Have you thought about how Amazon, Etsy, Flipkart etc manage so many products in all their warehouses? The short answer is, they don't.
In our last post, we spoke about what Inventory holding cost is and why should we reduce it. For a business like Amazon which has millions of items, it would be impossible to store all in every warehouse.
So, how does Amazon ensure that your product is delivered on time?
This concept is called Just-in-Time inventory. In simple terms,
It is the principle of replinishing your inventory exactly when it is needed.
This will reduce your storage costs and reduces wastage.
Companies like Toyota are much more appropriate examples of JIT focused supply chain. But, let's take Amazon's example here. Amazon uses a crude version of JIT.
Achieving JIT is a matter of figuring out,
- When do you order an item
- How much quantity
- Who do you order from
This helps you figure out how long before your stock runs out you are going to place an order. Because the order fulfilment will take some time, the right time to order would be to do the following.
- Your item should run out just as the new order arrives. This will ensure that you don't stock anything extra.
When you order these items, you also need to pay attention to how much you order. There's a cost to fulfilling an order. So you don't want to order too many times. At the same time, you can't order too many items because you will end up holding them for a long time.
So the right quantity to order is to balance the cost of storing these items and the cost of procurement.
Not all your vendors will deliver on time. There are some vendors who deliver fast and some who are slow but have a better product. Depending on the situational needs, it is good to figure out the right vendor you want to place the next order.
For a company like Amazon, Just-in-Time inventory is not going to cut it. Because JIT does not solve for sudden spikes in demand. A company like Toyota has much more predictable needs because it knows how many cars it wants to manufacture. But spikes and troughs are a daily thing in Amazon. So, they need to hold additional stock to handle these sudden spikes. Amazon uses some clever algorithms on their historical data to predict the demand and potential spikes. So they order ahead depending on this prediction.
A good way to get started is to have a look at the Reorder Level Calculator for your business. This will help you understand how often you expect to understock or overstock and how to optimize for costs.
How do you think you can use JIT principles in your business?
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