“I can't find this in my size/color/preferred Disney character—are there any more in the back?"
We've all heard (or used) this customer question. If you're on the selling end, more often than not there is no “back." What's out on the floor is what's in stock, and this question means you've run out of something.
For small retailers, the revenue that walks out the door with an unhappy customer can be the difference between life and death. Just-in-time inventory seeks to solve this problem by keeping enough stock on hand at all times—but just barely.
Inventory is, relatively speaking, illiquid. In finance, the liquidity of an asset refers to how easily it can be converted into cash. According to AccountingTools, inventory is less liquid than cash, marketable securities, and accounts receivable. Inventory is more liquid than fixed assets (your office equipment) and goodwill (your brand value).
Keeping just enough inventory on hand to cover demand means you have more of your company's value in cash, increasing your liquid assets and giving you access to more investing options.
In this article, we'll look at how just-in-time inventory management can help you keep customers happy while holding on to cash, talk about the importance of demand forecasting for inventory management, and examine how much of the inventory process is science versus art.
What is just-in-time inventory?
Just-in-time inventory is a system that forecasts demand and keeps just enough inventory on hand to cover that demand, which cuts down on excess and increases cash on hand.
The system was designed by Toyota and applied to its car manufacturing process. Instead of forecasting the number of customers walking through its doors, Toyota predicted the number of cars it needed to produce within a certain time frame.
The company's real focus was efficiency. Instead of ordering excess product, it attempted to order just the amount needed to get through a production cycle, reducing the amount of “buffer" product. Unused buffer is, ultimately, waste.
In the retail sphere, just-in-time inventory is also used to reduce buffer product. By forecasting as accurately as possible, you can minimize the amount of inventory that will go unsold or require discounting in order to sell.
The importance of forecasting in inventory management
The key to just-in-time inventory is demand forecasting. You can't have just enough lying around if you have no idea how much you're going to need.
Demand forecasting is both an art and a science. The science portion is generated by demand forecasting software and a lot of math. The more data you incorporate, the more math is required.
Big data in demand forecasting
Big data makes demand forecasting even more fascinating for retailers. When I was managing a Starbucks, we would look at what we did, both supply and sales-wise, over a four week-period and roll that forward. Pretty clever, right?
With big data, you can look at every item sold, when it was sold, how many people walked by your store, how many of those came inside, how foot traffic changed when it rained, and just about any other bit of data floating around.
You can then combine these individual components to generate incredibly detailed forecasts. If you follow these forecasts carefully, you can order inventory with very little buffer.
Demand forecasting without big data
Not everyone has big data or a way to analyze big data. Well, not yet, anyways. What if you need an alternative? This is where the “art" part of forecasting comes into play.
Your intuition has to replace a lot of data. Tim Berry from Lean Business Planning created a great example of how to generate a passable sales forecast without
fancy data or statistical models. It requires some estimation, and that employees be “comfortable making educated guesses" and “guesses based on [their] experience as an employee."
The rougher your forecasting, the larger your inventory buffer will be. You'll get better with practice and time, and your buffer will shrink as your forecasting accuracy improves.
Tracking sales and inventory
There are plenty of inventory management systems out there that can help you make better predictions. You can also use accounting and budgeting software to inform your inventory decisions.
Even if you don't have access to inventory tools—don't forget to check out the great free inventory options out there—you can get closer to just-in-time inventory by shortening your lead times. If it takes you five calls and three weeks to get new inventory in, you'll need a bigger buffer to cover spikes in demand.
By working with your suppliers and shippers, you can shorten those lead times and give yourself more freedom to run a lean inventory system in your store.
By making a few changes and utilizing some basic math, you can keep your floor stocked and avoid customer disappointment.