What is JIT Inventory?
Over the past several decades, companies large and small have adopted a Just In Time (JIT) Inventory strategy to reduce costs and eliminate waste.
As the name implies JIT means inventory arrives at the point of use when it's needed, and not a moment before. There may be an arrival window that the supplier can deliver the parts ahead of time to ensure the assembly line doesn't have to slow down.
JIT got its start when Toyota put their system in place for automobile production in the 1970s. Since then, companies such as Apple, Motorola, and Kellog's have adopted the process.
For an automobile manufacturer, components such as seats arrive at the exact time the workers are ready to bolt them in place. Apple keeps its inventory of expensive electronic devices low. Food producers like Kellogg's follow a similar discipline, continuously feeding raw materials into production.
Retailers and distributors are adopting the JIT approach to position products nearby to restock shelves when popular items run low. Fast fashion designs respond to shifting trends and keep pace with consumer demands.
Prior to the JIT inventory system, producers would use the “just-in-case” approach. They kept a lot of inventory on hand just in case supplies would run low due to higher demand or service interruptions.
Ultimately, the goal of JIT is to align incoming products with production schedules and sales forecasts instead of having a surplus of inventory on-hand. You could say it's a case of working smarter, not harder.
What's the difference between JIT inventory and JIT manufacturing?
JIT inventory and manufacturing share the same basic principles - produce or receive the product only at the time it is needed. They are essentially two different points in the supply chain but can operate independently or at the same time.
Many JIT companies produce a product or add it to inventory only when it receives new orders from customers. There's a plan to move the product through the supply chain to the customer before it's manufactured or stocked.
For instance, an automaker receiving components focuses on when the component is needed on the assembly line. It's up to the component manufacturer to manage its own inventory process.
Let's take a look at a fast-food restaurant. The assembly process for your burger and fries doesn't start until you order it. However, the inventory is on hand to allow the kitchen staff to start manufacturing your order immediately.
For a more integrated process, manufacturing and inventory can work together hand in hand, reducing waste and expenses throughout the supply chain.
In order for JIT inventory to succeed, the product must be available at the time it's needed. With Just in Time manufacturing, the product is produced on schedule. Then it's delivered into inventory at the appropriate time.
What's the reasoning behind using JIT inventory?
Some companies have said, “Inventory equals death.” In other words, the company can't survive with excess inventory on-hand. The surplus on resources can fatally impair the company's financial health if it is not sold or used in a timely manner.
Inventory represents an investment of working capital that could be used more productively elsewhere in the enterprise. An inflexible supply chain weighed down with long-lead orders and full warehouses means the company can't respond to changing trends and new opportunities.
JIT production systems cut inventory costs because manufacturers do not have to pay to warehouse their products. Manufacturers are also not left with unwanted inventory if an order is canceled or not fulfilled.
The goal of implementing JIT inventory management is to boost a company's operating profit by reducing overhead expenses.
Advantages and disadvantages of JIT inventory
Many companies are adopting the Just In Time inventory strategy because, simply, it works. Less inventory means there's less need for warehouse space. Reducing investment in inventory frees up cash flow for other parts of the business. Operating with JIT inventory requires a higher level of discipline that helps improve other areas of the business.
Retailers and distributors can support JIT inventory with forward-deployed products at decentralized mini-warehouses. Retailers can stock their shelves within hours to ensure that customers can find and purchase hot-selling items. The store will no longer need expensive square footage to warehouse their product. Instead, retailers could reclaim storage space for retail floor space, adding sales opportunities within the same store footprint.
Keep in mind that a JIT inventory system requires a resilient supply chain. With JIT, there is no safety stock. Any delay in inventory shipments could lead to shortages and stock-outs. JIT systems have had to shut down due to interruptions from severe weather or problems at suppliers. If there's a sudden demand for a certain product, the system may not have the flexibility to respond quickly. A 3PL partner like Warehouse Anywhere can provide the supply chain resiliency required to maintain JIT inventory when there are unforeseen disruptions.
Suppliers may charge higher rates for smaller, more frequent orders. But the cost can be offset by lower inventory carrying expenses. A JIT company may need multiple suppliers that are geographically close to maintain a flow of product with minimal shipping time and disruption.
It's also important to note that JIT inventory requires highly accurate forecasting and a predictable, stable production cycle. In industries where they are unable to forecast demand, this can be difficult to implement.
How can JIT inventory eliminate waste and reduce costs for your company?
A JIT inventory model eliminates waste from ordering and storing excess inventory. This, in turn, reduces the overall financial investment and carrying costs as well as the infrastructure to store the inventory.
Many companies are burdened by unsellable inventory that takes up valuable space. The products may be liquidated or disposed of at a financial loss. JIT inventory eliminates the burden of sunk costs. Adopting a JIT strategy allows a company to reduce expenses, allowing them to compete on price in the marketplace and boost financial performance.
If your company is spending too much on inventory management, it might be time to talk to the experts. Adopting JIT requires reexamining the total workflow of your company, from raw materials to the finished product. We can help implement a just-in-time inventory strategy to eliminate waste in the supply chain and cut your operating costs. Contact us today to get started.