How to Reduce Costs Using Just-In-Time Inventory Management (JIT)
Just-in-Time (JIT) inventory management is a method of optimizing the procurement of materials to align with production schedules.
Think of it like this: Let’s say that you really love coffee. You can’t wait to get your hands on that first delicious, steaming hot cup in the morning. Maybe you enjoy yours so much that you often opt for a second and even a third. Now imagine if one morning, anticipating you may want additional cups later, you pour all three at once; one that you drink right away and two others that will sit on the counter until you’re ready.
Crazy, right? The coffee would get cold, you’d use two extra mugs that other family members might need, and you’d unnecessarily increase the number of dishes that require cleaning at the end of the day.
Similarly, JIT helps manufacturers avoid overproduction, save on storage costs, and deliver quality products to their customers by ordering materials on an as-needed basis. Simply put, JIT is a bit like pouring the cup of coffee you need rather than the cups you might want later on.
What is Just-in-Time (JIT)?
Just-in-Time (JIT) inventory management is the practice of purchasing materials on an as-needed basis. Raw materials are only purchased in response to customer orders. Organizations can keep a lean inventory and remain flexible in responding to peaks and valleys in customer demand without incurring unnecessary holding costs.
For companies who want to reduce working capital and increase the efficiency of their production line, JIT represents an opportunity to become more flexible and responsive to market trends, with far less up-front investment than traditional inventory models. It’s a pull system that prioritizes current demand to avoid the pitfalls of excess inventory.
History of JIT
Japanese car manufacturer Toyota is widely considered to have pioneered this method. In the 1970s, Toyota responded to mounting market competition by completely re-imagining its production process with lean manufacturing principles and only purchasing parts when new orders came in. For this reason, JIT is sometimes referred to as the Toyota Production System.
For this revolutionary, Just-in-Time system to work, Toyota had to enlist buy-in from everyone in the organization and ensure that it organized every facet of the production process to support JIT manufacturing. Communication became a priority along the assembly line, and teams committed to continuous improvement in response to feedback. It took Toyota nearly 20 years to perfect JIT, and they’ve maintained this philosophy ever since.
If we explore Just-in-Time inventory management within the context of Toyota, it would look something like this: Rather than purchasing thousands of airbags and then paying warehousing fees to store them until needed, Toyota would wait until they receive customer orders for new cars and then purchase the airbags necessary to fulfill those orders.
The Kanban Method
Often associated with JIT inventory management is the Kanban method. The word “Kanban” is Japanese for “visual board” or “sign.”
When Toyota first launched its JIT strategy, they helped teams visualize the supply chain and lean manufacturing process by creating a wooden board that divided activities into three columns: Requested, In-Progress, and Done. Cards communicating progress would be passed along the assembly line and hung on the board as activities progressed from one stage to the next.
Since then, the Kanban method has become common practice within the Lean and Agile communities. Today, while some teams continue to find it helpful to have a physical Kanban board in their office, most teams prefer a shared virtual board to enhance collaboration between remote team members.
How Does Just-in-Time Work?
The handy flowchart below illustrates how the JIT inventory system works.
The production cycle begins when a customer places a product order. From there, the manufacturer orders the necessary raw materials (or products) from their supplier. The supplier fulfills the order and sends it to the manufacturer. The manufacturer then begins assembling the order on the production line.
Once complete, the product is shipped to the customer, and the cycle can start again.
Benefits of Just-in-Time Inventory Management
Just-in-Time is the opposite of Just-in-Case manufacturing, in which companies choose to bulk up on storage so they have it on hand in the event of a surge in sales.
There are several benefits to adopting a Just-in-Time approach, primarily the avoidance of overproduction, reduction of storage costs, improved cycle times, and having a line of sight that results in continuous improvement.
Let’s take a closer look at a few of the main benefits of JIT manufacturing:
Eliminates overproduction
When companies overproduce, excess inventory sits dormant while the company continues to pay to house it. This dead stock takes up warehouse space that in-demand products could better utilize.
In a JIT production scenario, raw materials are ordered when customers place orders for new products. This helps companies avoid creating an imbalance in which the product supply exceeds demand.
