Its Counter intuitive.
But true.
Ordering more than you actually need makes shortages worse.
Typically, a retailer or manufacturer only orders as much as they think they can sell or consume until the next cycle begins.
But sometimes a hot seller comes along, or you hear a part is going to be in short supply, so you decide to order extra—just in case.
In many sectors over the past year, companies that use electronic components in their products have been ordering as much as twice what they think they actually need.
Sometimes the rationale is, “If I have the parts and my competitors don’t, I can win market share!” The flip side of this is, ”If I don’t have the parts and my competitors do, I’ll lose market share!”
Or maybe it’s just to be on the safe side.
This has two predictable consequences:
At first, it makes those products or parts that are in short supply even harder to get.
And second, companies will someday likely be stuck with a lot of excess inventory, and will need to cut prices to unload it, or spend a lot of money carrying it.
The answer isn’t to abandon just-in-case production.
It’s a balance.
Just in time still makes sense when you have local suppliers and everyone is communicating, or to buffer distant suppliers with some just-in-case inventory.
Communication is key.
If you have a good relationship with your suppliers and are communicating regularly so they know your true demand, then you can hold just-in-case inventories in case of disruptions, and if you start to draw on it, everyone knows and you won’t get a bullwhip.
When people are guessing, that’s when they misread signals and put their own spin on forecasts and things get messed up.