Just-in-time (JIT) is a production technique that was first pioneered by Toyota, to minimize the need for excess inventory through linking production to demand.
In a nutshell, JIT means that a product is only ordered or manufactured once an order has been placed. This way, a business can operate with a minimum of stock and labour, greatly reducing the associated costs of sourcing, making and holding excess inventory, as well as the cost of writing off spoiled or obsolescent items.
For some businesses, there are situations and circumstances in their day-to-day operations that require the holding or manufacturing of more inventory than may be needed for current orders. JIT makes it possible for a business to operate with the realistic bear minimum.
When used well, this translates to a valuable combination of lower inventory costs, less production waste and all-around greater efficiency.
So, let’s have a look at the key features and benefits of JIT to see if it has something to offer your business.
Less reliance on forecasting
Traditionally, businesses stock as much inventory as they think is needed to meet demand, based on forecasts for the coming year or quarter.
And of course, this works fine if the forecasts are accurate, and demand doesn’t fluctuate too much.
But if forecasts are off and demand is unpredictable, then a business can be left with spiraling costs and significant inventory losses.
Because JIT means that production is linked to real-time demand, businesses are able to operate without a heavy reliance on forecasting.
And while forecasting still has a significant role to play in deciding which products are available for order, actual inventory levels can be restricted to only what is necessary to supply demand.
Lower warehouse costs
One of the benefits of operating with minimum stock levels, is a reduction in storage and handling costs.
Obviously, the more inventory being stored, the more associated costs there are.
Everything from the size of warehouse space needed, to the amount of staff required to run it can be reduced when JIT is successfully used.
Less spoilage and waste
Inventory spoilage and obsolescence is an ongoing headache for inventory managers. No business likes to write off and discard stock they invested capital in and while there is no total fix for this, techniques like JIT go a long way to reduce the impact of waste on the bottom line.
As JIT dictates that production is triggered by demand, as opposed to forecasting, a business’ efficiency can be positively affected by its use.
JIT helps to streamline all aspects of production by ensuring that manufacturing or ordering are only activated to meet demand. In a nutshell, this means that staff and machinery are only working to meet an actual order.
This in turn keeps the inventory ratio high, so a business’ efficiency has an ‘on-paper’ indicator.
Higher Return On Total Assets ratio (ROTA)
The ROTA ratio, one of the metrics used to determine a business’ efficiency and profitability, is positively affected by the successful use of lean techniques like just-in-time.
Put simply, this ratio works out how effectively a business is turning investment into profit. When inventory levels are lower and profits are healthy, this ratio will show a positive result for the business.
Reduced inventory costs
When it comes to inventory costs, just-in-time offers businesses an alternative path.
Instead of investing capital in an abundance of stock, supply is linked more directly to demand.
This frees up businesses, allowing them to refocus their capital in other areas like growth and diversification.
The risks of JIT inventory
Whilst Just-In-Time Inventory management is geared toward reducing a company’s surplus stock levels to zero, it requires a huge commitment both in terms of initial investment as well as time. But that is not all – any business looking to switch to Just-In-Time inventory would do well to consider the following possible pitfalls.
Change the way you do everything
JIT systems are notoriously complex to operate effectively. The business needs to completely restructure its supply chain from beginning to end. Often this means sourcing out several suppliers who are both closer in location, as well as able to manufacture and supply product with little or no notice whatsoever.
Renegotiate the basics
Minimum Order Quantities (MOQs) with existing suppliers may be impossible to meet when switching over to an inventory management model that demands only the quantity required to fulfill a customer’s order be purchased.
Apart from possibly leading the business to a stock out – since it will be unable to secure the inventory required – it might lead to crippling price hikes. This is because the business can no longer purchase the quantity of goods required to capitalize on lower cost advantages offered with MOQ terms.
No margin for error
Unlike with more conventional inventory management systems, JIT leaves no margin for error. The ripple effect throughout the supply chain when something goes wrong is immediate.
One glitch in the supply chain and the business could find itself facing a stock out in peak season.
Whilst Just-In-Time inventory has proven to be remarkably effective at cutting costs and boosting profitability when implemented successfully, businesses that remain wary of the risks involved should consider implementing a powerful inventory management software system instead.