Should companies continue to follow a just-in-time inventory management strategy? Or should they go back to holding safety stock just in case stockouts occur? The answer is a little bit of both.
Jonathan Byrnes (jlbyrnes@mit.edu) is a senior lecturer at the Massachusetts Institute of Technology (MIT) and is founder and chairman of Profit Isle, a SaaS profit-analytics Enterprise Profit Management company. He coauthor of the recently published book Choose Your Customer: How to Compete Against the Digital Giants and Thrive.
John Wass is CEO of Profit Isle and former senior vice president of Staples. He is a co-author of the recently published book, Choose Your Customer: How to Compete Against the Digital Giants and Thrive.
A November Wall Street Journal headline declared, “Companies Grapple with Post-Pandemic Inventories Dilemma.” The first paragraph read, “Companies are wrestling with how big their inventories should be, since the pandemic highlighted the danger of having both too much and too little stored away.” According to the article, the most important inventory question facing managers today is whether their supply chains should be just-in-time (with low inventories) or just-in-case (with high inventories).
Two important principles will enable managers to answer this question today:
The right amount of inventory for a particular product serving a specific customer depends on the customer’s profitability and the product’s demand pattern (in other words, is demand steady or erratic); and
The right definition of excellent service is always keeping your promises to your customers, but you don’t have to (and should not) make the same promises to all customers.
In other words, the right answer to the just-in-time vs. just-in-case question is both; companies should run multiple parallel supply chains with the supply chain structure and inventory strategy tailored to the specific customer and product.
In the past, this was impossible to do because companies did not have adequate information on customer profitability and product demand patterns. Instead they had to watch broad aggregate financial metrics like revenue, gross margin, and cost. They also had to monitor aggregate supply chain metrics like the percent of complete on-time order shipments. As a result, service intervals (the time between when an order is received and when the customer receives the shipment) were typically the same for all customers. In that era, it made sense to have broad, companywide policies for inventory management, like just-in-time vs just-in-case.
But today, advance analytics and business intelligence tools, such as an enterprise profit management (EPM) system, can provide profitability metrics down to the transaction level. These systems can produce the profit and demand variance information needed to set the right inventory and service intervals for every product ordered by every customer. Because an EPM system tracks every order, managers can determine both every customer’s demand variance (order pattern) for every product they purchase and every customer’s profitability. This enables astute managers to make the right service interval promises to each customer for each product, which provides the basis for determining the right inventory levels for each customer-product set.
Managers across industries who use EPM systems typically find a characteristic customer profitability pattern:
20% of their customers typically generate about 150% of the company’s profits. These “Profit Peak” customers are their large, high-profit accounts. For these customers, the objective is to flawlessly meet their needs and find ways to create service innovations that grow these relationships.
30% percent of their customers are large, money-losing accounts that end up eroding about 50% of the profits gained from the “Profit Peak” customers. In our experience, the problem with these “Profit Drain” customers is rarely that they are being offered below-market pricing but rather that they are accruing excessively high operating costs. For example, the customer may be ordering too frequently or holding excessive safety stock. In many cases, these practices are costly for both companies but can often be easily reversed.
50% of their customers are small accounts that produce minimal profit but consume about 50% of a company’s resources. For these “Profit Desert” customers, the goal is to reduce the operating costs associated with serving them while growing the few that are development prospects.
When a company is able to identify which of the three profitability categories a customer falls into and what the demand/order pattern for the product is, it finally becomes feasible and practical to tailor its inventory strategy to the customer. The company can now individualize (and keep) its customer service promises.
Make the right promises
Figure 1 presents a matrix that shows example service intervals that a company might promise to its customers. The columns represent profit-based customer segments, while the rows represent steady- vs. variable-demand patterns.
[Figure 1] What service interval should you be providing? Enlarge this image
Profit Peak customers and steady-demand products: Your Profit Peak customers provide your core profitability. Your most important supply chain task is to give each profit peak customer what it needs every time (unless supply chain disruptions make this impossible for a time). Their service interval is set at one-day (or less).
