Business customers generally try to maintain an adequate inventory – certainly enough to prevent stockouts or keep production lines moving. There’s no greater disaster in a factory than to have a production line close down. And a retailer or wholesaler can lose sales quickly if popular products are not on the shelf.
On the other hand, keeping too much inventory is expensive. Firms now pay more attention to inventory costs – and look to their suppliers for help in controlling them. This often means that a supplier must be able to provide just-in-time (JIT) delivery – reliably getting products there just before the customer needs them.
Just-in-time relationships between buyers and sellers require a lot of coordination. For example, an automobile producer may ask a supplier of automobile seats to load the delivery truck so seats are arranged in the color and style of the cars on the assembly line. This reduces the buyer’s costs because the seats only need to be handled one time. However, it may increase the supplier’s costs. Most buyers realize they can’t just push costs back onto their suppliers without giving them something in return. Often what they give is a longer-term contract that shares both the costs and benefits of the working partnership.
A key advantage of JIT for business customers is that it reduces their physical distribution (PD) costs – especially storing and handling costs. However, if the customer doesn’t have any backup inventory, there’s no "security blanket" if something goes wrong. If a supplier’s delivery truck gets stuck in traffic, if there’s an error in what’s shipped, or if there are any quality problems when the products arrive, the customer’s business stops. Thus, a JIT system requires that a supplier have extremely high quality control in production and in every PD activity, including its PD service.
For example, to control the risk of transportation problems, JIT suppliers often locate their facilities close to important customers. Trucks may make smaller and more frequent deliveries – perhaps even several times a day. As this suggests, a JIT system usually requires a supplier to be able to respond to very short order leadtimes. In fact, a supplier’s production often needs to be based on the customer’s production schedule. However, if that isn’t possible, the supplier must have adequate inventory to meet the customer’s needs.
You can see that the JIT system shifts greater responsibility for PD activities backward in the channel – to suppliers. If the supplier can be more efficient than the customer could be in controlling PD costs – and still provide the customer with the service level required – this approach can work well for everyone in the channel. However, it should be clear that JIT is not always the lowest cost – or best – approach. It may be better for a supplier to produce and ship in larger, more economical quantities – if the savings offset the distribution system’s total inventory and handling costs.
While not every firm can – or should – use a just-in-time approach, it is an important idea. It focuses attention on the need to coordinate the PD system throughout the channel. It also highlights the value of close working relationships – and effective communication – between marketers and their customers. Whether or not a firm uses the JIT approach, good information is often the key to coordinating PD activities.