Just-in-Time vs Just-in-Case Inventory: How Much Cover to Hold

The choice here is a quantity rather than a creed: how many working days of production the paper on the floor will carry. Take Anjani Stationers from the 49.30 working days it holds down to ten and Rs 22,32,000/- comes off the floor, saving Rs 2,12,040/- of interest a year. A paper stall longer than 14.59 working days costs more than that. Arithmetic gives a threshold, never the answer.

The two postures have already been introduced. Just-in-TimeBuying and holding as little input stock as the works can run on, with deliveries timed to arrive close to when they are needed. The posture and its effect on a chain are set out on The Supply Chain: Dependency, Cost and Fragility. and Just-in-CaseDeliberately holding more input stock than production needs right now, so that a break in supply is absorbed by the pile rather than stopping the works. The Supply Chain: Dependency, Cost and Fragility sets this out too. were both set out on The Supply Chain: Dependency, Cost and Fragility, along with what a break in supply does to a chain step by step. Both definitions are assumed here rather than reopened.

The part that earlier account leaves open is the choice itself. Four separate comparisons sit in this stretch of reading and each one is asking a different question. One asks which direction a manufacturer should grow in. Another asks whether a step of the work is worth doing in-house at all. Just-in-Time against Just-in-Case asks a question about a quantity: how much cover to hold. Not which philosophy is correct, not which posture sounds more modern. How many days.

What is the choice actually between?

Here is the move that turns this from an argument into arithmetic. The two names sound like two systems, two schools of thought, two temperaments. Neither name is a system. The choice is not between two philosophies, it is a number of days. A low number is one of those postures; a high number is the other; and every posture anybody has bothered to name is some reading on that same scale.

The quantity is days of coverStock on hand divided by how much of it gets used in a working day, so the answer comes out as a number of days. The measure itself was set out on The Supply Chain: Dependency, Cost and Fragility.. Anjani Stationers Private Limited, an invented manufacturer of hard-bound registers, closed year two with 14,000 reamsA ream is 500 sheets of paper. Anjani Stationers' lead register takes 100 sheets, so five registers come out of a ream when nothing is spoiled. of paper on the floor. Its works consumes 284 reams every working day. Fourteen thousand divided by 284 is 49.30 working days, and that is where its dial actually sits. Cut the pile to 2,840 reams and the dial reads ten. Same business, same paper, same machines. One number moved.

Once the choice is a number, both consequences can be put in rupees, and that second move is what makes the comparison possible. Money held in stock costs something every day it sits there, and production that does not happen costs something too. Both costs can be written in the same unit and set against each other. Neither of those costs appears as a line in any statement, which is exactly why the decision gets argued rather than computed.

Think of it at kitchen scale first. A household that keeps three months of rice, oil and pulses in the cupboard is holding cover. The household has not lost anything, but the money for those three months is sitting in tins rather than in the bank, and an overdraft means it is paying interest on tins. A household that buys for the week is holding almost no cover. The weekly household keeps its money, and the first time the shop is shut for a fortnight it eats out at restaurant prices. Neither household is being clever or foolish. The two have set the same dial to two different numbers, and which setting was right depends entirely on how often that shop shuts.

What does cutting the cover release?

Take the dial from 49.30 working days down to ten and follow the paper. Ten working days of production consumes 2,840 reams. Anjani Stationers carries its closing paper at Rs 200/- a ream, so ten days of cover is Rs 5,68,000/- of paper standing on the floor. The pile it actually held was Rs 28,00,000/-. Subtract one from the other and Rs 22,32,000/- of money stops being paper.

A large number on its own means nothing. Put the Rs 22,32,000/- beside something. Anjani Stationers ended year two with Rs 5,00,000/- in the bank. The Rs 22,32,000/- released by cutting cover is 4.46 times the entire year-end cash balance. This is not a tidy improvement to a working capitalThe money tied up in the day to day running of a business: stock on the floor and amounts owed by customers, less the amounts owed to suppliers. line that a reviewer might mention in passing. The release is several times more cash than the business has anywhere else.

The number is large enough to tempt bad language. Here is the thing to be careful about. Nothing was earned. The Rs 22,32,000/- was always the business's own money. The money was simply sitting in the form of paper, and now it sits in the form of a bank balance. A release from stock is not a profit, it is not a gain, and it must never be written into a report as either. The household that stops keeping three months of groceries in the cupboard has not made money that week. The household has stopped tying money up in tins.

What is the released cash worth in a year?

One distinction gets skipped most often, and skipping it makes every later comparison meaningless. The release is a one-time event and the interest saving is the annual one, and only the annual one can be set against an annual risk. Rs 22,32,000/- comes off the floor once. The same money does not come off again next year. The repeating figure, year after year, is what that money stops costing.

Anjani Stationers runs a cash credit facilityA working capital borrowing arrangement where a business draws and repays as it needs to, up to an agreed limit, and pays interest on what is actually drawn. contracted at 9.5 per cent. The rate is this particular invented business's own facility rateThe interest rate a lender has actually agreed with one borrower on one facility, written into that borrower's own sanction letter. A facility rate is not a market rate and not a policy rate., written into its own arrangement with its own banker. The rate is not a market rate and not a benchmark, and it belongs to one borrower and nowhere else. Rs 22,32,000/- at 9.5 per cent is Rs 2,12,040/- a year.

Put that against something the reader already has. Anjani Stationers earned Rs 41,50,000/- of operating profit in year two. Rs 2,12,040/- is 5.11 per cent of it. Five per cent of operating profit is worth a serious conversation, and it arrives quietly: roughly Rs 17,670/- a month, folded into an interest charge nobody reads line by line.

