Your ecommerce business is always looking for new ways to reduce costs, improve efficiency and increase profits. Lean inventory management is helping many businesses do just that.
But what exactly is lean inventory management? How can it help improve your bottom line? And how can you implement it in your business?
This article aims to answer these questions while giving you a thorough understanding of lean management best practices. Then, you can determine whether it’s the right inventory management style for your business.
What is lean inventory management?
Lean is an inventory management technique that aims to reduce waste, optimize production and put the customer first.
The philosophy associated with this concept is known as kaizen, a Japanese term that translates as “‘continuous improvement.” In lean management, kaizen embodies the reduction and elimination of unnecessary resources across your operations.
Lean management principles can inform your selection of the techniques and methods you’ll use for each improvement project. An effective lean management system allows you to execute these initiatives at scale.
Understanding the 5S framework
The 5S framework is a systematic approach to workplace organization to help you maximize operational efficiency and boost your bottom line.
Traced back to post-war Japan, the methodology was created by Toyota Industries, at a time when the company was looking for ways to reduce waste and remove inefficiencies from their operations.
Their solution, Toyota Production System (TPS), encompassed a number of now famous methodologies, including Just-in-Time manufacturing (lean).
Since then, the 5S framework has expanded into other areas of quality assurance including the visual workplace and total productive maintenance.
In fact, the methodology is most commonly used as a visual control tool in lean systems to ensure a smooth flow in the production line.
It includes a list of five actions that aim to facilitate continuous improvement and eliminate waste that could lead to defects, errors and injuries.
Sort through all the items in your work area and separate what is needed from what is not, then dispose of any unwanted items.
Straighten your work area so workers can easily locate necessary items from a specific and permanent place according to their usage.
Keep your work area clean so any pre-failure conditions or abnormalities that might impact quality can be easily spotted.
Standardize your work processes and procedures to ensure a continuous flow that is uniformed and without any confusion or obstacles.
Ensure safe manufacturing process policies so that the workplace can sustain continuous improvement.
5 key principles of lean inventory management
Lean inventory management aims to increase efficiency by applying the five lean principles to manage inventory.
According to lean principles, customer value is defined specifically as everything that customers will pay for. And nothing they won’t.
An ecommerce business implementing lean inventory management practices will regularly review their products from the eyes of the customer.
The flow principle involves analyzing each step in the process to maximize efficiency, reduce waste and remove friction.
Removing friction from your supply chain helps to clear away any obstacles in your current processes.
Common causes of friction in inventory management include:
- Supplier delays
- Multiple stakeholder approvals on purchases.
- Relying on manual reporting to make decisions.
The third principle of lean management is pulling inventory when requested by the customer.
A pull system helps to create a demand-centric business, whereby minimal inventory is kept in your warehouse and is only replenished once it’s been consumed.
In contrast, a push-based system relies heavily on the retailer to determine production levels based on historical sales data.
Consequently, a push system can result in overstocking, delays, product obsolescence and increased inventory carrying costs
On the other hand, a pull system enables you to carry just enough inventory to meet the demands of your customers while keeping costs to a minimum. You’ll see reduced inventory carrying costs.
What’s more, a pull system means new work starts only when there is demand for it and your team has spare capacity, in order to avoid overproduction. In other words, it’s a just-in-time (JIT) inventory management tactic.
With a continuous evaluation of your inventory flow, you’ll benefit from the ability to adapt to change quickly.
This level of responsiveness will ensure that your inventory is kept at appropriate levels – preventing increased carrying costs and obsolete inventory.
Building a responsive, proactive culture that stops to fix problems and ensure maximum quality every time is integral to successful lean management.
The last of the five principles, perfection, requires that you consistently work to refine your inventory management processes to improve upon quality, efficiency and reduce cost.
Focus on enhancing your activities that generate the most value while removing or reducing as many wasteful activities as possible.
Lean inventory management attributes
To fully understand lean management techniques, you also need to know about the key attributes involved in building and maintaining such a system.
Practicing lean management means you only provide inventory when requested by the customer. To do this effectively, you must maintain accurate demand forecasting by fostering collaboration between sales and operations.
Cost and waste reduction
While waste reduction is the primary aim of lean inventory management, it shouldn’t negatively impact customer value. When you implement lean inventory management, don’t compromise on the quality of your end product just to save a bit on costs.
Process and industry standardization
Process standardization is needed to improve production and enable continuous inventory flows.
Everyone in the company, from stakeholders to suppliers to customers, must work together to provide the highest value to the end user.
6 benefits of lean inventory management
How do lean inventory management processes translate into real benefits for your business? Here are some of the most common benefits of lean management.
Faster delivery times
With lean management setting the standard across your operations, your inventory and manufacturing processes will benefit from improved efficiency.
As a result, you’ll experience fewer delays and shorter lead times — maximizing customer satisfaction. Having more efficient operations also contributes to increased flexibility when customer needs change.
A key focus of lean inventory management is to decrease the number of product defects and reworks. Quality increases when you’ve optimized processes to prevent human error and save time across all organizational workflows.
By maintaining smaller inventory levels, you can also form closer relationships with suppliers, which can lead to better service, smoother operations, improved forecasting and fewer mistakes with orders.
Lean practices decrease costs by eliminating waste across the business, with savings going toward profit. In this process, you’ll scrutinize all expenditures at each stage of production.
Lean inventory management can also help reduce storage and carrying costs, leading to improved cash flow that can be invested in other areas in the business.
Reduced inventory waste
JIT inventory management means you receive goods only as they are needed. This reduces inventory holding costs and dead stock.
