Startups often grow faster than projected. While sudden growth can be very exciting, it can also be very stressful. Managing inventory is one of the biggest challenges entrepreneurs face.
Just-in-time inventory management is a great solution to this problem. It is a concept that originated in Japan in the 1980s and became very popular in the United States shortly thereafter.
The cost benefits of just-in-time inventory management are huge. However, it is very important to make sure the system is properly structured, because you can face crippling inventory shortages otherwise. You will need a strong relationship with your suppliers and a powerful inventory management software.
Benefits of Just-in-Time Inventory Management
You need to make sure that you have enough inventory on hand to fill customer orders. Your customers will become very dissatisfied if you can’t meet demand and have to refund their money.
On the other hand, you don’t want to start too much inventory either. Keeping inventory costs money for a variety of reasons:
- You have to pay for a storage facility.
- You need to pay for insurance.
- Inventory depreciates over time and may become obsolete before it can be used.
If you are worried about managing inventory for your growing start up, you may want to consider using just-in-time (JIT) inventory management. Here are some factors you need to consider.
Avoid Downtime Costs
If you don’t keep enough inventory, you will not be able to meet your production needs. This can be disastrous, because downtime can be very expensive. Automotive companies that run out of materials can be fined up to $4,000 a minute by their trading partners.
Fortunately, if you have a reliable supplier and inventory management software, you don’t have to worry. You should always have enough inventory on hand.
Save on Storage Costs
Inventory carrying costs are much higher than most entrepreneurs expect. You may need to pay up to 25% of each item’s value to store it.
Since you don’t need to store nearly as many materials with JIT, you can cut your storage costs considerably. You can reduce inventory storage costs by up to 70% with JIT. You can also reduce labor costs by 50%.
Eliminate Unnecessary Storage Space
The monetary cost savings aren’t the only benefit to consider. You also free up your real estate, that would otherwise be used to store lots of inventory.
This minimizes the clutter around your property. It helps you maintain the mindset of a lean, entrepreneurial business, which is necessary to grow in the early years.
Reduce Risk of Theft
Storing excessive inventory can attract thieves. It can also lead to employee shrinkage.
Theft can become very costly over the long-term. It can lead to expensive downtime, higher insurance premiums and strained relationships with customers. The risk of theft is lower with JIT for a couple of reasons:
- You won’t attract as many thieves.
- It is easier to identify shrinkage.
- Your security team will have an easier time safeguarding it.
The risk of theft is something most businesses overlook when doing a cost-benefit analysis of JIT. You want to take it into consideration, because shrinkage costs are one of the biggest causes of business failures.