Just in Time (JIT) inventory management was conceptualized in an effort to create a leaner, more efficient, and less expensive chain of production. This method of management was developed for companies looking to reduce inventory-related expenses and wasteful practices.
What is JIT?
The goals of JIT are all in the name. It’s a strategy to deliver materials and inventory when, and only when, they’re needed/ordered, without holding excess. The idea is that the entire production chain runs efficiently enough that only the exact quantity of materials to complete the current orders is moving through the inventory system at one time.
The History of JIT Inventory and Production
Just in Time, as a concept and process, was arguably created by Toyota in Japan during the 1970s. The company needed to cut waste and make more efficient use of the limited natural resources at their disposal. Using JIT allowed them to do away with the need to hold excess stock, and it also allowed them to use a production facility for more than one model at a time, which further streamlined operations.
This necessity was born out of Japan’s post-war economic situation. Just in Time was designed to make up for issues, such as a lack of space for additional factories and large warehouse storage, an economy still struggling to recover from World War II, and few natural resources. It only took a few years for news of this process to start making its way overseas, and JIT was soon adopted by Western manufacturing industries.
Advantages of Just In Time Inventory Management
JIT is an extremely advantageous, but delicate, strategy used by manufacturers and other types of industries that rely on chains of production in which raw materials are turned into component parts, and those parts are transported to facilities where they’re assembled into a finished product. These chains can be long and complex, but the idea is that when an order is placed, internal requests for precisely the materials and parts necessary to complete the order move down the chain.
The primary problem that JIT solves is overstocking inventory, which is an expensive way to manage a supply chain. Holding more inventory than you need costs money because you’re spending before you’ve received an order, you need extra space to store it, and holding extra inventory can become a tax liability.
JIT, on the other hand, results in several cost-cutting advantages for a business.
Short Production Runs
Only holding enough inventory for what they currently need to produce enables businesses to control the size of a run of products. It turns product-run planning into an exact science, and it aligns spending on material with how many orders are expected. By the end of the run, there won’t be any inventory left over to handle or write off.
Less Dead Stock
Expenses on stock that doesn’t get used are a drain on finances. Even if it does get used, having stock sitting around, already purchased, and waiting for an order interrupts cash flow. It ties up a business’s finances in things it can’t use, takes up space, and might not see a return for a long time. JIT solves this problem and frees up money that would otherwise be tied up in overstock inventory.
Less inventory kept in holding means less need for space. That means less money spent on acquiring, staffing, and upkeeping multiple facilities. The reduced need for space is a primary way to reduce costs and other bloat that harries supply chains.
Better Cash Flow
Without money tied up in dead inventory and dead space, a business can be more responsive to its own needs. Overstocking inventory has a great deal of cost associated with it. JIT makes businesses more agile and allows them to use their available cash more efficiently, benefiting other areas of operation.
Risks of Implementing Just In Time Inventory Management
There are legitimate reasons that businesses tie up funds in extra inventory. Having extra on hand means that you’re prepared for unexpected circumstances. The big issue with JIT is that there’s no margin of error. If one link in the chain fails, it has the potential to grind the entire production chain to a halt. If raw materials don’t get delivered, parts don’t get made. If parts don’t get made, assembly doesn’t happen.
Supply Line Disruption
There are so many things that can go wrong in a supply line, and not having excess inventory can feel dangerous. Issues can happen with availability or with delivery schedules. If one plant or warehouse has to shut down for even a day, the effects can ripple all the way down the supply chain. It’s also possible that critical assets might get lost along the way, misplaced during delivery, or simply stored in the wrong place.
Countering these disruptions is possible, but it takes care and planning. It’s vital to ensure that every item and every step in the supply chain is properly tracked and monitored so that every asset reaches its destination “just in time.” The right data about delays and disruptions, generated and delivered far enough in advance, can help you source the assets that are missing quickly enough to make up for the disruption.
For a business running a leaner operation, price shocks can be difficult to handle. If a business has extra inventory on hand, they might more easily weather a price shock. JIT systems, however, are vulnerable because they’re forced to immediately take on the cost of the materials if they want to keep producing.
Having to buy materials and commodities at their current price, rather than waiting for the best time and buying in bulk, can be a major disadvantage. That’s why it’s wise to use some of the freed cash flow from holding inventory to account for fluctuations in prices. Price shocks can shrink profit margins, but the overall benefits of JIT, if you manage it well, should overcome those losses.
Incorrect Demand Forecasts
Of course, if a business is going to use JIT, it must be careful about forecasting actual sales. Accurate data about inventory metrics is the key to success here. Knowing how a supply chain and sales interact with one another can help you plan for the future. Understanding metrics like sell-through rate (which is inventory received and held versus inventory actually sold) during different times of the year can create more accurate forecasts.
An inaccurate forecast can leave a business with too much inventory, defeating the advantages of JIT systems, or too little, which results in lost revenue. The leaner an inventory system and supply chain is, the more critical it is to be accurate with these forecasts.
Just in Time systems can reduce a lot of overhead, but they require careful consideration and accurate tracking tools to be most effective. Without the right knowledge, a business could suffer for not being prepared. With the right preparation, however, these techniques can be ideal for trimming the fat on a supply chain that is costing too much money.