What is Just in time inventory?
Just In Time Inventory, or JIT in short, is an inventory strategy first used by Toyota in the early forties, and eventually perfected and used by several companies to keep their inventory moving smoothly through the supply chain.
For over three decades, the idea remained known only to Toyota and to those enterprising individuals who traveled to Japan to learn the technique firsthand. Soon, a growing number of manufacturers began to adopt the Just in time inventory Strategy method, making it almost iconic in its popularity and usability.
Don’t be daunted by that introduction though. As a technique, JIT has stood the test of time and understanding how it works can benefit every retailer. In this article, we talk about why you should implement Just In Time Inventory Management, the steps and processes involved, a few problem areas you may encounter and how to solve them as well as the benefits of automating the entire process.
Just In Time Inventory Advantages
Before you can understand the benefits of Just In Time Inventory (JIT), you need to know what its core concept is. In this inventory strategy, you hold very little to no inventory, instead of shipping products to your warehouse only when they are required. You decide your inventory levels and requirement based on current sales trends.
You take a call on how much safety stock you need to have in order to receive a vendor shipment just as existing inventory falls to zero. Sounds like a risky proposition, doesn’t it? There are several benefits to this approach:
- If you own a retail outlet, you can free up more space from storage and use it as the shop floor instead by following Just In Time.
- If you manufacture and sell goods, by not hoarding an inventory of parts and raw material, you have more space for actual production.
- In general, lower inventory levels mean that you free up more working capital. You can put this money to other uses, such as opening more stores or employing more people.
- You are able to save on expenses involved in renting out warehouse space.
- If on one fine day, a certain product doesn’t sell anymore, you are not stuck with huge volumes of unsold inventory and dead stock.
- Lack of inventory is no longer unexpected and instead exposes problems in your supply chain that you can then correct. Just In Time gets rid of the inherent waste of holding the stock as a means of ensuring against sales spikes. You can read more about it here.
Disadvantages of Just In Time Inventory
There are also some cons involved in implementing this strategy effectively. For one, you are dependent on your vendors to understand your approach and deliver accordingly. If any of your vendors have issues both within and beyond their control, your sales are sure to be affected. Likewise, a sudden spike in orders for a product can leave you nowhere, especially if the promised delivery time is shorter than it takes to get the products to your warehouse.
There’s also the issue of quality. In subsequent sections, you will see how to calculate safety stock and reorder points. If you order ‘x’ number of products when you touch the reorder point, unless all of them are saleable, you’re stuck with inventory that is lower than it should be.
The cons, however, don’t always overtake the pros. If you can establish a vendor management system that works fast to deliver goods to you in good condition, you can still make Just In Time inventory a reality in your business model.
How Can I Implement A Just In Time Inventory System?
What is the difference between buying 3600 products from your vendor once a year, or buying 300 products a month? We could go a step further and buy just 75 products a week as well! In all of these cases, we are buying the same number of products over time. But by shortening the purchase cycle, we can be more responsive to the market. As a retailer, you know that sales fluctuate throughout the year. Isn’t it better to buy products in shorter time periods?
Just In Time can help you do just that. Ideally, this is what your inventory should look like over time if you only order products as and when they are required.
Image source: Chainbalance
This saw tooth graph of inventory levels over time is the ideal case scenario. We start with a certain inventory level, depicted through the white dots and circles at the top of the graph. Over time, as we sell more of the product, these levels fall steadily. The dotted horizontal line represents the reorder point or that point in time at which you should place an order for more inventory.
Since there is a time lag between when you place the order and when you receive the products, your inventory continues to fall for a bit longer. Then, at the point labeled ‘transport arrival’, your stocks are back to being sufficient again.
Fluctuations to this trend are beyond the scope of this article. Let us now focus on how to keep our product graph as close to the ideal case as possible. We can do this by calculating reorder level, safety stock and economic order quantity for each of our products.
Reorder Level and Reorder point
Reorder level is the level of inventory at which you will be placing an order for more stock. If you calculate this number correctly, your new inventory should arrive just as the older stock is exhausted. Reorder point is that point in time when you place the order for more stock.
Let us calculate reorder levels for a few hypothetical cases. A retailer sells children’s apparel online. On any given day, he sells 10 bibs, 20 onesies, and 3 pacifiers. He sources these products from different vendors. His bib vendor can ship products to him in 8 days.
His onesie and pacifier vendors take 5 days and 7 days respectively to ship products to him from the time when he places the order. Hence, the retailer calculates he reorder levels for these products as follows. The reorder level for bibs is 10*8= 80 units. Likewise, the reorder level for onesies is 20*5= 100 units. And the reorder level for pacifiers is 3*7 = 21 units.
Hence, the reorder level is calculated by multiplying average daily sales with the lead time the vendor needs to deliver the product. If this retailer hopes to have just enough inventory at all points in time, he needs to reorder bibs when he has 80 of them in stock and pacifiers when he has 21 of them in stock.
Reorder Level = Average Daily Sales * Lead Time
In the ideal sawtooth graph, there is no place for safety stock. The very concept of Just In Time is to have just enough inventory and bring more in when you’re running out. However, you can think of safety stock as an emergency kit to tide you over unexpected spikes in sales.
