For any business, it’s important to have an inventory strategy that will keep your company moving forward. One traditional method is to predict demand and stock an inventory for the anticipated sales. This will reduce issues like not having enough product in stock, and will also decrease the number of orders being delivered.
Another method that has gained in popularity in recent years is called just-in-time inventory. According to John T. Williams of Demand Media, this system was first developed in the Japanese auto industry, and has subsequently been adopted by many manufacturers, retailers and other industries in the U.S.
The Positives of JIT
The core principle of the JIT system is that only enough inventory is delivered to last one day, or in some cases, even just a few hours.
The purpose of the JIT system is to reduce inventory levels to maximize workspace. If you are a retailer, this could mean expanding your sales floor without expanding your building. If you are a manufacturer, this could mean adding beneficial workstations, or having more space between different areas.
“Just-in-time inventory can maximize workspace.”
Additionally, JIT decreases the chances of a product or material getting damaged after purchase because it is not stored long enough for anything to happen to it. The system can also cut down on wasted materials due to a decline in demand before the company had a chance to get through all its inventory. Also, if a production mistake is being made, it could be identified quicker, resulting in less wasted material.
Accounting Tools also pointed out that businesses will then put less money into its inventory, as not as much is needed, and there isn’t much warehouse required to store the goods.
Recreating Supply Channels
However, for all the great benefits JIT offers, there are plenty of risks a company takes when adopting the system. The first challenge a company might run into is simply organizing the workflow. JIT is highly complex and depends on every single person in the line of production being on task and on time.
Williams pointed out that companies that employ this method will have to call on suppliers for orders with little to no advanced notice. This could put strain on the suppliers. The company may find their former dealer isn’t a good fit for their new inventory strategy, and may have to find someone that is closer – one that can work with no advance notice, or begin ordering from several suppliers.
Additionally, some suppliers have minimum quantities that must be met to place an order. A company that is trying to keep its inventory as tight as possible may not be able to meet these minimums anymore, and will either have to continue maintaining an inventory of some amount on hand, or find another supplier.
Natural Disasters Impact Revenue
The biggest risk is that the company depends solely on others to provide exactly what it needs at a precise time. There is no room for error on the part of the provider.
Bloomberg pointed out that this could lead to major halts in operations. It used Dell as one of its examples. The computer company relied on specific suppliers for particular parts, including its silicon chips. In 2011, earthquakes and a tsunami in Japan had devastating results on the area economy. The natural disasters held back 25 percent of the world’s production of silicon. This risked shortages in the computer chip market that could have lasted several weeks.
Electronic Products and Technologies explained the same events also caused a Texas Instruments facility to close for six months, and a company that makes up about 20 percent of the global share of quartz components, Nihon Dempa Kogyo, also had to make up for damage at its Japanese location. Those relying on these facilities surely experienced great difficulties addressing the production shortage. As much as 10 percent of TI’s revenues were affected because of it.
“Instead of months’ worth of inventory, there are now days and even hours of inventory,” Jim Lawton, the head of supply management solutions at Dun & Bradstreet, a business consultancy firm in New Jersey, told Bloomberg. “If supply is disrupted as in this situation, there’s nowhere to get product.”
Human Error and Behavior
Production can be halted as a result of simple human error, too. Supply Chain Brain explained that if someone miscalculates what is needed for a project, the company will have to scramble to find a required component or product as a replacement. A manufacturer that made a simple mathematical mistake could be out of production for several months to a year.
Just as natural disasters and miscalculations are difficult to predict, so is human behavior at times. If a company experiences a large, unexpected order, it may not be able to accommodate its customers in a timely fashion. Inventory will go from lean to non-existent, just when a surplus is needed.
Extra Space When It’s Needed
Many of these issues can be addressed or avoided with the help of mobile storage containers. One of the main points of using JIT inventory is to maximize production or workspace by decreasing inventory. When that inventory is stored outside, but still on site, manufacturers get the best of both worlds: not having to worry about storing materials far away from where they are needed, but still opening up the floor for other important functions.
By keeping some extra necessary components on hand, a production shortage due to manmade error or natural disaster won’t have as much of an impact on the company. At the very least, it’ll buy the manufacturer some time to come up with a solution to the shortage.
Plus, if a supplier requires minimum quantities in each order, the company can meet those needs without taking away from the production floor.
Just-in-time inventory can be a positive strategy for many manufacturers and retailers, but it does pose a good amount of risk. But by using portable storage solutions, a company can alleviate some of that risk.