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Just-in-time, or JIT, is a method of inventory management in which only as many goods are received from suppliers as they are needed. The main objective of this method is to reduce inventory holding costs and increase total revenue.
Just-in-time (JIT) inventory management, also know as lean manufacturing and sometimes as the Toyota production system (TPS), is an inventory strategy that manufacturers use to increase efficiency. This process involves ordering and receiving inventory for production and customer sales only when it is needed to produce those items, and not before.
This type of inventory management gives the firm many benefits, but is not without its downsides, and relies very much on factors such as a strong, fast, and efficient network of suppliers.
Ordering inventory on an as-needed basis means that the company does not hold any safety stock, and works with continuously low inventory levels. This strategy helps companies lower their inventory carrying costs, increase efficiency, and reduce waste. JIT requires manufacturers to be very precise in forecasting the demand for their products.
Just-in-time inventory management is a positive cost-cutting inventory management strategy, although it can also lead to the item(s) being out of stock. The goal of JIT is to increase a company’s return on investment by decreasing unnecessary costs.
Some alternate inventory management systems exist, in which short-cycle manufacturing (SCM), continuous-flow manufacturing (CFM), and demand-flow manufacturing (DFM) are included.
The JIT inventory system is a step away from the old “simple-case” policy, where factories held much greater inventories of inventory and raw materials if they wanted to produce more units due to higher demands.
The management technique was found in Japan and is often attributed to Toyota. However, many believe that Japan’s shipyards were the first to create and successfully execute this strategy. Its origins are seen as three-fold: Japan’s post-war lack of cash, lack of space for big factories and inventory, and Japan’s lack of natural resources. Thus the Japanese “leaned out” their processes, and JIT was born.
News about the process and success of JIT/TPS reached Western shores in 1977 with executions in the U.S. and other developed countries beginning in 1980.
Toyota started using JIT inventory controls in the 1970s and took more than 15 years to make its process perfect. Toyota sends off orders to purchase production parts only when it accepts new orders from customers.
Toyota and JIT manufacturing will succeed as long as the company maintains a steady production rate, with high efficiency and no machine breakdowns at the plant that could stop production. Moreover, it needs reliable suppliers that can always deliver parts quickly, and the ability to quickly assemble machines that put together its vehicles.
Just in time needs careful planning of the entire supply chain and usage of the best software to carry out the entire process till delivery, which increases efficiency and eliminates the possibility of error as each process is observed. Here are some of the important benefits of a just-in-time inventory management system:
Reduces inventory waste
A just-in-time strategy eradicates overproduction, which happens when the supply of an item in the market is more than the demand and leads to the acquisition of waste inventories. These unsalable products turn into inventory dead stock, which leads to the increment of waste and consumes inventory space. In a just-in-time system, you order only what you need, so there’s no risk of the acquisition of waste inventory.
Decreases the cost of warehousing
Warehousing is very costly, and more inventory than you need can double your holding costs. In a just-in-time system, the warehouse holding costs are kept to a minimum. Because you order only when your customer orders something, your item has already been sold before it reached you, so there is no need to store your items for long. Companies that follow the just-in-time inventory model will be able to minimize the number of items in their warehouses or eradicate the need for warehousing.
Gives the manufacturer more control
In a JIT model, the manufacturer has full control over the manufacturing process, which works on a demand-pull basis. They can answer their customers’ needs by quickly increasing the manufacturing of an in-demand product and reducing the manufacturing of slow-moving items. This makes the JIT model flexible and able to serve ever-changing market needs. For instance, once an order has been issued, Toyota will not buy raw materials. This has allowed the company to keep minimal inventory, thereby lowering its costs and allowing it to quickly adapt to changes in demand without having to worry about existing inventory.
Local Sourcing
Since just-in-time needs you to start manufacturing only when something is ordered, you need to source your raw materials locally as they will be delivered to your unit much earlier. Other than that, local sourcing lowers the transportation time and cost which is involved. This in turn provides the need for many complementary businesses to run in parallel thereby improving the employment rates in that certain demographic.
Smaller investments
In a JIT model, only necessary stocks are acquired and therefore less working capital is needed for finance procurement. So, because of the less amount of stock held in the inventory, the organization’s return on investment would be high. The Just-in-time model uses the “right first time” concept whose meaning is to do the things right the first time when it’s done, thereby lowering inspection and rework costs. This needs less amount of investment for the company, less money reinvested for correcting errors, and more profit generated out of selling an item.
