Just-In-Time or Just-In-Case? Inventory Management Strategies for Defense-Critical Supply Chains

The pandemic caused a boom in warehousing demand, which was precipitated by a shift in inventory strategy from just-in-time inventory to just-in-case inventory strategies. Should the Department of Defense (DoD) also be changing their inventory strategies to have more stock on hand? The DoD keeps stores of weapons, food, and repair parts in storage locations around the globe. They face many consequences, not just financial, for not having their supplies when and where they need them and are more risk-averse than their commercial counterparts.

With a just-in-time inventory strategy, the goal is to have as little inventory on hand as possible, that still allows you to meet your missions’ requirements. On the other end of the spectrum is the just-in-case inventory strategy which has become popular again in recent years, which means everytime you place an order, to order a little extra, just in case you need it down the road. The tradeoff is that you will spend more capital now acquiring and storing inventory but that it will increase your effectiveness in the future as you will have the material when you need it, and ideally also where you need it.

There are drawbacks to both types of inventory strategies and the right answer is somewhere in the middle of the two policies. The correct inventory strategy will depend on specific characteristics of each product, which are discussed later. For now, let’s review the dangers of leaning too far towards just-in-time inventory or just-in-case inventory.

Drawbacks of just-in-time inventory

There are many concerns around a fully just-in-time inventory strategy, where products are ordered only when they are needed from the manufacturer. The main drawbacks being: taking longer to receive products, potential loss in quality, and increasing production and transportation costs.

Delay in responding to needs

Rapid response time is a critical component of success to the DoD. Whether responding to natural disasters or man-made attacks, the first few days are often the most critical. It can take weeks and months to place orders for equipment, have the parts made, and shipped to where they are needed.

Long response times is the largest barrier to the DoD from using a fully just-in-time inventory strategy as it has too large of a negative impact on readiness. The DoD is graded on its readiness as it needs to be able to respond quickly in order to achieve its mission. The defense industrial base cannot respond quickly enough to get material produced and shipped around the world to where it is needed.

No time for quality control

When speed is of utmost importance, oftentimes steps get cut out of the regular production, validation, and shipment process. Regularly, that step is quality control. When parts and supplies are needed right away, for instance during wartime or humanitarian relief efforts, with just-in-time production there isn’t always time to verify that the components being produced are up to specified standards. If the material is being shipped directly from the manufacturing facility to the point of need then there is zero testing that can be done by any other parties. The parts get put into use immediately and you have to hope for the best. This also opens the door for malicious actors to be able to seize an opportunity to intentionally send compromised components.

Increases production and transportation costs

With just-in-time production material needs to be shipped quickly from where it is produced to where it is needed. This often means that it needs to be shipped via costly modes of transportation, e.g., as air freight. Especially if the equipment can only be manufactured at a few locations, or even a single place, that means the chances are low that the point of manufacture is close to the point of need.

Customers also typically pay a surcharge in production costs for express orders. The defense industrial base would have to stop their current production runs to accommodate these express orders. Production plants also like to produce material in the largest batches possible to gain efficiencies, which they are not able to do for smaller just-in-time orders, further increasing the cost of production.

Drawbacks of just-in-case inventory

Having excess inventory sitting in storage, waiting until it is needed brings its own set of challenges. Lots of inventory requires large up-front and ongoing investment to keep the material and also causes concerns over the products going bad sitting in storage. All of these things can negatively impact military readiness.

Large up-front capital investment

Having lots of inventory requires spending lots of money on that inventory, which then cannot be spent on other activities which might be higher priority. If the inventory will be used in the next couple of years, then it is money well spent. However, if the products end up sitting past their shelf-life or until they are no longer needed, then it was money wasted. Stockpiling more and more inventory also requires more and more upfront expenses in purchasing or building warehouse space.

Large ongoing maintenance costs

Having lots of inventory requires lots of warehouse space. Warehouses need maintenance and people and equipment to run them, all of which costs money. People and forklifts are needed to move items into and out of the warehouses, assuming inventory is constantly moving. The more inventory you have, the easier it is for the warehouse to get cluttered and items get lost and retrieval times and costs increase. Even if the inventory is sitting in one place for long periods of time people and resources are still needed for security of the inventory as well as keeping track of the inventory and making sure it’s still in good working order.

Shelf-life concerns

When material is sitting unused on the shelf, it is deteriorating in its effectiveness. Many stories came out about Russia’s deteriorating equipment in the initial invasion of Ukraine and how it hampered their goals. It was suggested that the Russians were slowed because their tires had sat too long and were rotting away and that many of their food rations were expired. Moisture damage, expansion and contraction due to freezing and thawing, and parts seizing up due to rust are a few issues that can quickly happen to parts sitting around, especially when they are outside. Climate controlled warehouses can delay the effects of product deterioration, but climate controlled warehouses are expensive both in the initial construction as well as the additional ongoing operating costs needed to operate them.

How to find a happy medium

There are certain situations when a just-in-time strategy is most effective and certain situations when a just-in-case strategy is most effective. There is no single strategy that should be applied across all products in your system. Below are some rules of thumb for when you might want to explore a just-in-case inventory strategy. For your products that don’t meet this criteria, then you should consider using a just-in-time inventory strategy.

High cost items

For larger order sizes and when more time is available, manufacturers can sell their items at a lower price. They are able to gain efficiencies from the larger order sizes and with enough time, they can schedule production runs far in advance, meaning they won’t need to stop production on other customers orders. For higher cost items these savings can be substantial. When expensive items can be acquired at a discount, it makes sense to keep some extra in the warehouse just in case they are needed.

For lower priced items, the production savings would not justify the additional warehousing cost to store these items. Lower priced items should lean more towards the just-in-time inventory strategy, unless they meet any of the following criteria:

Long lead time items

Items that take a long time to acquire are not good candidates for a just-in-time inventory strategy. The long lead time could be because an item is difficult to produce and requires lots of steps, or perhaps there is only a limited number of suppliers for a part who can’t always instantly stop their current business to meet the requirements of the DoD. Long lead times are also typically more variable, making it harder to predict when your items will arrive. When lead times are longer, it is smarter to rely on a more just-in-case inventory approach.

For low cost items with a quick lead time, those items can use more of a just-in-time inventory approach, unless they are a high priority item.

High priority items

Some items are absolutely critical to a mission’s effectiveness. There should always be a surplus of these items available in the warehouse just in case. These are the items that would compromise a mission if they were needed and not available in a timely manner. Another consideration is to place these high priority items at multiple locations close to their point of need, potentially at locations around the globe. Having items at multiple locations decreases transportation time and reduces the risk of stockouts in case something were to happen to one of the storage locations.

Items that are lower cost with shorter lead times and lower priority can lean more towards a just-in-time inventory strategy. There is no need to stockpile large amounts of products that can be acquired quickly and cheaply that will not hamper a mission’s effectiveness if there is a small delay in receiving them.

Right-size inventory for a strategic advantage (whether or not you’re the DoD)

There are multiple factors to consider when evaluating between a just-in-time and a just-in-case inventory strategy. There is no one solution for every product type. Having the correct levels of inventory to remain mission effective while remaining cost effective is a balance. While the specifics of this blog relate directly to military strategies, many of the same questions and principles can be applied to other critical supply chains.

Technology that helps you assess correct inventory levels and storage locations is essential for identifying which approach to take to right-size your inventory for a strategic advantage. The right technology will include the factors listed here as inputs into its recommendation processes.