- Hour Glass
Just In Time Inventory
Mastering lead times, i.e. how long it takes your supplier to produce your goods, and transit times, i.e. how long it takes to receive your goods once production is complete, is often a fine art and an extremely critical part of your business and definitely mine.
In the dozen or so years that I have been importing from China I can only venture to guess how much money our company has lost in sales because we did not have the products in stock when needed. I do not think it would be a stretch to think our sales overall could have been 25% greater during that 12 years or so.
The issue is that one must order products normally a minimum of 4 to 6 months in advance of when they will need them (and that is playing with very tight margins; 6 to 8 months is more realistic). If you’re a business that relies on the Christmas season, that could mean ordering products in March to June when sales are stagnant on the hope that they will increase during Christmas. For my company, which has our prime selling season go from March to August, it means putting together our POs in October. Our October sales volume is approximately 25% of our June volume and needless to say it is scary committing that much cash when your sales have taken a sudden and dramatic drop off during the off season.
Perfecting Just In Time inventory management for the importer normally means attempting one of two things:
- Making far larger orders and holding a lot of inventory.
- Trying to time things just right so your products arrive at exactly the right time.
Option number one is fraught with problems. First, it ties up a lot of your cash. Most people and businesses cannot afford to hold a year worth of inventory- and always remember, a large number of profitable businesses go out of business because of poor cash flow. Second, if all of a sudden you get a bad shipment of products from your supplier (or something else unforeseen happens) more of your money is at risk. Of course, if you receive good quality products and have lots of it in stock, you will not lose any sales due to stock shortages.
Option number two is possibly the best option. You know you need xyz number of widgets in for abc month so you order them at just the right time. The problem with this option is reality: something always seems to happen to screw up your estimates. A once in a life time flood hits your supplier in Ningbo and your shipment gets delayed a month and misses the Christmas season (it happened to my company). A port strike hits Vancouver and your shipment is stuck in port for an extra three weeks (it also happened to us).
So what can a savvy importer do? There are a few key points I try to exercise:
- You must be able to accurately forecast your demand. Don’t order Halloween costumes to arrive in November.
- You must know your supplier and their realistic lead times. If they say 30 days, double this. If they make Halloween costumes, the chances are they’ll get behind in production a few months before October (even if they truly believe they can handle the added demand).
Know the transit times to receive products and pad these estimates. If you think it will take your goods 25-40 days in transit time from China to your home country, assume it will take 40 days.
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