A recent article on wringing cost out of the supply chain in World Trade Magazine suggested that carrying too much inventory can lead to a significant hit on the balance sheet for a SME and that SMEs should use a JIT inventory strategy to lower costs. And while I agree that this is a good strategy for MEs and LEs, I’m not convinced this is always the case for SEs with less than 100 Million in revenues.
First of all, as the article notes, SMEs often struggle to come up with the resources for payroll, much less [the resources to] develop intricate supply chain models, optimize inventory levels, and calculate their carrying costs. Unless the savings are significant, they will quickly be eaten up by the additional manpower needed to design, execute, monitor, correct, and maintain the JIT strategy.
Secondly, they will likely need help at first. And while this could come from a logistics provider, this too will come at a cost. Either the logistics provider will assign a resource to manage the JIT strategy for the SE and up their rates to cover the cost of the resource assigned to manage the JIT strategy, or the provider will simply store inventory on behalf of the SE in shared warehousing, which still increase the logistics cost. So even though some savings may be found, they won’t be as significant as one might expect. Furthermore, the logistics provider is not likely to be in a position to sense demand changes and this could increase the possibility of a costly, and even business threatening, stock-out. Since most SEs operate on (relatively) slim profit margins, a stock-out on a key product line could not only cost revenue, but customers vital to business success.
Thirdly, and most importantly, the expected savings can be wiped out by a single, short-term, supply disruption. Consider the example presented in the article for a 40M company. After all is said and done, the reduction in net income before taxes is a mere 47,000! That’s an expected reduction of only 0.1%! A single volcano erupting, port going on strike, or political breakdown that causes a one-week delay in your next order and that projected savings is dwarfed by the magnitude of the loss the SE will be facing. The extra 50K is now an insurance payment.
I might be wrong, but I don’t think JIT is right for SEs. Good inventory management with reasonably low safety stocks in shared low-cost warehousing, certainly. But lean? I’m not sure the SE can afford it!