Just-in-time inventory management helps companies reduce waste by keeping only the minimum necessary inventory on hand at the right time. Car manufacturer Toyota developed the system in the 1970s and it has been common practice at many manufacturers and retailers since then.
Any business can use Just In Time (JIT) to achieve numerous benefits, including matching production to demand, reducing working capital needs, and improving cash flow.
However, just-in-time inventory management comes with risks and you must apply it carefully.
What is Just-in-Time Inventory Management?
At some point in your life you have bought something in bulk because it is cheaper per unit. You use some and put the rest in the cupboard, but months later it’s broken and unusable. Companies make a similar mistake when they buy too many stocks or hold them for too long.
JIT gives you a more efficient system by “producing the right products in the optimal quantities at the required time.”
Maintaining the right inventory avoids the following:
- Storing incorrect or inferior parts
- unsold inventory that you need to discount
- Stocks that spoil or go out of fashion.
Who uses Just In Time?
JIT is still a popular technique among assembly-based manufacturers such as automobile manufacturers and electrical appliance manufacturers. But the restaurant chain McDonalds, the supermarket Tesco and the clothing retailer Zara are also known to use it in different ways.
Mark Greenhouse, lean manufacturing consultant and trainer, says it can help any type of business — from brokerage lawyers looking to speed up closing times for real estate sales to investment managers looking to speed up onboarding times for new clients.
What types of companies use JIT?
Smaller companies tend to have more control over their resources and therefore require less JIT. As they grow, they are more likely to develop inefficiencies because there are too many resources in the wrong place or at the wrong time. They are also more likely to have processes that haven’t changed in years. These companies often benefit the most from JIT.
Mark says that JIT is also typically adopted by companies:
- with relatively stable demand, such as supermarkets
- Who can control demand – for example, a car manufacturer who can determine when your order is available?
- for products with a short shelf life such as fast food or fashion.
This is how just-in-time inventory works
A core principle of JIT is to order only enough parts and produce only enough products to precisely meet demand.
Let’s say you’re a manufacturer and you expect to sell 500 assembled products per month. You could consider purchasing the parts for all 500 in a single order, or even ordering 1,500 every 3 months to receive a volume discount.
If incoming parts are of poor quality, you could end up storing hundreds of wasted items. Or if demand falls, the stock could sink or go out of fashion. By matching inventory more closely to demand by only purchasing parts to fill immediate orders, you can avoid such waste.
But there are many other aspects of a successful JIT implementation, from sourcing more local suppliers to improving workflows, company-wide communications, and transportation connections — these will be explored in later sections.
Once you have JIT established, you can further refine it. Dr. Omera Khan, founder and director of OQK Associates, says a good example of this is Zara, which integrates design processes into its JIT approach to meet consumer demands faster than competitors.
By using local suppliers and designers, Zara can offer new designs in stores within days, allowing it to introduce more products and respond quickly to trends, she says. However, this requires close collaboration and the application of JIT throughout the entire production chain.
The advantages of Just In Time
Other benefits of JIT include focusing resources only on fast-moving items that generate money quickly. Less incoming inventory means you spend less cash up front and generate receipts faster.
Less Work In Progress (WIP) means workflows are simpler, problems are easier to identify and processes are easier to control. If a problem occurs during production, a smaller volume is affected.
JIT also allows you to scale production faster, accelerate sales, and improve customer service. But it can have an even bigger impact on your production processes.
For example, you often need to figure out how to reduce batch sizes to allow work to be transferred more quickly from one production step to another and reduce idle time.
“With all production steps running simultaneously, you can complete multiple individual batches in half the time of a single, larger batch,” says Mark. “It can also force companies to look at many other aspects of their organization and identify inefficiencies or skills shortages.”
Disadvantages of JIT
During supply chain disruptions, such as those caused by the war between Ukraine and Russia, it may make more sense to build inventories to deal with problems rather than reduce them.
