Just in Time (JIT) vs. Stockpiling

I’ve already told you about the Investment Mentality, so maybe it’s time to share with you my core philosophy on how I create things for sale at a consistent profit.  It’s my hope to get you to apply this previous discussion to what I’m about to talk about.

Just-In-Time (JIT) Manufacturing

This term comes from the real world and is commonly seen in accounting and manufacturing.  What this basically means is that you do not maintain a surplus inventory of your raw materials, and all materials used in the process are ideally provided at the time they are needed in the process.  Hence, “Just In Time”.  It’s commonly considered to be the most efficient means of production, allowing you reduce overhead and carrying cost.  When a part is needed, it’s simply taken off the shelf, and when inventory depletes to a certain state another order is made for more materials.  The efficiency of the process gets into lead times, personnel, availability, etc.  For any organization running at maximum efficiency, ideally you have your orders in place ahead of time and only take delivery of the materials at the last possible moment.

Sounds like a smart plan, the Japanese implemented this system in their auto facilities and have almost perfected it.  It took a great amount of finesse to get it to work properly, but the Japanese being who they are developed a system that almost destroyed the American manufacturers during the 1980s.

In Warcraft

You are using this today if you are determining what to craft via Tradeskill Master.  When you queue up a product for crafting, you have to either pull from your inventory or make the purchase of those missing parts directly from trade or the auction house.  It seems simple from a bird’s eye view, the system determines based on certain parameters what’s profitable and you craft from there.  Further, you don’t waste valuable inventory space with materials you don’t need, most things are readily available daily, and all is right in the world.

This system is decent if you are newer to goldmaking and have a limited budget from which to draw your materials.  Further, what you craft daily is completely determined by the addon, and it doesn’t take anything into account other than the day’s trading price or market value.

My main argument against this system is that it turns you into a Walmart of bargain basement goods and items that you could possibly lose on.  If you don’t care about losing gold on something, then obviously your time is worth nothing and you should stop reading right now.

JIT works wonders in the real world where you have overhead (material handling, physical space, management), cash flow considerations, decay, shrink, and taxation on the products used in your process.  Further, it’s really a means of improving quality of work, and extracting every last dime of productivity from a workstation.  If this was the real world, I would advocate this but JIT is also heavily criticized for possibly being subject to the interruption of the supply chain – through scarcity, time delay, shipping loss, and most important price shock.  Further, this system takes forecasting heavily into account, so if you cease purchasing a product at some point you are engaging in inventory management, thus JIT.

When you make a product based on what a simple algorithm tells you to make (A-B=C) you run the gamut of being at the mercy of the market that day.  The prices you purchase materials at, the prices you sell them at, and your profit/loss have the ability to change drastically.  If you are on a very large server as mine is you can see prices swing wildly within just an hour.

This is not to write off JIT from Warcraft entirely.  This system is perfect for those with limited resources and only deal in the foolproof markets where goods are high turn but low earn:  Glyphs, Gems, Cheap Enchants, Potions/Flasks.  Note:  These happen to be heavily camped for a good reason.  You can acquire your basic materials and have a reasonable expectation that you will be able to sell through your servers demand within 24 hours.

Stockpiling

In a previous tip, I stated that you make gold when you buy, not when you sell.  If you aren’t already doing this, then let me explain the logic behind adding this to your arsenal.

When most people talk about stockpiling, what they really mean is hoarding and waiting for a patch to bring prices back up.  In the realm which I play, this is not stockpiling and typically results in a person holding dead assets and often breaking even if they speculated wrong.  As I went into in my discussion of the Investment Mentality, as you acquire wealth you always want to reinvest as much as possible back into the raw materials so as not to get to a hoarding point but a reasonable amount of goods that you can cull from.  This is the application of that philosophy and you should be familiar with it before proceeding.

Stockpiling requires the player to constantly reinvest their profits and excess gold into more raw materials of whatever product they are making (regardless if they need the materials or not) at the lowest possible overall costs in an effort to predict the profitability of all future products and it’s relation to normalizing costs.  The main feature of this inventory acquisition method in game is to prevent price shock for an unlimited supply of raw materials giving the player a pricing advantage and the ability to determine when they should reduce and decrease exposure.  Liquidation occurs when the market’s demand for their end product has depleted or is forecast to become obsolete.

There are many downsides to stockpiling and I want to point out some first before I go into the benefits:

  • Inventory carrying cost is translated to loss of use of the gold
  • Prices can fluctuate causing you to be stuck with an excess inventory of raw materials
  • Management of your materials – you have to store them somewhere and keep track
  • A never ending supply of materials that you may never use due to end product demand
  • Add-on calculations are no longer entirely controlled by add-ons, you have to heavily monitor the flow of material usage (more human intervention)
  • A requirement to liquidate ahead of looming price reduction
  • Research required to adequately determine the trends in pricing, including their historic limits and future demands
  • You MUST be a value added reseller of items to see the true benefit, not a flipper or commodity trader

This method is for those that are in the long game, or those that aren’t looking for quick bucks but a consistent and high income over time.  You are running your AH activity like a small and profitable business and not a stock market.  This also insures that you aren’t having to engage in pointless camping when you have other IRL or game things to do (raid, pvp, etc) and can log into a mule 2-3 times a day to collect money and repost your products (you also stockpile a high turning inventory of finished goods, but that’s for another day).

