For decades, the general wisdom in approaching manufacturing has been to rely on a “just in time” strategy to ensure component parts are available the moment they are needed rather than tying up capital to purchase and store inventory.
However, with the recent supply chain disruptions that have been causing delays across industries, there is an argument to be made for holding “just in case” (JIC) inventory as well. This is especially important for “golden screws,” the one or two critical components that are needed to finish production and start generating revenue.
While the “just in time”(JIT) philosophy has been effective for over 30 years now, the recent disruptions that have been happening in the supply chain are unpredictable. In the past six years, these disruptions have been more severe and unanticipated, upsetting a relative stability that had existed for some time. Suddenly, parts are completely unavailable, a problem that has been increasingly troublesome over the last 18 months.
When there is supply chain harmony, when everybody is delivering on time and there is plenty of inventory in distribution, “just in time” works really well, but that is not the current reality and as covid taught us, you can never anticipate the next event. As a result, the “just in case” inventory philosophy becomes a crucial piece of the profitability puzzle.
JIC is not a new concept, but works now given the instability in the past six years. It is an inventory management strategy where companies keep inventory on hand to anticipate and prepare for unpredictability of demand or the times. The strategy is typically employed in less industrialized countries where disruptions in the supply chain are more common and maintaining more inventory in case of emergency is critical to avoid production delays and other inefficiencies.
“Just in case” means having specific critical items in stock all the time so that when a situation arises like covid, civil unrest, countries in conflict, or anything that disrupts the supply chain, a company still has enough critical electronic components on hand to continue to manufacture products. Even if it is not as profitable, the company remains operational.
A balance is needed between “just in time” inventory, which helps businesses keep their inventory low and their capital high, with “just in case,” especially for items or parts that may be essential to the continued profitability of a business. A term gaining traction to describe such parts is the “golden screw,” an item that at times is difficult to procure but is essential to doing business.
There are a lot of golden screws now that companies could not get their hands on and there were many products that could not be shipped. Some companies are shifting their strategies to ensure they always have the golden screws in the future.
Combining these two inventory strategies gives organizations the best of both worlds – the low inventory and available capital of JIT with the security of JIC. In our example, Classic Components invests its own money to purchase items for customers ahead of time. We keep a certain amount in buffer stock, and we ship it out when needed and then we get paid by the customer. In doing so, the customers achieve their goal of having only what they need, when they need it, which is basically “just in time” philosophy.
To accomplish this approach, a distributor invests its own capital to secure “golden screw” items for customers and holds them in inventory until they are needed, however long that might take. This is a unique offering within the independent channel and only the largest and financially stable distributors are willing or able to do so.
However, customers need to be willing to shift their strategy to accommodate a JIC philosophy. Organizations must have the foresight and awareness to anticipate future orders not yet placed and be proactive about securing that inventory required to ensure there are no delays when the product is needed.
Items that have been difficult to find are not always complicated parts. OEMs require simple electronic components to make products in the same way nails and screws are required to construct a house.
It is important to adopt a “just in case” philosophy both for less sophisticated items along with higher end items as well, to cover all the bases. To extend the construction analogy, if a house is built with nails and screws, it will also require expensive fixtures to be completed.
A distributor can help secure these items for the OEM without asking for money up front and assist with the logistics of transporting the items when needed. They do this by being flexible in their approach and shipping material, whether upstream or downstream, including to contract manufacturers, sister companies, and subsidiaries.
Not many companies are offering this type of service during shortages, including traditional distributors.
Although authorized distributors provide added value such as engineering support, contractual obligations dictate all materials must come directly from the factory. This makes sense when the supply chain is operating as expected, and there are no global pandemics or other supply chain constraints. The current disruptions, however, are creating lead times in the regular distribution space of up to 50 weeks for parts that used to be available in eight to 18 weeks, a massive disruption that independent distributors can work around more easily.
Regular authorized distributors may also struggle to get parts because the contractual agreement that these companies sign prevents them from sourcing products in the open market. Independent distributors can lock in prices and delivery dates using its vast network of supply chains and partners for many months at a time. This ensures that the inventory will be there when the customer needs it and not sold to someone else.
OEMs must make a philosophical adjustment. Companies have to look in the mirror and say, “We built our organization on just in time and that is how our shareholders measure us, but we need to secure the golden screws to protect against any possible future disruptions.”
Mike Thomas is vice president and global general manager at Classic Components, an independent electronics components distributor in Torrance, Calif.