For companies looking to decide which inventory is best suited to their needs, there are two methods that immediately come to mind; JIT (Just in Time) and Min/Max inventory management. The problem occurs when companies decide to manage their inventory based on what they’ve seen work elsewhere, instead of matching their approach to their company’s business model, and the customers and market they service. Instead of running the right inventory approach, they run something they believe will work, but ultimately won’t. So, given these two options, what should companies choose and why?
The Conditions for JIT
For those companies who have large purchasing volumes of raw materials and parts, and who have constant, high volume demand for their products, then JIT is often the inventory method of choice. Just in Time inventory management is based on the assumption that a company can reduce its inventory costs by ordering only what’s needed, when needed. By managing inventory this way, the company has less inventory remaining at the end of the month, because it makes sure to use most of what it takes in. Now, some companies that run JIT, can get raw materials and parts in one day, and immediately ship that finished product in the same day. The benefit of this approach is that a company gets paid from its own customers, right around the time it must pay its own invoices. For example, the company orders parts and materials, receives an invoice, ships out a finished product the same day, and invoices its own customers. Sounds great doesn’t it? Well it can be, but there are some inherent drawbacks, and they are listed below. max freight
• Defective Product or Delivery Delays: Any poor quality product or delivery delays are huge costs to JIT, because the company likely doesn’t have any safety stock available. Try explaining that to an upset customer!
• Lack of Purchasing Power: Small companies that lack the volumes in purchasing shouldn’t run JIT. Companies that adopt JIT must be able to be the number one priority in their supplier’s eyes. You can’t be screaming for product and have nobody listen to you.
• Too Many Different Product Lines: Companies that have small volumes spread across a large product portfolio, don’t have the necessary individual volumes to make JIT work. The best example of this is an automotive company like Honda. They have a few car models, but extremely large volume across those models.
• Infrequent & Cyclical Demand: JIT requires constant and linear demand for products. Infrequent demand means infrequent volume and a lack of purchasing power.
• High Freight Costs at Times: If inventory is not available, or if that shipment is wrong or defective, then the company must rush parts into their warehouse, receive it, and then ship out again, often at huge costs.
The Conditions for Min/Max
The above points pretty much sum up the reasoning behind why a company might want to run Min/Max. Contrary to JIT, Min/Max is based on a minimum and maximum amount of inventory, hence the term Min/Max. While not as dynamic as JIT, there are fewer problems with defective parts or materials, as companies maintain a safety stock. In addition, companies that run Min/Max often don’t have those high freight costs for urgent shipments when there’s a stock out or late shipment. Min/Max is perfect for companies with infrequent and cyclical demand, as they know they’ll get an order, but aren’t exactly sure when. Having the inventory ready at a moments notice, allows them to service customers immediately. In addition, companies can often lower their per unit freight costs and purchase prices, by buying and shipping in bulk. However, like JIT, there are some issues with Min/Max and they are summarized below.
• High Inventory Holding Costs: Because inventory must be available at a moment’s notice, the month to month holding costs are higher.
• Higher Incidence of Damage: Inventory that remains for extended periods of time runs the risk of being damaged.
• Higher Incidence of Outdated Inventory: Much like the point above, holding inventory for longer periods means that inventory could quickly become obsolete and outdated.
In the end, deciding which inventory system to run should really be based on the company’s business model, its customer’s ordering patterns, and the market it services. Match inventory approach to customer demand. There are benefits and drawbacks to both approaches, but never assume that what works for another company, should work for yours.