What does short cover cost when the paper stops?

Now let the other side of the dial speak. The paper merchant stops for 21 working days. Anjani Stationers is sitting on ten days of cover.

The first ten of those days cost nothing at all. The pile absorbs them. Absorbing a stall is what a pile is for. Then the pile runs out and eleven production days are lost. Anjani Stationers makes 1,000 registers a working day, so eleven days is 11,000 registers that do not get made. Each register carries Rs 46.20/- of contributionWhat one unit brings in after the costs that move with volume are taken out of its selling price. The remainder goes towards covering the costs that do not move.. Eleven thousand at Rs 46.20/- is Rs 5,08,200/-.

Set that beside the saving. One stall takes 2.40 times the whole year's interest saving. Twelve months of careful working capital discipline, undone by three weeks of a lorry not arriving.

The shape of the two is why this mistake is so common. Notice it. The saving arrives as twelve slices of about Rs 17,670/-, each one invisible inside a monthly interest charge. The loss arrives as one block, in one month, on one line, in front of everybody. The saving is the kind of thing nobody notices and the loss is the kind of thing nobody stops talking about, and that asymmetry is about attention rather than arithmetic.

Where do the saving and the loss exactly cancel?

Both quantities are now in rupees a year, so they can be set against each other and the crossing point can be found. Three steps, each one small enough to redo on the back of an envelope.

Step one. A lost production day costs Rs 46,200/-. One thousand registers at Rs 46.20/- of contribution each. Rs 46,200/- is what a day of the works standing still is worth, on the assumption that the only thing lost is the contribution on registers that were not made.

Step two. The annual saving buys 4.59 production days. Rs 2,12,040/- divided by Rs 46,200/- is 4.59. In other words, a year of running on ten days of cover pays for four and a half days of the works standing idle, and no more.

Step three. Add back the cover still held. At ten days of cover, the first ten days of any stall are free. So the stall that exactly exhausts the year's saving is ten days plus 4.59 days, or 14.59 working days.

The rule in the words a person would actually use runs like this. At ten working days of cover, holding the stock instead pays for itself if one paper stall a year is expected to run longer than 14.59 working days, and it does not if the stalls expected are shorter or rarer than that. Above the line, the pile earns its keep. Below the line, the pile is expensive furniture.

The 21 working day stall used throughout sits well past the line, and the cost above looked brutal for that reason. The stall is not a marginal case. Twenty-one days runs more than six days past the point where the whole year's saving is gone.

Why are there two thresholds, and when does each one apply?

The 14.59 repays a careful reading. The threshold moves the stall length while holding cover at ten days. The panel above it does the opposite: it moves cover while holding the stall at 21 days. The two questions have two different answers, and swapping them is a real mistake rather than a pedantic one.

The 14.59 is a stall length. The 14.59 answers one question: at ten days of cover, how long a stall wipes out the year's saving? The 17.26 in the panel is a depth of cover. The 17.26 answers a different one: against a stall already known to run 21 working days, how deep does the pile have to be before holding it costs more than it protects? At 17.26 working days of cover, both sides come to Rs 1,72,875/-. Neither figure can be quoted at the other's question.

What does that threshold quietly assume?

The 14.59 day rule prices a stall at lost contribution and at nothing else. That is a real assumption and it is doing a lot of work.

The rule does not price a customer who places an order somewhere else and never comes back. Nor does it price a distributor who quietly moves half his shelf to another maker. And most seriously for this particular business, it does not price a missed season.

Anjani Stationers' volume is seasonalSales that arrive unevenly across the year, bunched into particular weeks or months rather than spread level, so the same delay costs different amounts depending on when it lands., and its own published accounts show it: the cash credit facility is drawn through the school-supply season and cleared before the year end. A register that does not get made in a quiet month gets made the following month and sold to somebody. A register that does not get made in the four weeks before a school year starts does not get sold at all that year. The buyer has already bought one from somebody else and will not need a second until next June. Same 11,000 registers, same Rs 5,08,200/- in the arithmetic, and two completely different events. The arithmetic cannot tell those two stalls apart.

So here is the honest statement, and it is the one worth carrying away. The arithmetic gives the threshold; the stall frequency is a judgement no formula supplies. Every input to the 14.59 came out of the accounts except one, and the missing one is how long the longest stall next year will be. The longest stall is a fact about a paper merchant, about a mill, about a monsoon and about a lorry. No calculation contains it, and no amount of arithmetic will produce it.

So is one posture better than the other?

Neither one, and that refusal is not mere politeness. A comparison establishes a difference and produces a threshold. A comparison does not produce a ranking, and dressing a preference up as balance would be worse than saying nothing.

Look at what the arithmetic actually settled. On the stated criterion of money, with a stall priced at lost contribution only and one stall assumed in the year, the threshold decides. Change the criterion and the answer moves with it. Price a missed season and the threshold falls. A stall now costs more per day. Give the business a lower borrowing rate and the threshold rises. Holding stock is cheaper. Give it a second paper merchant in a different state and the longest expected stall shortens, and the whole question softens with it.

A threshold is not an answer until somebody supplies the frequency, and supplying it is not arithmetic. Both halves of the comparison are real. Cutting cover really does release Rs 22,32,000/- and really does save Rs 2,12,040/- a year. Holding cover really does absorb a 21 working day stall whole and leave production untouched. Which of those matters more is decided by a number that lives outside the accounts.

How does anybody actually settle a cover decision?

What is deliberately left out here?