It was back in the ‘70s when Toyota was one of the first manufacturers to adopt a Just-in Time (JIT) inventory management strategy and the world followed. Back then, the strategy mostly applied to manufacturing by strictly managing the arrival of raw materials just prior to the production process. JIT decreased inventory carrying costs for the manufacturer which drove improved profitability.
Today, JIT applies to all segments of product distribution, including ecommerce, and not just the manufacturing process. JIT is an assumed product management process and is rarely referenced today as a cost savings differentiator.
Additionally, advanced predictive analytics technologies are permitting merchants and distributors to further ratchet down the amount of warehoused inventory by placing smaller amounts of product in forward stocking venues, based on predicted, micro-demand. However, this practice must be closely managed as holding reduced inventory levels at forward stocking micro fulfillment locations can drive up middle mile transportation expense.
The Intersection of JIT, Ecommerce and Supply Chain Disorder
JIT inventory management practices negatively impacts ecommerce product availability during this period of supply chain disorder, and can drive up the cost of managing inventory:
- Adobe recently reported that out-of-stock merchant notices to ecommerce consumers were up this past holiday season. However, it is not clear that increased out-of-stock products resulted in lost ecommerce sales as most consumers probably purchased 2nd or 3rd choice gift items that were in stock, or visited alternate websites that did have the desired product in stock.
- E-commerce order-fulfillment 3PL’s were having to manage the late arrival of smaller product allocations during the busy holiday selling season, which drove higher handling costs.
- Retailers still had to quickly move/sell products that arrived at order fulfillment 3PL’s after 12/25. In many cases, these products were offered for sale at reduced cost which should have negatively impacted merchant profitability. However, for the larger publicly traded ecommerce merchants, we won’t understand the impact on profitability until Q4-21 and Q1-22 earnings are reported.
- Ecommerce micro fulfillment solutions must be closely managed in this challenging environment being impacted by supply chain delays. By design, JIT inventory management drives reduced inventory levels at these forward stocking fulfillment locations and results in higher instances of stock-out conditions, which will drive higher middle mile transportation expense.
- In the US, our dependence on ecommerce products sourced from Asia makes it more difficult to manage JIT based product availability at the fulfillment center level as these offshore sourced products are more prone to delays at our overburdened west coast ports.
Will Supply Chain Disorder Result in an Ecommerce JIT Paradigm Change?
It’s unlikely that supply chain disorder will result in major changes to JIT ecommerce supply chain practices. US consumers have demonstrated that they are accepting of out-of-stock inventory conditions, partially driven by JIT product management practices.
This condition is more about the overall change in the ecommerce value proposition as perceived by the consumer. Ecommerce as we know it today is just so darn convenient that consumers are willing to trade off periodic limited product availability against the overall convenience of ecommerce. The condition of out-of-stock notices directed to ecommerce consumers is not going away…and the consumer will get over it.
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