A recent study suggests that the worldwide cost of inventory distortion, including shrinkage, stockouts, and overstock, is an estimated $1.1 Trillion. It is nothing but a nightmare for any business owner.
Running a business requires a strong workforce, strong business partners, and above all, a solid inventory management system. After all, the profit & loss of your company is directly related to how well you manage your inventory. Especially when you are dealing with a large customer base, there are chances of overstocking or going understock- both situations are troublemakers for any company.
The point of any business is to generate profit by never disappointing a customer or bear any unnecessary losses that can occur due to overstocking. What you need to find is the right balance of the two. Or maybe just a technique that can prevent you from wastage of resources.
Wondering what this technique could be?
It’s Just-in-Time Inventory Aka JIT Inventory.
The JIT inventory is a years-old technique, and in recent years it has seen a rise in the business sector. Let’s find out what is a JIT inventory and find out if there are any pros and cons of it that you must know.
What is JIT Inventory?
Just-in-Time Inventory is an inventory management method that aims to provide inventory, raw materials, and workers only at the time of need. It ensures that the current demand is satisfied by catering to exact requirements rather than stocking up beforehand.
A study conducted between 1981-2000 in the US discovered that Organizations with less stock in their warehouses are more proficient than those with more stock in the warehouse. It encouraged the idea of the JIT Inventory.
Keeping moderate stock in the warehouse enables an organization to work inconsequential expenses of holding costs and keep set-up costs at a minimum. It takes out unwanted lead time and conveys goods only as per the customer’s demand.
Another popular technique for inventory management is Dropshipping.
Haven’t heard about it?
Here is a quick walk-through of dropshipping as an inventory management technique.
What is JIT Dropshipping?
Dropshipping is an inventory management technique that allows retailers to sell goods that they do not store in their warehouses. By using the dropshipping method, retailers take customer orders and send customer orders to the vendors. What the vendor then does is ship the goods directly to customers using his facilities.
The upside to this for a retailer is that he does not have to incur any storage costs, nor any facility costs like- Packing the goods for delivery or shipping cost.
Today, Dropshipping is a famous practice in the eCommerce industry because it allows numerous players to engage in markets with niche offerings.
Head over to our guide on dropshipping to know more.
There is one more technique that saves you from overstocking or going understock.
Imagine your business is touching new heights, you are dealing with demands more than ever, your sales are off the charts. When we say off the charts, we mean that the customer demand is so high that you cannot keep up with it. So, in this case, what do you do?
Do you send your customers back?
Do you disappoint them? Or do you take a step back in the competitive market?
No, you Backorder!
Backorder is another technique to help you manage your business efficiently. Let’s take a glance at the meaning of Backorder in business.
What is JIT Backorder?
Backorders allude to unavailable goods that are relied upon to be delivered by a specific date. Organizations continue to sell goods on delayed purchases with the assurance to dispatch them to the buyer once they restock.
For example, you have an order for eight mobile phones, and you have only four left with you in the warehouse. What do you do?
You still accept the order for eight phones. While you will be able to dispatch four phones immediately to the customer, the rest of the four phones will be backorders. They will reach the customer, but late. In this way, you don’t lose a customer. You fulfill their demands even when you are understocked.
Learn more about how Deskera can help you with backorder management.
Pros of JIT Inventory System
Every coin has two sides, so here we have a few pros and cons of the JIT Inventory system for you to take note of before you adopt it.
Many companies like to use JIT inventory because it is more cost-efficient in terms of stock-keeping.
Minimum/No warehouse expense:
A business, small scale or large scale, everyone has to pay the rent for the warehouse and incur costs that go into managing it. While it will be easier for an established company to afford the warehouse-related expenses, small businesses may find it difficult. With JIT Inventory, you can do away with these costs because you no longer have to store a lot of inventory. It results in minimum warehouse expenses or nothing at all.
High demand, high delivery of goods, low demands results in wastage of goods. By the time there is again a demand, the goods sitting in the warehouse may become damaged or obsolete. However, in the case of JIT inventory, there is no wastage of goods. You only order goods when needed.
JIT Inventory can work as a magic spell for small companies. They don’t have to buy goods in abundance and pay large amounts of money. Ordering goods only when needed will keep their company in competition with minimum investment. As mentioned before, they will not even have to release any money for warehouse management. If you are a startup or planning to start a small business, the JIT Inventory system sounds like a win-win for you.
Enables Flexible Workforce
As we discussed before, with a warehouse comes its management costs. Above all, the labor cost you have to incur when you have a warehouse is the most vital one. There are two benefits of JIT inventory when it comes to managing labor and managing labor costs.
One, you don’t have to engage a full-time employee to look after the goods, and the same employee can help you with other tasks where he is needed the most. Secondly, a warehouse manager might cost you a lot, and with the JIT inventory technique, you can save that money.
On the flip side of these benefits, there are a few cons too you must take note of.
Cons of JIT
Demand Hike Results in Supply Shocks:
You must be wondering how a hike in demand is a roadblock.
We explain why.
In the case of high demand and large orders of goods, there are high chances that the supplier might fail to fulfill your current need for goods. You have to remember that the supplier is not just supplying to you but others too. So, in a JIT inventory, any demand in big numbers can be a big shock to suppliers, and it may cost you your customers.
Sudden Price Hikes
With JIT, your risk to market price fluctuations increase.
If you have purchased inventory in advance, and have excess sitting in your warehouse, then sudden price changes impact you a lot lesser because you can choose to ride out the fluctuations by utilizing stored inventory.
With JIT, however, you by definition do not keep stored inventory, and therefore have to adjust in real-time to market forces.
JIT Inventory is not as easy as it seems to manage, no matter how monetarily benefitting it can be. It requires a strong commitment of both time and money that small businesses often don’t have.
You require time and money to manage your supply chain efficiently. Everything from the delivery of the resources needed for production to the delivery of the finished goods, everything needs to be re-thought. It requires you to keep in close contact with everyone part of the supply chain. Since JIT inventory fulfills last-minute or at the moment specific requirements, it still requires preparations too.
Over to You
JIT has many benefits and seems the logical choice for any business. However, it can only be beneficial to you when it's implemented right. Every move and decision should be well calculated. One of the few things you should take into consideration, before adopting a JIT for your company is- Size of your company, the nature of your company, the products you sell, and most importantly, a study of the market for your product. Another tip is to make sure you know your suppliers. Know at what lengths they can go for you to provide you.
To make your JIT Inventory experience easy, we at Deskera have accounting provisions for JIT inventory, JIT Dropshipping, and JIT Backorder. It can be complex to manage so many things at a time. In such situations, online accounting and inventory management software like Deskera can come in handy.