Just-in-time (JIT) inventory is an inventory management strategy that involves receiving inventory just before selling it, rather than keeping it on hand for weeks or months until you need it.
JIT is one of the most efficient inventory management systems for retailers, as it reduces storage needs and helps keep stock moving.
Whether you’re currently using a just-in-time strategy or are looking for a new solution to your inventory woes, you’ll learn everything you need to successfully implement JIT in this guide.
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What is just-in-time inventory?
“Just-in-time inventory is a management strategy that involves holding limited quantities of inventory. Raw materials (for a manufacturer) or units of stock (for a retailer) arrive just as you need them, hence the name ‘just in time,’” says Kate Ashley, Associate Teaching Professor in the Supply Chain and Information Management Group at Northeastern University's D’Amore-McKim School of Business.
JIT is part of a broader management philosophy of reducing waste and improving efficiency through so-called ‘lean management’ practices and a focus on continuous improvement.
So, what does JIT look like in practice? If you’ve ever encountered companies that make their products to order, or that use dropshipping, you’ve seen examples of just-in-time inventory in action.
Dropshipping eliminates the need for a retailer to keep a pool of inventory on hand, reducing holding costs and the risk of obsolescence.
Making products to order similarly ensures that retailers source only the supplies they need, without wasting space or cash flow on superfluous inventory.
How does just-in-time inventory work?
Kate Ashley has a simple framework for understanding just-in-time inventory, “A useful way to distinguish JIT from other inventory strategies is to think about push vs. pull.” She explains,
“In a traditional inventory system, units are ‘pushed’ through the supply chain to meet a target inventory level (or as they are available), whereas under a JIT system, inventory is ‘pulled’ to the next stage of the supply chain only when demanded. Under other systems, there is typically more inventory held at each stage of the supply chain, and thus much more total inventory in the system as a whole.”
With traditional inventory management, a retailer would, for example, pre-purchase all of its holiday inventory before knowing the demand for it. If it’s a slower shopping season than anticipated, the business may not be able to sell everything, resulting in dead stock.
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With a JIT system, that same retailer would use historic data to forecast demand and order a fraction of the inventory it anticipates needing. The business would then reorder inventory as it gets close to using it up.
The success of JIT, therefore, relies heavily on inventory tracking systems that help monitor demand.
A retailer that wants to use JIT inventory management needs to have excellent forecasting capabilities on both the demand and supply sides.
So, what kinds of businesses would benefit from using a just-in-time system for inventory? Ashley says, “Just-in-time inventory can work well in a wide variety of industries, but companies using this approach need to have the systems in place for supply chain visibility, accurate forecasting, and reliable supply contracts. JIT works best when it is used as part of a system of consistent, self-reinforcing management decisions.”
💡 PRO TIP: Want to know how much stock to order from a vendor? If you’re using Shopify POS, install the Stocky app to get purchase order suggestions based on historical sales data or a product’s seasonality.
Advantages of a just-in-time inventory system
There are many benefits to implementing a just-in-time inventory system, including lowering your storage expenses, boosting efficiency, and generating more cash. The advantages of JIT include:
- Lower inventory costs
- Improved cash flow
- Reduced risk of overstocking
- Increased agility and efficiency
Here’s a closer look at the advantages of JIT.
Lower inventory costs
Lower inventory costs in one of the primary advantages of the JIT inventory system.
With fewer units being held in stock, the total cost of holding and managing inventory is reduced. This could include financial holding costs (e.g., financing a large purchase of goods), physical costs of maintaining warehouse space, or costs associated with spoilage or items becoming obsolete or out of style.
Improved cash flow
When you order stock as you need it, instead of in advance, you not only lower your inventory costs, but you’re also able to have more cash on hand to spend in other ways.
With more cash flow you can invest in things that help the business grow, like advertising, research and development, expansion, or hiring more staff.
Reduced risk of overstocking
When you order only as much inventory as you need, you avoid overstocking. When retailers overstock, they usually need to reduce prices to sell inventory, which leads to lower profit margins.
If stock just isn’t moving, they need to donate it or throw it away to avoid losing money on storage and administrative costs. With a just-in-time system, you can reduce the risk of overstocking by letting demand dictate your inventory needs.
Increased agility and efficiency
A just-in-time system can make your business more nimble, says Kate Ashley.
“An additional advantage of JIT is that with less inventory, it can be easier to notice issues, perceive demand trends, and respond quickly to changes. Having lots of inventory can sometimes hide problems in a supply chain in the short term, and this makes firms slower to respond when issues arise.”
A JIT system can also help your business be more efficient. Instead of ordering, receiving, and then storing stock, you can begin using it as it arrives (which also reduces the risks of having phantom inventory).
This streamlined process reduces administrative work and waste. It also ensures you order how much you need, instead of how much you think you’ll need.
