An integral part of any lean and successful ecommerce business is managing the supply and demand of your inventory. Businesses are selling on multiple channels and also fulfilling goods to customers in a variety of methods—pickup in store, shipped direct to consumer, fulfilled by Amazon, and more. These variations further complicate inventory control and management. It becomes harder to ensure that your inventory numbers will accurately fulfill your customers needs and demands, without overstocking or understocking.
A great inventory management system will help you streamline these issues—some companies rely on Just-In-Time (JIT) inventory management wherein products are purchased (often if raw material form, or parts that will be assembled in production), shortly before they are needed so that they can be produced just as the customer orders. Utilizing JIT can allow for merchants to hold a minimum amount of stock supplies on hand, to balance inventory costs, while at the same time making sure that stock-outs don’t happen should there be a sudden spike in demand. If you are working with a third-party logistics provider to outsource your inventory management they can likely help implement a JIT strategy.
A JIT system can potentially be time saving as well as profit boosting, however it is important to consider both the advantages and disadvantages.
Decreased Inventory Costs
While reducing the direct cost of maintaining the inventory that your business needs to have on hand, there are also other tangential cost savings that can come from using a JIT approach. This includes lower costs associated with labor, storage, and warehousing. The capital you would have been using can then be deployed to other areas of your business, such as marketing, shipping costs, or sales staff.
If you have too much of a product that is not meeting the demand that you have forecasted, chances are that you will have to offer markdowns or have special sales in order to offload the excess inventory. By decreasing the amount of inventory that you carry, it can lower the chance that you’ll need to discount your products in order to move them.
Since your products are only ordered when a customer makes a purchase you don’t need to devote resources to maintaining and managing a warehouse to store your products.
Fewer Production Errors
If your inventory orders are smaller and more frequent, it can allow for potential product defects to be spotted more easily before too much stock is purchased or manufactured. This will help to lower the number of returns or refunds that you need to process. It also might mean that your customers will wind up with a higher quality product—which in turn increases the chances that they become repeat buyers.
If your products sit in storage or on shelves for too long, there is a chance that they may become damaged, obsolete, or even potentially expire. Any items that fall into this category become automatic waste. Because with JIT you have no excess inventory sitting around, your product waste is greatly lessened.
If your company wants to develop a new product or manufacturing line it can do so efficiently and cost effectively since you don’t need to consider what to do with the excess inventory that you are likely to have on hand. This allows for your business to be leaner and more agile as marketplace demand changes.
A JIT inventory management system is put in place with certain expectations, such as regular order frequency. If there is a sudden spike beyond your forecasts there is a chance that your production won’t be able to keep up with the increased demand, and you might find that you are not able to meet the volume of orders. This could lead to the cancelation of orders and loss of potential future return business.
In order for a JIT system to be successful, the deliveries themselves need to arrive “just in time”.
If you find yourself in a place where a component in your supply chain gets disrupted then you could wind up stuck with stock-outs or delayed deliveries to your customers causing you to have to increase your customer service related costs. To avoid this it is important to have clear lines of communication with your suppliers, manufacturers as well as third-party logistics providers (3PL) if you utilize one.
Since your products will be purchased only on an as-needed basis, a JIT system becomes more vulnerable to price changes that occur in the marketplace. This can be beneficial if the cost of products that you produce from suppliers decreases, however if they increase then you will likely either have to absorb the difference to keep your customers happy, or raise your prices which could affect customer loyalty.
Low inventory volume results in a higher cost-per-unit, making this model unaffordable for smaller retailers. It might be better to purchase your products in larger quantities if you have the space to store them.
If your ecommerce business operates in a relatively stable marketplace, you have good relationships with your suppliers, and you can track relatively large and consistent volume of orders, then a JIT system might be the right fit for your inventory management system. It can help you optimize the flow of your products and increase your profits. A Just-In-Time system requires a flexible and efficient supply chain so it might make sense to partner with a third-party-logistics provider to help you implement your JIT inventory management strategy.
If you are considering implementing a JIT inventory management system or have questions if it might be a good fit for your ecommerce business, send us a note to connect about how we can help your company grow. You can read DCL’s list of services to learn more, or check out the many companies we work with to ensure great logistics support.