Lots of companies are getting attracted by the idea of zero inventory. Imagine a way of managing inventory where you have exactly what you need, neither too much nor too little. That means you don't have to store a lot of items and only order or make things when it's needed.
Zero inventory is a new age way of handling things in the supply chain and can help businesses make more money. In this article, we'll explore zero inventory and why it matters so much.
Zero Inventory: What Is It?
Think about zero inventory as a special way of handling stock. It's all about storing as little stock as possible while still making sure everything runs smoothly, like delivering things on time.
Even though it's called "zero inventory," most companies still keep some stocks around or in the inventory. We'll talk about it in more detail in the coming sections.
Zero Inventory and Stock Control?
For the zero inventory concept to work, things should only be made and purchased when customers actually want them. To make sure everything runs smoothly in the supply chain, companies need inventory management software to manage everything.
An inventory management software will update information quickly across all platforms as items sell out. In this way, if raw materials are used in the production of an item, the item can be shown out of stock on the website or sales platform to make sure customers are not left unhappy.
Defining Zero Inventory
The zero inventory model is a business practice in which a company aims to hold the least possible stock. It means the company fulfills new orders as swiftly as it produces or buys products.
Instead of storing items in a storage facility, they are purchased or created right when needed. This approach is termed as a just-in-time stocking approach, where inventory is restocked on schedule to fulfill new orders.
Zero Inventory: Why Is It Important for Businesses?
Here is an example to explain why a zero inventory system is important for businesses.
Imagine a furniture company that makes and sells wooden lawn furniture.
- They buy materials like wood, screws, bolts, paint, and stains from suppliers.
- Then, they craft the furniture in their workshops and store the finished pieces in a warehouse until they're sold.
Let's say they have Rs. 1 Lakh of finished furniture and Rs. 2 Lakh of materials in the warehouse. They pay Rs. 50,000 each year to rent this space.
Now, let's say the company wants to grow its operations, but they don't have enough money to do it. Here's where the zero inventory idea will help.
Instead of holding onto lots of inventory, they only keep what they need. It helps them avoid using too much money to store things, and they can use that saved money to improve their business operations.
What Are the Advantages of Zero Inventory?
Here are some zero inventory system advantages:
- With zero inventory, you don't keep extra inventory sitting around, which means you spend less money on storage.
- When you have zero inventory, you make products just in time to fulfill orders. It helps you respond quickly to your customers' wants without wasting time on the extra stock.
- Keeping a lot of inventory can lead to waste, especially if products become outdated or unsellable. Zero inventory minimizes this waste because you're only making what's needed.
- Zero inventory frees up cash flow. When your money isn't tied up in inventory, you have more freedom to invest in growing your business. It might mean expanding, trying new ideas, or improving your products and services.
Examples of Zero Inventory
Here are two examples to understand zero inventory:
Custom-Made Orders
Imagine fancy custom-made shirts for specific individuals.
Instead of having a ready collection of shirts with different sizes and styles, these are tailored to fit a particular person's measurements and style. The tailor doesn't need to store a bunch of pre-made shirts since customers understand they won't walk out with a custom shirt on the same day they order it.
Middleman Retailers
Think about big online marketplaces like Amazon.
They connect buyers and sellers but don't own the products themselves. When you buy something on Amazon, the seller ships it directly to you. This type of company doesn't need to store inventory because they're a bridge between buyers and sellers.
Achieving Zero Inventory
Achieving a zero inventory business model involves the following steps:
1. Predicting Demand
A company must time its production with customer demand to have zero inventory. Ideally, a product is made just when a customer orders it. To do this, companies need to become skilled at forecasting customer needs.
2. Quick Production
Companies aiming for zero inventory keep their production in sync with demand. If an unexpected order comes in, those with fast and flexible production can respond by making and shipping products without relying on pre-made stock.
3. Strong Supplier Relationships
Companies that sell products rely on various suppliers for materials or wholesale goods. To maintain zero inventory, a company must order the right materials exactly when needed. It requires close interaction with suppliers who can meet these demands on time.
4. Close Customer Communication
At the end of the chain are the customers. Companies usually want to fulfill orders quickly to satisfy customers and prevent losing sales. However, some customer relationships allow more time for fulfillment, especially in custom or large orders.
Supply Chain and Zero Inventory
The success of a zero inventory plan depends on how well the supply chain is managed. It means understanding how manufacturers and suppliers work together to handle the items they have in stock.
Now, let's say a manufacturer wants to go for a zero-inventory method. They only order the needed materials to meet expected orders or make new products. It means they no longer have to store many raw materials. But, the problem is that the raw materials supplier now has to deal with this.
Instead of regularly giving the manufacturer a fixed amount of goods, the supplier can only sell what the manufacturer asks for based on real-time demand. It might increase the supplier's costs because they need to adjust their sourcing and production.
When suppliers' costs increase, including storage costs, they often make their customers pay some of that cost by raising their prices.
So, if a company aims for zero inventory, they should be ready for the costs of getting their materials to go up.
Simplify Zero Inventory Management With TranZact
TranZact makes managing zero inventory much simpler. TranZact’s inventory management software allows you to easily handle your inventory without stress. It helps you keep the right amount of stocks you need, avoiding excess.
It means you save money and time while still having what you need. TranZact removes the complications and lets you focus on your business growth, making zero inventory management easier.
FAQs on Zero Inventory
1. What is zero inventory management?
Zero inventory management is a process where a company aims to keep as little stock as possible. Products are made or purchased just in time to fulfill orders, reducing the need for excess storage.
2. Why is zero inventory important?
Zero inventory is important because it:
- Saves money on storage costs
- Reduces waste
- Helps companies respond faster to customer demands
- Frees up capital for other business goals.
3. Is zero inventory suitable for all businesses?
While zero inventory can benefit many businesses, it might not work for those with unpredictable demand or complex supply chains. Business owners should consider their unique needs.
4. How can companies predict customer demand correctly?
Companies use historical data, market analysis, and trends to forecast demand. They might also make agreements with key customers to gain more certainty about future orders.
5. What if unexpected orders come in under a zero inventory strategy?
Companies with flexible production capabilities can quickly scale up production to meet unexpected demand. It allows them to respond without relying on existing stock.
6. How does zero inventory affect suppliers?
A zero inventory approach shifts the responsibility to suppliers to provide materials just in time. Suppliers might need to adjust their processes, thus increasing their costs.
7. Does going for zero inventory increase sourcing costs?
Yes, going for zero inventory might lead to increased sourcing costs, as suppliers might need to adjust their operations. This cost can be shared with customers through higher prices.
