Understanding the Just-In-Time Inventory System
Just-in-time inventory (JIT) is a production system designed to cut costs and optimize logistics by delivering and receiving materials and parts right when they are needed, never too early or late. Toyota is a leading company efficiently utilizing a JIT inventory system. As a part of their production strategy, materials are not only prohibited from the production floor until needed, but parts are not even able to be placed at a station unless the assembly process is actively in place. These slight but powerful changes in Toyota’s approach to production have resulted in decreased inventory and lower costs. Implementing a JIT inventory system is a process that has multiple steps. The first step is to assess and document current inventory, marking materials and parts that are needed, as well as those that may potentially be needed in the future. Managers then seek to streamline the inventory process by making small inventory purchases to stock up on only what’s needed. Although rewarding, this multi-step process can be challenging to implement, so it’s important to closely consider the benefits and challenges of a JIT inventory system.
Just-in Time Inventory: Advantages
Reduced Logistical Costs
The central goal of a just-in-time inventory strategy is to cut the total cost of the supply chain in order to reduce an organization’s inventory and capital footprint. A well-run JIT inventory system makes it possible to function effectively with virtually no inventory. It also shifts the operational focus to other aspects of the production process, which can make it easier to implement large-scale process improvement projects that can yield a high return on investment. Toyota’s JIT inventory is a great example of this as raw materials are placed on the production floor only after a customer has placed an order. This allows Toyota to maintain only the inventory that is needed so that they can easily pivot when there are changes in consumer demand.
Reduced Inventory Waste
When inventory is maintained in a distribution hub or plant, there are a number of potential dangers. Components or finished goods might be stolen, damaged, or misplaced, and in some cases, parts may sustain damage simply with the passage of time. Furthermore, inventory requires a great deal of space. Under a mature JIT inventory regime, a significant amount of money can be saved due to saved space and little to no inventory loss. Harley Davidson has successfully reduced inventory waste through a JIT inventory system. After implementation, Harley Davidson increased productivity and reduced inventory by approximately 75%, due to their newfound ability to quickly locate and solve manufacturing inefficiencies.
Under less than ideal conditions, responding to new customer needs can take months. This is especially true for large manufacturing companies that have to make many machining changes to shift the focus of production. By contrast, a JIT inventory system makes it easy to respond to new needs as they emerge. It also supports a company’s strategic agility due to the ease of obtaining resources in a less expensive yet efficient manner. Dell has leveraged a JIT inventory strategy in order to provide quick customer responsive times. Since they don’t acquire or assemble supplies until a computer or product has been purchased, Dell is able to respond quickly to market trends and customer feedback through its JIT system.
Just-in-Time Inventory: Disadvantages
High Institutional Learning Curve
The implementation of a JIT system involves a large learning curve for all those involved. For example, in order for a JIT inventory strategy to be effective, the enterprise must learn to forecast demand effectively. If large, unexpected changes in demand materialize, it may be impossible to secure the core benefits of reduced cost. JIT inventory systems also require stakeholders throughout the enterprise to adapt to new methods of operations. Often, employees at manufacturing plants and distribution hubs need to understand how Kanban inventory signals impact their operations. These Kanban inventory signals are a production technique that leverage simple order slips to detect a need for more supplies.
Vulnerability to Supplier Errors
A JIT inventory system requires a high degree of trust and coordination with supplier relationships. If suppliers cannot be trusted to furnish components promptly as required, the entire enterprise may temporarily cease. This means enterprises must evaluate their vendors before implementing a JIT inventory strategy, and they also may need to engage in new sourcing approaches.
Risk of Material Cost Increases
In any manufacturing environment, the cost of components is influenced by the cost of commodities and raw materials. The JIT inventory model exposes enterprises to the potential of spikes in these costs. When price fluctuations substantially affect the cost of components, enterprises that have inventory on hand achieve a price advantage for the duration. If the spikes prove to be prolonged, manufacturers face the peril of shifting strategies.
The JIT Inventory Market Today
Today, a JIT inventory strategy is used by major brands in a wide range of industries. In North America, it is frequently used in computing, IT, and telecommunications. Studies have shown that JIT inventory has also had a measurable effect on both quality and flexibility in the furniture and food manufacturing industries. However, these benefits have only been attainable in markets where reliable vendors are accessible.
Another recent trend within the JIT inventory system has been the increased use of computer automation to automatically purchase materials as soon as inventory decreases to a certain level. As technology progresses, this use of computer automation is expected to progress to further increase efficiency, lower costs and optimize logistics.
As Toyota, Harley Davidson and Dell have shown, implementing a JIT inventory system can help companies reduce logistical costs, cut inventory waste and improve customer responsiveness. Yet, along with these advantages, managers need to be aware of the potential disadvantages to ensure that their JIT system is effectively leveraged.
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Critical elements in implementations of just-in-time management: empirical study of cement industry in Pakistan, National Center for Biotechnology Information
A Theory of Just-in-Time and the Growth in Manufacturing Trade, Federal Reserve Bank of Atlanta