Decreases storage cost
Imagine a scenario in which Company A employs a Just-in-Case strategy, producing a bulk number of widgets in anticipation of market demand. While awaiting these sales, all the widgets must be stored, costing a fortune.
Now imagine Company B adopting a Just-in-Time inventory strategy. They build their widgets as customers order them. Once a widget is sold, it spends very little time on the shelf before being sent to the customer, freeing up space for the next widget off the assembly line. In this way, JIT optimizes inventory levels and saves money.
Flexible and adaptive to market needs
Within the Just-in-Time model, manufacturers can easily adapt to changes in the market, pulling back on the production of certain products as sales wane and beefing up the production of others as sales improve.
The visibility of the entire supply chain and real-time data that JIT provides empowers manufacturers with greater control over the production process. It allows them space and freedom to respond to ever-changing customer demands.
Buying local
Not only is Just-in-Time beneficial for the manufacturer, but it’s also beneficial for the environment and the communities within which the manufacturer operates. Since JIT requires that materials are purchased on an as-needed basis, ease and speed of delivery are key to the strategy's success.
For this reason, it makes the most sense for manufacturers to purchase goods from local providers. By buying locally, the manufacturer receives their materials faster, reduces their carbon footprint, and nurtures the local economy by supporting businesses that create local jobs.
Improving cash flow
By ordering materials as needed, manufacturers reduce the working capital necessary to keep the business running smoothly.
Rather than investing heavily up-front in a massive amount of safety stock, JIT production purchases materials once an order comes in. Return on investment is higher because there isn’t any overstock hanging out in the warehouse waiting to be sold.
Weighing the Pros and Cons of Just-in-Time Inventory management
Just-in-Time manufacturing can decrease working capital, reduce carbon footprint, and shrink inventory costs by optimizing the production schedule. That being said, like all strategies, it does have its shortcomings. Let’s take a look at some of the pros and cons of JIT.
Pros
Just-in-Time is a lean manufacturing strategy that can help manufacturers avoid many of the most common pitfalls and economic risks associated with production-based business.
Primarily, JIT works to ensure that manufacturers are not carrying unnecessary inventory costs by housing finished products that have not yet been sold. JIT avoids overproduction because products are only assembled when a customer places an order.
- Eliminates overproduction.
- Reduces storage costs.
- Flexible and adaptive to customer demand.
- Increases cash flow and reduces working capital.
- Environmentally friendly.
- Supports local economies.
- Enhances communication throughout an organization.
- Companies remain lean and competitive.
Cons
For Just-in-Time inventory management to succeed, manufacturers must have steady, high-quality production, reliable machinery, and suppliers who can be counted on to deliver orders on time. This way, JIT is vulnerable to factors like machinery breakdowns and supply chain shortages.
When a manufacturer encounters a disruption in the production process, work-in-process goods can stall out part way through, resulting in a backlog. Since these affected items aren’t finished products and can’t be sold, they incur not only the costs associated with their materials but the storage costs associated with housing them until production can resume.
This was never more clear than during the early days of the pandemic. As lockdown restrictions placed regulations on travel and in-person contact, shipments experienced crushing delays. Manufacturers were stuck with an excess of customer orders but unable to fulfill them within a reasonable timeline.
- Vulnerable to disruptions in the supply chain.
- Heavily dependent on communication and monitoring.
- Risk of low inventory.
- It may take longer for goods to reach the customer.
How to Implement Just-in-Time Inventory Management for Your Business
To take advantage of everything that JIT has to offer while avoiding the potential pitfalls, you’ll want to keep some principles in mind:
Know your supply chain
The best JIT inventory management systems run smoothly because of excellent manufacturer-supplier relationships. Choose reliable suppliers who come backed by a reputation for excellence. It’s wise to create relationships with multiple local suppliers to have more than one option in an emergency.
Keep an eye on inventory
A JIT inventory system is entirely reliant on the visibility of inventory. Without alerts regarding low inventory, you won’t be able to fulfill orders quickly, leaving money on the table and customers unhappy. Optimizing the balancing act of inventory (ensuring that you don’t run out while also avoiding carrying excess materials) is the bread and butter of this strategy.