The amount of inventory needed for your profit peak customers depends on their demand variance. (Actually, it depends on the degree to which you can forecast their demand; a customer may have a lot of variance, but if you can forecast it, you can plan your inventory purchases to match the customer’s demand peaks and valleys.)
High-profit customers with steady demand products (for example, major urban hospitals buying IV solutions) only require low inventory levels. Their supply chains should be “flow-through pipelines” with minimal inventory at each point. (In other words, inventory should be replenished at a steady rate at every point in the supply chain to match the customer’s steady volume of consumption. You should only hold just enough safety stock inventory to meet emergencies.)
Profit Peak customers with variable-demand products: High-profit customers with variable-demand products (for example, major urban hospitals trying a new type of safety glasses) warrant a lot of safety stock. For these critical customers, you need to carry enough just-in-case inventory to ensure that they will almost never run out of product.
If the local distribution center (DC) runs low on one of these products, you should expedite shipments from a central facility at no cost to the customer. Their service interval is set at one day, as well.
Profit Drain customers with steady-demand products: Profit Drain customers with steady-demand products (for example, distant mid-sized hospitals purchasing IV solutions) also require only low levels of inventory. They also should have flow-through pipeline supply chains. However, their steady demand means that you will not have to carry safety stock locally. If local stock is tight, they should have lower priority than your Profit Peak customers.
Here, the service interval again should be one day, with the understanding that it will stretch to two to three days on the rare occasions that your local DC is low on stock and reserving product for your Profit Peak customers. If they insist on getting faster service in these unusual occasions, they should bear the cost of expediting the product from a central warehouse.
Profit Drain customers with variable-demand products. If a large, money-losing customer has erratic demand for a product (for example, a distantly located mid-sized hospital buying fashionable flowered gowns), it is not necessary to hold high levels of local safety stock. Instead, you should set a service interval (perhaps three days) that enables you to bring stock in from a central warehouse. The safety stock inventories of these products in the local DC should be reserved for your higher priority Profit Peak customers.
Profit Desert customers with steady-demand products: Your Profit Desert segment is comprised of numerous small customers. Typically, the top quartile of this segment (arrayed in descending order by profit) is quite profitable, the bottom quartile is quite unprofitable, and the middle quartiles produce negligible profits. Although the aggregate demand is stable, the demand for a local DC serving these customers can be very unpredictable.
The top quartile Profit Desert customers should get priority on order fulfillment over the other three quartiles. The service interval for steady-demand products (for example, consumables ordered by small machine shops) might be set at three days. In most cases, your top quartile Profit Desert customers will receive their orders in one day, but if your large Profit Peak and Profit Drain customers have a surge in demand, the three-day service interval provides ample time to bring product in from a central warehouse while still meeting your service commitments. The other three quartiles of Profit Desert customers would typically have a three-day service interval.
Profit Desert customers with variable-demand products: The service interval for variable-demand products sold to customers in the Profit Desert segment (for example, a specialized machine tool needed by a small machine shop for an occasional project) might be set at five days. This will provide ample time to bring product in from a central warehouse while giving priority on DC stock to the Profit Peak and Profit Drain customers. Because the majority of products typically have variable demand, this will greatly reduce your overall inventory costs while maintaining your high service levels. If a Profit Desert customer needs a product quickly, it should pay the cost of expediting the product from a central warehouse.
Manage your account relationships
Tailoring your service intervals to match customer profitability and demand pattern will help you keep your inventory low while keeping your service level high. If you don’t tailor your inventory strategy, you risk facing stockouts for your Profit Peak customers or carrying expensive safety stock for the Profit Drain and Profit Desert customers (which is not economically justified). The key is to be clear in advance about the “rules” of how you will serve your customers. If you always keep these promises, your service level will be 100%.
