Zero Inventory is a process set-up in a business where the firm maintains a very low amount of inventory or no inventory at all with an aim to reduce the possession and storage costs. This also facilitates the business to enjoy more liquidity which will help in the expansion.
It acts as one of the goals of the just-in-time inventory management system and in fact, both the terms are used interchangeably.
How does this benefit the business?
- The firm can enjoy the reduced costs that are wasted in storing the goods and can make use of the same for other business activities. This will help the company to shift the focus to business expansion or extension rather than wasting time in inventory forecasting and scheduling.
- The warehouses where the company stores its inventory and finished goods can be utilized for other purposes or can even be rented out to ensure that the firm is making that extra money with the existing resources. The storage of goods may be outsourced but will not reduce the costs to the company.
Few disadvantages to be taken care of
Zero Inventory has its own set of potential risks. In an unexpected production plan, the firm might be unable to get immediate stock which upsets the whole supply chain management.
The prices quoted by the suppliers in short-term are generally high and this might add to extra costs to the company. If there are long-term orders the smooth process of the supply chain ensures that the overall cost of production is borne by the customer which might not be the case in this scenario.
This system is also beneficial to huge companies where they have a regular set of vendors whom they deal with but small businesses might not profit from this as their vendors might change and their production plan is not interpreted and is quite unexpected.
Get more definitions about zero inventory and other ERP related terms here.