All you need to know about JIT inventory philosophy

Just in time (JIT) inventory is a management system in which materials or products are produced or acquired only as demand requires, supplying only “what is needed, when it is needed, and in the amount needed”. This approach to managing inventory has become increasingly popular in the early 21st century as suppliers and retailers collaborate to try to control inventory costs, eliminate waste, inconsistencies, and unreasonable requirements, while still meeting customer demands and improving productivity.

The main goal of inventory control is to have the right amount of all types of inventory available when and where they are needed, while minimizing costs of managing and storing inventory along the supply chain. To accomplish this, companies are starting to use JIT inventories, in which necessary items, parts and raw materials are delivered just when needed and neither sooner nor later. JIT systems are essential to time based competition and rely on waste reduction, process simplification, setup time and batch size reduction, parallel processing, and shop floor layout redesign.

JIT inventory system is based on a cluster of controlled manufacturing activities that are designed to only produce enough products to meet customer demand. This control pulls demand through a production facility, where each step in the production process is only authorized to produce a limited amount of inventory.

Purpose

Manufacturers using JIT processes want to use materials for production at levels that meet distributor or retailer demand but not in excess. That is why JIT inventory aims to avoid managing extra-inventory-situations. Excess inventory requires storage and management costs.

Manufacturer JIT

For manufacturers holding to an inventory requires warehousing of finished goods to go along with already taxing costs to manage raw materials inventory. Warehousing requires extra space, which at the same time requires utilities costs and employees to store, organize and retrieve goods as needed. Furthermore, excess production runs the risk of the business ending up with unwanted products and having to sell them at auction or let them go to waste.

Retailer JIT

Having significantly more inventory than is needed on the sales floor again requires significant storage space. Every foot of storage area in a retail store is space that could be used for selling products. Also, retailers have to pay utilities for storage areas and pay workers to organize and move extra inventory. This means they also have to discount excess inventory and throw out wasted or expired product.

factory_inventory_just in time_david kiger
Image courtesy of Herculie the Great at Flickr.com

Advantages and Disadvantages of            Just-in-Time Inventory

Customer Needs

JIT inventory balances the goals of avoiding stock outs while minimizing inventory costs. One of the main benefits of automated and efficient inventory replenishment systems is that you can quickly respond to reduced inventory levels. Many companies are now prepared to pull back on stock in a given product category and build up inventory in another as customer needs and interests change.

Inventory Costs

When you reduce the amount of holding space and staff required with JIT inventory, the company can invest the savings in business growth and other opportunities, this is why minimization of inventory management costs is a key driver and benefit of just-in-time practices. By keeping a reduced inventory, you are also less prone to throwing out products that get old or expire, meaning the reduction of waste.

Better Supply Chain Management

The just-in-time inventory model helps companies be more effective, efficient and competitive in the way they manage their supply chains and use their parts to manufacture products for their customers. Reducing costs due to the implementation of a more efficient supply chain will lower costs that can be passed on to the customer. Having lower costs will most likely make the company’s products more affordable, and will help the company gain a larger market share and stay ahead of its competitors.

Coordination

One of the biggest disadvantage of managing a just-in-time inventory system is that it requires significant coordination between retailers and suppliers in the distribution channel. This usually means buildup of technology infrastructure, which is costly, so retailers can syncing their computer systems with suppliers and get more directly monitor inventory levels at stores.

More planning required

Most companies have seasonal sales periods, meaning a number of products will need a higher stock level at certain moments of the year due to higher demand. Consequently, companies need plan for inventory levels, ensuring suppliers are able to meet different volume requirements at different times based on sale trends.

Risks

The major risk is that a minor problem in the supply chain system can cause stock shortages. A supplier facing difficult weather or transportation issues can delay shipments, causing inventory to run dry. The more critical the products are to the end buyer, the more sensitive they are to this precarious situation. Nevertheless, during the past century many suppliers and retailers partner have coordinated their JIT efforts, showing that it is generally regarded as an efficient inventory management system.

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