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How to Reduce Inventory Costs with a Just-in-Time Inventory System

How to Reduce Inventory Costs with a Just-in-Time Inventory System

Manufacturing & Distribution

Manufacturers and distributors need to have inventory available to ensure a steady flow of goods to producers and consumers. Selling inventory also keeps a steady flow of capital coming into your business. However, handling and storing materials can be costly.

How Can Your Manufacturing or Distribution Business Reduce Inventory Costs?

When considering the costs of housing inventory, it is important to distinguish between value added activities and non-value added activities.

  • Value added activities add value to a product or service at a given stage in the production cycle or supply chain; customers are willing to pay for value added activities because they make the product or service better
  • Non-value added activities increase the final cost of the product or service, but do not increase the value to the customer

The cost of warehousing inventory is a non-value added activity. Upon receiving merchandise, your customer’s only concern is, “Does it work and is it going to perform the function for which it was purchased?”


 

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Just-in-time (JIT) purchasing and just-in-time production help combat these undesirable, non-value added inventory costs. These demand-pull inventory systems are applied by requiring that raw materials arrive in your warehouse exactly as they are needed for production or distribution. The goal of JIT systems is to eliminate all non-value added activities.

The Benefits of Just-in-Time Inventory Systems

JIT purchasing and productions systems offer many advantages over traditional systems, such as:

  • Lower investment in inventory
  • Reduced space required to store inventory
  • Reduced risk of defective and obsolete inventory
  • Reduced manufacturing costs
  • Simplification of your costing system (all goods sold / produced will flow to the cost of goods sold since inventory is sold and produced only when needed)

The primary benefit of a JIT purchasing or production system is the reduction of inventory … ideally to zero. Reducing inventory will decrease the cost of handling and storing materials. It will also free up space that can be used for more cost effective activities.

In order to successfully implement such a plan, it is critical that you have strong relationships with your suppliers.

What Kind of Relationships Do You Have With Your Suppliers?

JIT requires manufacturers and distributors to shift the activity of inspecting for defective products to your suppliers. As products are added to your inventory just when they are needed, it is essential that they are shipped in good working order.

Shifting inspection activities helps to reduce your costs of inspecting and sending back defective inventory. If suppliers do not deliver defect-free materials on time, stockouts and customer returns will occur and they will be more pronounced under the JIT system, since safe levels of inventory are not maintained. This is why building strong relationships and increasing communication with your suppliers and customers is so important.

Implementing a just-in-time inventory system, and identifying and reducing non-value activities, can save you money and time.

Need Help?

Contact us online or call 800.899.4623.

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Published on July 15, 2013