Running short of inventory is a cardinal sin in wholesale or manufacturing inventory management; putting aside lost sales, not having enough inventory means failing to meet customer needs – something that any business with a long-term outlook should avoid. This doesn’t mean that a business should accumulate excess safety stock; as any business owner can attest, working capital is too important to be tied up in unproductive buffer stock. Businesses have to straddle the line between too much inventory and too little. So, how can you find the balance?
Do You Trust Your Forecasting?
Most businesses have traditionally approached the inventory balancing exercise by developing extensive models and business plans to estimate how much inventory they will require over the next year or season. This approach essentially involves inferring future demand from past performance, assumptions about business growth and known factors such as seasonality.
Once a business has acquired inventory for the season ahead, it has largely committed to that stocking level – there’s generally no returning unneeded inventory at the end of the season. In this sense, a business that orders a set amount of inventory in reliance on a forecast is sometimes known as a ‘push inventory’ business; the business is in the position of having to ‘push’ its inventory to market.
It’s not difficult to see the main drawback of the ‘push’ system: forecasts are rarely perfect crystal ball predictions, meaning that businesses often experience stock outs or end up saddled with too much inventory. Until recently, however, most small businesses thought that working to a forecast was the only available option.
Just In Time Inventory: Taking a Lean Approach
Until recently, just in time inventory was mostly the preserve of large corporations with well oiled manufacturing inventory management. Toyota is an early example, having practiced just in time inventory as early as the 1970s. As online inventory management software has become more popular with SMEs, just in time inventory has become a realistic option for any business.
Just in time is essentially a strategy used to minimise waste throughout the supply chain, particularly in manufacturing inventory management. Just in time is a simple concept; when customers place orders, corresponding stock orders are placed and fulfilled in a tightened timeframe. So, for example, a business that sells automotive parts to a network of mechanics might only hold the most common parts in stock (knowing that turnover is high), opting instead to place stock orders for less common parts as orders from customers are received. This inventory management strategy is commonly referred to as ‘pull inventory’. Customer orders are the trigger for inventory orders further up the supply chain, so in other words, the customer order can be said to be ‘pulling’ inventory down the supply chain.
Just in time inventory can help most businesses solve the inventory balancing problem provided that your customers can tolerate a small lead time, you can avoid the need to hold inventory altogether. Even if your business needs to hold some critical products in stock, shrinking the range of SKUs in your warehouse can help your business reduce both costs and stock out risk.