Just-In-Time Inventory Management: What It Is and How It Works
Just-in-time inventory is an effective strategy to reduce inventory costs, and gain efficiency. But what is it, and how do I use it?
Like many other business owners, you may struggle to find the right balance between too much and not enough inventory. On one hand, you don’t want to run out of products and lose sales; on the other hand, you don’t want to waste money on excess inventory that sits in your warehouse collecting dust. So how can you achieve the perfect level of stock for your business? With just-in-time inventory management. Read on to learn more about this approach and see if it could work for you.
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What is just-in-time inventory management?
Just-in-time (JIT) inventory management is a type of inventory system designed to keep just enough inventory on hand to meet customer demand. This may include a week or even as little as a day’s worth of inventory. You can think of this as an ongoing replenishment of parts or raw materials needed for manufacturing, production, or assembly.
The opposite of this system is the traditional inventory management process which stores raw materials or parts based on order volume minimums or pice-breaks.
The just-in-time inventory system requires careful planning and coordination between suppliers and customers to work effectively. It can be a challenging system to implement, but it offers significant benefits for businesses that do so successfully.
How JIT Inventory Management Works
JIT inventory management only works when there is a good relationship and communication between the company and its suppliers. The supplier must be able to deliver parts or other inventory as needed, or in more regular, smaller batches.
JIT Example:
- Your business typically sells 1,500 products per month.
- You receive orders for 50 products in a day.
- Instead of purchasing raw materials to make 1,500 orders, you only purchase the supplies for the 50 ordered products.
- The supplier immediately sends raw materials for the 50 products to your facility.
- Your production team uses the raw materials to make the 50 products required for that day’s production.
- Repeat this process for each period (whether daily, weekly, bi-weekly, etc.)
Any orders that come in during production are handled with the same steps, so there’s no backlog and inventory doesn’t accumulate in your warehouse.
A Pull Inventory System
Just-in-time inventory management relies on a “pull” system, where the product company requests products from the supplier based on actual demand. The supplier may then produce the items requested for that period.
This differs from a “push” system, where the supplier produces and sends products to their customer in less frequent, larger batches regardless of whether or not they are immediately needed.
Advantages of a JIT Inventory Management System
There are a few advantages to the just-in-time inventory model. These advantages can provide a significant benefit for any business looking to optimize its inventory.
Lower Costs & Better Cash-Flow
The most profound advantage of a just-in-time inventory model is the cost-benefit. This comes from a greatly reduced working capital requirement which results in better profit margins. By eliminating the stock of materials normally required in a manufacturing or production process, other expensive items are simultaneously eliminated.
- Reduced storage space requirements (reduced storage costs)
- Reduced capital expense for parts
- Reduced labor costs
Helps Ensure Items are Always In-Stock
The just-in-time inventory management system can also help improve customer service levels by ensuring that products are available when they are needed.
Customers today demand immediate satisfaction. If they can’t get what they want when they want it, they will take their business elsewhere. This is why it’s so important for businesses to have a just-in-time inventory management system in place.
A JIT system ensures that products are available when customers need them, which helps keep customers happy and keeps businesses from losing business.
Improved Efficiency
Just-in-time inventory improves efficiency by reducing the time and money spent on managing inventory. When a business uses just-in-time inventory, it only orders products when it knows it will need them. This means that the business is not wasting money on products it doesn’t need and that it’s not storing products in its warehouse for longer than necessary.
Additionally, efficiency is gained strictly from a storage point of view. A warehouse with months worth of inventory has to receive, store, catalog, and track that inventory. Plus, when the time comes, a warehouse worker has to pick the parts needed for production, which also takes extra time. Just-in-time eliminates a lot of this process by minimizing the amount of inventory on-hand to only a short production cycle.
Reduced Waste
Waste often comes from over-stocking parts that may go out of production, or are replaced by a new version before all the stock is used up. This results in dead stock either for particular parts, or entire products. Just-in-time inventory helps to increase efficiency and decrease waste by receiving goods for only what’s needed during that production period. This system also helps to keep costs down by avoiding the need to store excess inventory.
One area that can create waste is the potential for damaged parts or goods. As the total amount of stock on hand reduces, so does the potential for that inventory to become damaged.
Smoother Production Cycles
A manufacturing process can sometimes hit a snag due to low inventory or part quality problems. When this happens, the entire workflow comes to a halt. After the problem is corrected, the workflow must play “catch up” to not only return to regular output levels but also backfill the missing output created from the downtime. As things spin back up, production schedules may accelerate faster than typical. Therefore, production processes may be skipped or performed faster. This leads to potential new issues in the production runs such as quality and even employee satisfaction.
The just-in-time manufacturing model allows for a company to meet demand, but when quality issues arise for parts, the impact is lessened. This is because adjustments in part design or the usage of materials are much more flexible since they are either made or supplied in smaller, more frequent batches. Any part problem therefore only affects a smaller set of parts rather than a larger batch.
