Managing Inventory

Just-in-Time Inventory Management

Just-in-Time (JIT) inventory management is a strategy where materials, parts and goods are delivered exactly when they are needed in the production or sales process.
JIT helps to reduce inventory carrying costs, as fewer goods are stored and reduced space is required for storage.
The application of this strategy requires a high degree of coordination with suppliers to ensure timely delivery. Any disruption in the delivery chain can cause significant production delays.
Extremely successful when implemented effectively, such as seen in companies like Toyota.

Economic Order Quantity (EOQ) is a method that determines the optimal quantity of inventory to order so as to minimise total inventory costs.
It is primarily useful when demand for a product is constant and each new order is delivered in full when the inventory reaches zero.
To apply the EOQ model, it’s necessary to know the demand, set up or order costs, and storage costs.
Although a powerful tool for inventory management, it does have limitations, including that it assumes constant demand, immediate replenishment and known, constant costs, which might not be the case in real-world scenarios.

ABC Analysis is an inventory categorisation method which groups items into three categories, A, B and C. A items are the most valuable, C items are the least valuable, and B items fall in between.
It helps in prioritising inventory management efforts, meaning more resources are allocated to the items that offer the most revenue or value.
It’s a dynamic process and should be updated regularly as market conditions, customer preferences and product life cycles change.
It’s widely used and can be applied to any company regardless of size or industry.

Safety Stock refers to the additional quantity of an item held in the inventory to reduce the risk of a stock-out due to unpredictable changes in supply or demand.
It acts as a buffer against potential disruption in supply, which might be due to delayed deliveries or sudden spikes in demand.
Over-reliance on safety stock, though, can lead to increased carrying costs.
Balancing the cost of carrying extra safety stock and the potential loss from stockouts is crucial.

Inventory Turnover Ratio is a measure of the number of times inventory is sold or used during a specific period.
It’s a crucial metric as it indicates the efficiency of a firm at managing its inventory and making sales.
A high ratio indicates more frequent sales and is generally favourable. However, a very high ratio could mean there’s no buffer for unexpected increases in demand, which might lead to stockouts.
Conversely, a low ratio could indicate poor sales or overstocking.