Just in Time Inventory can be defined as a strategy to increase production efficiency and decrease waste by receiving goods as and when required in the production process that results in the reduction of the inventory costs. The concept refers to an inventory management system with the aims of having inventory readily available to meet production demand, but not to a point of excess where there is a stockpile of extra products in the organization.
Breaking Down Just in Time Inventory :
When applied to inventory or purchasing aspects of the firm, the concept of Just in Time inventory aims to at the reduction of the number of components or finished goods sitting in the warehouse unused or unsold.
The Just in Time Inventory management system works on the vital objective to only have parts in inventory that are needed to make enough finished goods to meet immediate demand of the target market.
Parts and raw materials are ordered from the suppliers and vendors at the time when they are required and they are delivered to the manufacturing floor only when the process that needs and uses that specific part or raw material needs it.
The successful implementation of the concept mainly depends on other things such as having reliable suppliers that can work with short lead times.
It also involves a thorough market research to support the development of the forecasts to predict customer demand in the market. Depending on the nature of the industry, seasonal fluctuations might need to be taken into account to accomplish a robust forecast of the goods in the market.
Advantages of Just in Time Inventory management system :
- Lower inventory holding cost : As the required inventory is purchased or produced at short notice there’s no need to have unsold inventory taking up valuable warehouse space in the company.
- Improved cash flow : As there is no need to store large volumes of inventory at all times, capital expenditure is reduced considerably and the saved cash can be invested elsewhere.
- Less amount of dead stock : As inventory levels mainly rely on customer demand, there is a less risk of unwanted stock left sitting unused in the warehouse.
- The approach keeps stock holding costs to a bare minimum level. The released capacity results in better utilization of the space available and bears an encouraging impact on the aspects of insurance premiums and rent.
- It helps to eliminate waste and the chances of expired or out of date products do not arise.
- As under this method, only essential stocks that are required for the manufacturing process are obtained results in the less working capital requirement. A minimum re-ordering level is set, and only when that level is reached, order for fresh stocks are made and this becomes a boon to inventory management as well.
- Owing to the low level of stocks held, the Return on Investment of the organization is high in general.
- As this methodology works on a demand-pull basis, all the goods produced would be sold, and it includes changes in demand with an unexpected ease.
- It harps on the concept of right-first-time so that the rework costs and the cost of inspection are minimized.
- Greater levels of efficiency and high-quality products can be derived.
- Better relationships are fostered within the production chain of the firm.
- It ensures higher customer satisfaction owing to the continuous communication with the customers.
- Just in Time Inventory adoption results in the elimination of overproduction of the goods.
On the flipside, Just in Time Inventory management has its potential disadvantages.
Disadvantages of Just in Time Inventory management system :
- Problems with order fulfilment : If a customer orders a product and the company does not have it in stock, there is a risk of not being able to fulfill the order on time.
- Little room for error : Following the concept of JIT inventory right means having accurate forecasts of the demands and insights to the customers’ buying habits at all times. Any sort of miscalculation could lead to a significant negative impact on the business operations of the firm.
- Price shocks : Using the Just in Time Inventory management system, there is no luxury of waiting around for the best prices on goods. When prices elevate, profit margins go down.
- JIT Inventory methodology states no tolerance for mistakes, making re-work difficult in practice, as inventory is kept to a bare minimum level.
- A successful application of the approach requires very high reliance on suppliers, whose performance is outside the purview of the manufacturer.
- Due to no buffers in the overall process, manufacturing line idling and downtime can arise which would have an adverse effect on the production process along with the finances of the firm.
- Chances are quite high of not meeting the unexpected demand of increase in orders as there will be no excess inventory of finished goods with the firm.
- Transaction costs would be quite high depending on the frequency of transactions.
Examples of Just in Time inventory :
The technology giant makes it a point to keep as little inventory on hand as possible. And by lowering the amount of stock on hand, the company carries a lower risk of overstocking of products and chalking up dead stock in its warehouses. As per by Tim Cook, the CEO of Apple, “Inventory is fundamentally evil. You kind of want to manage it like you’re in the dairy business. If it gets past its freshness date, you have a problem.”
As the company mostly produces perishable goods, it shouldn’t come as a surprise that they use the Just in Time Inventory management system as an efficient and effective stock management system. Kellogg’s makes sure that just enough products are manufactured to fulfill orders and limited stock is kept on hand at the warehouse.
Similar to Apple, Xiaomi also manages a small inventory by releasing limited quantities of its mobile phones every week. The main demerit to this strategy is that eager consumers have to wait for the items to hit the stores that result in potential loss of sales. Still, the company benefits from keeping costs lower and eliminating wastage.
The brand believes that inventory is equal to death. It commits six months in advance to only 15 to 25 percent of a season’s fashion line and it only locks in 50% to 60% of its line by the start of the season, meaning that up to 50% of its apparels are designed and manufactured right in the middle of the fashion season.
If a certain fashion style or design suddenly becomes popular, Zara reacts quickly by designing new styles and getting them into stores quickly while the trend is still at its peak satisfying the seasonal demand and exploiting changing preferences of the customers.
Just in Time Inventory management : Go-to or a No-go?
The Just in Time Inventory methodology requires businesses to be extremely agile in the industry with the capability to handle a much shorter production cycle of the goods so it’s not for every company. If you are considering adopting the Just in Time Inventory management system, first ask yourself these questions:
- Can my products be manufactured or supplied in a very short period of time to the market?
- Are my suppliers reliable and efficient enough to get products on time, every time?
- Do I have a thorough understanding of customer demand, sales cycles, and seasonal fluctuations of the target market?
- Is my system of order fulfillment efficient and effective enough to get orders to customers well on time?
- Does my system of inventory management offer the flexibility required to update and manage stock levels regularly?
Hope the above article gave you complete understanding of Just in time Inventory – Its examples, importance and advantages.