What it means
Traditional stock control keeps a cushion of inventory so that production never stops. This approach reverses the logic and treats that cushion as an expense to be reduced, with deliveries timed against the production or sales schedule.
Stock arrives shortly before it is used rather than long before. The financial appeal is that inventory is cash sitting still.
Money locked in raw materials cannot pay wages or fund growth, and stock also costs money to store, insure, count and occasionally write off. Cutting average inventory therefore improves both cash flow and reported margins.
Making it work depends less on the warehouse than on the relationships around it. Suppliers must deliver small quantities frequently and on time, forecasting must be reasonably accurate, and quality must be high because there is no spare stock to cover a rejected batch.
Firms usually shrink their supplier list and share production schedules in exchange for that reliability. The usual measure is days of inventory, calculated as average stock divided by daily cost of goods sold.
A falling figure shows stock is turning faster, though it should always be read alongside service levels and stockout rates. A very low number achieved by disappointing customers is not an improvement.
The obvious risk is fragility. A port closure, a supplier failure or a sudden demand spike hits a lean operation immediately, which is why many businesses now run a hybrid: tight stock on stable, easily replaced items and deliberate buffers on critical or long-lead components.
The strategy is a dial rather than a switch.
In practice
Real-world examples.
Example
A car assembly plant receives seat sets four times a day, sequenced in the exact order the vehicles will be built. Nothing is stored on site beyond a few hours of production. The supplier runs a small facility ten minutes from the gate purely to make that possible.
Example
A coffee chain moves from weekly bulk deliveries of milk and pastries to daily drops. Waste falls sharply because less product reaches its use-by date unsold, and cramped store rooms free up space for extra seating.
Example
A medical device distributor keeps almost no stock of slow-moving accessories, ordering them from the manufacturer only when a hospital places an order. It deliberately holds three months of cover on one sterile component with a single approved supplier, because a stockout there would postpone surgery.
Think of it
“JIT is getting deliveries exactly when needed-no early, no late, minimal storage.
Formula
Calculation
Formula: days of inventory = average inventory value / (annual cost of goods sold / 365). Annual holding cost = average inventory value x holding cost rate.
Worked example. A furniture maker has annual cost of goods sold of $7,300,000, which is $7,300,000 / 365 = $20,000 per day. Its average inventory before the change is $2,400,000, so it holds $2,400,000 / $20,000 = 120 days of stock.
After moving to smaller and more frequent deliveries, average inventory falls to $900,000, which is $900,000 / $20,000 = 45 days. If holding costs run at 22% of inventory value per year, the annual holding cost falls from $2,400,000 x 0.22 = $528,000 to $900,000 x 0.22 = $198,000, a saving of $330,000. The business also frees $1,500,000 of cash that was previously locked in the warehouse.Case study
Seen in the real world.
Bellhaven Bikes is a fictional assembler of commuter bicycles created to illustrate the trade-offs. It held $2,000,000 of frames, wheels and components, roughly ninety days of stock, largely because ordering in bulk earned a 4% discount from its main supplier. A new operations director renegotiated with three suppliers for weekly deliveries, gave up part of the discount, and cut average inventory to $800,000.
Cash improved by $1,200,000 within a single year and the company stopped renting a second unit on the industrial estate. Two years later a shipping delay left it without gear sets for three weeks and it lost a seasonal order worth $350,000.
The illustrative outcome was a sensible compromise rather than a reversal: lean stock on locally sourced parts where a lorry could arrive the next morning, and a six-week buffer on anything arriving by sea. Average inventory settled at about $1,100,000, still well below where it started.
Watch out
Common mistakes.
- Treating the approach as simply ordering less. Without supplier reliability and decent forecasting, smaller orders produce nothing but more stockouts.
- Judging success only on inventory value. Service levels, expedited freight costs and lost sales all belong in the same assessment.
- Applying one policy to every item, including critical components sourced from a single distant supplier.
Questions
People also ask.
Does this work for seasonal businesses?
Partly, since most build planned buffers ahead of the peak season and run tight for the rest of the year.
What happens to bulk purchase discounts?
They usually shrink, so compare the lost discount against the saved holding and financing cost before committing to the change.
Is it only for manufacturers?
No, retailers, restaurants and distributors use the same logic, and food businesses often gain most because waste falls alongside stock.
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