Remember, if you’re trying to implement JIT and find that you are depending on the safety stock too often, it is time to re-evaluate if your reorder level and EOQ quantities are accurate and up-to-date.
Safety stock is calculated on the concept of how much stock you would need if either you sell too much or your vendor takes too long to deliver a product. If you are the bib retailer from earlier, you need to observe the maximum sales you made in a day and also the most time it took your vendor to deliver products to you. You know that on an average, you sell 10 bibs and the vendor lead time is 8 days. Say you notice that you consistently sold 15 bibs each day in a time period, and your vendor took an uncanny 15 days to deliver goods. In this case, the safety stock level is:
(15*15)- (10*8)= 145 units
In general, the formula for safety stock would be
Safety Stock= (Maximum daily sales* Maximum lead time)- (Average daily sales* Average lead time)
Economic Order Quantity
Now, you know how many units of a product you need at different points in time, and when to reorder. But how much should you order each time? The Economic Order Quantity (EOQ) is slightly more complex, as it is essentially an optimization formula. Calculating EOQ tells you how much you need to order to keep inventory costs minimal, while also ensuring that you have just sufficient inventory to avoid stocks out. Take into account the fixed cost you incur for every order, the carrying cost of inventory per unit and the number of units you sell in a year.
We recommend using a simple calculator such as this for EOQ. In general, the formula is
Economic Order Quantity=
√ (2* Fixed costs* Total demand)/Carrying cost
Problems And Solutions
How Do I Manage With A Low Working Capital?
Most retailers, unless you are a behemoth, don’t have the money to spare for anything that isn’t absolutely necessary. When you set out to implement Just In Time inventory handling, you can expect there to be a major shuffling around in how you do business. It is important to remember why you are doing this- to reduce the amount of money held up in inventory and thus give yourself more capital to work with.
If you have a low working capital already, the best way to implement JIT is to start internally and do it manually. First, train your core staff to understand the concept. Assign one of them to set reorder levels and points. Explain to them the end goal- that of never having more inventory than is absolutely required.
Second, consider implementing the process internally first. You can start with having just enough packaging, or just enough labels. Get your staff used to it before you begin dealing with external vendors.
How Do I Rotate Inventory Fast?
If you are a retailer of products with a sell-by date, there is indeed no better way to ensure inventory rotation that to follow JIT principles. Also, follow through with the time-tested practice of moving older products to the front of shelves, be it in retail stores or warehouses.
In a Just In Time Inventory system, you will be ordering products in smaller quantities and just when you need them. This process inherently reduces the amount of old stock you have. Whenever you receive a new shipment, run a quality check to ensure that each product’s sell-by date falls within the window of time in which you expect to sell it.
How Do I Handle My Suppliers?
Most retailers trying to implement Just In Time struggle with communicating the message across to their vendors. Even when the vendors are convinced, there is always the uncertainty of losing stock while in transit. Indeed, a technical issue at the vendor end can throw you off-track.
When you do approach your vendors with a proposition to ship fewer products more frequently, expect resistance. You may even be charged a delivery fee that is higher than it would be if you buy in bulk. Explaining what you are trying to do is one way to tackle the resistance and negotiate an acceptable fee.
More famously, natural calamities have often caused JIT to backfire spectacularly on Toyota. This is often cited as a reason for not following the practice.
However, no system in the world can plan for all emergencies. This is why we recommend that you have safety stock in place to fall back on. By updating your inventory dynamically, calculating and recalculating reorder levels often and accounting for occasional uncertainties, you can reduce the effect of vendor uncertainties in disrupting your sales.
Automated Purchase Order Management
Calculating reorder levels, keeping track of when each product in the inventory is falling to that level and raising a purchase request need continuous monitoring.
This is why it is ideal to automate it and let a system do it for you. For one, computers never take a break, and they can track your inventory in real time. Secondly, you decide at what frequency you want to calculate your reorder level and let a machine do the job for you.
Primaseller’s purchase order management software can do just this, and more. You can dynamically track and manage inventory, orders, billing and shipping across channels. You can also raise a purchase request each time inventory falls to a certain level, or you can enable the system to automatically raise purchase request for a product when the reorder level is reached.
When you add a new product to your inventory on Primaseller, you will be able to set reorder point. Be sure to toggle track stock levels to ‘Enable’. This is what the new product page looks like:
Do More With Primaseller
Beyond this, you can create low stock reports for each of your products on a daily, weekly or monthly basis. These reports are created separately for each of your warehouses. Move to the ‘Purchase Planning’ option under the ‘Purchases’ option in the left menu bar. You will be led to this screen:
Clicking on the ‘Create New’ option on the top right-hand corner leads you to this page:
From this screen, you can choose the facility for which you want to generate the low stock report, choose the frequency and time at which you want these to be generated. Under ‘Automatic PO Creation’, you can even choose to have purchase orders created automatically.
Once you choose that option, you can control a few other parameters such as the basis for choosing a vendor to receive your purchase order, and whether you want the purchase order to shop up as ‘open’ on your end, or be sent to the vendor.
Once you set these options to your choices, managing vendors and purchase orders are as easy as sitting back and letting someone else do the job for you! Such an automated system will further help you implement Just In Time Inventory Strategy more effectively, by monitoring inventory, alerting you to low stock and reducing the potential delay between receiving a low stock report and sending out a purchase order.