How more small businesses could embrace Just-In-Time as an inventory strategy - with the right supporting systems in place
Receive an order and then buy the parts to create the product; that’s the premise on which a lot of large businesses operate – the Just-In-Time inventory strategy.
First used by Toyota as early as the 1940s, and then for a long time kept secret from any organisation outside Japan, the strategy has, over the past thirty years, been honed by hundreds more large businesses and put into action as their preferred method for running their supply chain.
To fully understand the benefits of JIT, organisations need to get on board with the main premise; the business holds little to no inventory, and has products shipped to their warehouse only when they have received an order from the customer or forecasts indicate that they are required. Inventory quantities are decided from predictive estimates based on previous sales trends, with a decision made as to how much ‘safety stock’ is needed from suppliers just as you run out of the previous batch.
A boon for Finance Directors
A well implemented JIT approach can be very powerful for manufacturers and appealing to Finance Directors. After all, the nature of the approach reduces the amount of inventory waste, improves efficiencies and keeps manufacturing costs way down. For these reasons, JIT has stood the test of time for manufacturers, but it’s generally more well-received as an approach by larger organisations, who can manage the complex logistics required more easily and mitigate the risk of occasional disjoints between forecast and reality. JIT has always been a more challenging premise for smaller businesses, as each order is more critical to the margins of the business, and the complexity can be an intimidating thing to face.
Dealing with risk
The JIT approach leaves a business very dependent on suppliers understanding exactly what’s needed and when – and then delivering on time and effectively. Even if it’s out of their hands, any issues a vendor has getting you the stock in time will have an impact your sales and customer relationship. Similarly, an unexpected, unpredictable surplus of orders for a certain product can leave you unable to supply the right goods to your own customers in time, especially if you’ve promised them a delivery time that’s sooner than the goods could get to your warehouse. Given that any missed sale has an immediate bearing on revenue, this is critical.
Supply chain risk in this model also adds some fragility. What if your stock shows up at a lower quality than you were expecting? With the JIT method, there’s very little time to get new materials in before you’re due to ship the products to customers yourself. FDs supporting the business with these transitions need to gauge the probabilities of risk and help operational leaders set expectations with customers accordingly.
The need for immediate insight
The challenge with JIT is that many manufacturing businesses maintain individual relationships with suppliers they physically call or place orders with via another analogue process. This can make it hard to automate a JIT approach – after all, a supplier’s data might live in someone’s mobile contacts list and they might manually phone in an order when someone orders a batch. So, whether that’s bottling whiskey or making fudge, getting an order right means having a real-time view of all customer orders and demands.
Understanding all of the above is something small business and Scottish wholesaler Ivan Wood & Sons Ltd needs to do each day and while working with the JIT method. The company imports tonnes of fresh produce several times a week from suppliers across Europe to satisfy a wide and exacting customer base. That’s a tricky job when your wholesale prices are going up and down from one hour to the next – plus you’re having to calculate different prices for different price structures. Due to the perishable nature of the goods it sells, it’s almost enforced JIT inventory management, and seriously tests its business systems, so it needed a complete overview of everything happening across the business to get its stock levels just right for any order.
British design and manufacturer of lifesaving and fire safety equipment storage, Jo Bird, meanwhile, tailor makes all of its cabinets to protect equipment based on local environments. Ordering exactly the right amounts of materials can both mean reducing waste if they order too much or it could mean less waiting around for materials to arrive if they have to panic order as a result of not initially ordering enough. The company has been able to effectively manage JIT inventory thanks to its Greentree system, which gives a single view of any job.
All members of staff have live information on their desktops. The number of orders, value of orders, order status, outstanding POs and payment details can all be found at the click of a button. They just need to move through the workflow in the system and they’ll see the latest order, supply chain and stock information live. At any given time, any member of staff can see what raw materials are needed to complete the orders in process – if they have an adequate amount, or if they should order more or less.
Just in time for lean innovation
In the current climate, small businesses can’t risk stock waste – and so the JIT method does make sense. However, it needs to be managed carefully and with a full overview of exactly what is coming in and out of the business at any given time – as well as the orders that are likely to be received. Thanks to new ERP and business systems, small businesses can take the approach – once considered one too risky for any non-enterprise organisation, but now, it’s definitely an option for more to consider when it comes to inventory management.