Just-in-time inventory (JIT) is an inventory management strategy that seeks to keep inventory levels to a minimum by having inventory acquired or produced only on demand. It’s a departure from more traditional strategies, that involve acquiring a set level of inventory to meet a predicted amount of demand. This article will outline the key features of this strategy.
This is the central concept of JIT: that inventory is only ordered or produced on demand. So there will be some kind of trigger, a ‘pull mechanism’, in place to authorise more inventory to be ordered or produced, so that it arrives with the customer just in time. This does not necessarily mean that products will only be ‘made to order’, and later delivered to the customer; it will depend on the trigger. This trigger might occur when in-store stock levels go below a certain level, or it might be when an item is actually ordered for later delivery.
Low amounts of inventory held.
A major advantage of JIT is that the business has a minimal amount of inventory held at any time. This comes with certain risks (see below), but also major advantages. Primarily, it allows a business to minimise costs associated with holding inventory such as warehouse rent, security, and logistics. It also means there will be less inventory that becomes obsolete or out-dated such that it must be sold at a discount.
Close supplier-retailer interaction.
For JIT to work, there will have to be clear, efficient communication between the retailer and the business unit that supplies and/or manufactures the product. If the request for more stock is not communicated and then acted on instantly, there will be delays in getting the product to the customer. It may be that the business selling the goods also manufactures them, meaning it can closely integrate its sales operations with manufacturing. For example, a trigger request from the store could be linked to a specific part of the manufacturing process, such as a specific machine starting to assemble a batch of the goods in an early stage. However, with modern inventory management software available, businesses can seamlessly integrate sales and manufacturing, not just within different operations of a single business, but between different businesses if they both agree to use the software.
Smaller production lot sizes
JIT has consequences for the production of the goods as well. Production will be at smaller, more focused levels since goods are only produced according to demand. This has advantages: production of the good can be changed quickly (e.g. a change in machine setup) if any adjustments need to be made, and any errors can be more easily identified and fixed. This can benefit both the supplier and the manufacturer, depending on who bears the burden of these production costs.
Exposure to risk.
Because this strategy involves minimising the amount of inventory held, there is inevitably an exposure to certain business risks. One such risk is that there could be periods of increased demand that a business using JIT will be slow to respond to, as it does not have inventory stored to meet this demand in the short term. The magnitude of this risk will depend on factors such as how fast the good can be produced, and how susceptible the industry is to fluctuations in demand. Another major risk is that if the production process is halted for whatever reason, or there is a breakdown in communication within the business, then there will likely be a shortage in store, once again due to the lack of inventory held.
The above features show that switching from traditional inventory management methods to JIT comes with more risks and more rewards. Often the question of whether JIT is appropriate will depend on the type of industry you are in, however with current inventory management software, it is becoming simpler and easier to use JIT, making it at last an option worth considering for any business.