Inventory management plays a key role in all areas of your business. Just in time inventory is no different.
Just in time inventory, also referred to by JIT inventory, is the reduced amount of inventory owned by a business after it installs a just-in-time manufacturing system. This type of system is a term defined as a “pull” system. The purpose of this JIT system is to ensure that the components and sub-assemblies used to create finished goods are delivered to the production area exactly on time. By following this JIT inventory system, you can eliminate a large amount of your investment in inventory, which will help you reduce the working capital your business ultimately needs.
By using the just in time concept, inventory may be reduced by the following means:
- Reduced Production Runs – When you can set up your equipment quickly, you make it more economical to create short production runs. In return, this reduces the investment in finished goods inventory.
- Compressing Operations – When production cells are arranged close together, there’s less work-in-process inventory being moved between cells.
- Production Cells – Employees are known to walk individual parts through processing steps in a work cell, which helps you reduce scrap levels. Doing this can also help you eliminate the work-in-process queues that typically build up in front of a specialized work station.
- Certification – Supplier quality is certified in advance, so those deliveries can be sent straight to the production versus piling them up in the receiving area for inspection.
- Delivery Quantities – Deliveries are made with the smallest possible quantities, possibly more than once a day, which nearly eliminates raw material inventories.
- Local Sourcing – When suppliers are located close to a company’s production facility, this shortened distance makes it much more likely that deliveries are made on time, which reduces the need for safety stock.
What Are The Advantages Of JIT Inventory
There’s a number of different advantages that come from using JIT inventory, especially in relation to reduced cash requirements and the ease of uncovering manufacturing problems. Besides the obvious, here’s a few more advantages for just in time inventory.
- Working Capital – Just in time inventory is designed to be exceedingly low, so the investment in working capital is minimized as much as possible.
- Process Time – When the just in time system is implemented correctly, it should shorten the amount of time required to manufacture products. In return, this can decrease quoted lead times given to customers placing orders.
- Obsolete Inventory – Since inventory levels are so low, there is little risk of having much obsolete inventory.
- Lower Scrap Cost – With a small amount of inventory on hand, all defective inventory items are more easy to identify and correct, resulting in lower scrap costs.
- Engineering Change Orders – It is much easier to implement engineering change orders to existing products, because there are few existing stocks of raw materials to draw down before you can implement changes to a product.
- Process Time – A thoroughly implemented JIT system should shorten the amount of time required to manufacture products, which may decrease the quoted lead times given to customers placing orders.
Disadvantages To JIT Inventory
While there’s not many disadvantages to JIT inventory, there is one big one.
- Shortages – Low JIT inventory levels make it more likely that any problem in the supplier pipeline will lead to a shortage that will stop production. This risk can be mitigated through the use of expensive overnight delivery services when shortages occur.
Evaluation of JIT Inventory
The benefits of reducing the investment in inventory are substantial, which can lead a company to pare away too much inventory. When this happens, any unanticipated disruption to the flow of materials can bring operations to a halt almost immediately. Consequently, JIT concepts should certainly be followed, but be aware that there is a lower limit on how far you can reduce inventory levels.
Here’s 3 big brands that use just in time inventory.
Apple – This consumer electronics giant keeps as little inventory on hand as possible. By lowering the amount of stock on hand, Apple carries a lower risk of overstocking and chalking up dead stock in its warehouses.
Kellogg’s – It’s no secret that Kellogg’s produces a lot of perishable goods, so no surprise that they use the Just in Time inventory management method as a strategy for their stock management system. Kellogg’s makes sure that enough products are made to fulfill orders and limited stock is kept on hand.
Tesla – Despite the incredible growth rates of Tesla, the company continues to be one of the smallest auto manufacturers in the world. In contrast, Tesla takes complete ownership of the supply chain and has been vocal in their rejection of the traditional franchise-dealer sales model.
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