Inventory management is a critical part of business, but it can also be a costly burden to a business owner. In today’s economic environment, just-in-time inventory management becomes an even more effective way to reduce inventory carrying costs and maximize cash flow.
Just-in-time (JIT) inventory management and techniques can be an important tool for companies to use to make better and more efficient use of resources and cash. As people become more interested in sustainable means for doing business, JIT inventory management may become increasingly popular as a means for reducing the company’s environmental footprint.
Just-In-Time (JIT) Inventory Management is a system that strives to reduce the amount of inventory on hand by limiting or completely eliminating inventory that is not needed or is not used on a frequent basis. This strategy helps to eliminate the chaos that is associated with inventory management and the costs associated with owning and storing these items.
What Does JIT Mean?
JIT stands for Just-in-time. It is a popular inventory management system.
A strategy for replenishing, or reordering, finished goods as soon as they are used up. This is done to avoid the need for carrying large stocks of these items.
The basic idea behind JIT inventory management is that an inventory of products should be only kept as long as necessary to minimize investment and not as long as possible.
Some might think that just-in-time inventory management means never having any inventory. This is not the case. What it means is keeping your inventory at the smallest level possible while minimizing the costs of raw materials. For example, when a factory is building a product, it will send its raw materials suppliers an order request when the raw material inventory level falls below a set point. It will usually delay sending the order until it falls below, or close to, the inventory setpoint value for the previous product.
The JIT strategy is very advantageous for companies who find themselves with too much inventory on hand, causing them to incur costs such as storage fees or even potential damages to items.
Simply put, JIT means more profits for the company.
Advantages of Just In Time Inventory Management
Here are some general benefits of a JIT strategy:
- Less inventory costs helps minimize cash flow
- Optimized inventory levels
- Less inventory-related expenses
- Flexibility in response to consumer demand fluctuations
- Reduced costs
- Improved customer service
- Improved inventory accuracy
- Reduced conflict due to
Key Qualities of a JIT Inventory Management System
Just-in-time is an inventory management concept that helps companies to cut down on costs. It relies on information and feedback that enables the right amount of material to be delivered as needed.
For example, if a worker is busy on a single project, a manufacturer might deliver the materials and subassemblies required to complete this project, but not the materials and subassemblies needed to unblock the next step in production. The manufacturer then waits until the worker signals that the materials or subassemblies required for the next step in production are needed.
When goods are being manufactured, they are in a sense, “created”, and it would seem that they would be the owners of the goods being created, to the exclusion of anyone else. However, before the goods are completely created, they are in a sense “uncreated”, or raw materials and components. The production process is a sequential build-up, and any given step in that sequential build-up takes materials from earlier steps and converts them into a more advanced form, but all the materials and components that go into the production process have to be acquired by someone. As such, the ability to efficiently acquire those goods is a precursor to their creation, and requires the ability to coordinate inventory tightly, which is the key quality of
Just-In-Time (JIT) inventory management system is a critical aspect of lean manufacturing. Following are the key factors to make it effective.
- Short cycle times: The key objective of JIT is to reduce the investment into inventory while at the same time reducing costs. The ideal situation is zero inventory levels.
- Surge Capacity: The system aims to maintain supplies of all kinds of components in different departments and in a manner that allows the company to respond to peak demands.
- Part Numbering System: The system aims to maintain only one version of any particular part number, eliminating production waste associated with multiple part versions. It also enables tracking of parts through the production process.
- Lead time: Since the strategy is to replenish components just before they are needed, inventory needs to be reduced or eliminated. The shorter the lead time, the more just-in-time is employed.
Objectives of JIT
JIT is a strategy that aims to reduce the level of inventory investments, while at the same time reducing costs. The ideal situation is to keep inventory assets to zero.
There are three key objectives to JIT:
- To reduce the investment into inventory
- Reducing costs
- To maintain supplies of all kinds of components in different departments and in a manner that allows the company to respond to peak demands.
History of the Just In Time Inventory Management Technique
The need for inventory in the 20th century was needed because retailers had to have in-storage inventory in order to keep their business running. The inventory would be in demand by the customers. But, in the early-to-mid-20th century, the supply chain was not well equipped to store that much inventory. Productivity was not what it needed to be at that point either, so how could they produce enough product to keep up with the demand?
The retailers came up with a new system called Just-in-Time Inventory Management Technique. This technique was perfected by Toyota Motor Corporation. It is “a method of inventory management in which goods are sold when needed…”
In 1980, Toyota introduced a system called “Just In Time,” or JIT. The theory behind JIT is that when supply meets demand, inventories are minimized. This also means that when inventories are minimized, there’s less need for storage space, fewer mechanical systems to maintain, and fewer people to track and manage the inventory.
