Let’s be honest, we all want to be able to have the perfect amount of inventory in house to fill our shipping needs on a daily basis. Too much inventory leads to having overstock and surplus inventory on hand, while not enough merchandise impacts our ability to support sales. Having too much inventory leads to selling closeouts and old inventory at a discount, which also affects the bottom line.
Just in time is a form of inventory management that allows new inventory to arrive just in time to prepare, stage and ship. The goal is to have just the right amount of inventory on had to support current sales, without having any overstock or surplus inventory in the warehouse. In order for this system to work, you must have a reliable supply chain with the ability to deliver inventory as promised.
Vendor relationships are vital to the success of JIT inventory management. It is important to negotiate contracts so your suppliers understand your requirements in terms of lead times and delivery expectations. If inventory arrives late and misses shipping deadlines, you may have to deal with canceled orders which can lead to an accumulation of old inventory and a buildup of closeouts.
Companies often adopt this type of inventory system as a cost savings measure. By using Just In Time inventory, management can reduce waste, increase cash flow and increase flexibility. It eliminates holding too much extra merchandise which reduces the amount of overstock and surplus inventory in stock.
This management technique began in Japan is is often credited to Toyota Motors. They began using JIT inventory in the 1970’s and it took 15 years to perfect the process. Toyota submits orders for production parts only once it has received it’s orders from consumers. This will continue to work as long as the company maintains a steady production rate, with high-quality workmanship and no machine breakdowns at the plant that could stall production.
Clearly, the benefit to this type of management is fewer markdowns, closeouts and old inventory. Companies of all sizes will welcome not having to sell excess inventory and closeouts. The drawback is that this is a highly sophisticated system requiring a precise level of synchronization and communication.
As explained by Tim Cook, CEO of Apple, “Inventory is fundamentally evil. You kind of want to manage it like you’re in the dairy business. If it gets past its freshness date, you have a problem.”