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by Lauren

What is Just in Time Inventory?

Saturday 21, Dec 2019

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Look at any profitable business and you will see tons of efficiencies. Every working part has its purpose, every resource is being fully utilized. How does a business get to this point of success? One way is with a well-understood inventory management strategy. The Just in Time (JIT) inventory system is one of these popular choices for businesses looking to cut costs, get organized and operate more smoothly.

The goal with JIT is to minimize inventory and increase efficiency. (And hey, who doesn’t want that?) By intentionally keeping inventory levels low at all times and ordering inventory only when there is a buyer, you can cut costs, reduce waste and operate more smoothly. 

What is Just in Time inventory (JIT)?

The JIT inventory system is about having the lowest inventory amounts possible in order to minimize inventory costs, increase efficiency and reduce waste.

In order to keep inventory amounts at their absolute lowest point, that means ordering inventory when a customer makes a purchase. An easy way to remember this is to think of JIT as being made to order. When there is a buyer, you make an inventory order.

Here’s a Just in Time example: Your construction company installs windows. You could order large amounts of windows at a time, but because of how fragile they are, the longer they sit in a warehouse, the greater the chance of them getting broken. And the cost for all that storage space to hold windows that you might not even sell can add up quickly. So instead, you wait until a customer places an order for the exact windows they want. You then order them from your supplier and deliver them to the customer on the exact date they need them by. This is how the JIT method works. 

In order for the efficient aspect of this method to kick-in, your business needs to be able to deliver the inventory very quickly. A customer who orders the windows doesn’t want to wait for weeks to receive their order. If that is the case, they can easily go to a competitor who can deliver the product much more quickly with a more efficient inventory system.

The JIT method, also known as Lean Manufacturing, Just in Time Manufacturing, and the Toyota Production System (TPS) is completely opposite from the Just in Case inventory strategy, which consists of ordering large amounts of inventory upfront. The problem with the Just in Case inventory technique is that you end up with a lot of deadstock (inventory that does not sell) and therefore higher costs of goods. 

In the case of JIT, deadstock is avoided. You are only placing inventory orders when you have a buyer.

Understanding what this inventory management technique means is pretty simple. But implementing this practice successfully into your operations is a completely different story. The challenge for a business comes with making sure JIT works without fail. 

How does Just in Time inventory work? 

Since this inventory management strategy means there is no back-up stock and inventory orders are placed only when customers purchase product, it can be risky business. Several supply chain functions and business operations really need to be running smoothly in your company in order for this technique to succeed. Because with just-in-time inventory, there really is no in-between of good and poor inventory management. A simple mistake in ordering inventory can be devastating to a business.

You should ask yourself these five questions to make sure several elements of the Just in Time inventory technique are dialed-in: 

1. Are your suppliers reliable? 

Reliable suppliers are crucial when it comes to having a successful Just in Time inventory management technique. Your suppliers must be able to deliver the raw materials, parts and all other types of your inventory quickly. The turnaround time must be fast, so it helps to work with responsible suppliers that are nearby to your business. And if your suppliers use any machinery to produce your inventory, you need to make sure that machinery is resilient and consistent. Even a breakdown for as little as one day can result in catastrophic financial losses to your company. 

2. Can you forecast demand accurately? 

You must have a thorough understanding of your consumers’ buying habits. Are there certain months of the year when the demand for your products while be higher than other periods? With JIT, you must anticipate large increases in sales. You also need to make sure your business operations can handle different amounts of orders during different time periods. 

Additionally, it helps to have suppliers that will carry extra inventory for you in case there is a small issue with orders. Think of this as a buffer, giving you a tiny bit more wiggle room in case you do make a slight mistake with your forecasting and demand management.

3. Do you have steady production? 

When you place an inventory order from your suppliers, they need to be able to get that inventory out their doors and to you or the customer very quickly. If your supplier takes a week to process an inventory order you guaranteed a customer in three business days, you will most likely lose that customer’s loyalty.

4. Is your workmanship high-quality and efficient?  

Similar to your suppliers, employees need to work quickly and reliably. Everything from processing customer orders to ordering and tracking inventory needs to be done correctly each time. That requires proper job training and professional management in place. 

5. Is your inventory management system flexible? 

Your company needs to have an inventory management system in place that can have inventory numbers updated within seconds at any time throughout any day. To have real-time inventory counts, you’ll need a computerized system (like inventory management software) that you know and trust to help with your inventory control

Where does Just in Time inventory come from?

