The right inventory strategy affects every aspect of your ecommerce operations. It plays a critical role in costs, profits, cash flow, forecasting and customer satisfaction. Moreover, it prevents common inventory management issues like stockouts and overstock.
In addition to everyday stock challenges, the rise of supply chain disruptions and economic fluctuations created a greater need for strong inventory management strategies. Before, throughout the pandemic and after, brands have tried JIC (Just-in-Case) inventory, JIT (Just-in-Time) inventory, demand forecasting, ABC analysis, push, pull, FIFO, LIFO, relying on software and more. Some retailers utilize a combination of strategies.
The key is recognizing there is no one-size-fits-all inventory management strategy. Instead, brands must continually assess, adjust and evolve to meet current trends and demands while navigating complex global issues.
In this article, we’ll look at JIC vs JIT inventory strategies along with several others and provide the steps to help identify the right strategy or strategies for your ecommerce and omnichannel business.
JIT vs JIC: What’s the difference?
Inventory often changes due to evolving demands and industry challenges. For example, before the pandemic, businesses often leveraged the most cost-effective solutions, such as Just-in-Time inventory.
What is JIT inventory?
Just-in-Time inventory has been around since the 1970s. It’s a “lean” strategy where retailers receive the exact amount of inventory they need right when needed. Brands aim for little to no excess inventory, which results in cost-efficient production, waste elimination, efficient storage space use, reduced storage and inventory costs and the ability to change over inventory more quickly.
However, a JIT inventory management strategy can also create lost opportunities, unpreparedness, order issues or as retailers saw in the pandemic, being affected by supply chain disruptions.
The pandemic blindsided brands that were using a JIT strategy. And with the continued disruptions and fears of another supply chain breakdown, some retailers moved more toward a Just-in-Case inventory strategy.
What is JIC inventory?
A Just-in-Case inventory strategy aims to prevent stockouts and ensure that products are in stock despite supplier delays or unexpected increases in demand. It’s also a tactic used to avoid increases in the cost of a material or component – and then having to raise prices. Brands that practice JIC inventory management either forecast the need or are prepped to deal with sales surges. The benefits include fewer lost sales, saving when purchasing in bulk, gaining a competitive edge and less need for accurate demand forecasting.
Like JIT, there are cons to a JIC strategy. Brands tie up more money into inventory, taking away from other opportunity costs or business operations. There are additional storage costs, which can be high, and retailers carry a higher risk of dead stock (aka obsolete inventory) or write-offs for damaged or spoiled inventory, which can happen in beauty fulfillment and healthcare fulfillment inventory.
Other inventory management strategies
In the era of omnichannel fulfillment, brands must achieve scalable fulfillment that supports optimal inventory management. Inventory must be filled across channels, including ecommerce, retail and wholesale distribution. Although JIC and JIT strategies are ideal for specific types of situations, inventory management requires a more diversified approach. Strategies may adjust based on season, product line, current demands, economic climate, etc. Other methods commonly used are:
Also known as inventory forecasting, demand forecasting uses past data and trends, and known upcoming events to predict the inventory needed for future periods. Demand forecasting can be done through four formulaic methods: graphical, qualitative, quantitative and trend. Several factors can impact your forecast, but brands must have the correct data elements for an accurate forecast, including current inventory, historical trendlines, forecasting period requirements, maximum possible stock levels, expected demand and seasonality, outstanding purchase orders, sales trends and velocity and customer response to specific products.
Reorder points in inventory forecasting represent the inventory level at which a new order should be placed to replenish stock before running out. It's a critical aspect of inventory management to ensure that products are available for customers while minimizing the risk of stockouts. Here's how it works:
- Definition: The reorder point is the inventory level at which a new order is triggered. It is set based on the expected demand during the lead time it takes for new stock to arrive.
- Lead time: Lead time is the time it takes for a new order to be delivered after it has been placed. This includes order processing, shipping, and receiving. Reorder points are calculated to cover the demand during this lead time.
- Safety stock: Reorder points often include a safety stock level, which is an additional quantity of stock kept mitigating the risk of unexpected increases in demand or delays in the supply chain.
