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Inventory management solutions: For small businesses, the best model might not be Toyota’s

For small and medium businesses that carry high inventory costs (like manufacturers and retailers), it’s only natural to be interested in inventory management solutions that can reduce inventory carrying costs: Just in time (JIT) is one of the systems that has a strong appeal to these companies.

Does the just-in-time method actually work for small and medium businesses like it does for Toyota? Sure, some businesses make it work, but inventory and supply chain experts caution against rigidly adopting an inventory system that doesn’t match the company’s business model.

What is just-in-time (JIT) inventory management?

The just-in-time inventory system was developed in Japan in the 1970s when Toyota, over the course of several years of trial and error, standardized the system at its automobile manufacturing plants. Toyota sought to reduce inventory levels to the absolute minimum by receiving items from suppliers just as the last of those items were being pulled from Toyota’s warehouse shelves.

There were certainly bumps in the road: In one well-known example, a supplier of a brake part had a factory fire and couldn’t supply Toyota with new parts for the assembly line. With no parts in reserve, Toyota’s entire assembly operation ground to a halt for several days before another supplier could hastily refit its own manufacturing process to build the missing part.

The challenges of JIT for small businesses

Yet for the typical small and medium business, unforeseen interruptions to the supply chain—like fires at supplier manufacturing facilities—are really the least likely worry when trying to adopt just-in-time inventory practices.

Supply-management consultant Ian Johnson argues that few small and medium businesses have the purchasing power and strong economies of scale necessary to successfully adopt just-in-time inventory management: “Ultimately, large companies can make JIT work because they have guaranteed contractual supply agreements in place. Small businesses typically have infrequent demand patterns and low volumes and are almost never their suppliers’ number one priority. In essence, small businesses are typically at the end of the line in terms of priorities—regardless of what their suppliers say.”

Small and medium businesses have other challenges, Johnson notes, when trying to adopt just-in-time processes: Small businesses simply don’t have the constant and linear demand necessary to make lean-inventory methods work like they do for large companies: “Companies that are successful running this inventory management approach are required to ship product daily, weekly and monthly. In some cases such as Dell, they ship product on the hour. This is the essence of linear demand. It’s constant and almost never seems to end.”

The best inventory management strategy for SMBs

So, if just in time is off the table for most small and medium businesses (except, as Johnson notes, for those companies with a limited product offering and high sales volume across that offering), what are the options for a business looking to reduce the capital costs of retaining inventory while also insuring its ability to avoid stockouts and missed sales opportunities?

Businesses shouldn’t emulate an inventory management system just because another business is running it or because (as is the case with Toyota’s just-in-time method) a system has been valorized in the business media. “Focus on one simple rule to supply chain optimization,” Johnson advises. “Match your inventory strategies to your customers’ needs, your markets business cycles and your product’s sales cycles. If that means running Min-Max, or a demand-driven derivative, then so be it. Just don’t run something you can’t merely because someone else is.”

How inventory solutions can help your profitability

Regardless of the inventory management system your small or medium business uses, the right technology can help you cut inventory costs by eliminating errors and automating purchasing orders.

Look to software to create inventory profitability reports that show you which items are selling and which have the greatest and lowest profit margins. For manufacturers, software can help you create assemblies that define exactly how many parts, components, or materials are needed to complete a product.

And for any small or medium business with a significant inventory component, look to technology to increase productivity and efficiency by automating purchase orders, which replenish inventory when it reaches a predetermined level.

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