This inventory system started in Japan as a result of limited options for space to expand factories and limited funds post-war. As a result, Japanese businesses started using a method of ordering inventory when there was a buyer. It then started gaining international popularity in the 1970’s, when Toyota began using this inventory technique. They ordered parts for cars when customers placed orders for cars. 

But this didn’t go without issue. In 1997, one of their brake parts suppliers (Aisin) had a fire that stalled the manufacturing of these parts, giving Toyota no choice but to stop production on cars.

This caused Toyota close to $15 billion in lost revenue and 70,000 cars. Toyota, of course, was able to make a comeback over time, and is still one of the leading automotive corporations in the world. 

What are the Just in Time inventory pros and cons?

As you can see from the above Toyota example, the JIT inventory system has its fair share of advantages and disadvantages. Knowing the realities of using this inventory management strategy in advance could help safeguard your business from devastating losses in revenue. 

The pros of using Just in Time as an inventory management method include:

  • Lower inventory holding costs: You’ll have less inventory in your storage which means you’ll be spending less on storage costs.
  • Less deadstock: Since inventory is being ordered based on customer purchases, your business is less likely to have items that are sitting in a warehouse, unsold. 
  • Increase in cash flow: You spend less on storage costs since you are holding less inventory, both of which free up more cash. Also, using JIT can lower the amount of capital that is required if you are just starting your business. Money that would be spent on deadstock inventory is available to spend in other ways.
  • High inventory turnover ratios: With JIT inventory management, you are more likely to have a high inventory turnover ratio, which indicates that your business is highly-efficient.

The cons include:

  • Risk of stockouts: You risk not being able to access inventory when customers place an order. This can result in losing potential sales and losing your customer base. Stockouts can be caused by both natural and man-made disasters that stop production, such as hurricanes, wildfires, strikes and embargos.
  • Increased pricing for inventory: If prices for your inventory spike, you’ll have no choice but to pay more.

How does Just in Time inventory reduce costs?

One of the biggest advantages of Just-in-Time (and the primary reason it is used) is that it saves money. How exactly does it cut costs? There are two primary ways:

  1. You don’t have to pay for as much storage or warehouse costs since you have less inventory.
  2. If an order is cancelled by a customer, you are much less likely to be fronting the bill for the inventory’s original cost, since your supplier holds the inventory.  

Examples of How Just in Time Inventory Can Work Well

The Just in Time inventory method works extremely well for many types of businesses, ranging from small businesses that sell perishable items to huge, big-name corporations requiring large amounts of inventory. Below are two just in time inventory examples.

Tesla

Tesla’s vehicles are made to order, which also means they are highly customizable. By keeping very low amounts of inventory in their warehouses, Tesla reduces inventory holding costs and give customers the ability to  add pricey features to their cars, increasing profit.

Apple

As a technology company, Apple has great relationships with a variety of suppliers, making it easier to reduce how much inventory they hold in their warehouses. By having their suppliers both carry their inventory and deliver their inventory, also known as drop shipping, they reduce deadstock in addition to holding costs and shipping costs that would otherwise be significant.

But it isn’t only larger businesses using this inventory system. Plenty of start-ups and smaller companies use the method, especially since it requires such little capital. For example, a florist would use this inventory strategy by ordering flowers only when a customer has called to make a purchase. That way, when the florist goes to the local flower market, they know exactly what to order and how much. This practice of JIT guarantees that every flower the florist buys is used before it dies. (On the flip side, walk-in customers looking for a last-minute, simple bouquet of roses would leave empty-handed!)

Just in Time Inventory and Kanban Scheduling

Kanban is a scheduling system started by Toyota after World War II. To this day, Kanban is regularly used in conjunction with Just in Time inventory management. The goal of Kanban, meaning “signboard” in Japanese is to further improve manufacturing efficiency. It limits the buildup of excess inventory along any point in the production cycle by using cards (either manually or with a computerized system) that produces visual cues notifying employees when an inventory item is getting low and needs to be restocked. 

Get Help Implementing a Just in Time Inventory System

Sortly inventory management software is shown on multiple devices.

Using a Just-In-Time method to manage inventory in your business starts with using the best inventory management software. With Sortly, you can quickly and easily incorporate JIT inventory system techniques into your business. Update inventory levels in real-time, accurately track inventory locations, and get customized alerts to help you know exactly when you need to order more inventory. 

Get Started with Sortly for Free!

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