Effective JIT practices also improve your ability to identify bottlenecks in your supply chain and streamline inventory management processes.
Stronger company culture
Lean management ensures every worker has a defined role that brings value to the business, which contributes to productivity and morale. Because of lean’s emphasis on accurate forecasting and data-driven decision making, lean organizations are likely to improve communication, problem-solving and accountability.
As a result, you’ll see a shift in culture as employees embrace continuous improvement.
To be successful with lean inventory management, you’ll need access to real-time tracking and inventory data. When you have visibility, you’ll encourage transparency and open communication to drive data-based decisions.
With improved demand visibility, you can also plan more effectively for production and procurement changes and delivery updates.
4 challenges with lean inventory management
Lean management isn’t without its potential drawbacks, and it’s not right for every business. Here are some disadvantages to keep in mind before implementing lean inventory.
Lack of customization
Lean management emphasizes standardization as it seeks to minimize waste. Consequently, this restricts product variation and customization, as any changes add complexity to your production process that create inefficiencies or add lead time.
Therefore, if your customers value a high level of product customization, lean techniques might not be a good fit for your business.
Significant investment of time and other resources
An ecommerce company can’t simply become lean overnight. It takes years to perfect. And the job is never really done. Effective lean management systems need the flexibility to make continuous small changes to maintain efficiency.
Besides the time, resources and potential costs of implementing lean practices, you also need to embed lean thinking into your culture, which can include costly training programs.
Need to convert the whole team
Lean practices need to be implemented across the business. Every team must be on board. This type of transformation isn’t easy, and many employees might feel uncomfortable with the changes.
If lean inventory management isn’t embraced by all teams, you’ll suffer from inefficiency and a breakdown in trust. The consequences are bad for your culture, productivity and operational effectiveness.
Increased risk of stockouts
Because lean inventory management focuses on carrying lower levels of inventory, you run a greater risk of stockouts if demand unexpectedly shifts. Your performance will also suffer if suppliers fail to deliver on time.
Stockouts create a negative customer experience and drive additional expenses, such as paying for expedited shipping or seeking out alternative, costlier suppliers.
How to implement a lean inventory management system
To implement lean management, you must make sure all elements of production follow the five lean inventory principles. Here are three best practices for deployment:
Maintain good supplier relationships
You’re reliant on suppliers to help you maintain optimal stock levels. Timely communication, deliveries and responsiveness to unexpected problems are all critical to successful implementation.
You should have a central point of contact at each supplier, both to communicate when urgent needs arise and to create that relationship over the long term. The key to successful supplier relationship management is to make them feel like they are a part of your business.
Adopt modern inventory management software
Lean inventory management works best when you have real-time access to stock levels. The best way to maintain that visibility into your inventory processes is by adopting modern inventory software.
An inventory management system synchronizes stock automatically, monitors movement throughout your supply chain and provides regular updates.
With JIT capabilities, inventory management software supports lean techniques and practices by avoiding excess inventory and risks such as damaged stock and warehouse fees.
Hold safety stock
Because lean requires minimal inventory levels, you’ll want to balance that with emergency safety stock. This is buffer stock in case customer demand spikes or you encounter sudden problems in production or supplier delivery.
Safety stock isn’t a blanket solution, and you can have too much of it. Determine your optimal level through detailed analysis of past sales data and purchase history.
What is continuous inventory flow?
Continuous inventory flow is a system in which inventory is constantly moving and being replenished, so that there is no interruption in the production process.
This is the ideal state for a company practicing lean inventory management, because it minimizes the cost of inventory and maximizes efficiency.
3 benefits of continuous inventory flow
Ecommerce businesses that have perfected continuous inventory flow have an advantage over their competitors, because they can produce more with less.
- Lower costs: Retailers can pass along the savings to customers, capturing a greater share of market in a competitive market.
- Better profit margins: Businesses can also retain those cost advantages in a less competitive market in the form of higher profit margins.
- More adaptable: Companies with continuous inventory flow can adapt to change more quickly, because they don’t have to stop production to replenish inventory.
3 continuous inventory flow requirements when implementing lean management
There are a few things that a company must do to maintain continuous inventory flow, all of which support lean inventory practices and a lean inventory system.
- Strong forecasting system. This allows you to anticipate customer demand and produce the necessary amount of product. Second, they must have a just-in-time production system, so that they can produce products as they are needed, rather than stockpiling inventory.
- A well-functioning supply chain. This is essential so that inventory can be quickly replenished.
- Reliable system for tracking inventory. This allows you to quickly identify any problems that might cause a disruption in the flow.
Is lean inventory management right for my ecommerce business?
Lean management is best suited to businesses that sell in high volumes. The goal of mass production is low-cost manufacturing, which is a key principle of lean alongside enhanced product quality.
When applied to ecommerce, that means businesses that sell products with minimal variations and customization so you can simplify the production process. This makes it easier to break down individual processes and identify areas of continuous improvement.
On the other hand, if your customers expect high levels of customization, lean inventory practices are less likely to be a match because of the sheer number of changes to your production lines alone.
Lean is also less suitable for companies that don’t have direct control over production, because lean requires constant, direct communication to implement.
Optimize your inventory for lean management practices
Lean inventory management exists to optimize inventory levels and reduce waste, strive for continuous improvement and take a customer-centric approach to growth and competition.
As you evaluate this option for your business, keep in mind the need to have a lean inventory management system to oversee the process. When you have accurate data on inventory levels, locations and forecasting, you can make informed decisions about how much inventory to keep on hand and when to order more.
Fulfill orders faster, at a lower cost and with greater accuracy with automated workflows across your supply chain.