What is just-in-time inventory management and its benefits?
By Indeed Editorial Team
Published 1 May 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Manufacturing and retail industries continually assess how they can become more efficient, increase productivity and reduce their costs. One way of reducing your outlay is to receive goods from suppliers exactly when you need them. The just-in-time inventory management system allows retailers and manufacturers to order at the last minute. In this article, we discuss what a just-in-time inventory system is, weigh the benefits and drawbacks and explore how it works in various manufacturing processes.
What is just-in-time inventory?
In answer to the question 'what is just-in-time?' (JIT), it's an inventory management system that orders goods, raw materials and components from suppliers only as necessary. Businesses and manufacturers using this method hold no goods in stock. Instead, they rely on the delivery of materials and goods to arrive exactly when scheduling production. The goal is to increase efficiency and reduce waste by decreasing the cost of storing merchandise and unsold goods.
We can balance warehouse costs against the expenses involved in more frequent deliveries and losing out on discounts for buying in bulk. Producers and retailers rely on being able to accurately forecast potential demand so they don't run out of stock. They manage the supply chain with sophisticated software to ensure it runs smoothly.
How does a JIT model work?
The JIT system relies on a streamlined process. Originally created by the founder of Toyota, this management strategy coordinates orders of raw material from suppliers in tandem with production schedules. The method means a manufacturer only makes an order when it's needed and only receives the necessary amount at the time. The idea is to use a minimal inventory. The basic steps of a JIT inventory are:
Client order: Once a company receives an order, the project manufacturer determines the materials necessary to build the product and the quantities.
Material purchase: They buy the exact raw materials they need for the order.
Create and deliver the product: Once they receive the materials, the manufacturer builds the product and delivers it to the client.
Build a cycle: When a company has a contract with a client to continually renew orders based on a timeline, they can order enough materials to build and maintain a cycle.
What are the benefits of JIT?
Manufacturers once saw raw materials and finished goods as assets, but this concept has changed because of JIT. Here are some of the advantages of using this inventory method:
Reduces warehouse costs
Ordering just-in-time allows manufacturers and retailers to reduce warehouse costs since holding less stock means a huge storage space or warehouse, which can be expensive is no longer necessary. Because businesses only request goods when a customer puts in an order, the just-in-time system slashes the costs of storing large amounts of stock. Some businesses have stopped using warehouses altogether.
Saves on inventory costs
This system has the advantage of saving on the inventory costs necessary for a large number of goods, products or raw materials, which frees up this money to use elsewhere in the business. Because you request a product only when the customer places an order, the customer pays for the product before it's dispatched.
Manufacturers only buy the necessary materials for each order, rather than purchasing an excessive amount that they may not use. Since producers know exactly how much to manufacture, this reduces the wastage associated with stock going out of date or clothes going out of fashion.
Increases manufacturer's control
Since manufacturers only produce the amount of items ordered, this reduces production time and thereby reduces costs. The manufacturer controls the manufacturing process through a demand-pull system. They respond to their customer's demands by expanding their rate of production for in-demand products or reducing it for less popular items.
You might pass costs onto the customer because JIT lowers the costs of the manufacturing process. This means a company can lower its prices in shops and stores. In turn, this makes a company's products more attractive to the consumer.
What are the disadvantages of JIT?
While JIT saves a lot of the costs associated with the manufacture and storage of goods, it comes with some disadvantages. The following are some of the drawbacks:
Manufacturers may stop production if suppliers don't deliver raw materials or components on time. Breakdowns in supply or manufacture can mean goods aren't made. The model depends on a timely supply which isn't always possible. A company may order from a different supplier if suppliers don't deliver on time, which may double the costs of buying the raw materials.
Administration and delivery costs
The amount of administration increases when a business delivers stock as and when it's necessary. Delivery costs increase because suppliers make more frequent deliveries. It's often necessary for manufacturers to cover any hike in the cost of raw materials since they aren't able to wait until the market stabilises.
Worse environmental impact
More frequent stock deliveries mean a higher number of truck journeys. A higher number of journeys between the supplier, manufacturer and customer uses more carbon and more packaging.
Potential sales disruption
If there are delays in the manufacturing process, this can result in stores not being able to fulfil their orders. Because just-in-time slashes the time between purchasing and manufacturing, it increases the chances of running out of products and therefore losing sales. If a manufacturer has run out of an item you need, you may not be able to source an alternative.
What is Kanban scheduling?
Kanban is a Japanese word for signboard. Kanban scheduling avoids oversupply. The system determines what to produce, how much of it to make and by what date. It improves efficiency by highlighting glitches and measuring lead and production cycle times. The system helps manufacturers avoid overcapacity.
How does JIT fit in with lean manufacturing
Lean manufacturing is the process of identifying areas of the business that waste resources. Companies consistently look for ways to optimise systems, cut costs and increase productivity. Lean manufacturing considers how these efficiencies can add value for the customer and is a concept that businesses can apply throughout the organisation, in production, marketing, manufacturing and distribution.
Using just-in-time is one step in this process as it eliminates the costs of a large inventory. You might use resources in other areas of the business. A manufacturer could, for example, convert space that you use for storing stock, into an additional production area.
How to make JIT work for your business
Japanese car manufacturer Toyota was one of the first companies to introduce just-in-time in the 1970s, which is why you might have heard the system called the Toyota Production System. Careful planning is necessary when setting up a just-in-time inventory system. It's important to develop good working relationships with suppliers so they respond quickly to your requests. Excellent software and management is necessary for businesses to set up the supply chain and demand planning, which helps businesses meet customer demands.
Establishing long-term contracts with dependable suppliers who can deliver on time is essential. The JIT inventory process can help your business run much more effectively because it means you only order products or materials you need. It can be very useful to start-up businesses since they can initially spend less on stock, or inventory and save on storage space.
Examples of JIT in practice
Here are two examples of how JIT inventory systems work:
Example 1: Car manufacturer
Previously the car-maker ordered components in bulk and stored unused parts on-site. Since the number of orders didn't equate to the number of parts stored in the factory, this led to unnecessary waste.
The company decided to change its ordering system and only bring materials to the production process when a customer made an order. They stored small quantities of parts near the production line so there was always enough to keep production moving. This saved space by reducing the number of parts stored at the site. It also helped lower the cost of cars and therefore helped to increase their profits.
Example 2: Restaurant
Many restaurants use the just-in-time system. As an example, Lily's restaurant ordered enough food to make meals for a month in advance, storing any excess in freezers. The owner realised that by estimating how much food she needed in a week, she could order a specific amount on a weekly basis.
This meant she didn't need large freezers to store so much frozen food or a big pantry to store sacks of dried food. She could use this space to make a larger food preparation area, which in turn led to a wider menu choice. The food was fresher and more seasonal which led to more customer satisfaction and greater profits.
Please note that none of the companies mentioned in this article are affiliated with Indeed.
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