Better Quality
A side benefit of just-in-time manufacturing is an overall tendency toward better quality. This is largely due to the smoother production cycles in this model. As materials are supplied only in smaller batch quantities, adjustments are easier to make in production runs without wasting vast quantities of materials or parts.
Additionally, the production line can shift to fix quality problems much faster. This eliminates secondary quality problems from arising due to playing “catch up” on customer orders.
Production Line Flexibility
Because a JIT manufacturing line typically involves shorter production schedules, the entire production can switch from one part or assembly to another much faster. This is especially useful for a business that needs to pivot away from poorly performing products quickly and at low cost.
Disadvantages of JIT Inventory Management
While there are quite a few advantages to the JIT model, there are also some disadvantages. You should familiarize yourself with both so you can decide whether the JIT inventory system is right for you.
Supply Problems are Exaggerated
Because the just-in-time inventory model carries only a small amount of parts, any supply chain problem is immediately felt. Whereas, the traditional inventory model allows for some cushion from supply chain issues.
Suppliers Must Be Reliable
One of the key reasons why suppliers must be reliable with just-in-time inventory management is because companies using this system rely on a constant and uninterrupted flow of materials to produce their products.
If a supplier has a problem and cannot deliver the parts that a just-in-time company needs, that company will be unable to produce its products. This will result in a shortage of products and lost sales. The just-in-time company may also have to go back to its regular suppliers, which could disrupt its production schedule. Therefore, any JIT manufacturing company must have reliable suppliers to operate effectively.
Less Flexibility for Demand Increases
The same disadvantage that makes supply chain problems felt sooner by a just-in-time company also affects their response to sudden shifts in demands. If demand suddenly increases, the JIT system may not have the flexibility to cope with this demand, leading to stockouts.
Requires Good Forecasting
Any manufacturing or production process requires good forecasting. However, errors or inventory problems from poor forecasting are realized much sooner with JIT manufacturing. Again, this is due to the much smaller inventory levels for parts used in the production lines. So, if you are considering JIT for your inventory management strategy, you must also ensure that your forecasting is as accurate as possible.
Who should use a just-in-time inventory system?
Generally speaking, JIT inventory management is best for well-established businesses that have a track record of success and relationships with their vendors. Mature businesses are also more likely to have better processes and process control than younger ones. This is immensely useful (and critical) when establishing a process like JIT inventory management.
Additionally, good candidates for JIT inventory management include companies who have good relationships with reliable suppliers and good forecasting. If your company struggles with managing its existing production lines and processes, then you should not try to implement JIT inventory management yet.
Do I need JIT inventory?
Some companies, however, have excellent vendor relationships, process control, and forecasting but still may not use a JIT inventory control system. This is because their particular industry or business model may require the flexibility provided by traditional inventory management methods.
For example, medical products such as syringes or needles are critical for society. These parts are necessary regardless of whatever supply chain-related problems happen. Therefore, this industry needs to maintain safety stock to ensure that these products are still available during a crisis. In this case, JIT inventory management would not be the most effective inventory control method.
So, choosing to implement JIT inventory management comes not only from meeting the suggested qualifications but also from other factors related to the industry and your specific business requirements.
Here are some questions to ask yourself when deciding to implement JIT inventory management or not:
- Are my suppliers reliable?
- Do I have a good relationship with my suppliers?
- Are my processes under control?
- Are my product, industry, and workforce suitable for JIT inventory?
- Am I capable of good forecasting?
- Do I have the technology (software) to support JIT?
- Is my company capable of utilizing JIT technology?
How to Implement Just-In-Time Inventory Management
To implement just-in-time inventory management, businesses need to work with their suppliers to create a system that is both efficient and reliable. This process can be time-consuming and challenging, but the benefits can be significant.
Businesses should also make sure that they have the necessary resources in place to support just-in-time inventory management. This includes knowledgeable staff who can coordinate the system effectively, as well as the necessary software and systems to track inventory levels and supplier performance.
Tips for an Effective Just-In-Time Process
If you’re interested in adopting the JIT approach for your company, there are some tips to help optimize JIT to work for you:
- Establish a good relationship with your suppliers. If you want to use just-in-time inventory, you have to have a good relationship with your suppliers. That means they need to be able to trust you and you need to be able to trust them. You also need to be able to work together well so that the just-in-time system works well for both of you.
- Properly qualify suppliers. Some suppliers specialize or at least have experience with JIT manufacturing. Often, these suppliers even have a quality certification that can help you qualify them for your specific needs. Doing the work up-front to verify they are reliable partners can save a mountain of headaches and costs in the future.
- Implement warehouse management software. Warehouse management software is software that helps businesses track and manage their inventory. It does this by providing a system that monitors inventory levels, tracks supplier performance, and records other important data related to inventory management. Inventory management software is critical for businesses that want to implement JIT, as it helps them keep track of their stock levels and make sure they are always in sync with their suppliers.
