Inventory management strategies can support cash flow by helping businesses reduce excess stock, lower carrying costs, and align purchasing or production with customer demand. Strategies such as just-in-time inventory management and accurate response inventory management can help businesses balance efficiency, flexibility, and service levels.
One of the largest and most expensive assets to maintain for many businesses is inventory. This goes beyond the cost of purchasing goods and encapsulates all expenses such as storage, labor, insurance, transportation, obsolescence, depreciation, and shrinkage. If you have excess inventory, you’re also at risk for cash being tied up that you could instead use for new growth opportunities or operational properties. Take a look at two inventory management strategies that could help you reduce inventory carrying costs, improve cash flow, and enable a more efficient response to change in customer demand.
1. JIT Inventory Management
Under the just-in-time (JIT) approach, a business plans shipments of raw materials to arrive just before they’re required for production or fulfillment. This reduces the amount of inventory on hand, and the associated carrying costs. It also increases production responsiveness and flexibility. Elements of this approach include:
Small Lot Sizes
This allows the business to be more flexible and adapt more quickly to changes in market demand. It can also decrease inventory cycle time, lead times, and pipeline inventory. Because lot sizes are smaller, businesses that use this approach can achieve more consistent workflows.
Tight Set-up Times
By reducing equipment set-up times and the associated costs, a business can afford to produce smaller lot sizes. In addition, the business can avoid lengthy or inefficient set-up processes, which may discourage frequent product changeovers and reduce operational agility.
Workforce Flexibility
A flexible workforce can quickly shift responsibilities and resources during bottlenecks or unplanned spikes in demand.
Strong Supplier Relationships
Suppliers must provide frequent, on-time deliveries of high-quality materials. So, close ties with them are vital to this approach. Long-term relationships with suppliers promote loyalty and improved overall quality.
Regular Maintenance Schedules
For operations with a high degree of automation, preventive maintenance is critical. Unplanned downtime can be disruptive and costly.
Quality Control
JIT systems are designed to control quality at the source, rather than later in the process. For that reason, production workers are responsible for their own work, and if a defective unit is discovered, it’s returned to the area where the defect occurred. This makes employees accountable and empowers them to produce higher-quality products.
JIT can reduce carrying costs and improve efficiency. However, it hinges on having a reliable supply chain. Delays, shortages, and other disruptions can adversely affect sales and customer satisfaction when inventory levels are kept low.
2. Accurate Response Inventory Management
While JIT focuses on minimizing inventory levels, the accurate response approach tries to match inventory levels to customer demand. This approach can be particularly useful for seasonal products and items with unpredictable demand because it helps reduce excess inventory and decrease risk of stockouts. However, it requires timely sales and inventory data, demand forecasting capabilities, flexible production processes, and shorter replenishment cycles.
The accurate response approach begins with an initial forecast of customer demand, which helps management determine how much inventory to produce or purchase. Then management monitors actual sales and uses that information to adjust inventory levels. That way, the business carries more high-demand products and limits its investment in slower-moving items.
Inventory Management Strategies FAQ
What Is Just-In-Time Inventory Management?
Just-in-time inventory management is an approach where materials or products arrive shortly before they are needed for production or fulfillment. This can help reduce carrying costs, but it depends on reliable suppliers, timely deliveries, and strong quality control.
How Can Inventory Management Support Cash Flow?
Inventory management can support cash flow by reducing the amount of cash tied up in excess stock, storage, labor, insurance, transportation, depreciation, and shrinkage. It can also help businesses make more informed purchasing and production decisions.
What Is Accurate Response Inventory Management?
Accurate response inventory management uses demand forecasts, sales data, and inventory trends to adjust stock levels. This approach can be useful for seasonal products or items with unpredictable demand because it helps businesses carry more of what customers are buying and less of what is moving slowly.
Which Inventory Management Strategy Is Right For My Business?
The right strategy depends on your products, supply chain reliability, customer expectations, demand patterns, production flexibility, and available inventory data. A business with reliable suppliers may benefit from JIT, while a business with seasonal or unpredictable demand may need an accurate response approach.
Find The Right Fit
There’s no one-size-fits-all approach to inventory management. The right system depends on your products, supply chain, customer expectations, and operating model. Talk with our team to review your current inventory management processes and identify opportunities to support cash flow and operational efficiency.