This process might raise concerns that customers will leave for other suppliers with uniformly short service intervals. However, this is often not the case. Most major customers have their own in-house inventories and are simply issuing periodic replenishment orders. Oftentimes if the service interval is a few days, the customer can adequately plan for this. The real reason why most customers want very fast deliveries is that they do not trust the supplier to meet its commitments, and the reason why most suppliers can’t meet their commitments is because they make the same short-interval commitments to every customer. If you keep your service commitments 100% of the time (and accommodate the occasional actual emergency need), your customers will be fully satisfied. If your customers do complain about your service intervals, they have the option of working with you to bring your return on serving them up to a level that warrants a shorter service interval.
Moreover, the differentiated process described above commits to one-day (or less) service intervals for all Profit Peak customers on all products and even for Profit Drain customers’ steady products. Most Profit Drain customers can tolerate a short wait for variable-demand products, especially for periodic restocking orders. Your Profit Drain and Profit Desert customers should pay compensatory prices if they want uniformly quick service and not require you to make your Profit Peak customers cross-subsidize the losses that they cause.
Manage your supply chain(s)
This process of carrying the right inventory for each customer segment is very manageable. We have described only six business segments: Profit Peak customers, Profit Drain customers, and Profit Desert customers—each with ether steady or erratic demand.
In complex companies, this matrix can be expanded to address more customer segments (for example, special development accounts) and product types (for example, mission-critical parts). However, increasing the complexity quickly makes the system much more difficult to manage and maintain.
By tailoring their inventory strategy to the customer-profit segment, managers can boost their profitability by providing the right set of incentives for each segment:
Profit Peak customers get consistently fast service, with constant priority on inventory;
Profit Drain customers get appropriate service promises, which are always kept, and they have an incentive to engage with you to bring your profitability on serving them to Profit Peak levels (giving them priority on inventory);
Profit Desert customers get appropriate service promises, which they can rely on, and they have an incentive to grow their business and profitability to Profit Peak status.
This practical process enables you to define multiple parallel supply chains, each appropriate for a distinct business segment. This is the key to setting the right inventory level for each product, aligning them with your changing business, and using your supply chain to fuel your profitable growth.
Generative AI (GenAI) is being deployed by 72% of supply chain organizations, but most are experiencing just middling results for productivity and ROI, according to a survey by Gartner, Inc.
That’s because productivity gains from the use of GenAI for individual, desk-based workers are not translating to greater team-level productivity. Additionally, the deployment of GenAI tools is increasing anxiety among many employees, providing a dampening effect on their productivity, Gartner found.
To solve those problems, chief supply chain officers (CSCOs) deploying GenAI need to shift from a sole focus on efficiency to a strategy that incorporates full organizational productivity. This strategy must better incorporate frontline workers, assuage growing employee anxieties from the use of GenAI tools, and focus on use-cases that promote creativity and innovation, rather than only on saving time.
"Early GenAI deployments within supply chain reveal a productivity paradox," Sam Berndt, Senior Director in Gartner’s Supply Chain practice, said in the report. "While its use has enhanced individual productivity for desk-based roles, these gains are not cascading through the rest of the function and are actually making the overall working environment worse for many employees. CSCOs need to retool their deployment strategies to address these negative outcomes.”
As part of the research, Gartner surveyed 265 global respondents in August 2024 to assess the impact of GenAI in supply chain organizations. In addition to the survey, Gartner conducted 75 qualitative interviews with supply chain leaders to gain deeper insights into the deployment and impact of GenAI on productivity, ROI, and employee experience, focusing on both desk-based and frontline workers.
Gartner’s data showed an increase in productivity from GenAI for desk-based workers, with GenAI tools saving 4.11 hours of time weekly for these employees. The time saved also correlated to increased output and higher quality work. However, these gains decreased when assessing team-level productivity. The amount of time saved declined to 1.5 hours per team member weekly, and there was no correlation to either improved output or higher quality of work.
Additional negative organizational impacts of GenAI deployments include:
Frontline workers have failed to make similar productivity gains as their desk-based counterparts, despite recording a similar amount of time savings from the use of GenAI tools.
