Just In Time Inventory - Ultimate Guide
Just-in-time inventory method refers to having the inventory readily available at the right time
and in the right place as per the demand. It helps in minimizing overstock and hence, save space while optimizing inventory.
- Inventory Management Basics
- What are the basic functions of inventory?
- Types of Inventory
- What is Inventory Management?
- Inventory / Product Tracking
- Why is Inventory Management important?
- Methods of Inventory Management
- Perpetual Inventory Management
- Periodic Inventory Management
- ABC Analysis
- Just In Time Inventory
- FIFO & LIFO
- Economic Order Quantity (EOQ) Formula
- Vendor Managed Inventory
- Two Bin Inventory Control
- Inventory Cycle Count
- FSN Inventory
- Popular Processes of Managing Inventory
- Challenges in Inventory Management
- Best Practices for Inventory Management
- Maintaining Safety Stock
- