Zero inventory is a process set up in a business where the firm maintains a meager amount of inventory or no inventory to reduce the possession and storage costs.
That 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.
Zero inventory advantages
The firm can enjoy the reduced costs wasted in storing the goods and can use the same for other business activities.
That will help the company shift the focus to business expansion or extension rather than wasting time on 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 makes 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. For example, in an unexpected production plan, the firm might not get immediate stock which upsets the whole supply chain management.
The prices quoted by the suppliers in the short term are generally high, which might add 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 with a common set of vendors whom they deal with. Still, small businesses might not profit from this as their vendors might change, and their production plan is not interpreted and is entirely unexpected.
Zero Inventory Example
Flipkart and Amazon are the best examples of zero inventory practicing companies. They are web-based business companies.
They take up the orders from the customer through their website, and link that order to the original manufacturer through the online inventory management system, and ship the product to the customer.
In this way, they avoid physical warehouses and reduce their warehouse cost.
Is the zero Inventory model successful?
Yes, It is a very successful model. It is inexpensive, constructive, and flexible than holding on-hand inventory. Today most business companies and enterprises use technologies to market their product or services.
So these companies operate using a zero inventory model. Generally, zero inventory suits industries like fashion, industries that produce more variety of products.
How to achieve zero inventory
A proper supply chain management system is necessary to achieve zero inventory. The company should have an appropriate track of raw materials, inventories, and product demand.
Just-in-time inventory is one of the management strategies adopted by companies to reduce costs and increase efficiency. Toyota is the first company who adopted this system. Hence it is also called as Toyota Production System(TPS).
In this system, a company purchases raw materials only when it needs them for production.
To achieve just-in-time inventory company needs to have constant production, sound quality machinery, well-experienced employees, and genuine supplier.
The below image shows the just-in-time inventory process
Benefits of Just-in-time inventory
- Production runs are short, hence it is easy to stop the production of one product and switch over to the production of another product to meet the customer need
- Helps the company to reduce the cost of raw materials. Because company orders the goods enough for the production of ordered product
- This system fails when the supplier is unable to supply the raw materials in time. This leads to the late delivery of product to the client
Get more definitions about zero inventory and other ERP-related terms here.