Low Inventory Strategy - why it may or may not work for your business

Why optimise your inventory strategy?

In any company, having an optimised inventory strategy in play is essential to ensure you’re not losing money, and in many cases, increasing profits due to clever inventory management. It can also mean having a lower working capital, making savings with the decreased obsolescence, and reducing the logistics cost burden of managing too much inventory.

Matching inventory levels to your customer’s needs can be tackled using multiple strategies, including ABC Analysis, Cost-per-touch, Cross-docking, Back-ordering (pre-ordering) and the most popular ‘Just-in-Time’.

The Just-in-Time strategy focuses on only having the stock needed to fulfil customer orders, including the ones yet to come in. This strategy is most often used by fashion and food retailers, who need to keep their stock as fresh as possible. 

In any company, having an optimised inventory strategy in play is essential to ensure you’re not losing money, and in many cases, increasing profits due to clever inventory management. It can also mean having a lower working capital, making savings with the decreased obsolescence, and reducing the logistics cost burden of managing too much inventory.

Matching inventory levels to your customer’s needs can be tackled using multiple strategies, including ABC Analysis, Cost-per-touch, Cross-docking, Back-ordering (pre-ordering) and the most popular ‘Just-in-Time’.

The Just-in-Time strategy focuses on only having the stock needed to fulfil customer orders, including the ones yet to come in. 

This strategy is most often used by fashion and food retailers, who need to keep their stock as fresh as possible. 

What is a low inventory (Just-in-time) strategy?

Just-in-Time inventory strategy is essentially a low, to no, inventory strategy. The goal is to have the least amount of stock in whilst still fulfilling orders as efficiently and quickly as possible. It was first created in Japan, post World War Two, by Toyota Car Manufacturer. 

By having less stock, there are many direct cost-savings within the reduction of maintenance, shipping and storage of said stock. However, there is a bit of risk with this kind of strategy because there are no safety limits in-built, i.e. no spare parts, so any delay in even one area of the supply chain can throw it into chaos. The recent worldwide pandemic has demonstrated this chaos perfectly. However, companies are still reluctant to return to other strategies, as this is one of the most profitable and environmentally friendly strategies out there. 

Benefits of a Reduced Inventory.

So why might a low inventory strategy work for your business beyond these top-level cost savings? Here are a few points worth considering:

1. Reduction in Materials
   Having more stock has a direct effect on how much space you need to store it. In turn, it increases the labour cost to move said stock both in and outside of the warehouse. Thus, space and employees are high-cost factors; one many would like to get rid of or at least reduce.
   
   
2. The Flexibility of Inventory
   As society and how people purchase their everyday wants and needs change, so does the product’s lifecycle. Unfortunately, it continues to reduce dramatically for many, meaning new products created may be obsolete in as little as six months.By ordering less, businesses have more chance of selling off their entire stock and won’t be left with unusable inventory. It’s also considered irresponsible in this day and age to order so much when technology enables companies to predict what can and will be sold accurately.

    

    

3. No Waste
   Similar to the previous point, the stock which goes unsold becomes waste. You can’t throw it away easily either. Instead, it sits around in warehouses losing profits and then eventually, the additional task of disposing of it arrives. If you try to discount too much to try and sell it on, the whole product can lose its market value and affect future profits.This is particularly bad if you work with perishable goods. They don’t just become waste stock; they become dead stock that needs to be disposed of quickly. The less ordered, the less wasted and the more money saved.

Issues with Low Inventory.

Of course, there are some negatives to such a strategy. For instance, working out the right stock level to meet demand will never be 100% effective. If you decide not to order an amount of safety stock, you run the risk of running out. 

However, good analytics and supply chain management can be employed to stop this from happening. 

Additional stock may also be needed at certain times of the year, especially seasonal stock. This stock can be stored for the following season and sold easily but doesn’t make any money for the interim 7-8 months. 

And of course, disruptions to the supply chain like COVID-19 mean you could run out of stock for weeks to months on end, with no way to re-stock, losing a large amount of potential profit. Forecasting and quick action can help companies avoid the worst of these.

Deciding factors for your business.

When deciding whether a low inventory strategy will work for your business, you first may wish to consider completing a full assessment of your current inventory system.

Tip: Use technology to determine where your strengths and weaknesses lie within your supply chain, particularly focused on your inventory management strategy. Correct data is essential here to ensure optimal stock levels are being met.

Overall, you need to pick the best strategy for your company. Low inventory will work well for many, but a mix of tactics may be more effective to ensure that not all your eggs are in one basket, i.e. not all your money is tied up in on-time stock transactions. Providing fantastic shipping, returns, excellent customer service, and high-quality products can help ensure less focus on an endless stock supply.