Inventory management is crucial for any ecommerce business. You need to strike the right balance - having too little inventory means you risk stockouts and lost sales, while having too much ties up cash and leads to wastage. This is where Just In Time (JIT) inventory comes in. In this post, we'll explore how JIT inventory can help optimize your ecommerce operations.
What is Just In Time Inventory?
Just in time inventory, or JIT, is an inventory management strategy that aligns inventory levels closely with consumer demand. The goal is to have just enough inventory on hand to meet orders, without holding excess stock.
With JIT, you purchase inventory as you need it to replenish stock, rather than buying in bulk. This reduces carrying costs, storage space needed, and wastage from expired or obsolete products. Inventory only arrives “just in time” when it's needed.
The Key Benefits
There are several benefits to implementing a JIT inventory system:
- Reduced carrying costs - Less inventory means lower storage, insurance, taxes and other costs associated with holding stock. This frees up cash flow.
- Minimized wastage - With smaller batches, products are consumed before expiring or becoming obsolete. This avoids write-offs.
- Improved inventory turns - Inventory moves faster when stocks are leaner. This improves working capital efficiency.
- Faster adaptation - You can respond quickly to changes in consumer demand by adjusting orders. Excess stock doesn't tie up your ability to pivot.
Key Metrics to Track
To successfully implement JIT inventory, pay attention to these key metrics:
- Inventory turnover rate - This measures how many times average inventory is sold during a period. A high turnover indicates efficient inventory usage.
- Days inventory outstanding - Calculated by dividing average inventory by cost of goods sold per day. A low DIO means you're carrying fewer stocks.
- Fill rate - The percentage of orders filled from available inventory. A high fill rate means you're meeting demand.
- Stockout rate - The percentage of orders that can't be fulfilled due to inventory unavailability. Minimize for better customer service.
- Lead time - How long it takes to receive inventory orders. Shorter lead times allow more agile JIT systems.
Striking the Right Balance
For ecommerce, balancing understocking vs overstocking depends on your business model and acceptable risks.
For businesses with low inventory carrying costs or high risks of stockouts, overstocking may be preferred. Having surplus inventory acts as a buffer for uncertain demand.
Businesses focused on fast order fulfillment and inventory efficiency tend to favor understocking. They accept occasional stockouts to maximize inventory turns and keep costs low.
Omnichannel retailers need to weigh understocking online vs in physical stores. Excess online inventory can often be transferred to stores when needed.
Uncover the reasons why challenges in operations tend to compound over time. Explore insights and strategies to address these complexities in our latest blog: Why Everything in Ops Compounds.
No Perfect Solution
Implementing JIT inventory management isn't a one-size-fits-all approach. The right balance depends on your industry, product mix, supply chain capability and business priorities.
Fine-tuning your JIT strategy is an ongoing journey of continuous improvement. As your business evolves, so will your ideal inventory levels and management approach. The key is using data to align stock availability with actual consumer demand.
Over time, experience will give you greater ability to forecast needs and streamline reorders. With dynamic adjustment, you can reap the benefits of JIT inventory for your ecommerce operations.
JIT inventory optimizes operations by cutting excess stock and aligning supply closely with consumer demand. Lower carrying costs, less waste and improved inventory turns are compelling benefits. However, you need to choose an approach that fits your unique business context.
With the right metrics, balances between understocking vs overstocking, and continuous adjustment, JIT inventory can transform your ecommerce operations. Implemented effectively, it's a journey that leads to greater efficiency and profitability over time.