The just-in-time inventory management technique was first introduced by American engineer and business executive, William Edwards Deming. The technique was originally developed to be used in the manufacturing industry and was designed to increase efficiency and reduce costs by reducing the amount of time and resources spent on inventory.
Just-in-time is a management and production strategy, not a system of organization. This means that it can be used with any system of the organization but does not itself dictate the methods used.
Just-in-time evolved from takt time, which was first introduced by a German engineering company, Volkswagen. Takt time is the theoretical time needed to make one unit of something, for example, a car or a computer.
Inherent in any business is a need to track and know where inventory is at all times. But in a company with a complex supply chain, this can be a difficult task for a manager.
Potential Risks of Just In Time Inventory Management
Just in time inventory management has the potential to suffer from a lack of redundant inventory because required items may not be available in the production process due to non-timely delivery of inventory items. This can lead to inefficiencies in JIT inventory as it causes a backup of items in the production process and delays in delivery of items leading to delivery scheduling problems and chain of custody issues.
- Failure to ensure consistent service to customers.
- Inadequate inventory management can lead to a long lead time, which diminishes the ability of a supplier to respond in a timely manner to customers’ orders.
- This can lead to an inability of service providers for minimizing the production queue or “waiting time” for an order as well as deterioration of customer service.
- In addition to that, it can lead to product shortages or stock outages.
- This can affect negatively the ability of manufacturers to deliver the final product or service to the customer in a timely manner, creating an unfavorable perception of the company.
- Lack of control over the inventory. The inventory is most likely to be out of bounds when the system is not managed properly.
- Too much inventory which may lead to poor profitability. The normal activity of any business is to purchase supplies for production. Without planning, it may make the business keep too much stock. This will have a huge impact on the profit of the business as it has incurred too many costs for holding the stock.
- Lack of Physical Storage Space. The production may either start before the part of the preceding production is finished or the business may decide to keep the excess inventory due to the capacity limitation. Both situations may create too much inventory to handle.
What do lean manufacturers demand from their vendors?
Lean manufacturing is a production strategy that focuses on waste removal from the production cycle in any way possible. The primary goal of this approach is to make production more efficient and increase quality and service. Vendors are required to make available the currency for the lean manufacturing process. This gives them the advantage of helping their vendors to establish a proper traceability system, which is one of the most important things desired by lean manufacturers.
Lean manufacturing demands from vendors partners with high flexibility, in-depth experience, and innovative technology that help their clients to reduce related costs. These vendors are expected to be closely involved with the manufacturing process on a daily basis. The vendor should supply a customized solution to the clients and make sure it matches the design, material, and volume requirements. The vendor should have a high level of competency in the industry, especially in its region.
- Quality compliance: suppliers must comply with the quality standards stipulated by manufacturers for raw materials, components, and assembly.
- Supplier qualification: manufacturers must ensure that their suppliers are properly qualified and competent.
- Inspection and testing: manufacturers need to test and inspect the suppliers’ products to ensure the products meet the quality standards, including physical, chemical, mechanical, taste and appearance standards.
- Inspection and testing fee: manufacturers need to charge suppliers for testing and inspection fees.
- Private labeling: manufacturers need to set requirements for suppliers’ private labeling of their products.
- Logistics services: manufacturers need to stipulate the logistics services that should be provided by suppliers.
What reduces inventory investments while improving customer satisfaction?
Any time an event with a negative outcome occurs, customers have to have a degree of trust that the company is going to fix the problem. When this doesn’t occur and the problem goes unresolved for a long period of time, their trust in the company is hurt and they will go elsewhere to buy their goods and services. Good customer service is the best way to combat reducing inventory investments without sacrificing customer satisfaction.
To reduce inventory investments while improving customer satisfaction, following actions can be taken:
- JIT Inventory Management: Ordering products, components, and raw materials based on real-time market demand and consumption. The implementation of a just-in-time strategy and a pull material system is designed to decrease inventory holding costs and service delivery costs while improving customer satisfaction.
- Push System: A push system is a management paradigm where all sales orders are placed via sales to a common supplier. In a push system, no inventory buffers are kept within the production process. Instead, the system relies on predictable lead times and on-hand inventory levels to meet demand. Push systems are typified by long lead times and long delivery times. The push system relies on the assumption that supplier production or stocking quantities do not change in the short time.
- Order management systems: Order management is a software that allows managers to track and minimize expenses, time, and funds while reducing inventory levels. The software lets companies to manage their inventory and forecast demand accurately. It enables them to monitor inventory levels at different levels. This can help reduce overall inventory levels, which can decrease expenses. The software also notifies customers once an item they ordered is available. It gives customers their ordered products when they demand while companies are still aware of their inventory.
JIT brings phenomenal changes in the manufacturing industry. Later new techniques was developed for inventory management, such as Kanban, Zero waste, etc. The benefit of this system is that it requires less inventory in the system. This helps keep up with demand for the product because you never