Learn how carrying excess inventory ties up working capital and when to prioritise just-in-time stock orders.

Working capital is the oxygen of a growing business. A company can be profitable on paper — generating revenue, covering costs, building a customer base — and still fail, because it runs out of the cash it needs to operate day-to-day. One of the most common causes of working capital stress in product businesses is inventory: specifically, the practice of ordering more stock than current demand requires in order to secure lower unit prices or to avoid the risk of running out. For $1, this article explains when just-in-time ordering protects working capital more effectively than bulk purchasing, and how to calculate the real trade-off between unit cost savings and cash flow impact.

The bulk purchasing instinct is understandable. Supplier discounts are real. The unit cost saving from a 500-unit order versus a 100-unit order is real. What is often not calculated is the carrying cost of that inventory — the cash tied up in stock that is not generating revenue, plus the storage cost, plus the risk of obsolescence or damage. When these costs are included, the economics of bulk purchasing frequently look less attractive than they appear at the point of order.

The true cost of holding inventory includes four components: the purchase cost of the stock (the cash outlay), the carrying cost (storage, insurance, handling), the opportunity cost (what that cash could have earned if deployed elsewhere in the business), and the obsolescence risk (the probability that the stock will need to be discounted or written off).

A rough carrying cost estimate for most small businesses is 20-30% of the purchase cost per year. That means a $10,000 inventory purchase costs approximately $2,000-$3,000 per year to hold, before obsolescence risk. If that inventory will take 12 months to sell, the effective unit cost is 20-30% higher than the purchase price.

Run this calculation for your current inventory levels. The result is often surprising — businesses that thought they were saving money through bulk purchasing find that the carrying cost eliminates most or all of the discount.

Just-in-time ordering means ordering stock as close as possible to the point of sale, in quantities that match near-term demand. The objective is to minimise the time between cash outlay and cash receipt from sales.

To implement JIT ordering, you need two numbers: your average daily sales rate for each SKU and your supplier lead time. Average daily sales × lead time = the minimum order quantity needed to avoid stockout. Order at that level, triggered when stock drops to the reorder point.

The reorder point is: (average daily sales rate × lead time in days) + safety stock. Safety stock is the buffer you hold against demand variability and supply disruption. Set it at approximately 20% of the lead time quantity for most SKUs — more for your fastest-moving items, less for your slowest.

Just-in-time ordering is not always the right answer. Three situations justify bulk purchasing despite the carrying cost. First: when a supplier discount exceeds the carrying cost by a meaningful margin. Calculate the break-even: if the discount saves $1,500 and the carrying cost of the extra inventory is $800, the bulk purchase saves $700 net. Second: when supply reliability is low and stockout costs are high. If running out of inventory means losing customers to competitors, the cost of the safety buffer may be justified.

Third: when you have high confidence in near-term demand. A business with a confirmed order of 500 units can purchase 500 units without inventory risk — the stock is already sold. JIT principles apply to speculative inventory, not to confirmed orders.

The discipline is to make the calculation explicitly for each significant purchasing decision, rather than defaulting to either bulk or JIT without analysis.

Just-in-time delivery depends on supplier reliability more than any other variable. A supplier who occasionally misses delivery windows turns a JIT system into a production crisis. Invest in the supplier relationship before you depend on it: pay promptly, communicate lead time requirements clearly, and provide advance notice when volumes are likely to increase.

Identify a backup supplier for every critical component before you need one. The insurance cost of qualifying a second supplier — the time and initial order required — is negligible compared to the cost of a production stoppage caused by a single-source failure.

The optimal JIT inventory level is the minimum quantity required to sustain production through the longest plausible supplier delay, plus a defined safety buffer. Calculate this for each critical component: (Average daily consumption × Maximum plausible lead time) + Safety buffer.

Review and update the formula quarterly. Average daily consumption changes as the business grows. Maximum plausible lead times change as supplier relationships and logistics conditions evolve. A JIT formula calibrated to last year's data is systematically under- or over-stocked relative to current conditions.

Working capital is the oxygen of an early-stage business. JIT materials management extends the runway by ensuring that capital tied up in inventory is the minimum required for production continuity, not a buffer against procurement uncertainty.

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