Zero inventory (or “zero stock”) is a production and purchasing model in which a company produces or buys only what it needs when it needs it.
This differs from traditional inventory systems, in which a company stocks up on products in anticipation of future sales.
In this post, we’ll take a closer look at Zero Inventory systems, including how they work and their pros and cons. We’ll also offer some tips for businesses considering switching to Zero Inventory.
Definition
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 expand.
What is Zero Inventory?
While the goal is to minimize costs while maximizing profits, carrying inventory can quickly add up, especially for companies that sell physical goods. Maintaining a warehouse full of products incurs high overhead costs, including rent, utilities, and insurance. In addition, holding the inventory can become outdated or damaged.
For these reasons, many businesses are turning to a zero inventory model. Under this model, enterprises eliminate carrying any inventory, instead relying on just-in-time production and delivery, consignment selling, or drop shipping.
This allows businesses to save on costs and free up capital that can be invested elsewhere. As a result, the zero inventory model is becoming increasingly popular in today’s business world.
What are the four types of inventory?
The four types of inventory are
1. raw materials
2. work-in-process(WIP)
3. finished items
4. overhaul(MRO – maintenance, repair, operating supplies).
Zero inventory advantages
Reduced Costs
By eliminating the need to carry inventory, you reduce your costs significantly.
Increased Efficiency
Having products delivered just in time reduces wasted time and energy.
Improved Customer Service
It allows you to provide a faster and more efficient customer service experience.
More Time for Growth
It gives you more time to focus on growing your business.
Greater Flexibility
With it, you have the flexibility to change your product lines quickly and easily.
Few disadvantages to being 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 also benefits huge companies with a standard set of vendors 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.
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, stocks, and product demand.
Tips for implementing Zero Inventory in your business
Consider your needs
It is not suitable for every business. You need to consider your needs and what type of business you are in before deciding if Zero Inventory is the right choice.
Start small
Implementing it can be a significant change, so start small and see how it works for your business before making a complete switch.
Work with an expert
It can be complex, so it’s essential to work with an expert who can help you understand the pros and cons and decide if it’s right for your business.
Be prepared for changes.
It will require changes in how you do business, so you must be prepared for those changes.
Train your staff
Make sure your staff is trained on how to use it so they can take advantage of all the benefits it has to offer.
Use technology
Technology can play a significant role in a Zero Inventory system, so make sure you use the latest and most excellent tools available.
Implementing a zero inventory production system
- Analyze the business process to identify and eliminate waste.
- Streamline the production process to ensure a smooth flow of materials and products.
- Implement a just-in-time (JIT) model to improve production efficiency.
- Create a detailed plan for material procurement and stock management.
- Train employees in Zero Inventory principles and practices.
- Monitor performance and adjust as necessary to ensure success.
Steps to implement zero stock purchasing
Zero stock means having no inventory on hand. Implementing zero stock purchasing means taking steps to ensure that you never have to stock any inventory. Here are five steps to getting started with zero stock purchasing,
1. Determine what you need
The first step is to inventory everything you currently have in stock. Once you know what you have, you can determine what you need to keep on hand to meet customer demand.
2. Find a supplier who can provide what you need
Once you know what you need, it’s time to find a supplier who can provide those items. Again, finding a supplier who can meet your needs on short notice is crucial so you’re not left waiting for stock to arrive.
3. Create a purchasing plan
It would be best to create a purchasing plan that tells when and how much stock you will order from the supplier. This plan should ensure you always have the proper inventory without demanding too much or too little.
4. Place your orders
Once you have your purchasing plan in place, it’s time to start placing orders with your supplier. Again, communicate your needs clearly so that the supplier can provide the right products on time.
5. Monitor your inventory levels
The final step is to monitor your inventory levels and adjust your ordering as needed. This will help you avoid having too much or too little stock on hand and ensure that you always have the products your customers need.
Zero stock purchasing can be a bit of a challenge, but with these five steps, you’ll be on your way to never having to stock inventory again.
Just-in-time(JIT) inventory
Just-in-time inventory is a management strategy companies adopt to reduce costs and increase efficiency. Toyota is the first company who adopt this system. Hence it is also called as Toyota Production System(TPS).
In this system, a company purchases raw materials only when needed for production.
To achieve just-in-time inventory, the company needs to have constant production, sound quality machinery, well-experienced employees, ana d a genuine supplier.
The below image shows the just-in-time inventory process.
Just-in-time inventory advantages
- 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’s need.
- It helps the company reduce the cost of raw materials because it orders the goods enough to produce the ordered product.
- It helps the company reduce inventory holding costs by avoiding over-ordering.
- It enables the company to avoid overproduction.
- It streamlines the production system and hence saves resources.
- It reduces product defects and increases productivity.
Disadvantages
- This system fails when the supplier cannot supply the raw materials in time. This leads to the late delivery of the product to the client.
Zero Inventory Example
Amazon, Walmart, and Alibaba are the best examples of practicing zero inventory. They are web-based business companies.
They take up the orders from the customer through their website, 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 more 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 products.
Conclusion
Zero inventory is a business model with many benefits, but it’s not right for every business.
Consider your needs and speak with an expert before deciding if Zero Inventory is the right choice for you.
Hoping this post was helpful! 🙂
