What is just-in-time inventory management, and how can it help your business grow?
In contrast to the traditional approach to industry, where businesses maintain a large supply of inventory on hand “just in case,” the just-in-time (JIT) approach aims to keep only the minimum amount of inventory in stock. New inventory or materials are ordered only when the existing supply declines to a certain level.
Benefits of JIT
Generally credited to Toyota, which began using it decades ago, the JIT technique has great value for business owners in today’s fickle marketplace. Retailers, manufacturers and even food service businesses can benefit from implementing JIT inventory management. The technique is especially useful if you sell products that quickly become obsolete, such as food or cosmetics with “sell by” dates, consumer electronics accessories, or apparel. JIT can also help seasonal companies avoid ending their season with too much merchandise in stock.
JIT inventory management allows businesses to respond quickly to marketplace demands, while reducing the cost and time involved in storing, maintaining and handling inventory. With lower carrying costs for inventory, you have more capital available to make investments that can grow your business.
Successful JIT inventory management requires carefully calculating your optimal reorder point and reorder quantity. You also need to know the lead time between placing the order and receiving the goods, and calculate the optimal “safety stock” to have on hand (that is, backup inventory so you don’t run out of stock before the order arrives).
In years past, JIT had to be managed manually, which was time-consuming and complicated. Today, inventory management software can track your inventory in real time, alert you when specific items are running low, help you select the best vendor and automatically place purchase orders. The right technology not only simplifies JIT implementation, but also helps you maintain more accurate records and make better forecasts.
Is JIT for You?
Although JIT has become easier to use, it’s not for every business.
When considering implementing JIT in your business, ask yourself these questions first.
- Is your business big enough for JIT? JIT requires extra effort on the part of suppliers. Businesses that are very small or in the startup stage rarely order in large enough quantities to be priority customers for their suppliers.
- Can your suppliers handle JIT? Not all suppliers are able to ship quickly enough for JIT. For example, it might require shipping you smaller orders at odd intervals instead of large orders once a month.
- How strong are your supplier relationships? Reliable suppliers are essential to successful JIT. If you’re not loyal to your suppliers—for instance, if you frequently switch suppliers to get lower prices—they’re unlikely to bend over backwards for you.
- Is the savings worth the cost? JIT involves initial costs, including purchasing and setting up software, transitioning to the JIT system and training employees. There are also ongoing costs, such as higher shipping rates or per-item costs. Make sure the savings is sufficient to justify the tradeoff.
- How accurately can you forecast inventory needs? The more historical sales figures you have to fall back on and the more accurate your sales projections are, the more successful you’ll be with JIT.
- Are you comfortable with the risks? If you only have one supplier for a critical product, you could be in trouble if disaster hits and they can't deliver on time. Developing relationships with several suppliers can reduce this risk, but that only works if you order enough product to maintain steady business with all of them.
When implemented correctly, JIT inventory management can mean significant savings and greater flexibility, allowing for faster growth. Your accountant can help you determine if JIT is right for your business.