The Benefits of a "Just In Time" Inventory Approach¹
Sinking cash into inventory can unnecessarily deprive other parts of the business of much needed working capital. Smart inventory management can actually reduce costs, improve turnover and result in happier customers.
For businesses that trade in products, inventory management is an ongoing issue. Unless you are in a pure services environment chances are inventory represents what you make available to customers, and even if you use an order fulfillment service to manage order flow, chances are good that you’re still carrying some amount of inventory to facilitate immediate orders.
The real challenge is the struggle between making sure you have enough items available for sale at any given time but not so much inventory that you face:
- financing charges accruing on your products or components
- excess storage fees
- spending labor hours managing inventory
- risk of unreasonable losses due to damage or theft
- ongoing steep insurance costs
- any tax liability associated with unsold inventory
Sinking cash into inventory unnecessarily deprives other parts of the business of much needed working capital, making inventory management a key discipline for managing the efficient running of the business as well as for effective cash flow management. Smart inventory management can actually reduce costs, improve turnover and result in happier customers.
Your inventory replenishment cycle
Every product has its own sales and replenishment rhythm, and understanding the lead time needed to replace inventory is a key first step to managing inventory. Evaluating how often a given product or component is sold or used, as well as the amount of time it takes to get these items back in stock, is key. Understanding the balance between how often a product is sold in a given time period and the time needed to get more of those same items is the start to effectively reducing inventory costs without impacting sales to customers.
Buffers can smooth out inventory cycles
Once it’s clear what cycle your inventory tends to follow, it’s a good idea to consider incorporating inventory buffers into your planning. Even the most careful inventory strategy can get surprised by unplanned demand or a hiccup in production and supply, but careful use of buffers of inventory can smooth the peaks and valleys of the supply chain.
Of course the question of how much of a buffer to maintain is a difficult one to answer as each business is unique. What is important is to consider the tradeoff between the price of establishing and maintaining the buffer against the importance of having inventory available at all times. Expensive items that are rarely sold and readily available from a variety of suppliers aren’t ideally suited to be stored as a buffer, while difficult to source and high demand items are well suited to a significant buffer.
The basic inventory management system
Having considered your inventory cycles and the usefulness of buffers it’s time to put a strong inventory management system into place. At a minimum this system should accomplish the following:
- Generate a list of reliable suppliers that can meet the needs of your business and your customers.
- Decide on appropriate stock levels.
- Provide a framework for conducting ongoing evaluations of inventory needs and your supply chain.
- Respond to changes in inventory prices by delaying additional purchases should prices rise or taking advantage of decreasing prices by purchasing additional quantities of inventory or components.
- Choose and maintain a Client Relationship Management (CRM) program to improve real time sales and supply information as well as to forecast and demands on inventory and future sales.
Manage the impact of carrying inventory
Going beyond these basic inventory management techniques requires taking an active role in managing the costs of inventory.
Suppliers can influence the degree to which inventory will impact your business. Seek and partner with suppliers who take a flexible approach to managing inventory, advance goods on consignment, or provide just-in-time solutions.
Spread the word and share the most successful inventory management solutions for your business with other locations and business partners. Spreading and implementing efficient practices can lead directly to reduced expenses across the organization.
Adjust your operations to better map to your desired inventory situation. Matching production schedules to inventory needs is an easy way to reduce the costs of inventory and increase operational efficiency.
Decrease the gap between reviews of physical inventory levels. Lengthy inventory audits and reviews can impact the business by inadvertently forcing higher than ideal inventory levels, whereas a more frequent review process can improve the accuracy of supplier orders and save on inventory carrying costs.
Streamline the way you purchase and reduce the lead time associated with orders by pre-approving sensible order amounts. Adopting this approach to reducing the amount of time it takes to replenish inventory is an easy way to manage inventory levels without breaking the budget.
Understand your customers well enough to accurately fill their orders in a way that makes sense for both of you. Some customers will order large quantities of products but use them slowly over a long period of time. Fulfilling these orders according to a “just-in-time” philosophy, while still being careful to make sure the customer has adequate access to products needed at all times, is another great way to better manage inventory and improve client satisfaction.
Create accountability around inventory management by aligning the interests of employees with the adoption of inventory best practices. This can prevent situations whereby employees sacrifice inventory discipline in favor of achieving other goals that may not be well aligned with the actual needs of the business.
With benefits like enhanced cash flow and reduced costs the case for implementing a rigorous approach to inventory management is compelling for businesses of all sizes and industries.