Inventory is a source of friction for many small businesses. Many companies struggle with determining how much inventory to keep on hand. The problem is that if you don’t have enough inventory on hand it can take you longer to fill orders and if you keep too much inventory on hand you have to deal with carrying costs of inventory that is just sitting on your shelf. One inventory strategy that has been developed to find an affordable middle ground for inventory management is called just-in-time inventory strategy.
What Is Just-In-Time Inventory Strategy?
A just-in-time inventory strategy is a lean inventory strategy. This means that just enough inventory is kept in stock to cover common order volumes. This strategy was developed to increase the return that small businesses get from their inventory investment, as well as to speed up that return. However, in order for it to work you first need to determine what your average inventory turnover rate is.
Calculating Your Inventory Turnover Rate
The first thing you need to do when utilizing the just-in-time inventory strategy is to calculate your average inventory turnover rate. This rate can be calculated for a week, a month or a quarter, depending on how often you want to reorder inventory. To calculate your average inventory turnover rate you will need to pull up your order records from the last several years. You will want to calculate turnover rates for several time periods throughout the year because order trends vary by season. If you order on a monthly basis you can calculate average turnover rates for each month by adding together the data for a specific month and product and dividing it by the number of years that you collected data from. For example, in June 2001 you may have sold 40 units of product A, in June 2002 you may have sold 100 units of product A and in 2003 you may have sold 75 units of product A. Your average turnover rate for product A in June will be: (40+100+75)/3 = 71.7 units.
Setting Up a Lean Inventory Ordering Plan
The key to setting up a lean inventory ordering plan is to only order the number of units for each product that are most likely to sell during a specific ordering cycle. This means that if your average inventory turnover rate is 72 that you order about 72 units of product A during that period. If you are worried about selling out, or if you have noticed an increase in business, then you can increase your ordering based on current buying trends. Another strategy would be to keep your average inventory turnover rate and to keep your supplier on standby with a second shipment. You will need to authorize the subsequent shipments when your supply is getting low, but not quite out. This will prevent you from running out of an item that is in demand.