Inventory management and liquidity: how specialist companies can offer the best of both worlds
Covid-19 and our response to it have impacted everything. The changes have been profound. Restrictions on activities which we long took for granted have been deeply unwelcome. But our ability to adapt has unlocked newfound interests as we abandoned the commute and embraced enforced domesticity: ‘sourdough bread’ was one of the most googled words of 2020. Our spending habits have changed accordingly.
As we look ahead to 2021 and a swiftly vaccinated return to normality, the question every business wants to know is: what changes in consumer behaviour are here to stay? And what should we do to be ready? This is particularly the case for supply chain management, with the pandemic cutting a swathe through networks globally at all stages of an inventory cycle.
Of course, for many nervous CEOs, Covid 19 was just the latest in a series of black swan events, ranging from Brexit and the US-China trade war to hurricanes, acts of terror and oil spills. ‘Twas ever thus’, you may shrug. However, even before Covid hit, companies were starting to question the accepted wisdom of the Just in Time (JIT) approach pioneered by Toyota in the 1960s and look again at its Just in Case (JIC) counterpoint. Covid has merely accelerated this rethink.
The JIT model certainly sounds attractive. With its emphasis on lean inventory, only making something when it’s ordered and keeping that all-important Days Inventory Outstanding (DIO) number low and liquidity-friendly, what’s not to like? However, it only really works if you have fixed inventory requirements, low product diversity, steady demand, a dedicated vendor and the ability to scale up quickly. You also need resilience to adapt to changing vendor priorities, seasonality and the disruption unleashed by unforeseen events.
Given this, the JIC model may seem increasingly less unattractive, despite the drawbacks of coagulating capital, a high DIO number and a sluggish Cash Conversion Cycle. But does the choice have to be so binary? Is there a path between JIT and JIC which the changes brought by the pandemic have helped illuminate?
There are certainly a growing number of strategies which companies can implement. Cementing closer relationships with favoured suppliers is key, not least to understand their ability to shift production and purchase order fulfilment to other locations, as well as exactly where your business sits in their allocation hierarchy should inventory be impacted.
Maintaining supply chain visibility beyond trusted partners was a nice-to-have pre-Covid, but manufacturers now increasingly expect this from their suppliers. This may be challenging, but predictive analytics, AI and a burgeoning menu of monitoring tools are affording increasing comfort. Establishing a control tower to scan the horizon for looming challenges will also help you maintain end-to-end visibility and implement solutions before it’s too late.
Supply chain diversification is also key. Covid has driven a growing focus on developing an agile roster of approved suppliers that can react to sudden shortfalls or switch production on demand. Supply chain masters will be looking for alternative manufacturing sites and assembly nodes; offshore production may be brought closer to home to cater to core markets; and more authority will be devolved to regional and local teams to avoid decision-making bottlenecks at Head Office.
This is all very well but implementing new technologies and diversifying supply chains will not come without cost. How can businesses have access to adequate inventory to react to the next disaster, whilst finding ways to minimise obsolescence, reduce low-margin clearance sales and unleash inventory-trapped capital, estimated to be $1.2 trillion in the Hackett Group’s latest Working Capital study?
An increasingly popular approach is the use of specialist companies such as Falcon Group that will agree to buy new inventory and make it available to you as and when you need it on a JIT basis. In the meantime, inventory is held in a dedicated area in your own warehouse or in a geographically relevant third-party warehouse, with a specialist like Falcon holding inventory on its books until you require it. This increases Cash From Operating Activities on balance sheets, but without the risk of being unable to meet supply chain master demands when the next black swan inevitably strikes.
This is a win-win supply chain strategy, enabling companies to have the best of both worlds, avoiding the potential vulnerability of JIT and the trapped capital and burdened balance sheets of JIC. The tailored working capital solutions offered by Falcon can also be integrated into the manufacturing cycle, affording assistance at every step of the way, including with after-sales, warranty and service parts – the last mile of inventory. Falcon also has the agility and expertise to cover complex supply chains where there is a change in inventory.
Across the world, the fervent hope for 2021 will be that we can put Covid-19 firmly in the rear-view mirror and life can return to normal. However, let’s also hope that some changes are here to stay, not least to foster smarter supply chains which are both robust and liquidity-friendly.
