Just-in-Time inventory, as the name implies, is where products for manufacture are purchased shortly before they are needed so that they arrive ‘just-in-time’. There are several advantages associated with this method of inventory management as well as a few notable disadvantages. We will look as some of these as well as some things that should be in place for Just-in-Time inventory, or JIT, to work effectively.
A bit about JIT inventory
JIT inventory runs on the basis of total quality management (TQM) where the manufacturing process is designed to be streamlined and flawless, allowing for minimal production waste (both in product and time) and maximal efficiency. The leader in this method is Toyota which began just-in- time and lean manufacturing initiatives back in the 1970s. Over the course of fifteen years, they were able to establish working systems which were effective in minimising waste while still promoting quality and customer satisfaction.
A clear advantage of JIT inventory is the fact that working capital is not tied up in inventory waiting to be used. This means that the money is available for use elsewhere so that the company does not face lost-opportunity costs. However, by not having excessive amounts of product on site waiting to be used, this inevitably means there is less of a risk of product being written off due to expiry or obsolescence – two big tell-tales of inventory mismanagement.
Additionally, if the company wishes to develop a new product or manufacturing line, it can do so quickly and easily without having to consider what to do with a whole lot of leftover over stock. A physical advantage of operating a JIT system is that there is minimal product being stored resulting in a minimal requirement for storage space. This of course has the knock-on effect of saving money in leasing, insurance and overheads.
Although JIT inventory has the potential to save money in storage costs, it also poses many risks to the company which should be carefully weighed up. By operating a JIT system, the company is far more reliant on its suppliers and, in particular, the company depends on timely and consistent supply. This is because there is not a large safety net of stock should the supply chain fail.
Potential consequences of such a situation may be the inability to continue production resulting in loss of production time and money (idle staff still earn wages) and, of course, dissatisfied customers who are waiting on unfulfilled orders. With any inventory operating method there are drawbacks to consider. However, with careful planning, these downsides can often be mitigated.
Tools to have in place for effective JIT inventory system
Transparency and communication with your suppliers
It is imperative to have good communication and transparent processes with your suppliers if JIT is to be effective. This is so that you can visualise their stock and quickly place an order as soon as one of your own customers have placed an order with you. For JIT inventory to be effective, your suppliers need to understand your business, your order patterns and what your expectations of them are. This depends on honest and clear communication.
Trusted and reliable freight company
The very nature of JIT inventory means that products may well be required much sooner than anticipated which could incur expedited shipping costs. As such, it is useful to partner with a reputable freight company beforehand who you can turn to for cost-effective and reliable shipping options.
Thoughtfully assigned backup supply
To avoid placing the company in jeopardy, a useful part of JIT inventory could be determining a healthy stock level to keep on site just-in-case so that, if demand spikes, the business can continue as normally as possible for some time while more stock is obtained.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.