When a business holds excess inventory it ties up capital and incurs holding and carrying costs. Minimizing inventory waste should therefore be a key inventory management goal for an efficient business. Just-in-Time (JIT) inventory involves the ongoing minimization of inventory waste by only procuring inventory to meet immediate demand. It stands in contrast to a forecast-based approach where a business models future demand for its products and orders inventory in advance. How does JIT inventory typically work?
How JIT works: a green light to go
In practice, businesses give effect to a JIT inventory strategy by using a certain event as a trigger to order more inventory. This trigger is not necessarily a customer order, but it must be proximate enough to customer demand that the order arrives just in time. It must not be so far out as to involve any significant guesswork in relation to demand – JIT inventory is a responsive, not a predictive methodology. The trigger essentially operates as an inventory ‘green light’ – inventory does not move until the signal is given.
The key feature of JIT inventory is simply having less inventory. Both as a goal and a consequence of practicing just-in-time, only a very marginal amount of inventory is held. This has two major ramifications for the business. Firstly, there is a much lower risk that inventory will become stale or subject to shrinkage. If a product line is retired, a business will be in a much better position to clear its inventory if it holds a small number of units rather than multiple bays of stock. Moreover, with less inventory in stock, there is simply less inventory that can be damaged or stolen.
Secondly, JIT inventory minimizes inventory holding costs such as warehouse rent, insurance and handling costs. A business that has implemented JIT inventory does not need a large warehouse – less rent means better margins and more profit. Perhaps crucially, having less inventory can involve less risk and less worry about holding onto and clearing lots of stock.
Precision supply chain management
Just-in-time inventory leaves very little margin for error. Mistakes carry acute risk. If something goes wrong, either at the ordering stage or upstream in the supply chain, your business could be stuck without stock when it is needed most. This risk will vary from business to business – so consider the likelihood and potential impact of failure from a risk perspective. If the risk is unacceptable, JIT inventory may not be appropriate for your business. However, for many businesses the risk of failure can be appropriately mitigated.
Because of this heightened supply chain risk, businesses who practice JIT inventory typically have very well managed supply chains. Issues with poor or unreliable supplier performance are worked through where they may otherwise be tolerated. Best in class logistics systems are used to realize even the smallest efficiencies. In particular, the relationship between suppliers and their customers tends to be closer where a JIT approach is used – even including, for example, integrated inventory management systems.
Businesses who implement JIT inventory depart from the traditional approach to planning and ordering inventory. Because JIT represents a major shift from traditional inventory management, other seemingly unrelated aspects of the business can be affected. Deciding whether implementing JIT is right for your business will depend on how your business works, what events could be used as triggers and your appetite for and approach to managing risk.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. When not writing about inventory management, you can find her eating her way through Auckland.