This method of inventory acquisition in a perfect world (of Warcraft) demonstrates what happens when you remove all of the real world considerations of JIT, with the exception of unlimited resources to purchase more materials.  The materials do not spoil, there’s no decay, prices tend to settle within a certain range, so why would you not stockpile constantly?

I have snatch lists of everything I use and make purchases consistently of items that are at levels I researched and determined were reasonable.  On my server I essentially reset the prices to higher levels in many goods purely because I buy everything within a range (Gold cost averaging).  If I can guarantee my costs today, then when prices go up due to a patch, shortage, or ban of bots, I’m holding a 1 month supply of my materials and can really cash in at that point, or consistently post at reasonable profit margins and always make my required 20-50%.  Should prices temporarily dip below my required margins because a person is farm crafting (selling items at unreasonably low prices mostly because they farmed the materials) I can afford to pull out of that market segment and proceed to continue buying raw materials.  When the person eventually leaves the market I’ve insured I will be able to resume pricing at my ROI.

Notice I mentioned a 1-month supply.  While I obviously don’t count my goods one by one, I have forecast my sales so that I have a rough idea of exactly what amount of supplies I need to maintain at all times because I have sales history data for my server that I’ve experienced.  1 month is my number mostly to keep myself sane.  Using this method to it’s absolute most efficient level you can easily offload those products that may not be of use to you and you won’t have to wait around very long to be completely liquidated in that line again.

For some items I tend to keep a 1-week supply on hand, and this is due to severe price fluctuation in the market.  These items would obviously be higher dollar materials like Sha Crystals and Blood Spirits which have a high chance of seeing a price collapse due to duping.  At present I can eliminate my entire Sha Crystal supply (generally 300-400) within a week because this is the demand I have witnessed because of my own sales.  Should the price collapse, I can begin gold cost averaging my stockpile and reduce my snatch pricing to a lesser amount that will yield a lower supply allowing me to clear inventory and make room for new prices.

Anyone who stockpiles can typically be overheard muttering “I need more space” a thousand times a day.  I personally have 2 accounts and 4 guild banks to store all the junk I buy, and this doesn’t include the mail I’m constantly having to cycle and process.  I have mail mules who’s sole job is to hold items for 30 days, after which time the items will bounce back to me for processing.  This can be time consuming, but this is also why addons like TSM Mail and Postal are utilized heavily by the stockpiling community.  My chief crafters hold their own banks, which gives me 7 tabs of materials I want immediate access to (cloth being a culprit here).  If you don’t have the means to acquire your own guild banks yet, you should work towards this as soon as possible.

These are my thoughts on the two different sourcing techniques, and I encourage you to comment here or contact me here.  I will be revisiting them over time, but you are always welcome to ask as your question may be something others wish to understand more.

Tip of the week:  ABB – Always Be Buying (with all due respect to GlenGary Glen Ross)

Thanks for stopping in!

2 responses to “Just in Time (JIT) vs. Stockpiling

  1. Interesting post. I very much agree with you that you make your gold when buying. Too many dont seem to understand this point and very few bloggers ever comment on it.

    As to what/when/how much to buy. I have always been one who believes you buy based on the markets your dealing with. If the mats are extremely plentiful there is no rush to overstock. If the price is a huge opportunity than sure buy it all. I have always aimed to have supply for a week or more on the key areas in my supply. In some cases its higher depending on the stage we are in the expansion. For example at the start of say 5.0 you know prices on many items will drop over time. No need to stockpile. Late in an expansion have to be careful what stock you hold to know that it can be sold. Over buying based on rumors of changes is another….potential risk.

    I aim to hold stock so that I know I can make the product I want to sell. TSM is only a tool. You can not solely rely on TSM to tell you what to make. It is a guideline. Do you use market prices or do you set your mat prices based on your acquistion cost. There are many ways to deal with what to buy but relying solely on TSM is not something I recommend.

    Your view of JIT…is in part how I view my production process. I produce goods as I need to sell them. This means I will make say 3 belt buckles if I know I can sell them that night. I do though base what I make based on what I keep in inventory. My inventory is based on my buying parameters. My method isnt really composed of either of your two methods but is a modification. I dont do large stockpiling and I dont just buy off the AH when I need something. My plan is to buy raw mats when they are at the bottom 25% of their typical selling price. Thus sometimes there is lots to buy and sometimes there isnt but my inventory is still enough to keep posting. I will say this is more of an acquired art than a science as you must adjust if the markets are not fluctuating to allow you to do this type of buying.

    I have been doing this for a long time, since 1 year after wow started. I like gold making and have always done it but more as a sideline to my playing. I enjoy gold making though and continue to do it even though it really is pointless now as being multiple gold capped really doesnt mean you need more gold.

    Like

  2. This post was recently resurrected by Nev, and was published almost 2 months ago.

    As per the comment above, I'm only working towards a goal, even though I've enjoyed every “cap” except Realm and Account Cap, the former is a goal however. I make gold even though I'm sitting on millions again because I enjoy it, and I want to see what it takes to move to the next level. Stockpiling is an important aspect of what I do, but I'm working on another route to see if it produces better results. =)

    Like

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