Disadvantages of a just-in-time inventory system
As with any system, the just-in-time inventory strategy is prone to some pitfalls. JIT can make your business vulnerable to stockouts and supply chain breakdowns. It also makes you dependent on accurate forecasting. Some of the disadvantages of JIT include:
- Increased risk of stockouts
- Vulnerability to supply chain breakdowns
- Less price flexibility
- Dependant on accurate forecasting
Here’s a closer look at the limitations of a JIT system.
Increased risk of stockouts
“A downside of JIT is the risk of stockouts,” Ashley explains. Sometimes you may under-predict demand and not order enough inventory, which could lead to a poor customer experience and a missed opportunity for profits.
Other times, you may order the right amount of inventory, but your suppliers may not have them available when you need them. Either way, stockouts are not a good problem to have.
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Kate Ashley says that retailers who use a JIT inventory system should maintain “good supplier relationships.” When you have strong relationships and open lines of communication with your vendors, you’ll be able to stay in the loop about stock availability and minimize stockouts.
💡 PRO TIP: Ship-to-customer order fulfillment is the easiest way to prevent stockouts from hurting store revenue. Rather than being limited to selling products you have in stock, you can sell products in-store and ship them to customers from your warehouse or another store location that has inventory.
Vulnerability to supply chain breakdowns
Because a just-in-time system involves receiving inventory and supplies as they’re needed, rather than in advance, retailers who implement it are susceptible to global supply chain trends and crises.
When other parts of the supply chain break down, like we’ve seen during the pandemic, it may not be possible for a firm to take corrective action to get the inventory it needs.
Ashley continues, “In situations like this, firms practicing JIT are left with less inventory to weather short-term swings in supply or demand than firms that use more traditional inventory management systems. In order to fully realize the advantages of JIT, firms need to be monitoring their inventory levels closely, and they need to be able to take action when circumstances change.”
Less price flexibility
Because of the last-minute nature of a JIT system, retailers who use it have less price flexibility.
If a shop owner needs something at the eleventh hour, they don’t have the luxury to price shop or wait for prices to drop, and they don’t have much leverage to negotiate. As a result, just-in-time inventory management can lead to higher costs for inventory purchased.
Dependant on accurate forecasting
A JIT system can’t work without data, as data is needed to accurately forecast inventory demands. If you order too much stock and can’t sell it, then you’ve wasted money. Ultimately, you’ll need to reduce prices, resulting in lower profit margins. And, if you produce less than your demand, you miss an opportunity to make more money.
If you’re just starting your business, forecasting can be nearly impossible because you don’t have historical data to work with.
How to implement a just-in-time inventory system
If you’ve weighed the pros and cons of JIT and have decided to pursue it, follow these steps to kickstart your just-in-time strategy.
- Track sales data
- Find trusted vendors
- Invest in inventory management software
Let's take a closer look at each of these steps.
1. Track sales data
You’ll need to track sales data in order to successfully forecast demand. Fortunately, your point-of-sale (POS) system can help. Leverage its reporting features to track and export historic sales data. With this data, you can conduct an ABC analysis to see what sells well and what sells poorly, and how often you should restock.
2. Find trusted vendors
Working with vendors who are reliable and communicative will help prevent stockouts. Not sure where to find good suppliers? Ask for recommendations from fellow entrepreneurs.
Look for suppliers who respond quickly to your outreach efforts, can send you samples of products, and assign you a dedicated account manager. Ask for references to make sure they have a solid track record and are able to meet demand.
3. Invest in inventory management software
Inventory management software will help you keep track of what you have, what you’ll need, and when you’ll need it. Find inventory software that integrates with your POS and omnichannel sales outlets to ensure correct, in-the-moment inventory levels.
Examples of just-in-time inventory in action
As a consumer and business owner, you may not be aware of which well-known brands make use of a JIT system. Here are a few to keep your eye on.
“Apple [is a] prominent example of [a] retailer that use[s] just-in-time methods,” says Ashley. Apple uses “some degree of vertical integration on their side to make coordination across layers of the supply chain easier.”
“Big box retailers including Target and Walmart use JIT for some types of items. Think product categories with shorter shelf lives, like holiday items that will rapidly drop in value after a certain date,” Ashley says.
Accessories brand Alohas uses an on-demand business model to predict inventory needs and create less waste. The company rewards customers who order new items weeks in advance with lower pricing.
Is a just-in-time inventory strategy right for you?
A just-in-time inventory system can help you lower inventory and storage costs, run a more efficient and agile business, and have more cash on hand to invest in business growth. In order to ensure JIT works for you, you’ll need powerful forecasting in place.
A Shopify POS can equip you with the reporting and omnichannel inventory tracking you need to meet your inventory management needs. Start your free trial today.
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