Just in time, or still too late?

We live in a world in which it is possible to receive the goods that we desire, from as near as our own cities or from anywhere across the globe almost instantaneously.

It’s a hallmark of modern day life in our globalized world that we expect to receive our products as quickly and as cheaply as possible. It’s strange to think that it has only been this way for just a few decades, but there seems to be no going back.

Business owners and managers of supply chains have responded to this expectation for instant gratification with various methods. Many large companies approach suppliers with a principle known as ‘just in time’ or JIT to improve efficiencies and reduce costs.

JIT is designed with a primary goal in mind: to reduce the lead-time and costs associated with delivering a product. In short, this means manufacturing and product orders must always be done based on the customer’s desires. This approach seeks to ensure that expectations of timeliness, quality and delivery are always met.

Of course, these expectations can change drastically, despite companies’ best efforts to track and predict them. Recent events such as the coronavirus have made this all too clear, as average shoppers rush to stock up on essentials for fear of missing out.

Just in time or just in case?

Originating from Japan in the 1960s, the JIT approach is now broadly used in today’s supply chains, even across big names such as Toyota, McDonalds and Apple. Many e-commerce driven companies also use this method, as their margins tend to be slim, so efficiency and costs are key.

JIT allows each company in the chain to only manufacture what the next company in the chain requires and orders.

As a consequence, some companies hold minimal supplies of stocks across their entire supply chain in order to use their resources only for what has been agreed and paid upon on. This approach mitigates the risk of holding stock that might not be used, as these goods may decrease in value.

JIT enables companies to reduce the cashflow disadvantage through raw materials and/or intermediate products catching dust in warehouses, reduce inventory cost, reduce labour costs and increases the efficiency and quality of the supply chain.

This method is in contrast with the ‘just in case’ or JIC method of production.

JIC occurs where companies have a large inventory in order to minimize the probability that they cannot meet the market demand and will sell out of stock. The best way to think of this is to consider companies like Amazon, who seem to stock everything rather than trying to predict demand.

Efficiency has its downsides

JIT is cost-efficient through eliminating labour costs and waste by not simply holding stock that is waiting to be used. However, this approach has its downsides.

JIT optimizes supply chains in theory but there is minimal-to-no room for delays in the manufacturing and logistics process, not to mention other disruptions.

Recently, the trade war between the United States (US) and China, the major bushfires in Australia and the outbreak of the coronavirus (COVID-19) have been extremely disruptive factors which have exposed the disadvantages of the JIT method.

Many manufacturing facilities across Asia and Europe are currently closed, and some ships or planes are not able to leave their ports or airports. Some companies are currently struggling or unable to keep up with the customer demands.

Finding a balance

Some businesses are already finding ways to close the gaps left by a JIT approach. One possible solution is to have manufacturing companies or stock close to where the customer is located, usually by making use of strategic gateways.

This approach, which effectively shortens the supply chain, is a common occurrence within the European Union (EU), and the benefits of this approach are likely to increase further as Brexit goes ahead.

Similarly, the effects of COVID-19 have exposed the weaknesses in global supply chains and made the case for relocation of local supply hubs to shield business from future international shocks.

While an emphasis on having a central location with optimized logistics and transport connectivity can fill the gaps left behind by JIT and JIC approaches, this is not the only solution.

It’s also important to consider and compare the tax position of your company in each country or location. This includes reviewing potential benefits from a VAT and customs perspective in relation to import regimes, which can have a significant effect on your bottom line.

So, which is it?

There is something to say for using either just in time or just in case methods when designing your approach to supply. There really is no ‘one-size-fits-all’ approach for businesses, and companies need to consistently review their processes as their business grows, shrinks or relocates.

However, given recent global events, every business should reconsider whether its current supply chain set up is the right one – and that means right for now but also for the future.

Will your business be protected from shocks like coronavirus, economic downturns and restricted international travel, or is it time to reconsider your operational approach?

With the benefit of hindsight, only the businesses who have been on the front foot in reviewing and shock-proofing their supply chains will emerge from the current crisis unscathed.

This article is an example of the close collaboration within the Baker Tilly network. VAT & Customs specialist Marisa Hut from Baker Tilly in the Netherlands worked on this with Darryl Daisley, Director Customs, Fuel Tax and International Trade at the Baker Tilly member firm Pitcher Partners in Perth, Australia. On a daily basis Marisa and Darryl along with their teams are working closely to assist clients with global and local solutions for their supply chains.

This content was published more than six months ago. Because legislation and regulation is constantly evolving, we recommend that you contact your Baker Tilly consultant to find out whether this information is still current and has consequences (or offers opportunities) for your situation. Your consultant will be happy to discuss the latest state of affairs with you.