Just in time inventory - the pros, cons, and examples of this lean method.
Just in time inventory is a lean method in use for decades. But how effective is it and can your business benefit from it?
Just in time inventory reduces stock liability but also comes with its risks. Let’s see about this and how effective it can be for your business. Read on to find out the pros, cons, and examples of JIT.
What is just in time inventory?
Achieving lean manufacturing can be difficult for many businesses. But one of the methods used in lean, just in time inventory, or JIT, is a powerful way to increase efficiency and reduce waste. In JIT, the raw material inventory levels are replenished only when it’s necessary to manufacture finished goods. In many industries, the labor is also scheduled with contractors as and when required. JIT was first practiced by Henry Ford after which the concept expanded into lean in Toyota.
Just in time inventory relies on an almost instant supply of products at any given moment. This means stores would need to have little to no stock and rely solely on deliveries to provide what's needed when they're needed which oftentimes leads to less wasted inventory as well as lower inventories overall. The first company to use this lean method was Toyota in the 1930s, but over time other companies such as FedEx and Walmart have been implementing it.
Why use JIT?
Procuring raw materials only when required means there is minimal or no surplus in warehouses. The result? Very little carrying costs. When the demand is uncertain, high carrying costs is a big chunk of money locked away in inventory. Using JIT in a business means fewer products will be sitting around waiting to get sold or thrown away which saves money on multiple fronts. The first and most obvious is the inventory cost of excess materials, secondly, on space costs, and thirdly, on transportation costs by reducing how much has to be shipped from suppliers to your warehouse. For heavy items, the shipping costs can add up quickly.
The advantages and disadvantages of JIT
So if JIT is so good and obviously saves money, why doesn't every company go the lean way and use JIT? Well, because it's not easy and there are multiple factors to consider and plan for before using JIT as your go-to inventory strategy.
JIT inventory pros
Let's take a look at the pros of just in time inventory.
Reduced carrying costs
Since raw materials are bought and held only when manufacturing orders need to be fulfilled, no surplus cash is locked away in raw material units stored in warehouses.
Increases cash flow
The result of reduced carrying costs is that you have more working capital at your disposal to spend on other activities like investing in a more efficient production line or in R&D for more product skews, applications, and so on.
Saves staff time
JIT also reduces productive staff hours spent on maintaining inventory, tracking sales and inventory reports which again saves costs.
Reduced dead stock
Replenishing and manufacturing when required also means that there'll be less dead stock in your warehouse. Lower chance of stock units going bad or not getting sold.
JIT inventory cons
With the added efficiency, JIT inventory also brings a set of drawbacks:
Since you procure only when there's demand, the risk of having stockouts and not being able to meet demands also increases.
Needs accurate planning
Proper demand forecasting and being able to predict customer buying behavior is key if you are to succeed going JIT. Wrong demand calculations can leave a business with dry spells.
Risk of lower profits
Since you will have to procure fast, the option to scope and choose the best supplier goes away. Often, you may have to purchase raw materials with higher costs which in turn affects your margin.
Examples of companies using JIT
Here are examples of five companies that practice just in time inventory successfully.
Apple's supply chain was one of the first companies to establish JIT back in 2001 and they continue to do so even today. They're able to have all their products available at any given time. Tim Cook made their supply chain leaner by cutting down the number of suppliers and warehouses and changing the manufacturing line to support more contract based work.
As of 2021, Tesla is huge and it’s booming stock prices have made it’s founder, Elon Musk, the richest person in the world. But it wasn’t always like this, Tesla was small and focused on a niche market—luxury electric cars. At the time, they didn’t have any car dealerships or retail stores, and cars were made to order. They also offer customizations before making a purchase, thanks to JIT.
With lean and JIT, Nike reduced their lead times by 40%. They did this back in 2012 to improve their production across Southeast Asia and since then have been able to produce and distribute new models faster in the market.
McDonald’s and fast food chains
Fast food? Ok, hear me out. Fast food chains predict footfall in their stores and stock only what is required to fulfill orders. Further, do you notice that when you order a burger or any other dish, you get served pretty quickly? That’s because they keep an eye on demand and have the menu items at an almost ready to go state. The same goes for items like rice and noodles in restaurants, they half cook it and when an order comes up, they fully cook it to serve the order.
The Swedish furniture retailer does a different variation of JIT for years. It doesn’t even assemble the furniture and simply ships parts with instructions. By storing disassembled pieces of furniture, they save huge amounts of space in their warehouses. This style also allows them to make the quickest deliveries possible while leaving customers happy with their lower prices.
Should you do JIT inventory?
Adopting JIT requires companies to be quick and responsive to demands. Given the pros on cons of the method, it's not something every company can have success with. Before opting for JIT, here are some factors to consider:
- The efficiency of your manufacturing line. How fast can you produce finished goods before the customer's patience runs out waiting for the product?
- Having a reliable supply chain and suppliers that can deliver you raw materials with short lead times.
- Accurate forecasting methods and expert-level insight to predict customer demands.
- Having efficient logistics to deliver items once you've produced them with JIT.
JIT can be a tough system if you are not properly prepared, but many big businesses have had success with it. The key is to plan everything meticulously and understand your customers’ patience and demands before using JIT as an inventory management method.
Marketing at Frappe.