We’ve all witnessed the notable shift in focus over the past few years, and how resiliency emerged as the sexiest new buzzword in the world of supply chain. With a barrage of disruptions and unexpected events shaking industries worldwide, the call for resilience reverberated across boardrooms and supply chain strategies.
In response, companies swung like a pendulum, directing their efforts towards bolstering resilience and agility. Yet, as the dust settled, a realization dawned upon many: in the quest for unwavering resilience, have we inadvertently neglected the crucial pillars of efficiency and cost optimization?
As we come to terms with a new reality of uncertainty, and organizations strive to meet customer demands while minimizing costs, the debate between supply chain efficiency and resiliency has gained prominence. While the focus has been primarily on adapting to sudden disruptions, companies must realize that a singular emphasis on resiliency could come at the expense of efficiency and cost saving.
Achieving a balance is crucial for maintaining profitability and establishing a robust yet cost-effective supply chain strategy. The goal must be to build resilient supply chains to quickly adjust and respond to disruptions, while preserving efficiencies to meet business goals and customer expectations, maximize opportunities, and add value.
Just-in-Time vs. Just-in-Case
The traditional approach of just-in-time (JIT) inventory management, which aimed to minimize costs by keeping inventory levels as low as possible, has faced scrutiny in recent times. Many companies are reevaluating their inventory strategies, favoring a just-in-case (JIC) approach that emphasizes buffering inventory to enhance resiliency.
Toyota, credited for pioneering JIThas more recently recognized its supply chain vulnerabilities exposed by the pandemic and following disruptions. This has led the automotive giant to reassess its just-in-time supply chain model, seeking ways to evolve its approach to inventory management. This shift underscores the growing recognition of the need for resilience across all aspects of the business.
However, this shift towards a just-in-case approach, in between JIT and the traditional approach to carry a lot of buffer stock, presents a conundrum for supply chains today. On one hand, there is a need to keep inventory levels low to minimize carrying costs and improve efficiency. On the other hand, the highly uncertain and volatile business environment requires a buffer of inventory to support not just long and unpredictable lead times, but also plan for production and material outages, port congestion and more.
This is why some companies, like Target, are opting to maintain a lean inventory strategy. Target's focus on inventory efficiency allowed the company to weather the storm of consumer spending fluctuations last year. Following some well documented drastic actions in 2022, Target is now managing inventory levels to preserve cash and mitigate the impact on margins and profits. This exemplifies the ongoing debate and the need for an approach that aligns with one’s specific business requirements.
Balanced Scorecard: Save Money or Deliver Resilience?
A balanced scorecard approach brings value by helping businesses make informed decisions, considering the trade-offs between supply chain certainty and reducing costs. The focus is either on saving money through efficiency and cost optimization – or delivering resilience, which is paramount in the face of uncertainties and disruption.
Adopting a JIT approach can help minimize inventory costs and reduce waste. By closely aligning supply and demand, companies can streamline their operations, improve productivity, and ultimately cut down on expenses.
Instead, with a JIC approach and a focus on resilience, companies prioritize being prepared for unexpected events, supplier failures, or market fluctuations. JIC involves building buffer stocks, diversifying suppliers, and implementing robust risk management strategies.
The balanced scorecard allows companies to evaluate the trade-offs between the added costs of resilience measures and the potential benefits of safeguarding the supply chain against disruptions and maintaining customer service levels.
Multi-Echelon Inventory Optimization (MEIO)
One approach that combines efficiency and resiliency is Multi-Echelon Inventory Optimization (MEIO). MEIO goes beyond individual items or warehouses and takes managing inventory to the next level by optimizing stock levels across the entire value chain, at each location and form from raw to WIP to finished goods. This approach ensures resilience across the distribution network or product lines while simultaneously reducing overall inventory levels because you are optimizing both the form and function of inventory at each location.
MEIO solutions apply to inventory optimization for complex supply chains with a need for overall orchestration. An effective MEIO solution suggests the right levels of inventory at each stage of the supply chain by optimizing inventory balance across multiple echelons and locations in parallel.
With a MEIO approach, businesses use an all-encompassing view of the supply chain and demand forecasts across multiple stages in that value chain. This allows for maximizing the benefits of efficiency and resiliency. Companies can use this strategy to ensure the availability of critical inventory while avoiding excessive stockpiling by pooling risk across semi-finished goods, raw materials, or locations.
By analyzing data, demand patterns, and market trends, organizations can optimize their inventory levels, reduce carrying costs, and improve responsiveness to unexpected events.
A Strategic and Holistic Approach to Find Balance
The ongoing debate between supply chain efficiency and resiliency reflects the inherent challenges faced by businesses in today’s ever-changing world. While recent major disruptions have emphasized the need for resilience, we’ve also been reminded of the importance of efficiency and cost optimization.
Achieving supply chain excellence is not solely reliant on resiliency or efficiency. Rather, it requires a nuanced understanding of inventory optimization and the ability to adapt strategies as circumstances change. Inventory optimization must be aligned with customer expectations, business goals, and risk mitigation strategies.
Reducing inventory while operating in a highly uncertain environment, all while maintaining service levels and profitability, poses a significant challenge. It requires a delicate balance and careful consideration of numerous factors. Organizations must leverage data and analytics to gain visibility into their supply chain, understand demand patterns, and identify areas where inventory can be optimized without compromising resiliency.
Finding this equilibrium is essential for navigating the complexities of the modern supply chain landscape. Companies must analyze their unique circumstances, industry trends, and customer expectations to determine the most suitable approach. Flexibility, adaptability, and a continuous improvement mindset are crucial for success.
Ready for a solution to tackle the challenge? Explore the benefits of the Atlas Planning Platform, which utilizes machine learning algorithms to model your network in real-time, enabling continuous optimization of inventory levels. With its data-driven approach, the Atlas Planning Platform empowers companies like yours to make proactive and informed decisions, so you can balance efficiency and resiliency in a dynamic environment.
Schedule a demo with our team and discover how we can help revolutionize your supply chain operations.