What is just-in-time inventory management, and how can it help your business grow?
Given how the COVID-19 pandemic wreaked havoc on the global supply chain, causing numerous obstacles prohibiting or postponing getting stock on time, many small business owners wonder if just-in-time inventory is dead.
Just-in-time inventory management (JIT), an offshoot of just-in-time manufacturing, is a lean management system created for better organizational efficiency. It helps limit pointless inventory expenses and ensures that goods arrive only when needed. However, implementing JIT inventory successfully depends on several crucial factors, such as reliable supply resources, top-notch technology, and extensive research so businesses can accurately predict consumer needs and preferences.
The pandemic’s hit on the economy taught us how volatile supply sources require business owners to inject an additional “just in case” component to their inventory strategy and always be ready to pivot to find new resources for new markets.
What is Just-in-time Inventory Management?
Just-in-time inventory management has been around for decades. It owes its beginnings to Toyota, which implemented its just-in-time auto manufacturing system to stop overproduction during the post-WWII economy. In general, the JIT approach aims to keep only a minimum amount of inventory in stock. New inventory or materials are ordered only when the existing supply declines to a certain level.
Retailers, manufacturers and food service businesses have benefitted from implementing JIT inventory management. The technique is beneficial if you sell products that quickly become outdated, such as food or cosmetics with “sell by” dates, consumer electronics accessories, or apparel (which can soon become “so yesterday” in style). JIT can also help seasonal companies avoid ending their season with too much merchandise in stock.
Post Pandemic Strategies
While JIT inventory management allows businesses to reduce the cost and time involved in storing, maintaining and handling inventory, the ability to respond quickly to marketplace demands is not always possible. A recent SAP survey of top business decision-makers found that business leaders expect supply chain issues and disruptions to continue. The top three supply chain disruptions expected this year are:
- Reduced availability of raw materials in the United States (50%)
- A slowdown in the construction of new homes (44%)
- Disruption to public transport due to lack of drivers (44%)
What does that mean for your small business? Supply chain experts suggest integrating JIT inventory management with a “just-in-case” inventory strategy for purchasing extra stock of high-demand products to maintain business continuity.
By modifying just-in-time in this manner, business owners can save on inventory waste and still offer the variety of products, quick delivery and affordable cost consumers expect.
Successful JIT inventory management requires employing state-of-the-art technology that calculates your company’s reorder point and quantity. It helps if you also determine the lead time between placing the order and receiving the goods. Then verify the optimal “safety stock” to keep on hand, so you don’t run out of stock before the order arrives.
But is JIT right for your business? Although JIT has become more accessible, it’s not for every small business. When considering implementing JIT in your company, ask yourself these questions first:
- Is your business big enough for JIT? JIT demands extra effort on the part of suppliers, so it’s crucial to check minimum ordering requirements. Companies that are very small or in the startup stage rarely order large enough quantities to be priority customers for many suppliers.
- Can your suppliers handle JIT? Unfortunately, not all suppliers can ship quickly enough for JIT. For example, it might require shipping smaller orders at odd intervals instead of large orders once a month.
- How strong are your supplier relationships? Reliable suppliers are essential to a successful JIT strategy. If you’re not loyal to your suppliers—for instance, if you frequently switch suppliers to get lower prices—they’re unlikely to accommodate you.
- Do you have backup suppliers? Given the volatility of today’s supply chain, finding other resources is vital if and when your regular suppliers can’t fulfill orders.
- Are the savings worth the cost? JIT involves initial set-up costs, including purchasing and setting up software, transitioning to the JIT system, and training employees. In addition, there are ongoing costs, such as higher shipping rates or per-item fees.
- How accurately can you forecast inventory needs? The more historical sales figures you can rely on and the more accurate your sales projections are, the more successful you’ll be with JIT.
When implemented correctly, JIT inventory management with a just-in-case component can mean significant savings and greater flexibility, allowing for faster growth. Check with your accountant and SCORE mentor to determine if JIT is right for your business.
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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.