- Keep track of key performance indicators. One of the most important aspects of JIT inventory management is keeping track of key performance indicators (KPIs). KPIs data points that measure how well a business is performing. This data can include things like inventory levels, supplier performance, and manufacturing lead times. Tracking KPIs can help businesses identify areas where they need to improve to be more successful with JIT inventory management. You will need to implement inventory management systems in to gain access to the data for KPIs.
- Cross-train employees. When you have just-in-time inventory, it is important to have employees who can do many different jobs. This is because production needs to be flexible enough to shift the amount, or type of products produced every day.
How to Get Started With a JIT Inventory Management System
It’s helpful to take care of the basic principles of efficiency in your process before jumping into a JIT system. This way you can increase your efficiency on your own, and make sure your systems and processes are ready before making the switch. Here are the steps to get started with JIT:
Get Good at Forecasting
Forecasting is the practice of predicting future sales volume. To be successful with JIT inventory management, businesses need to be good at forecasting. This means being able to predict what their inventory needs will be in the future.
There are a few things businesses can do to get good at forecasting:
- Make sure you have accurate historical data. The more data you have, the better your predictions will be.
- Use forecasting tools and software. Several different software programs can help businesses with forecasting.
- Train employees to forecast. Employees who are familiar with the products and processes of a business are often in the best position to make accurate forecasts.
- Stay up-to-date on industry trends. Keeping track of current industry trends (such as seasonal demand shifts) can help businesses anticipate changes in their inventory needs.
Implement a WMS
If you want to successfully implement JIT inventory systems, you’ll need a warehouse management system (WMS). A WMS is software that helps businesses track and manage their inventory. It does this by providing a system that monitors stock levels, tracks supplier performance, and records other important data related to inventory management.
A WMS is critical for businesses who want to implement JIT inventory management systems, as it helps them keep track of their stock levels and make sure they are always in sync with their suppliers. In addition, a WMS can help businesses track key performance indicators (KPIs), which are data points that measure how well a business is performing. This data can include things like inventory levels, supplier performance, and manufacturing lead times. Tracking KPIs can help businesses identify areas where they need to improve to be more successful with JIT inventory management.
To implement a WMS, you’ll need to find the right software and then configure it to meet your specific needs. You may also need to train employees on how to use the software. Once the WMS is up and running, you’ll need to continually monitor it to make sure it’s meeting your expectations.
Learn About Lean Manufacturing
Lean manufacturing is a philosophy that focuses on reducing waste in the manufacturing process. The goal is to make sure that only the necessary steps are taken to produce a product, and that any waste is eliminated. This helps to minimize the amount of time and resources needed to produce a product.
Lean manufacturing is often used in conjunction with just-in-time inventory management. When businesses use lean manufacturing and just-in-time inventory together, it’s known as just-in-time (JIT) production. JIT production is a manufacturing methodology that relies on having a just-in-time inventory system. This means that businesses only produce what they need when they need it. This helps to eliminate the need for excess inventory, which can be costly and take up space.
Find Local Suppliers or Partners
When implementing JIT inventory systems, it’s helpful to employ local sourcing. This reduces the amount of time needed to get supplies to your warehouse. It will also help you build relationships with suppliers who are familiar with your business and its needs.
When looking for a local supplier, it’s also important to make sure they are a good fit for your business. You’ll want to ask them questions about their capabilities, their location, and how they can help you meet your production demands. Building a relationship with a local supplier can be beneficial for both businesses involved.
JIT Inventory Management FAQ
The benefits of just-in-time inventory include reduced costs, improved efficiency, and increased production capacity. In addition, JIT inventory management can help businesses improve supplier relationships and minimize waste.
Yes, just-in-time inventory and lean manufacturing can be used together to create just-in-time (JIT) production. When used together, these two methods can help businesses reduce costs and increase efficiency.
There are a few things businesses should consider before implementing just-in-time inventory, such as the type of business, the products being produced, and the availability of suppliers. In addition, businesses will need to have a good understanding of their inventory needs and production demands.
Just-in-time inventory can help businesses save money by reducing the amount of inventory that they need to hold. In addition, just-in-time inventory can help businesses improve their production efficiency and minimize waste.
Just-in-time inventory can help businesses improve efficiency by ensuring that only the necessary items are ordered and that orders are placed just in time to meet production demands. This helps to eliminate the need for excess inventory, which can be costly and take up space.
Yes, just-in-time inventory and just-in-time manufacturing can be used together to create just-in-time (JIT) production. When used together, these two methods can help businesses reduce costs and increase efficiency.
The difference between just-in-time inventory and just-in-time manufacturing is that JIT inventory management syncs orders with production demands, while just-in-time manufacturing produces items only as they are needed. JIT inventory can help businesses reduce inventory costs and increase efficiency, while just-in-time manufacturing can help businesses reduce waste and improve product quality.
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