What is Just-in-time (JIT) inventory?
Just-in-time (JIT) inventory is an inventory optimization strategy that manufacturers utilize to increase efficiency and decrease waste. The end goal is to reduce inventory and inventory holding costs by aligning orders for raw materials from suppliers with production schedules.
JIT was popularized by the founder of Toyota, who first developed the concept. Just-in-Time suggests that a manufacturer only procures and produces what is needed, only when required to meet actual demand.
Let’s look at some of the benefits of just-in-time inventory.
Benefits of Just-in-time inventory
Reduces work-in-progress inventory
JIT can streamline the production process by keeping the production rates consistent and reducing work-in-progress inventories. A key aspect of JIT inventory is producing intermediate goods as and when needed by successive stages. As a result, JIT minimizes the amount of money tied up with work-in-progress inventory.
Reduction in storage costs
Unlike traditional inventory strategies, JIT does not aim to accumulate stock for future use. JIT aligns production and procurement with actual demand, eliminating the need to store excess inventory and manage it. Between 2011 and 2015, warehouse renting rates were up by 28.7% in the US. With this trend likely to continue, optimizing inventory is becoming more and more critical for businesses.
Reduces procurement lead time
In manufacturing, lead time represents the time it takes to procure raw materials, produce the final product and deliver it to a consumer. Minimizing purchase lead times is a critical success factor for JIT. By entering into long-term contracts with reliable vendors, manufacturers can eliminate the time spent on vendor selection and managing vendor relations. Some manufacturers who follow the JIT system also use a vendor-managed inventory (VMI) program to supply raw materials and components based on usage automatically.
Improves customer satisfaction
Customers are more likely to buy from businesses that consistently deliver quality products within the shortest lead time. By reducing procurement lead time, manufacturers can produce and ship products to their end-users quicker, thereby impacting customer satisfaction positively. Since procurement of raw materials and production of interim goods occurs in response to actual usage, JIT enables manufacturers to give more attention to detail and quality.
Improves efficiency
The reduction of work-in-progress inventory and raw materials inventory has a direct impact on warehouse efficiency. Having lower inventory levels means businesses can use their resources in more critical areas rather than spending time storing and managing excess inventory.
JIT Caveats
We’ve learned that JIT is a robust inventory and production optimization strategy when used correctly. However, there a couple of caveats that businesses need to bear in mind before implementing JIT.
Risk of downtime due to stock-outs
Carrying just the required stock level means that you must have processes to ensure stock is readily available when needed. Having reliable suppliers who can deliver raw materials and components consistently is key to JIT implementation. Variability in supplier lead times and quality can cause production lines to come to a standstill if the required materials are not available at the right time.
Risk of losing customers
Any delay in your vendor’s lead time will often increase customer lead time as well. Not meeting customer expectations may result in customers taking their business to your competitors, which can significantly impact your business if this occurs often.
Conclusion
The JIT approach to inventory optimization can offer several benefits to manufacturers. Manufacturers can leverage JIT to streamline operations and grow their business by improving cash flow, lowering production and inventory costs, and improving customer satisfaction. However, reaping the benefits of just-in-time inventory requires strict compliance and a deep understanding of JIT principles. JIT requires careful inventory planning and real-time visibility into operations to make quick procurement and production decisions. Therefore, it is necessary that businesses also use a JIT inventory software capable of automating purchase requisitions in real-time based on actual usage.
