Don’t Go Bankrupt And Run Out of Stock – Safety Stocks Vs. Just-in-Time Inventory
I almost bankrupt my company twice when ordering too much inventory and we also stocked out of our 5 best sellers costing us hundreds of thousands of dollars.
So how do you make sure that doesn’t happen to you?
When it comes to inventory management, one of the biggest decisions a business must make is how much stock to keep on hand at any given time.
The two most popular methods for this are safety stocks and just-in-time (JIT) inventory.
Both have their own advantages and disadvantages which, depending on your specific needs, may or may not be suitable for your company’s operations.
Let’s take a closer look at what each approach means and its pros and cons.
What Is Safety Stock?
Safety stock is an amount of inventory that is kept in reserve to cover unexpected spikes in demand or unreliable deliveries from suppliers.
It ensures that companies can fulfill customer orders even if there are delays or shortages of products due to unforeseen circumstances.
By having extra stock on hand, businesses can avoid potential losses associated with running out of product or being unable to meet customer demands within short periods of time.
What Is Just-In-Time Inventory?
Just-in-time (JIT) inventory refers to a system where inventory is ordered only when it’s needed, and delivery times are as close to immediate as possible.
This reduces the number of resources such as space and labor required for storage purposes because businesses only need enough stock for immediate use rather than overextending themselves with unnecessary security stocks.
Additionally, JIT systems help reduce the risk of damage from slow turnover rates because orders are only placed when they’re needed, as opposed to carrying excessive amounts of stock in anticipation of future demand.
Advantages & Disadvantages Of Safety Stock & JIT Inventory
Both safety stocks and JIT inventory offer advantages for businesses when used appropriately in the right context.
- Advantages Of Safety Stock: Reduces risks associated with disruptions in the supply chain; provides peace of mind knowing that customer orders will always be fulfilled; takes the pressure off ordering processes since there’s no rush to order more product when supplies run low; offers greater flexibility should demand suddenly increase unexpectedly
- Advantages Of JIT Inventory: Helps reduce costs associated with excess inventory; minimizes risks related to spoilage or obsolescence since products only stay in stock long enough for customers to purchase them; allows businesses more freedom to experiment with different products without taking up too much storage space or labor costs
However, there are also disadvantages associated with using either method:
- Disadvantages Of Safety Stock: Can lead to higher costs associated with storage if stocks are not monitored carefully; runs the risk of overstocking which may result in additional holding cost expenses; requires extensive forecasting upfront so businesses don’t spend too much money stocking unnecessary items
- Disadvantages Of JIT Inventory: If something goes wrong unexpectedly such as supplier delays, then companies may struggle to fulfill customer orders meaning customers will be unhappy; increased chances of running out of certain items resulting in lost sales opportunities as customers shop around instead; cash flow might suffer if the ordering process isn’t optimized correctly meaning there could be long waiting periods between ordering new product and receiving payment successes from sold goods
To conclude, it’s important for businesses to consider both safety stocks versus just-in-time (JIT) inventory before making a decision about which system works best for them.
Depending on individual needs and goals, either method could ultimately prove successful – but careful consideration will be necessary beforehand.
Looking To Take Inventory Off Your Plate?
As an entrepreneur, you have a hundred things to worry about that impact the ability to do what you’re great at.
Because of this, we believe it’s always best to Eliminate, Automate, and Delegate.
If you’re looking to take the task of Inventory Management off your plate, our agency has released an Inventory Management Software and Full Analysis Service called Profitable Pineapple Express. PPE is designed to help you take the stressors of inventory off your hands.