Just-in-Time or Just-in-Case

Just-in-Time or Just-in-Case

Over the last decade many manufacturers have started using a “Just-in-Time” delivery system for their global supply chains. The advantage to this system is that companies receive the exact components they need at just the right time, which minimizes inventory costs. The disadvantage is that their supple chains become vulnerable to shocks. For example Ice Land’s volcanic eruption of 2010 prevented the air transport of components across the Atlantic. To reduce the risk of supple shocks, Economists at HSBC have purposed “Just-in-Case” supply systems.

Their proposal suggests diversifying supply chains both across companies and geographically. For instance having multiple suppliers from different countries reduces the risk that a natural disaster might stop the flow of inputs. The problem is that this new system loses the advantage of economies of scale and does not minimize inventory costs has efficiently as “Just-in-Time” supply chains. I think companies should measure the risk of each supply system and chose the system such that marginal cost equals benefit.

What do you guys think?

This article from the Economist describes the idea in greater detail.

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