How to Stay on Top of Stock Control and Reduce Costs Using the Just-in-Time Inventory Method

Warehouse worker and manager help each other move a cardboard box.

This is a guest post by Ty Kiisel. 

If you’ve never heard of just-in-time, don’t worry—it’s not too late. The just-in-time manufacturing model was introduced by Toyota in the 1960s and has become a popular way for manufacturers to manage their inventory, raw materials and the other supplies they use in the manufacturing process. Of course, manufacturers aren’t the only small businesses that can benefit from this approach.

Large companies like Motorola, Hewlett-Packard and others use the same basic concept but refer to their programs by different names. Nevertheless, small manufacturers and other small businesses can reap the benefits of the just-in-time approach to control inventory costs and maximize the value of the inventory they have on the floor.

In a nutshell, a manufacturer contracts with a supplier to maintain inventory levels of raw materials and other supplies needed for the manufacturing process so the manufacturer doesn’t need to. This helps lower production costs by reducing the cost of the inventory they carry, and helps increase efficiency throughout the manufacturing process, allowing the manufacturer to potentially lower costs to their customers. The same basic concept can also be applied to anyone who needs to stock inventory or otherwise has a supply chain.

Because this model is primarily a manufacturing model, we’ll use the manufacturing process as an example. Finding success with a just-in-time approach depends upon three important components:

1. A disciplined manufacturing process.

In order to successfully incorporate a just-in-time methodology, you’ll need to ensure you have complete control of all your production processes. The entire assembly line needs to be in sync and you can’t afford errors in production. Tight inventory control is crucial because if the part isn’t there, the assembly line stops—making downtime expensive both in terms of production and manpower.

This means repeatable processes must be in place to ensure that your employees keep track of what’s being used and what’s needed, so that there’s enough inventory to meet your manufacturing goals.

2. A good supplier relationship.

Lowering your warehouse costs by reducing inventory requires an excellent relationship with your suppliers. These suppliers will assume the costs of maintaining inventory while ensuring that the supply chain of inventory is readily available and deliverable to you when you need it.

Creating an excellent relationship with your supplier requires some forethought. As such, there are some things you should consider when negotiating with suppliers. For example, instead of thinking of how to achieve the lowest price on purchasing inventory today, the just-in-time methodology requires you to think longer-term. By creating contracts with suppliers to guarantee inventory delivery over the long term (think in terms of yearly—or longer—contracts) a small manufacturer can ensure they have readily available inventory when they need it at the lowest price possible. This is not only good for your business, but a potential win for your suppliers who enjoy the benefit of guaranteed business over the course of a 12-month or longer period.

The just-in-time approach also has the potential to reduce waste by eliminating parts or raw materials that become obsolete or otherwise unneeded within your manufacturing process.

3. The right technology.

Implementing a just-in-time methodology today is much more accessible than it might have been 50 years ago when it was introduced by Toyota. Technology makes it much easier to monitor inventory levels in real time and instantly communicate with suppliers to properly manage inventory levels within the manufacturing process.

The Internet makes it possible for what was once very expensive technology to be accessed by small businesses at relatively lower costs. Barcoding parts to track inventory usage makes it easy for you and your suppliers to keep track of inventory levels. The Internet makes it possible for your suppliers to see, in real time, whether you need more component parts or raw materials, enabling them to act quickly to get you what you need.

The just-in-time model requires a close, even intimate, relationship with your suppliers. As such, communication with your supplier is critical. Utilizing the right technology is critical in maintaining an open line of communication with your supplier. This will likely mean your suppliers will need access to your production schedules and instant notifications of any changes that would either increase or decrease your production.

Taking a just-in-time approach could be a great way to increase the efficiency of your manufacturing process. To determine if it’s the right approach for you, you’ll need to ask yourself a few questions:

1. Do you produce a predictable amount of products every day, week or month? Can you predict how much inventory in parts or raw materials you’ll need during your production schedule? If not, a just-in-time approach will be difficult to adopt.

2. Are your suppliers willing to stock the inventory you need and make smaller, yet more frequent, deliveries? Are they willing to negotiate favorable terms for the guarantee of long-term commitments from you? Can you rely on them to give you quick access to the supplies you need?

3. Are your employees willing to adopt new systems and technology that initially may add a step or two to what they are currently doing within your manufacturing process?

4. Are you willing to invest in the technology and tools to monitor your inventory and communicate with your suppliers so they have visibility into your production schedule and can seamlessly manage your inventory?

Although a just-in-time methodology is a popular way to help businesses manage costs and increase profits, you need to evaluate whether or not it’s right for your small business and determine if you’re willing to make the investments required to implement it. Fortunately, the technology you need is more accessible than ever before.

Ty Kiisel is a contributing author focusing on small business financing at OnDeck, a technology company solving small business’s biggest challenge: access to capital. With over 25 years of experience in the trenches of small business, Ty shares personal experiences and valuable tips to help small business owners become more financially responsible. OnDeck can also be found on Facebook and Twitter.

 

About Francesca Nicasio

Francesca Nicasio is Vend's Retail Expert and Content Strategist. She writes about trends, tips, and other cool things that enable retailers to increase sales, serve customers better, and be more awesome overall. She's also the author of Retail Survival of the Fittest, a free eBook to help retailers future-proof their stores. Connect with her on LinkedIn, Twitter, or Google+.

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  • Cathy Moore

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