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More companies adopting ‘just-in-case’ inventory systems

Unending supply chain bottlenecks and rising shipping costs, coupled with a general surge in demand for consumer goods, have forced local manufacturing and distribution companies to re-examine their approach to inventory management.

War and the pandemic have upended the once faithful ‘just-in-time’ inventory model, companies say, and it is being replaced for now with a more fitting ‘just-in-case’ approach to inventory control.

The transition is also complemented by efforts to deepen relationships with overseas suppliers in the hope that local orders will be prioritised before stock is depleted.

All of this is costly to Jamaican companies, not only in terms of the higher prices for raw materials, commodities and transport, but also in terms of warehousing and inventory management on the ground. There is also the opportunity cost of business lost where goods are in demand by consumers but there is none available to stock retail shelves.

The ‘just-in-case’ model has seen companies holding more inventory as a result. And it has led to warnings of potential losses from overstocking, especially where the goods have a short lifespan or are perishable.

Data collated by the Financial Gleaner on the value of inventory held by listed companies, whose accounts are public, show that in the three years prior to the pandemic, stock levels grew at about a 10-12 per cent pace annually.

However in 2020, the apex year of the pandemic when economies had locked down and the supply chain fallouts began, inventory levels rose only two per cent. That was followed by another dramatic shift last year. This time, inventory values climbed 27 per cent, from $66 billion to more than $83 billion for the stock market companies, the largest movement seen in the data stream.

The financial reports released for the first quarter of 2022 so far also indicate that inventory levels continue to climb.

Energy products distributor and PVC pipe manufacturer FosRich Company Limited, for example, reported a rise in inventory values from $1.4 billion to $1.8 billion at the end of March, saying in a note to shareholders that its forward-purchasing arrangements have been affected by issues related to trans-shipment availability and escalating costs.

“We, however, continue to manage inventory balances and the supply chain with a view to ensuring that inventory balances being carried are optimised relative to the pace of sales, the time between the orders being made, and when goods become available for sale to avoid both overstocking and stock-outs,” the company said.

“Increases in the carrying values of inventories reflect the increased cost of supplies,” it added.

The trigger for the March quarter, CEO of Derrimon Trading Derrick Cotterell says, is disruptions in the supply of finished goods and raw materials caused by the Ukraine-Russia crisis and a surge in demand arising from the rollback of pandemic restrictions. The continuing shortage of shipping containers has also sparked bidding wars for cargo space, he said.

The cost to ship goods to Jamaica is said to have fallen some 12 per cent in recent times but still exceeds pre-pandemic levels.

Companies have been going back to the drawing board on lead times, that is the timely placement of orders to replenish stock, supplier arrangements and economic order quantities, or EOQs, which is that sweet spot for minimising a company’s total costs of ordering, receiving, and holding inventory

“Let’s say lead time used to be four weeks to get here. Now we have to increase that to six or eight weeks because of the uncertainties around shipping,” Cotterell said.

Before the pandemic hit, supply chain managers typically focused on procuring finished goods and raw materials for the lowest cost possible, but that’s also slowly fading with the changing economic tides.

Company managers spend more working through supply details, including sourcing and securing alternative products in the event of product shortages, developing deeper relations with suppliers, and reworking their budget to accommodate for pricier imports.

The impacts vary for companies, depending on their scale, but for operations like grocery and consumer products trader Derrimon and tea maker Jamaican Teas Limited, both of which are listed on the junior stock market for SMEs, they have had to become more creative in their procurement strategies.

At large company Wisynco Group: “We can go out buy, say, six months’ worth of raw materials and lock in a price” but smaller companies “have to probably buy every two months or maybe in some cases every few weeks”, said Chairman William Mahfood. “Their pricing is already higher, and they are also at risk of price increases on a continuous basis.”

One of those small companies, Jamaican Teas Limited, says it has had to become more nimble in the management of its supply arrangements. CEO John Mahfood also said the company now spends more time on purchase orders and recently increased inventory by $100 million, hoping to avoid a recurrence of a dip in export sales that emanated from a shortage of raw material supplies.

“That’s one of the things that companies do in times of shortages. It carries more interest cost, but we are optimistic that as shipping costs come down, in the next three to four months our gross profit will be back at levels we had in 2021,” he said.

Derrimon, meanwhile, is looking towards more personal interactions to deal with its procurement issues.

“In this situation, we have more manual interactions. It’s not like you can set a programme and say this is it because lead times change regularly. Sometimes we have to pre-pay for goods just to ensure we get them because lots of manufacturers, retailers, and distributors going after the same products. And remember, we are competing with the global market for goods,” Cotterell said.

Relative to December 2019, Jamaican Teas’ inventory levels have climbed 54 per cent; Derrimon’s is up 35 per cent. Among large companies, GraceKennedy has seen a 44 per cent rise in inventory values while Seprod’s is up 48 per cent.

Wisynco Group’s inventory has dipped three per cent relative to pre-pandemic levels, but the beverage maker and consumer products distributor is facing a challenge with packaging material.

“The inputs that we use for packaging come from elsewhere. But there is a shortage of freight, and because of that, we could have labels or cans or something just not make it in time,” said William Mahfood.

“As we have seen in the market, many companies are in short supply; many companies are using alternative caps because they can’t get the right caps or bottles. All of those things are a factor of supply chain issues globally,” he said.

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