Employees report higher levels of anxiety as they are exposed to a growing number of GenAI tools at work, with the average supply chain employee now utilizing 3.6 GenAI tools on average.
Higher anxiety among employees correlates to lower levels of overall productivity.
“In their pursuit of efficiency and time savings, CSCOs may be inadvertently creating a productivity ‘doom loop,’ whereby they continuously pilot new GenAI tools, increasing employee anxiety, which leads to lower levels of productivity,” said Berndt. “Rather than introducing even more GenAI tools into the work environment, CSCOs need to reexamine their overall strategy.”
According to Gartner, three ways to better boost organizational productivity through GenAI are: find creativity-based GenAI use cases to unlock benefits beyond mere time savings; train employees how to make use of the time they are saving from the use GenAI tools; and shift the focus from measuring automation to measuring innovation.
Business software vendor Cleo has acquired DataTrans Solutions, a cloud-based procurement automation and EDI solutions provider, saying the move enhances Cleo’s supply chain orchestration with new procurement automation capabilities.
According to Chicago-based Cleo, the acquisition comes as companies increasingly look to digitalize their procurement processes, instead of relying on inefficient and expensive manual approaches.
By buying Texas-based DataTrans, Cleo said it will gain an expanded ability to help businesses streamline procurement, optimize working capital, and strengthen supplier relationships. Specifically, by integrating DTS’s procurement automation capabilities, Cleo will be able to provide businesses with solutions including: a supplier EDI & testing portal; web EDI & PDF digitization; and supplier scorecarding & performance tracking.
“Cleo’s vision is to deliver true supply chain orchestration by bridging the gap between planning and execution,” Cleo President and CEO Mahesh Rajasekharan said in a release. “With DTS’s technology embedded into CIC, we’re empowering procurement teams to reduce costs, improve efficiency, and minimize supply chain risks—all through automation.”
And many of them will have a budget to do it, since 51% of supply chain professionals with existing innovation budgets saw an increase earmarked for 2025, suggesting an even greater emphasis on investing in new technologies to meet rising demand, Kenco said in its “2025 Supply Chain Innovation” survey.
One of the biggest targets for innovation spending will artificial intelligence, as supply chain leaders look to use AI to automate time-consuming tasks. The survey showed that 41% are making AI a key part of their innovation strategy, with a third already leveraging it for data visibility, 29% for quality control, and 26% for labor optimization.
Still, lingering concerns around how to effectively and securely implement AI are leading some companies to sidestep the technology altogether. More than a third – 35% – said they’re largely prevented from using AI because of company policy, leaving an opportunity to streamline operations on the table.
“Avoiding AI entirely is no longer an option. Implementing it strategically can give supply chain-focused companies a serious competitive advantage,” Kristi Montgomery, Vice President, Innovation, Research & Development at Kenco, said in a release. “Now’s the time for organizations to explore and experiment with the tech, especially for automating data-heavy operations such as demand planning, shipping, and receiving to optimize your operations and unlock true efficiency.”
Among the survey’s other top findings:
there was essentially three-way tie for which physical automation tools professionals are looking to adopt in the coming year: robotics (43%), sensors and automatic identification (40%), and 3D printing (40%).
professionals tend to select a proven developer for providing supply chain innovation, but many also pick start-ups. Forty-five percent said they work with a mix of new and established developers, compared to 39% who work with established technologies only.
there’s room to grow in partnering with 3PLs for innovation: only 13% said their 3PL identified a need for innovation, and just 8% partnered with a 3PL to bring a technology to life.
Even as a last-minute deal today appeared to delay the tariff on Mexico, that deal is set to last only one month, and tariffs on the other two countries are still set to go into effect at midnight tonight.
Once new U.S. tariffs go into effect, those other countries are widely expected to respond with retaliatory tariffs of their own on U.S. exports, that would reduce demand for U.S. and manufacturing goods. In the context of that unpredictable business landscape, many U.S. business groups have been pressuring the White House to pull back from the new policy.
