What is Zero Inventory and How Does it Work?

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Inventory control is undoubtedly one of the biggest challenges in supply chain management and poor forecasting can leave companies with significant funds tied-up in excess stock. However, new technologies provide better inventory control solutions and with a more collaborative approach to supply chain partnerships, there is an alternative to holding large quantities of inventory stock.

Zero Inventory

Zero inventory is a business strategy where companies aspire to hold little or no on-hand inventory stock. The aim of zero inventory is to order the exact quantity that will be sold, and receipt goods into stock when they are needed.

Based on the just-in-time inventory approach of short lead times, zero inventory is more effective, flexible and less expensive than holding and storing large amounts of inventory. Stock is effectively pushed back up the supply chain by the retailer who wants to avoid the risks and cost of holding inventory.

The zero-inventory approach is not feasible for all enterprises but is perfectly suited to many businesses in today’s technological environment. Most internet-based retailers operate using the zero-inventory model, particularly for high variety, perishable and fashion-based consumer lines. Allowing companies to maximise cashflow by raising the speed and rate of inventory turns.

Ultimately, a zero-inventory strategy relies on having an efficient supply chain that is completely reliable.

Zero inventory and the supply chain

Robust supply chain management is imperative when implementing zero inventory because it places pressure throughout the entire supply channel. To facilitate the fundamentals of zero inventory, the burden of carrying raw materials and inventory is pushed back down the supply chain.

Suppliers need to perfect their operations and work with flawless efficiency to generate smaller, more frequent production runs. They will need to fulfil orders individually and ship these straight to the customer, which will require some negotiation to agree on minimum quantities.

It becomes necessary for manufacturers who typically never intended to be involved in the ordering process, to become directly involved with B2C orders. This means having the right technology, proper skillsets and B2C ordering and delivery processes in place.

Maintaining strong supply chain relationships is vital. Without effective communication and a high level of collaboration, the zero inventory goal will never be reached.

Zero inventory and stock control

For the zero inventory model to work effectively, goods must be produced and moved based on actual demand or consumption. To ensure all inventory processes are optimised, companies need an inventory management system that provides a holistic view of all the suppliers throughout their supply chain.

The inventory management software should ensure information is updated instantly across all systems as items sell out. That way, if there are goods that rely on raw materials in production, the item can be suspended on the website or sales platform to ensure customers are not left disappointed.

Zero inventory reality

It is unlikely that most businesses will truly achieve zero inventory because many will continue to hold some buffer stock for emergencies, late delivery, natural disasters or any risk that threatens customer service. They know that having the right product, in the right place at the right time is the simplest way to increase customer service level satisfaction.

However, the closer a business can get to achieving zero inventory, the greater the cost savings and benefits such as improved cash flow, reduced carrying costs and inventory waste from maintaining large, unnecessary levels of inventory stock.

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Melanie - Unleashed Software

Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.

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