“Just have it” inventory…have you heard of it? It’s the more audacious, unapologetic, more expensive (or so they say) alternative to “just in time” inventory - which I’m sure you’ve heard of by now. It's a supply chain legacy term. All the cool brands were doing it until of course, Covid-19 interrupted everyone’s plans.
“Just in time” was working great until it became “maybe you’ll get it, maybe you won’t, but one things for sure…it’ll cost you extra”
In this article we explore what’s going on in the world of planning and supply chain to help you decide how you can stay competitive.
State of Affairs
“Just in time” inventory was the glory child of the last decade helping brands meet demand whilst not having to hold that much inventory. It took years to perfect and set up, all to come crumbling down once major roadblocks became the new norm in supply chains across the globe. Its final farewell was its public shaming and finger pointing in a major report released by the Biden administration to uncover the cause of our excruciating delays.
This inventory holding strategy may not be gone forever, but for now, we have to re-strategize. Of course, you can consider a “just have it” strategy and bulk buy stock to have it sit for when you sell it. From a cost standpoint it's not ideal but it is a quick and dirty option.
To Buy or Not to Buy
A better option, however, is to make sure you have all of the CRITICAL components at all times. And if you’re wondering what’s critical - that really depends on your product and manufacturing. You have to look across your current supply chain to see what has the fewest suppliers, is used in the most or most profitable products, and is the piece that will cripple everything In your inventory availability if it happens to be out of stock.
Of course you have to make sure you have the storage space for this stock but don’t let that hold you back. There are plenty of storage providers out there, more so than there are manufacturers of speciality parts. Just make sure you’re doing a full cost analysis to ensure the numbers make sense. Beyond the costs, make sure you also consider the commitment. Bulk buying components limits your manufacturing and product flexibility. Meaning, if you want to make certain changes you might run the risk of having to deplete your critical components first or risk the financial loss on that inventory.
Keep in mind…this might not be the right strategy for you. Let’s go over a few other ways you can improve your supply chain to keep up with the current state of affairs.
What Else You Can Do
First things first - assess where you are. From this you’ll be able to do step 2 and 3 which is strategize for the near term, and strategize for the long term
Rock the Boat
So starting with where you are - you want to look at the big picture of your supply chain so that you can understand and dive further into each link. On the journey of manufacturing to your customer’s door you have ocean freight, middle mile, warehousing, and last mile.
Do you know who your ocean freight providers are? Currently, there are five companies that account for 65 percent of container capacity. These 5 are predicted to rise to 80 percent by 2025. So are you in the top 5? If not, it might be worth exploring that as an option. If 5 companies are able to control 80 percent of the volume, that means they may also have the most favorable costs, the most reliability, and the most structure and process in place.
Next you have middle mile and with most things, driver turnover is causing these costs to go up. Make sure you understand the risks this poses to your margin.
Rising costs are also being seen in warehousing with rates reaching on average $7/sq ft. Data from late 2021 show that only nine out of the top 50 US markets have experienced rent declines. A word of advice - figure out the locations that have low rent and determine if the long term benefits would warrant a relocation for your storage.
Keep in mind that rents are naturally going to rise with each contract cycle. If you’re able to lock in longer term contracts you might be able to limit rent hikes during renegotiations. Be sure to also include in your contract a fixed annual increase. This ensures that no matter how high their rate is going, you can be certain you’ve locked in storage capacity and have predictable cost changes.
And then finally you have last mile. Parcel providers have raised their prices to account for the additional D2C demand on their networks and are estimating to continue to do so. So if you haven’t already, you may want to consider shipping minimums or dare we say, no more free shipping. Even Amazon has raised their rates to account for this, and they are the shipping idols.
While not on the journey of supply chain, there is one more area you ought to take a look at - your technology. Those who have weathered the storm have been able to do so in part because they have the technology to precisely track inventory across the supply chain and gain an edge on the competition. A recent report highlighted a beverage company who saw an improvement of 13 percentage points in forecast accuracy from integrating machine-learning forecasting into its demand-planning processes. Remember, every additional point in forecast accuracy helps you protect cash flow by the same.
The report also stated that effective automation of your warehouses could boost profitability by 300 to 700 basis points. And the one simple thing that can aid some of this automation? RFID chips. Yes they cost extra, but the benefits could very well outweigh the costs. According to data by Avery Denison: In-store RFID leads to 99% inventory accuracy (that’s on count), 60%-80% stockout reduction, 2%-12% sales lift, and a 10% reduction in shrink. Moreover, a survey of supply-chain executives found that 64 percent of them are treating warehouse digitization and automation as a top priority. We say it time and time again - technology is THE tool to help you get ahead.
Changes Within Reach
Now that we’ve covered assessing your current state, let's talk about changes you can make for the near term. We just talked about assessing your technology, so that’s going to be our first recommendation. Set up systems to give you insights and transparency into your entire supply chain. By doing this, you can be more agile and proactive rather than reactive. According to some research, this can help you reduce excess inventory by over 30 percent.
Another thing to do is to start working on building supplier relationships. Investing in the right contracts long term (about 3 years) can reduce price volatility and help prioritize your production over other smaller or short term accounts. Some manufacturers have even publicly announced their intent to prioritize longer term contracts and to design pricing based on the length of term.
And finally if you haven’t already, start prioritizing your inventory. With strong vendor relationships you can negotiate purchase order flow and storage locations, both of which can help you capitalize on strong margin and cash flow generating products.
Over the Horizon
The last step we want to cover is setting yourself up for long term changes. According to some data from McKinsey, a continuous effort on this part can increase sales by 3-7%, margins by 1.5-2.5%, and boost working capital and cash flow by 15%.
The first thing you should look at is your supplier mix. Who are they, where are they, and what are they good at? After assessing the journey of your supply chain and any risks along the way, you’ll be better primed to re-establish what your supply chain looks like for beyond the next 2 years.
Next, assess your products themselves. With the shifts that have happened over the last two years, your original assortments may not make sense anymore. Don’t be afraid to pivot the direction of your products to what makes the most strategic sense for your business, be it profitably, new customer reach, or your long term supply chain capabilities.
And finally - invest in automation. Time is our most valuable asset. If you’re strapped for hiring in this current market, then technology is your best bet. Let's face it - uncertainty is here to stay. And the only way to beat it is to be ahead.
Fuse Inventory was built by a team of supply chain and planning professionals. We understand the pain points of planning and procuring your inventory. So, we built the solution for it. To learn more, email us at firstname.lastname@example.org.