Here is a sampling of the reaction to the tariff plan by the U.S. business community:
American Association of Port Authorities (AAPA)
“Tariffs are taxes,” AAPA President and CEO Cary Davis said in a release. “Though the port industry supports President Trump’s efforts to combat the flow of illicit drugs, tariffs will slow down our supply chains, tax American businesses, and increase costs for hard-working citizens. Instead, we call on the Administration and Congress to thoughtfully pursue alternatives to achieving these policy goals and exempt items critical to national security from tariffs, including port equipment.”
Retail Industry Leaders Association (RILA)
“We understand the president is working toward an agreement. The leaders of all four nations should come together and work to reach a deal before Feb. 4 because enacting broad-based tariffs will be disruptive to the U.S. economy,” Michael Hanson, RILA’s Senior Executive Vice President of Public Affairs, said in a release. “The American people are counting on President Trump to grow the U.S. economy and lower inflation, and broad-based tariffs will put that at risk.”
National Association of Manufacturers (NAM)
“Manufacturers understand the need to deal with any sort of crisis that involves illicit drugs crossing our border, and we hope the three countries can come together quickly to confront this challenge,” NAM President and CEO Jay Timmons said in a release. “However, with essential tax reforms left on the cutting room floor by the last Congress and the Biden administration, manufacturers are already facing mounting cost pressures. A 25% tariff on Canada and Mexico threatens to upend the very supply chains that have made U.S. manufacturing more competitive globally. The ripple effects will be severe, particularly for small and medium-sized manufacturers that lack the flexibility and capital to rapidly find alternative suppliers or absorb skyrocketing energy costs. These businesses—employing millions of American workers—will face significant disruptions. Ultimately, manufacturers will bear the brunt of these tariffs, undermining our ability to sell our products at a competitive price and putting American jobs at risk.”
American Apparel & Footwear Association (AAFA)
“Widespread tariff actions on Mexico, Canada, and China announced this evening will inject massive costs into our inflation-weary economy while exposing us to a damaging tit-for-tat tariff war that will harm key export markets that U.S. farmers and manufacturers need,” Steve Lamar, AAFA’s president and CEO, said in a release. “We should be forging deeper collaboration with our free trade agreement partners, not taking actions that call into question the very foundation of that partnership."
Healthcare Distribution Alliance (HDA)
“We are concerned that placing tariffs on generic drug products produced outside the U.S. will put additional pressure on an industry that is already experiencing financial distress. Distributors and generic manufacturers and cannot absorb the rising costs of broad tariffs. It is worth noting that distributors operate on low profit margins — 0.3 percent. As a result, the U.S. will likely see new and worsened shortages of important medications and the costs will be passed down to payers and patients, including those in the Medicare and Medicaid programs,” the group said in a statement.
National Retail Federation (NRF)
“We support the Trump administration’s goal of strengthening trade relationships and creating fair and favorable terms for America,” NRF Executive Vice President of Government Relations David French said in a release. “But imposing steep tariffs on three of our closest trading partners is a serious step. We strongly encourage all parties to continue negotiating to find solutions that will strengthen trade relationships and avoid shifting the costs of shared policy failures onto the backs of American families, workers and small businesses.”
In a statement, DCA airport officials said they would open the facility again today for flights after planes were grounded for more than 12 hours. “Reagan National airport will resume flight operations at 11:00am. All airport roads and terminals are open. Some flights have been delayed or cancelled, so passengers are encouraged to check with their airline for specific flight information,” the facility said in a social media post.
An investigation into the cause of the crash is now underway, being led by the National Transportation Safety Board (NTSB) and assisted by the Federal Aviation Administration (FAA). Neither agency had released additional information yet today.
First responders say nearly 70 people may have died in the crash, including all 60 passengers and four crew on the American Airlines flight and three soldiers in the military helicopter after both aircraft appeared to explode upon impact and fall into the Potomac River.
Editor's note:This article was revised on February 3.