How to Use Just-In-Time Inventory Management

A challenging economy often forces small business owners to look for new and innovative ways to conduct business. Those unwilling to think outside the box may wake up to find themselves at a serious competitive disadvantage.

Inventory management is a good example. Not too long ago, business owners and managers took pride in warehouses and stockrooms full of products and raw materials ready to ship or move into production at a moment’s notice. But savvy entrepreneurs know that lean is the word today when it comes to managing inventory.

Unfortunately, many owners don’t realize the true cost of carrying inventory that must be measured against the benefits of potentially faster product delivery or greater availability. When you add the costs of inventory storage, handling, damage, obsolescence, spoilage, and warehouse space, this cost can be as high as 30 percent of the inventory’s value per year. The fact is, excess inventory is really excess cash that may -- or may not -- be benefiting your company.

One of the best ways to improve profitability is to use a process known as just-in-time inventory management. As the name implies, with JIT, inventory is ordered and received just as it is needed, rather than days (or weeks) in advance. The concept of just-in-time isn’t new -- it was first used by the Ford Motor Company in the early 20th century -- but today’s sophisticated inventory management software makes it practical for even relatively small companies.

The idea is to manage inventory so that you have just the right material, at just the right time, in just the right location, and in just the amount needed. When combined with modern computerized inventory management systems, JIT helps companies to keep better track of inventory that’s on the shelf and to reorder as soon as items get to a certain level.

A great example of a company using JIT is Dell, which revolutionized the computer world in the 1990s by selling “custom-made” computers to customers over the phone and, later, online. Dell does not possess the raw materials needed to build a computer until a customer places an order. The company’s processes and systems enable it to order and receive inventory and build computers to exact customer specifications in about the same time it takes competitors to ship computers sitting on warehouse shelves.

The philosophy behind JIT is simple: Excess inventory is wasteful and should be minimized or eliminated if possible. Therefore, JIT systems aim to increase profitability and return on investment by reducing ordering and inventory holding costs. In a best case scenario, finished goods and services are produced only when needed at the point of sale and never even put into what would traditionally be called inventory.

In a manufacturing environment, the JIT process relies on signals (sometimes referred to as kanban, a Japanese word literally meaning signboard) between different points in the manufacturing process that tell production when to make the next part. This can result in significant reductions in work-in-process inventory due to more efficient movement of raw materials between workstations on the manufacturing floor.

In a retail/supplier environment, JIT aims for close coordination between suppliers and retailers to maximize the relationship between production and sales levels and inventory, thus reducing carrying costs. JIT systems are often linked with computerized point-of-sale systems so that inventory levels can be monitored and maintained via automatic reordering systems to minimize the number of out-of-stock items in a store.

To implement JIT successfully, businesses must have strong relationships with a relatively small number of suppliers. These suppliers will become your partners in the manufacturing or stocking process, and must be willing and able to provide smaller and more frequent deliveries. Before deciding to implement a JIT system, therefore, it’s wise to speak with your current and potential new suppliers to determine their ability to meet your new requirements.

Don Sadler is a freelance writer specializing in business and finance. Reach him at don@donsadlerwriter.com.