12 January, 2023

What is just-in-time inventory? Is it the right inventory management method for you?

Storage facilities and large stocks of inventory can be a huge drain on a business. The physical area has to be taken care of, rent has to be paid, and personnel have to spend time overseeing and maintaining all the stock. But what if a company could function without having to have a large store of goods? What if a business could operate by getting the raw goods and items it uses as, and when, they’re needed?

There is such an inventory management method, and it’s called just-in-time. This lean approach to inventory management is not for everyone, but for some it’s a great benefit, keeping outlay low while meeting manufacturing and order demands and keeping customers satisfied.

We’re going to take a close look at the pros and cons of just-in-time inventory, so you’ll be able to judge for yourself if the system is right for you.

 

What is just-in-time inventory management?

As the name implies, just-in-time inventory management means only having the raw goods and items on hand that are needed at any given time, no extra. That means getting in raw goods and items from your suppliers only when there are orders to be filled, and only in enough quantity for those orders. By extension, for a manufacturing company, just-in-time means ending up with the right amount of product for an actual order, and no more.

Conducting a business in this way cuts down the need for a separate storage facility and all its associated costs.

 

How does just-in-time inventory management work?

The just-in-time inventory management method is dependent on two things: accurate forecasting and reliable suppliers that are nearby.

Accurate forecasting – just-in-time inventory management can’t work without it; it’s as simple as that. That’s because, when you’re working with stripped-down inventory levels, you have to have a good idea of your needs ahead of time. These projections could be based on seasonal demands, known trends, or an upcoming event. Either way, automated inventory management systems are very good at doing these forecasts, basicinng their predictions on historical data.

Reliable suppliers – Because just-in-time inventory management is about getting inventory in at the last minute, or only having the minimal amount you need on hand, you have to be sure that your suppliers will deliver. You have to be able to depend on them.

When it comes to retailers, the just-in-time approach may mean passing an order directly to the wholesaler or a third-party logistics company (3PL) for fulfillment. This way, the retailer doesn’t have to physically handle the items at all.

 

Advantages of the just-in-time inventory method

Reduces carrying costs

Carrying costs are incurred when raw materials or finished goods are stored somewhere. The longer these items are stored, the higher the carrying costs. When goods are sold before they are even produced, and inventory is only brought in as and when needed for a particular order, there’s an immediate turnaround that reduces these carrying costs to a minimum. These savings can be used to lower the price of the goods produced or items sold.

Reduces inventory losses/damage

Inventory that’s stored is open to degradation, especially if it’s held there for a long period of time. Depending on what the items are, problems can include: the wrong temperature causing spoilage, products breaking, or dust and dirt causing its own damage. And that’s not to mention the possibility of having to throw inventory out because it’s passed sell-by dates or has gone out of style. Any of these possibilities has a monetary cost that will cut into the profit margin.

With just-in-time inventory management, inventory is used as soon as it’s received, or almost as soon as it’s received, eliminating the need for lengthy storage times and avoiding the negative impacts that can have. The big upside here is that overall inventory costs can be reduced, and those are savings that can be used in other areas of your business or passed on to your customers.

Promotes local suppliers

The just-in-time method is based on getting supplies only when there are specific orders to be filled. Because by definition this means getting those supplies as soon as you have the order, getting them quickly is important. That’s why it’s best to use local suppliers.

Using local suppliers has other benefits. Reduced transportation cost is one; less impact on the environment is another. A third benefit of having suppliers nearby, one that can be overlooked, is that it’s easier to nurture good relationships with them. If they’re not far away, you can pop over and see them.

Less money tied up

In addition to the cost of warehousing, the inventory held there has had to be paid for and so is, in itself, a large investment. When you need minimum stock, you don’t have money tied up and can invest it in other areas of your business.

 

Limitations of the just-in-time inventory management system

Less flexibility

While just-in-time inventory management cuts down costs associated with inventory, sporadic orders will affect workflow, and if a run of orders stops, a company might have to shut down. On the other hand, if a company gets too many orders at once, without the capacity to store inventory it might not be able to cope. Any change in an original order or cancellation will also cause issues for the company.

A production management feature in Cin7 Omni that generates a production order directly from a sales order can give a manufacturer flexibility.

Supplier dependency

If the good part about having a local supplier is the speed at which goods are delivered, the bad part is that they may not have much competition, which could make it more difficult to negotiate rates. Also, if that supplier runs out of the items you need, you’re going to have to scramble to find another quickly.

Inaccurate forecasts

The just-in-time method is based on accurate forecasting. But if those forecasts are flawed, the preplanning necessary for the system to work will be wrong and the company could fail.

A robust inventory management system like the Cin7 Omni can help prevent this from happening. With a clear view of the market, Cin7 Omni can give you more accurate forecasts you can rely on.

 

Is just-in-time inventory management right for you?

Just-in-time inventory management is the perfect system for contractors working on tight budgets because they don’t have to lay out money for raw materials until there are orders to fill. It’s why contract manufacturers who work with large companies like Toyota, IBM, Apple, and McDonald’s operate on this system. Apple, for instance, contracts its manufacturing out to many different factories in China, but these contractors will only start production when the tech giant authorizes them to.

To judge if management your inventory with this method is right for you, you should ask yourself the following questions:

  • Are your customers OK with the time gap between you receiving an order and being able to deliver the completed goods?
  • Can you rely on your supplier to deliver the items you need quickly?
  • Can you start the manufacturing process as soon as you have an order?
  • Can you be sure your customers won’t change their orders?
  • Is your supply chain efficient enough to support a system like this?
  • Do your products go out of trend, making it redundant to store them?

If you answered yes to several of the above, the just-in-time inventory management system is probably a good bet for you.

 

Winding up

Just-in-time inventory management has upsides and downsides. If you can make the method work for you, however, there can be huge financial advantages.

If you do decide to take up just-in-time inventory management, Cin7 Omni can be a great help. To find out more, click on this link to request a demo.

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