Long-term factors such as extreme weather events can also cause companies to consider holding more inventory.
Working with smaller quantities also leaves no reserve inventory to meet a sudden increase in demand, such as was the case with demand for hand sanitizer or PPE during the Corona crisis. or dealing with something going wrong during production.
This problem forces companies to increase quality control at every stage of production. You then only pass on correct items instead of later discovering that a large batch was defective.
Purchasing in smaller sizes can be more expensive per unit, and redesigning your processes for smaller batches can be costly and time-consuming. But Mark says such redesigns are often worth it in the long run and may even produce dramatic benefits you didn’t expect.
A good example is when Starbucks began grinding coffee in smaller, more frequent portions, which improved the customer experience by spreading the aroma of ground beans throughout its stores.
What are the risks of implementing JIT?
One risk is poor implementation, which can lead to service and reputation problems if customers do not receive goods on time.
“I’ve seen companies think that JIT was just about reducing inventory, that they went too far and didn’t put in place other necessary practices to make sure it worked,” says Mark. “They end up with a ‘just too late’ system — waiting for a single component to assemble units, or applying it to areas where a buffer is actually required because of how it works.”
Another risk is that other teams are not involved in the implementation and therefore do not understand how it works. This can cause problems if, for example, the finance team sets production targets that are too inflexible for JIT to work.
It can be a mistake not to closely monitor inventory movements, especially in a sophisticated JIT system. “Companies with 100% JIT-based operations continuously track transportation movements to their locations,” says Mark. “Delays can disrupt production schedules.”
Another challenge is that JIT may result in some employees being laid off or requiring retraining.
JIT methods work well under stable conditions when demand is more predictable, but some have been less profitable recently as business uncertainty has increased.
Omera says: “The pandemic has been a wake-up call for automotive supply chains because it has shown that a chain that is too lean can fail.” JIT can still be beneficial, but it needs to be managed differently than before. Establishing decoupling points (allowing production steps to occur autonomously) is necessary for success because it allows you to deal with unexpected events. This prevents a system crash if a key component does not arrive at the right place or time.”
Frequently asked questions about Just In Time
Does it work on all of our parts and products?
Not necessarily. But once you get used to it, you’ll be surprised at how many areas you can apply it to — even in businesses with low volumes or large mixes of customized products.
What tools do we need?
Visual control (indicators that record progress) and Jidoka (automation with human intelligence) are often implemented along with JIT to give manufacturing teams more control and allow them to stop when they find defects.
Kanban inventory systems also support the introduction of JIT — these are signals from one process to another to control the WIP.
Who needs to be involved in the implementation?
Mark says implementation must include:
- Sales to understand demand and how to communicate changes
- Production and planners to assess issues such as smaller batch production and which kanbans to use
- Procurement to find out how suppliers can meet your JIT requirements
- Distribution to ensure their systems can handle it
- Finance to model the impact of JIT on cash flow.
How quickly can we implement it?
Mark says: “I’ve seen results two to four weeks after implementation — not the full system, but the beginning of a system that is under control and producing only what is needed. Refining can take many months.”
Inventory management software from Sage
Cloud-based inventory management software makes it easier to track and manage your inventory. This allows you to operate an accurate JIT system more effectively.
It provides a real-time overview of inventory levels across all locations, helping you avoid overstocking and understocking. This can help you avoid lost sales due to understocking or markdowns of unsold items.
The software also allows you to use data and analytics to accurately predict demand, which is critical to a successful JIT.
Conclusion: The benefits of JIT make it a crucial consideration
Although just-in-time methods have been around since the 1970s, they are constantly evolving. New insights, practices and technologies make it easier than ever to make JIT work for your business.
The more uncertain trading environments can complicate the implementation of JIT, but also increases the pressure on medium-sized companies to improve their efficiency and agility.
Therefore, it is now more important than ever to consider whether and how Just In Time can improve your business.