Easily Identifiable
With so little inventory with the company, defective inventory articles are easier to identify and correct, resulting in lower scrap costs.
Lower Processing Time
An efficiently executed JIT system should reduce the amount of time required to produce products, which may reduce the quoted lead times given to customers placing orders.
Easier Engineering Change Orders
It is much easier to execute engineering change orders to existing products because there are few stocks of raw materials stored by the company to draw down before you can make changes to a product.
Good Quality
Supplier quality is certified in advance, so their deliveries can be sent straight to the manufacturing area, instead of piling up in the receiving area to await inspection.
Production Cells
Employees walk individual parts through the procedures in a work cell, as a result, lowering scrap levels. Doing so also eradicates the work-in-process queues that typically build up in front of a more specialized work station.
Reduced Production Runs
Fast equipment setup times make it cost-efficient to create very short production runs, which lowers the investment in finished goods inventory.
First of all, a customer orders something from the manufacturer. When the manufacturer receives the order, they place an order with their suppliers. After the suppliers get the order they supply the manufacturer with the materials needed to meet the customer’s order. The raw materials are then received by the manufacturer, assembled, and delivered to the customer.
The elements of JIT, when applied to inventory, make sure that parts or raw materials arrive at the shop only at the point of required use or when they are needed. Not only does this help with inventory control and costs, but also with inventory storage matters.
Wallace. J. Hopp, a Herrick Professor of Manufacturing at the University of Michigan and an expert on JIT, has defined JIT as “an approach to achieving excellence in a manufacturing company based on continuing elimination of waste and consistent improvement in productivity.”
JIT was originally considered a means to eradicate waste. Items were allowed to move into a production system only when they were required. The elements of JIT include establishing processes that make sure items moved into the production system are at acceptable levels with no defective parts.
JIT systems work well if the organization has everything:
We assume that JIT systems are best for existing companies on the basis of these parameters. Older companies appear to have trusted vendors who better enable them to establish the type of partnerships that are mutually beneficial and that are important for the operation of a JIT system. In addition, developed companies are more likely to have their manufacturing and supply chain processes working out, and they have a clear understanding of what to expect in terms of seasonality and fluctuation in demand.
All of this simplifies the receipt of your refill order if necessary and decreases inventory costs. However, you can do little more than use a just-in-time method and hammer out the wrinkles as you travel if your company works out a small budget (so you can’t afford massive refueling orders).
You can do a lot of things to prepare your business for the JIT method if it is not sure if a JIT system is correct for your enterprise (or you do not yet believe that it has been set up correctly).
In 1997 a fire took place at a brake parts plant owned by the company Aisin demolished its capability to produce a P-valve part for Toyota vehicles. Aisin was the only supplier of this part for Toyota, and the company had to shut down production for many weeks. Because of Toyota’s JIT inventory levels, it ran out of P-valve parts after just one day.
This circumstance could have destroyed Toyota’s supply line. Fortunately, one of Aisin’s suppliers was able to retool and start producing the necessary P-valves after just two days.
Nevertheless, the fire cost Toyota nearly 16 billion yen in lost revenue and 70,000 cars. The problem dripped through to other suppliers for Toyota, as well. Some suppliers were forced to shut down because the auto manufacturer didn’t need their parts to finish any cars on the assembly line.
The advantages of lowering the investment in inventory are considerable, which can lead a company to pare away too much inventory. When this happens, any unwanted disturbance to the flow of materials can bring operations to a stop almost immediately. As a result, JIT concepts should be followed, but be aware that there is a lower limit on how far you can lower inventory levels.
For each business, the situations and circumstances in daily operations may be different. For example, your business may need you to hold or manufacture more inventory than what is required for processing current order requirements. A just in time inventory management system allows the businesses to operate by keeping realistic levels of bare minimum inventory.
As is generally the case, one size does not fit all — not even in the world of software. Not all just in time inventory management systems are good enough for businesses of different sizes, or even in different industries. Therefore, before adopting the JIT strategy, it is important to check if it fits your business.
One of the most important factors you need to keep in mind is that this strategy generally works well with businesses that are quick and have a strong capability to manage extremely short production cycles.
So you should consider the different factors that are included in choosing whether just in time inventory works for your business or it doesn’t. This is a very important task for your business, and it can make or break your game in the market.
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