What is the just in time concept of inventory management?
The just-in-time (JIT) inventory concept is a manufacturing workflow and inventory management technique that seeks to reduce costs and flow times within production systems and the distribution of materials and products.
In just-in-time inventory management, goods and materials are received from suppliers only as they are needed. The whole point of this is to lower the company’s inventory holding costs and boost inventory turnover.
To implement JIT, you need to meticulously plan the whole supply chain and make use of the right software in order to carry out the entire process till delivery. Doing that will increase efficiency and reduce the scope for error substantially because every process will be very carefully monitored.
Along with reducing your inventory carrying costs, using the just-in-time strategy also helps you reduce your inventory waste by reducing the chances of overproduction, not allowing the supply to exceed the demand for the products, thus avoiding the accumulation of unsellable inventory.
You’d want to source your supplies locally as far as possible under this system so that your lead time is reduced and the supplies are delivered to you much faster.
What is the purpose of just in time inventory system?
The main objective and purpose of the just-in-time inventory system is to reducing your carrying and warehousing costs for your inventory and to increase your inventory turnover.
Warehousing can be rather costly, and the more inventory you hold, the higher your costs become. The just-in-time inventory system helps you reduce these costs because you only place an order with your suppliers when you actually need it. Under this inventory system, you could place an order with your supplier only after your customer orders from you. This means that the item that you order is sold even before it reaches you, so you won’t have to store it too long. Following this inventory management system could help you reduce the number of items that you have to store in your warehouse, or get rid of the need for warehouses completely.
It also gives manufacturers more control and flexibility. They produce on a demand-pull basis, so if certain items have a greater level of demand, the manufacturer can quickly scale up production for those items by ordering more raw materials for it and scale down the production of other items that do not receive enough demand.
Since only essential items are ordered, there is less working capital required in the procurement process. Since there is a smaller amount of stock held in the inventory, the company’s return on investment would be high. The Just-in-time model employs the “right first time” concept which seeks to perform the activities correctly the very first time they are carried out, thus lowering inspection and rework costs. This reduces the amount of investment required by the company, minimizes the need to spend money to rectify errors, and increases the profit earned from selling the product.
Who uses just in time inventory?
The just-in-time inventory system is used by large enterprises as well as small businesses due to the fact that it increases cash flow and reduces the amount of capital needed to run the business. The Toyota Motor Corporation, of course, is a large enterprise that has always been the biggest proponent of the just in time inventory system.
The JIT inventory management system is widely used by retailers, technology manufacturers, automobile manufacturing companies, on-demand publishers, restaurants, and other types of companies across a wide range of industries.
Major retailers like Target and Walmart also use this system in a way, seeing how they order their seasonal merchandise and make sure that it arrives right when demand is starting to pick up for certain items.
What are the characteristics of a just in time inventory system?
Here are some of the characteristics of a just-in-time inventory system:
- This system involves receiving deliveries of smaller volumes on a more frequent basis. The deliveries could even be on a daily or hourly basis to keep the production or sales process flowing and cater to the demand.
- The company might not have the time to inspect deliveries every time they arrive, so it will work with suppliers that are certified for providing supplies of high quality, leaving them rest-assured that the supplies received are up to the mark.
- The production areas need to be more flexible than regular production areas. They tend to be smaller and enable in-process goods to be passed from each work center in a quicker and more efficient manner.
- The employees also tend to be cross-trained and have to ability to carry out different tasks within the production process. This increases labor efficiency.
- The orders are fulfilled as soon as they are ready, without holding them in storage. After the product is finished, it is immediately loaded on a truck to be shipped to the customer.
What are the advantages and disadvantages of JIT?
The main advantages of JIT are:
- Since you don’t have to hold a lot of stock, you get a reduction in storage space which saves rent and insurance costs.
- There is less working capital tied up in stock.
- The chances of stock perishing or becoming obsolete are dramatically reduced.
- You are less likely to be stuck with stock that has become unsellable due to changes in customer preferences and demand.
- You spend less time checking, inspecting, and fixing the work done by others, and get the work done right the first time.
The main disadvantages of JIT are:
- There is less room for error since there is a very small amount of stock is kept for re-working faulty products.
- Production is reliant on receiving supplies on time, you could face major delays if your suppliers are late.
- You don’t have any safety stock to cater to unexpected orders. However, you coud place an order and get supplies delivered quickly if you are working with local vendors and suppliers.