- Demand variability: Reorder points take into account the variability in demand. If demand fluctuates, having a safety stock helps prevent stockouts during periods of higher demand.
- Formula: The basic formula for calculating the reorder point is:
Reorder Point = (Demand per Day * Lead Time in Days) + Safety Stock
As an example, if a store sells 20 units of a product per day, the lead time for restocking is 5 days, and a safety stock of 30 units is desired, the reorder point would be:
Reorder Point = (20 units/day * 5 days) + 30 units = 130 units
- Adjustments: Reorder points should be regularly reviewed and adjusted based on changes in demand patterns, lead times, and other factors affecting inventory levels.
- Automation: Advanced inventory management systems can automate the calculation of reorder points, taking into account historical sales data, seasonality, and other relevant factors.
ABC analysis lets retailers and commerce companies better decide which items to stock and how to manage them. It can also help prioritize items for reordering. ABC analysis assigns all items a value: A is high-value, B is medium-value and C is low-value items.
Successful ABC analysis is achieved by gathering data, calculating the ABC coefficients, classifying the items and implementing controls.
Push and Pull strategies
Inventory push and pull strategies resemble JIC and JIT but differ. A push strategy is a technique used in inventory management where retailers order inventory and then advertise or promote their existing stock to customers. This approach requires estimating customer demand by predicting how many units of a specific SKU will be needed for the upcoming month, quarter or year. By using this strategy, businesses can reduce costs associated with manufacturing and shipping products by ordering and shipping them only once within the designated time frame.
The pull strategy is about maintaining minimal stock levels and restocking only when customers have already ordered or received the items they want. This approach helps businesses avoid overstocking, which can be costly in terms of warehousing, and reduces the risk of being left with unsold products. However, frequent assessment and replenishment of inventory are necessary for a pull approach to work effectively and avoid stockouts, delayed shipments and dissatisfied customers.
FIFO and LIFO
FIFO (First-In, First-Out) and LIFO (Last-In, First-Out) are methods used for inventory valuation, particularly in the context of cost of goods sold (COGS) and ending inventory calculations. Here's how they work:
FIFO assumes that the first items added to the inventory are the first ones sold. It follows a chronological order. The cost of goods sold is calculated by using the cost of the oldest (first-in) inventory items first, matching them with the current sales. The ending inventory value is based on the cost of the most recently acquired items, as the assumption is that the oldest items have been sold. FIFO reflects the natural flow of inventory, making it a straightforward and logical method. In times of rising prices, it tends to result in a lower COGS, which can be advantageous for tax purposes.
LIFO assumes that the most recently acquired items are the first ones sold. It follows a reverse chronological order. The cost of goods sold is calculated using the cost of the most recent (last-in) inventory items, matching them with the current sales. The ending inventory value is based on the cost of the oldest items, as the assumption is that the most recently acquired items are sold first. In times of rising prices, LIFO tends to result in a higher COGS, which can lead to lower taxable income. It may better match current costs with current revenue.
How to create a hybrid inventory management strategy
Create a responsive and adaptable inventory management system by implementing a hybrid strategy. Different methods will work for different scenarios. By remaining agile in today’s ecommerce landscape, you’ll better handle the complexities of inventory.
Start by analyzing your current inventory, history and data. Next, develop your hybrid inventory management strategy by combining elements from different methods use to optimize stock levels, reduce costs and enhance overall efficiency. Do this by:
- Assessing your unique business needs
- Classifying products (e.g., fast-moving, slow-moving, hard to obtain, desirable, short lifcycle, etc.)
- Conducting an ABC analysis
- Utilize forecasting tools
- Employ FIFO and LIFO elements base on the characteristics of your inventory
- Establish safety stock levels and buffer management
- Implement dynamic reorder points that adjust based on changes in demand patterns, lead times or other factors
- Invest in inventory management software with features like real-time tracking, automation and analytics
- Regularly evaluate and adjust
By tailoring your inventory management strategy to the specific characteristics of your product portfolio and business environment, a hybrid approach can offer flexibility, responsiveness and efficiency in maintaining optimal stock levels. To learn more about inventory management and how a 3PL can help, contact the experts at Cart.com today.