Just-In-Time Inventory: What It Is, Advantages, Disadvantages, and Steps
The cut-throat competition in retail and the mounting pressure to increase profitability push many businesses to find new solutions to challenges in their operations. Just-in-time inventory, or JIT inventory, is a popular strategy that global manufacturing companies have been adopting to boost their bottom lines.
This article dives into what it is, the advantages, disadvantages, and steps to easily adopt the strategy for your own business.
What Is the Just-In-Time Inventory System?
Just-in-time inventory is an inventory management system pioneered in the 1950s and 1960s by Taiichi Ohno, an industrial engineer at the Japanese car maker Toyota. The system involves receiving raw materials from suppliers only when the production team needs them; that is, “just in time.” The goal of this lean management process is to keep minimal stock. The aim is to increase operational efficiency and inventory turnover and minimize expenses and waste.
The origin of this practice stems from the Japanese term “Kaizen,” which means “continuous improvement” or “change for the better.” This business philosophy focuses on improving operations and involving every employee at every level.
JIT requires interconnected and mutually dependent parts of a production or service system, staff, and long-term contracts with trustworthy vendors. These critical elements generate successful outcomes and meet the goals of JIT.
What Is an Example of a JIT Inventory System?
Here is an example to help you understand JIT better: a carmaker works with a low amount of inventory. But it depends heavily on its suppliers to deliver the parts for building cars only as and when needed. So, the manufacturer orders the components it needs to assemble cars only when it receives an order from a customer.
This prevents the manufacturer from keeping excess stock at hand and avoids tying up financial and other vital resources in inventory.
What Are the Advantages of a JIT Inventory System?
Why use JIT inventory? Here we tell you about its many benefits for your business:
Reduced Inventory Waste
A JIT system prevents overproduction. One item’s supply level does not exceed its demand with this method. This avoids the problem of accumulating unsellable and obsolete stock. It also reduces waste and unnecessary consumption of inventory space.
More Control to Manufacturers
JIT gives manufacturers complete control over the production process by working on a demand-pull basis. Manufacturers can quickly increase production for in-demand items and cut back easily for slow-moving products. They maintain the flexibility to fulfill customers’ exact needs and demands.
Within the JIT system, manufacturers can quickly respond to changes in market demands. By maintaining only minimum stock, companies can adapt to the ever-evolving market without worrying about having to unload the stock at hand.
When manufacturers receive raw materials on demand, it minimizes operating costs in many areas. As they need less space to store these items, it leads to minimal inventory holding costs, such as those related to warehousing.
Reduced stock levels also require significantly less working capital and cash investment, saving money in this area, too. It allows companies to use the available cash for other productive purposes.
Moreover, JIT requires fewer workers to manage inventory and fulfill orders, lowering labor costs.
The JIT model also follows the “right first-time” principle. This concept involves performing business activities in the right way the first time. It reduces the need for inspections and minimizes the tendency to rework products, which minimizes wasted resources. Companies use less money to correct errors in production and can optimize their budgets.
Overall, JIT maximizes a company’s return on investment and helps it remain profitable and successful in the long run.
The JIT model calls for beginning production only after a customer places an order. So, manufacturers must source goods from local suppliers to receive the needed materials at their facility as quickly as possible. This attracts customers who prefer locally sourced and manufactured products. Supporting local businesses can also lead to more partnership opportunities within your community.
Local sourcing significantly slashes transport time and costs. It allows allied businesses to work in parallel or in tandem, which boosts employment locally. These connections can lead to more long-term success for all involved.
Increased Productivity and Efficiency
The JIT inventory method reduces the time and resources needed to manage inventory. This means employees can focus on manufacturing and other more productive and value-adding operations. This boosts the organization’s productivity, efficiency, and overall performance.
Higher productivity and efficiency translate to increased business profitability and success.
As JIT provides greater flexibility for businesses, the staff can divert their time to developing high-quality products that are free of defects. This reduces production errors and cash outlay and boosts outcomes and customer satisfaction.
JIT also reduces the number of work-in-progress goods as fewer items move on the shop floor. Minimal inventory also means fewer storage-related accidents and less damage to goods, further improving quality.
What Are the Disadvantages of a JIT Inventory System?
The JIT model has many advantages. But it also has several drawbacks that you should be aware of:
Difficulty in Reworking Orders
Under JIT, manufacturers only maintain a bare minimum level of inventory based on the orders of customers. This makes it difficult to rework items that don’t meet customer specifications.
Excessive Reliance on Suppliers’ Performance
JIT depends heavily on the performance and efficiency of suppliers, which are difficult to ensure.
Manufacturers have very little control over delivery times. It’s up to the suppliers to deliver the goods as promised and within the agreed-upon window. If there is even a small delay in the delivery of raw materials, it has a huge impact on your ability to meet customers’ needs. Late delivery can drive your customers away.
Risk of Supply Chain Disruptions
If there are disruptions in the supply chain due to natural calamities or other causes, businesses using the JIT model will take a big hit. They will not have excess stock on which they can fall back on, which will negatively impact sales and operations.
Need for Intensive Planning, Tracking, and Organization
Under the JIT system, companies must plan all of their business activities well in advance. They need to constantly track their sales patterns and trends to factor in demand levels and ensure that suppliers can fulfill their material needs.
Risk of Inventory Shortages
With JIT, there is always a risk of running out of inventory when demand for your products suddenly increases, or the supply of goods suddenly falls. Failure to record sales and forecast customer demand accurately can lead to low stock replenishment when sales are high.
Manufacturers must also account for sudden price hikes for raw materials, as the JIT system prevents them from waiting to order when prices go down.
Negative Environment Impact
The JIT inventory strategy calls for continuous shipping between suppliers, manufacturers, and customers. This practice leads to excessive use of packaging and fossil fuels, which has a detrimental effect on the planet.
What Are the Steps in the JIT Process?
The JIT process is relatively simple. Here are the basic steps in this process:
- Customers first reach out to a manufacturer to place an order for a certain product.
- The manufacturer then places orders for raw materials with their vendors.
- Next, the vendors send the requested goods or materials to the manufacturer.
- The manufacturer converts the raw materials into the final product and sends it to their customers.
How to Implement a JIT Inventory Management System
If you’re considering implementing the JIT model in your business, here are a few important tips that will ensure a seamless transition:
Get an Inventory Management Platform
Getting the right resources can significantly ease your move toward the JIT model. Investing in robust and reliable inventory management software can help you track items accurately and predict restock times and customer demand.
Assess Your Existing Supply Chain
Review your current supply chain and ensure that your relationships with vendors and other business partners are productive. Partner with backup suppliers if you feel the need to do so to meet customer demand at all times.
Communicate With Your Customers
Communicate the change in your business model to your core client base. Clear their doubts and concerns in this regard and reassure them that you will maintain your product quality and efficiency of delivery.
Notify them that unusually large orders may require additional lead time. This will prepare them for delivery delays and help you maintain excellent customer relationships even with this change.
The just-in-time inventory system, also known as the “pull system”, focuses on producing or ordering goods based on actual customer demand. JIT is a simple yet powerful way to save money in inventory and other operational areas. It reduces waste and improves product quality, efficiency, productivity, flexibility, and market adaptability.
It is ideal for businesses with raw materials and products collecting dust on warehouse shelves or whose budgets are always tied up in unmoving inventory.
If you want to transition to JIT, make sure to follow our tips above. They will help you remain productive and efficient despite supply chain disruptions and other hurdles. Careful execution of the JIT system will prevent losses in your business when unpredictable events occur and help you rise above your competitors.
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