Demand for your products can rise and fall at any moment. You need to be prepared for such eventualities.
Do you have stock sitting in your inventory (see what is inventory) slowly depreciating or find yourself lacking the materials to keep up with customer needs? Maybe it's time you looked into a just in time inventory management system.
Just in time inventory (JIT) can keep costs low and allow you to operate your cycle inventory to meet demand. Here's how it works and how you can adopt the strategy for your business.
What Is Just in Time Inventory?
Just in time inventory is stock that arrives in your inventory as you need it for production or sales. With JIT, instead of having a large amount of merchandise inventory or raw materials inventory, you have a much smaller rotating stock. This stock is ordered with the intention of using immediately upon arrival and will spend as little time as possible on your premises. In that sense, it's opposed to mass shipping or bulk inventory.
Just In Time Inventory System
A just in time inventory system, or lean manufacturing, is an inventory strategy where raw materials and supplies are ordered and received as they're needed. This system requires a strong relationship between the retailer or producer and the supplier. It is unlike the just-in-case inventory system. In that system, you order and store safety stock in the event demand surges or you run into production problems.
Just in Time Inventory Management
Just in time inventory management requires planning and forethought to avoid running into supply shortages. Since inventory arrives only on an as-needed basis, you must always be aware of expected sales and the amount of time it takes for your goods to be ready for sale. You must also be flexible and ready to respond to sudden shifts in market demands.
Characteristics of Just in Time Inventory System
The just in time inventory system has a number of characteristics that set it apart from other inventory systems.
Here are a few common ones:
- Smaller deliveries received more often. These deliveries can be daily or even hourly as needed to keep the production or sales process going and keeping up with demand.
- Higher supplier quality. Since you don't have time to inspect goods every time they arrive, JIT suppliers are usually certified for quality. This means you can trust the materials that arrive are up to standard.
- Unique work arrangements. JIT production areas need to be more flexible than normal production. This means they are smaller and allow in-process goods to be passed from each work center quickly and efficiently.
- Cross-trained employees. JIT employees are often certified to work on different tasks within the production process. This gives them more work to do and cuts costs to the business like the cost of physical counts of inventory.
- Immediate fulfillment upon completion. There is little storage for completed goods or materials. As such, once you finish a good, it is immediately placed on a truck for shipment to the customer.
Just in Time Inventory System Example
The just in time inventory system isn't as complicated as it may sound.
Here's an example of how it works:
- You receive an order for 14 widgets from a customer.
- You place an order with your supplier for the materials needed to make only those 14 widgets.
- The supplier immediately loads a shipment and sends it to your facility.
- Your team receives the materials and immediately begins production.
- The goods are passed from station to station until completed.
- Once all 14 widgets are finished they are put into a shipment and sent directly to the customer.
If any other orders come in during that production time, the same steps are followed. This keeps the production chain moving quickly and keeps excess inventory from building up in your warehouse.
Just in Time Inventory Control Model
The just in time inventory control model allows a business to quickly respond to shifts in customer needs and reduces the number of unsold or outdated products. This model is best used for businesses that have shorter demand spikes. It is often used by the foodservice industry, technology manufacturers, and book publishing. These industries need to make product quickly to keep up with demand and avoid excess inventory when that demand falls.
Advantages & Disadvantages of Just in Time Inventory
As with all inventory management techniques, using a just in time inventory system has both advantages and disadvantages.
Advantages of JIT Inventory Management:
- Shorter production runs. Manufacturers no longer need to build up large amounts of manufacturing inventory as the product life cycle is shorter in JIT. This also allows the retailers to limit their offerings and put their full focus on only a few products youkeep on-hand for fewer inventory days.
- Easily switch between products. If a product has issues or doesn't sell well, you can easily shift your efforts to one that does. This agility is key to maximizing sales and profits.
- No need for large warehouses. Since inventory arrives only as you need it, you don't need a large storage space for work in process inventory. This saves a lot of money and energy that you can channel into growing your business.
- Lower material costs. Since you only pay for the material as you need, you avoid excessive costs for materials that sit in storage waiting to be used. You also suffer less waste and shrinkage. This can help you hit your target inventory KPI more easily.
Disadvantages of JIT:
A disadvantage of the JIT inventory system is the ...
- Requirement of more planning. Since you don't have stock sitting around, you need to order the correct amount every time. This requires a lot of planning and insight into your sales trends.
- Risk running out of inventory. If there is a sudden increase in demand, you risk not being able to meet it. This means you'll miss out on sales and upset your customers. This is made even worse if the goods you need are out of stock (read more about backorder meaning). It may also be more difficult to pull off kitting.
- Lack of control over time frame. No matter the inventory method, you always rely on manufacturers and suppliers to control their production time frame. With JIT inventory, since you don't have any extra stock, this can come back to bite you.
Did This Help You ... Just in Time?
Did we convince you to use a just in time inventory management system? Now that you know more about it, you can make an informed decision about what works best for your business. ABC inventory analysis may also be of interest. Whatever the case, don't leave money on the table and look into new ways to lower costs, boost your sales, and grow your business.
Other methods for eliminating waste and saving storage costs is by using dropshipping or consignment inventory. You can compare these two inventory models and see what might work for your business so you can focus on growing sales.