But how can lean improve your retail or wholesale business operations?
What is the lean method?
Generally, the lean method seeks to improve business performance by delivering value to the customer while eliminating waste, defined as anything that doesn’t add value, without sacrificing productivity.
At the core of lean is a mindset of continuous improvement, whereby products and processes are incrementally and iteratively refined with an eye toward reducing redundant activities. The other philosophical pillar of lean is a genuine respect for people built on mutual trust and buy-in, where anyone at any level of the organization can originate an idea.
What is lean inventory management?
Lean inventory management also focuses on identifying and eliminating waste. The idea is that by keeping your inventory lean, you can make your online or multichannel retail or wholesale business more efficient and more profitable.
Lean inventory management is achieved by holding just the right amount of stock across all your channels—no more, no less. Waste here is decreased by receiving goods only as needed. For that reason, lean inventory management in practice is sometimes called just-in-time inventory management, or JIT. (You may have heard of JIT in the context of just-in-time manufacturing, a means of cutting costs and increasing efficiencies in manufacturing processes.)
Though lean and “just in time” are often used interchangeably, they aren’t exactly the same thing. JIT focuses on specifically efficiency, while lean focuses on using that efficiency to create value for the customer. While JIT can be practiced on its own, the best approach is to make it part of your overall lean management strategy.
What is the purpose of Just in Time (JIT)?
A popular misconception is that lean is suited only for manufacturing products, but lean can apply to services as well. The goal of JIT is to reduce times within a production system or supply chain as well as response times from suppliers and to customers, all with the goal of improving customer service and satisfaction.
As with other lean or JIT practices, the lean inventory approach seeks to continuously increase efficiency and reduce costs. But, ultimately, it should lead to happier customers, regardless of how they buy from you.
Given that inventory incurs holding costs and ties up cash flow, receiving it just in time in your stores and warehouses can translate into retail success. In 2016, apparel retailer Urban Outfitters famously used lean practices to improve sales across all of its channels. Urban Outfitters did this by consolidating its supply chain, shortening its design cycle from quarterly to monthly, and reducing the amount of stock held in retail locations, waiting as long as possible to replenish based on real-time sales reports. To increase customer value and order efficiency, they also leveraged omnichannel returns and fulfillment from the nearest branch.
What are the Pros and Cons of JIT inventory?
What are the advantages of just-in-time inventory management? When done successfully, as in the above example, JIT will allow you to:
- Lower your inventory holding costs. You know it takes money to sell your product, but a big factor in the cost of goods sold is what you spend to store your inventory. Consequently, the longer a product takes to sell, the higher the COGS, and the lower the margin. To get your inventory lean, you’ll need to know your inventory turnover rate and COGS. When you know what products sell and what products don’t, you can make decisions that lower your costs and raise your bottom line.
- Improve your cash flow. Storing large volumes of inventory not only takes up space in your warehouse that you have to pay for but also reduces capital available for other activities or faster-moving inventory.
- Optimize your inventory, see the big picture. Because inventory levels are triggered by customer demand, you’ll have far less risk of slow-moving stock left sitting in your warehouse. This dead stock is also vulnerable to theft, damage and obsolescence, all of which create waste, a lean method no-no.
Of course, like anything, lean inventory management has some potential disadvantages:
- Slower order fulfillment: If a customer orders a product that you don’t have in stock, you risk not being able to fulfill the order in time and/or losing the sale to a competitor.
- A slim margin of error: Getting JIT inventory just right requires accurate demand forecasting and a thorough understanding of your customers’ buying behavior. Getting it wrong could be catastrophic for your bottom line.
- Possible price shocks: If your suppliers’ prices go up, your profit margins will go down. With a JIT system, you’ll be at the mercy of fluctuating prices and won’t have the luxury of waiting for them to drop.
Can You Keep Your Customers Happy?
The underlying goal of lean anything is to create value for your customers. Value here is defined as any action or process a customer would be willing to pay for. This isn’t just some quaint notion about customer service. First, it’s about letting your customers know exactly what products are available for purchase where, when and how. Then, it’s about using your entire supply chain to fulfill that promise, if necessary. For omnichannel businesses, that means the ability to fulfill orders from anywhere in your supply chain. For example, routing orders to the branch where the order can be filled and dispatched the quickest.
Lean principles call for tools to help you understand how your product flows from supplier to warehouse to multiple sales channels. When you know how long it takes to make your products and how long it takes to sell them, you can identify and correct any wasteful steps. Moreover, this flexibility will help inform important sales decisions. For example, if a product sells better online than on other channels, you can adjust production, warehousing and/or sales to make your inventory leaner and more efficient across the entire business.
That said, just-in-time methodology demands enough agility to execute a much shorter production cycle. If you’re thinking about going lean and implementing a JIT approach, first consider the following:
- Can my product(s) and raw materials be manufactured and/or supplied in a short time?
- Are my suppliers reliable enough to get me what I need on time, every time?
- Do I accurately understand customer demand, sales cycles and seasonal fluctuations?
- Is my inventory management software flexible enough to update and manage stock levels in real time?
- Is my order fulfillment system efficient enough to get orders to customers on time?
To be successful, you must be able to meet all of the above criteria. And remember, to reap the benefits of JIT inventory and a lean business model, focus not just on being fast but also on consistently delivering value to your customer.