Advantages and Disadvantages of Just-In-Time Inventory
History of Just-In-Time Inventory Management
Long before eCommerce or inventory management software, businesses attempted to meet consumer demand by manufacturing surplus quantities of products and stockpiling inventory. They manufactured just enough inventory to satisfy anticipated demand or they heavily relied on their sales and marketing teams to generate more demand to sell the overstocked inventory. Naturally, this led to high production expenses, inventory costs, and overstocked warehouses.
These issues led to the development of a new system for managing inventory called Just-In-Time (JIT) inventory. JIT inventory began in the 1970’s during the boom of high-quality, innovative, Japanese manufacturing coming from Sony, Toyota, and others. However, it didn’t become popular in the United States until the 1980’s.
What is JIT Inventory Management?
JIT inventory management describes a process in which merchants carry only the stock they need. Ideally, products should be flowing in just as quickly as customer demand takes them out. Additionally, a fully functioning JIT inventory model ensures merchants never run out of stock during peak periods.
JIT inventory management is quickly becoming a more viable solution for retailers, thanks in part to the rapid improvement in modern eCommerce software. JIT systems eliminate many of the issues associated with stock outs and overstocks while also providing additional benefits for the retailer.
Of course, there are drawbacks in JIT inventory models, most notably in execution. The guiding principle of JIT inventory is precision. This method requires tight logistics, strong relationships with suppliers, and accurate forecasting.
Successfully converting to such a means of eCommerce operations is no easy task. For retailers, JIT can be a tremendous challenge. This article will highlight the advantages and disadvantages of using a JIT inventory model.
Advantages of JIT
There are numerous advantages of implementing a JIT inventory model. With JIT, retailers can reduce markdowns – merchants don’t have to worry about purchasing too much stock and being forced to offload it at a discount to reclaim their capital. They can also avoid overstocks, especially critical for niche retailers who offer a broad array of inventory but may not be selling items in large quantities.
JIT inventory methods can also help decrease inventory costs. By reducing inventory on hand, retailers decrease the labor and storage expenses required to store and manage inventory. This allows retailers to utilize the space for other business activities such as for customer service or an in-store pickup counter.
These cost savings can be re-allocated to improving other areas of your retail business, whether it be improving fulfillment processes for faster shipping, upgrading your eCommerce site for a better shopping experience, or training your store associates on how to improve customer service. Case in point, our client Zumiez implemented a new omnichannel management system that created a seamless shopping experience for their customers as they moved between their stores and online spaces, resulting in a significant reduction in warehouse expenses.
There’s nothing more frustrating to a shopper who goes online or to the store only to find that the item she was looking to buy is out of stock. Another advantage of utilizing a JIT inventory model ensures merchants never run out of stock during high-demand periods. During these peak seasons, the threat of losing sales after running out of stock is greatly diminished by using JIT inventory methods.
Disadvantages of JIT
Successful execution of JIT inventory models is no easy task. Many retailers will face significant challenges trying to efficiently manage receiving, fulfillment, and shipping. One misstep in execution may mean a delay in delivery to customers, which could affect their perception of the merchant and the overall shopping experience.
One of the most difficult challenges to overcome when using JIT inventory models is forecasting. The difficulty is that forecasting by nature is always wrong. Therefore, not only do retailers need to calculate expected customer demand, they also need to predict what the difference may be between actual demand and estimated demand and evaluate the consequences that may occur when they exceed those tolerances.
In addition to forecasting, retailers will also face challenges with supply chain management. Using JIT inventory methods requires just that – for inventory to arrive ‘just in time.’ JIT models require suppliers, dropshippers, and manufacturers to coordinate efficiently in order to supply products and materials with little notice. Retailers today need to integrate systems with their suppliers/vendors to ensure successful synchronization and communication.
Retailers need reliable suppliers for timely inventory deliveries to fulfill customer orders promptly and prevent out-of-stocks. This also requires a vendor who provides quality products. If products are regularly out of stock due to late deliveries or if products are defective, shoppers will associate these issues with the retailer, which can significantly hurt brand reputation and ultimately, the bottom line.
A JIT inventory management system will take an initial investment and some commitment on behalf of the retailer. It’s not impossible. With proper planning and the right technology, a retailer can overcome these aforementioned challenges and transform his business.
Inventory management systems equip retailers with forecasting intelligence using advanced data analysis, allowing them to more accurately determine customer demand and lead time, thus preventing overstocks and out-of-stocks. Additionally, inventory management systems provide real-time inventory data, so that suppliers can directly monitor inventory levels, enabling them to quickly respond to low stock levels, thus preventing late deliveries.
The key to this whole process is quick turnaround time. A JIT inventory model needs to be lag-free and shouldn’t require hours of manual work from retail staff to receive inventory and process orders. Otherwise, businesses won’t be able to reap all the rewards of such a system.