Avoid miscounts
Even the most math-savvy among us aren’t immune to miscalculating. Software programs that conduct automated calculations will always be more reliable and accurate than manual calculations.
Use technology
The easiest way to stay on top of inventory levels is to take advantage of software that automates monitoring and alerts. These solutions help you make accurate calculations, predict upcoming needs with robust forecasting capabilities, and gain an in-depth understanding of the current trends in supply and demand.
Be up-front with your customers
Don’t be afraid to educate your customers on how you manage inventory so that you can manage their expectations. Be honest and transparent with them about how long it will take to fulfill their orders. Make a rule to never over-promise and under-deliver.
8 Steps for Continuous Improvement Using JIT
The JIT method is based on the principle of continuous improvement. Since JIT prioritizes flexibility, it allows organizations to adjust for efficiency and efficacy throughout the production process.
Asking the right questions and creating new solutions to answer them in real-time is essential to Just-in-Time inventory management.
- How can your JIT strategy improve cycle times?
- Where are the communication gaps?
- How can raw materials be procured faster and with less red tape?
When implementing the strategy, consider following these eight steps for continuous improvement:
Step 1: Review current processes and identify areas for improvement
Begin by reviewing your current processes. This may include manufacturing planning, personnel deployment, product design, and process design. Gain a thorough understanding of how your organization is currently managing production to identify where you can become more flexible and efficient and avoid disruptions.
Step 2: Define roles and responsibilities
Consider conducting a Total Quality Management (TQM) review in which you clearly define the roles and responsibilities of your team members, establish load and capacity schedules, and determine how you’ll measure quality control.
Step 3: Implement Kanban
Take a look at your lot size policies and consider whether they’re currently at optimal levels. Design a Kanban process or pull system in which production and withdrawal can be communicated to influence the assembly line.
Step 4: Nurture relationships
Choose your preferred suppliers and open the lines of communication to discuss items like contract negotiation, order lead times, expectations for delivery, and other relevant metrics. Nurture these relationships so that you’ll have an established contact with whom you can communicate openly in the event of a challenge.
Step 5: Explore the details
At this point in the process, utilize the information you’ve gathered to fine-tune the details further. Take a look at your policies, inventory needs, and controls and see where you can tweak them to maximize efficiency.
Step 6: Educate the team
JIT won’t work without buy-in from the team. Make sure that everyone is on the same page by conducting education sessions. Explain the benefits of the JIT system and ensure that every single team member understands how their role factors into the overall strategy.
Step 7: Refine your processes
Now take a look at your JIT strategy overall. Are there areas where you can reduce the number of steps in a process? Where can you standardize and automate? Notice how, throughout these eight steps, there are multiple opportunities to further review, refine, and improve. This is the heart of a continuous improvement approach.
Step 8: Assess problems and identify trends
In the real world, problems pop up all the time. When they do, conduct a root cause analysis. Determine where quality control can assist throughout the production process to avoid a similar problem in the future. Track trends along the way, and frequently loop back to consider how and where these trends could influence your strategy to create further improvements.
Learn More About Inventory Management with The Ecomm Manager
Inventory control is the backbone of any manufacturing operation and a function worth investing considerable efforts into optimizing.
As we learned from the Toyota example in Japan, to implement JIT, you’ll need first to have a solid understanding of your current manufacturing process to build Just-in-Time principles into every single step along the way.
To stay up-to-date on the latest industry trends in ecommerce, don’t forget to subscribe to our newsletter.
And if you’re interested in learning more about inventory management, you won’t want to miss these articles:
- What Is Inventory Management? And How To Get It Right
- Inventory Management Software: Benefits And Key Features
- 10 Best Cloud-Based Inventory Management Software In 2023
- 10 Best Inventory Management Software For Ecommerce [2023]
- 10 Best Free Warehouse Management Software In 2023
- 10 Best Free Inventory Management Software In 2023
- 10 Best Warehouse Management Systems In 2023
- 10 Best Cloud-Based Warehouse Management Systems In 2023