inevitable and, therefore, a new style of relationship is essential. In this "extended chain", there can be no limits and a spirit of trust (true agreements) and commitment prevail. Along with the integration process comes joint strategy determination, buyer-supplier teams, information transparency and accounting.
4. Network-Based: Individual businesses no longer survive in the age of network competition. Organizations that can better structure, coordinate and manage relationships with partners and form networks committed to serving consumers through a better, closer and more agile relationship with their consumers will perform better. It can be said that, in the current global market, the route to sustain competitive advantage lies in the ability to leverage the strengths and competencies of network partners to achieve greater responsiveness to market demands.

Where Traditional Supply Chain Management Systems Fall Short

A big problem in most supply chains is their limited visibility of real demand. Because supply chains tend to be understood as having multiple levels of inventory between the point of production and the final consumer, companies are likely to be more demand-driven than forecast-driven. By integrating functions such as transport, production and planning into a single system, a supply chain becomes truly demand-driven and supply chain performance improves. Making this transition allows for  agility across the entire supply chain. The goal of an agile supply chain should be to maintain inventory in a generic form, that is, standard semi-finished products awaiting final assembly or disposal. 

Let the supply chain consulting team at Performance Solutions by Milliken help you optimize your business’s supply chain. Contact us today.