Just in time (JIT) inventory is a strategy for increasing efficiency and minimising waste by receiving products only when needed in the manufacturing process, thus lowering the inventory expenses. It refers to an inventory management system that aims to have goods promptly available to satisfy demand, but not to the point of stockpiling surplus inventory. It is utilised by production companies to reduce inventory costs by having only enough inventories to meet the current demand. Learn about the definition, advantages, risks, and real-world examples of just in time inventory.
Did you Know?
Stock that arrives in your inventory just as you need it for manufacturing or sales is known as just-in-time inventory. Instead of keeping a big inventory of merchandise or raw materials, JIT allows you to keep a much smaller rotating stock. This product is being ordered to use as soon as it arrives so that it will spend as little time on your premises as possible. In this way, it differs from bulk shipment or bulk inventories.
Also Read: What Is Perpetual Inventory? Advantages and Disadvantages Explained
JIT – Background and History
The Toyota Production System (TPS), or just-in-time manufacturing, was the original name for the Just in Time philosophy. The method was created in postwar Japan when vehicle manufacturers faced resource limitations and needed to reduce resource usage to stay economical.
Two Japanese industrial engineers, Eiji Toyoda and Taiichi Ohno came up with the method after Toyota Motor saw that American automakers surpassed their Japanese competitors. After some experimentation, they developed the Toyota production system and bridged the period between 1945 and 1970. The popularity of JIT has increased over the globe. Essentially, this system's guiding principle is to eliminate wasteful use of resources that do not bring value to the product.
Significance of JIT Concept
Here are some of the most significant advantages of implementing a just in time inventory management system:
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Inventory Waste Is Reduced
When using a just in time strategy, it is possible to avoid overproduction, which occurs when the supply of a certain item in the market exceeds the demand, resulting in an accumulation of unsalable stocks. Items that are not sellable become dead inventory stock, which increases waste while also taking up inventory space. The benefit of ordering only what you need is that there is no chance of storing products that will not be used in the future. The best possible analysis of the business may be performed, and you can keep yourself organised and up to date with the best possible required inventory. With the help of JIT inventory, you will no longer have to be concerned about goods piling up in your warehouse.
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Reduces Warehouse Holding Costs
Excess inventory can treble your holding expenses, making warehousing pricey. Warehouse holding expenses are maintained to a bare minimum in a just-in-time system. Companies that employ the just in time inventory model can minimise the number of items in their warehouses or even eliminate them completely.
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More Control For The Manufacturer
The manufacturer has complete control over the demand-pull manufacturing process in just-in-time inventory management. They can instantly increase production for in-demand commodities while reducing production for slow-moving items in response to customer demands. Because of this, the just in time inventory system is adaptable to changing market conditions.
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Local Sourcing
Local sourcing cuts down on the time and money spent on transportation. As a result, numerous complementing enterprises must operate simultaneously, enhancing employment rates in that group. Depending on the stock required, the business owners can be more confident about how much stock they need to keep in the warehouse, and it becomes very easy to trace out the unwanted stock.
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Smaller Investments
Only essential supplies are obtained in a JIT system, and therefore there is less need for working capital to support procurement. The organisation's return on investment would be good due to the lower amount of stock held in inventory. The "right first time" notion is used in Just-in-Time models, which means that operations are completed the first time correctly, lowering inspection and rework expenses. This needs the corporation to invest less money in correcting faults and creating greater profit from an item's sale. All of this helps in inventory costing.
Elements Involved In JIT
JIT's Basic Elements are as follows:
The zero-waste mandate led to the JIT system. It is made up of the following elements:
1. Flexible resources
2. Cellular layouts
3. Pull production system
4. Kanban production control
5. Small-lot production
6. Quick setups
7. Uniform production levels
8. Quality at the source
9. Total productive maintenance
10. Supplier networks
Also Read: Everything You Need to Understand About Inventory Control
Advantages and Disadvantages of Just-In-Time Systems
Advantages
Companies prefer JIT inventory because it is considered a more cost-effective form of stock holding. Its goal is to reduce the number of goods you have on hand at any given time, which offers several advantages:
- Requires less space - Stock turnover is faster; therefore, you don't require as much warehouse or storage space. This lowers the quantity of storage that a company needs to rent or buy, freeing up finances for other aspects of the firm.
- Reduction of waste - Faster stock turnover reduces waste by preventing commodities from becoming damaged or obsolete while in storage. This saves money by avoiding superfluous stock purchases and decreasing the need to replace old stock.
- Smaller financial investments - Just in time inventory system is perfect for small businesses that don't have the resources to buy large quantities of inventory all at once. Maintaining a good cash flow can be achieved by ordering stock as needed, and all of these benefits will result in financial savings for the organisation.
- Long-term focus and savings - Long-term focus on production growth and supply requirements and coordinating changes in raw materials standards with suppliers; bring several long-term benefits to the company. Long-term savings, lower production costs, and improved customer satisfaction are all possible with the JIT inventory management.
Disadvantages
Unfortunately, just in time inventory system has a variety of drawbacks that, if they arise, can have a substantial impact on the firm.
- Risk of running out of stock - Because you don't have a lot of stock, it's critical that you have the right procedures in place to ensure that product is available fast. You'll need an excellent relationship with your provider to do this. You may need to negotiate an exclusive agreement with suppliers that says that goods must be delivered within a specified time range, putting your firm first.
- Lack of control over a time frame - Relying on the punctuality of suppliers for each order puts you in danger of delaying the delivery of items to your clients. If you fail to meet your clients' expectations, they may take their business elsewhere, which could significantly impact your company if this happens frequently.
- More preparation is required - Companies must analyse their sales trends and fluctuations in great detail when using JIT inventory management. Most businesses have seasonal sales periods, which means that particular products will require more stock at certain times due to increased demand. As a result, you must account for this when planning inventory levels, ensuring that suppliers can satisfy varying volume requirements at different periods.
Conclusion
Raw material orders from suppliers are synchronised with production plans in a just-in-time inventory system (JIT) using an inventory management software system. To reduce inventory expenses, businesses use these inventory methods to boost efficiency and avoid waste by acquiring things only when required for the production process. Producers must be able to predict demand before implementing this method accurately. JIT inventory systems are used to reduce inventory while simultaneously increasing overall efficiency. Inventory expenses are reduced in JIT manufacturing systems because producers acquire materials and parts only when they are needed for production and do not have to pay storage fees. In addition, manufacturers are not left with unsold inventory if an order is cancelled or not completed as expected.
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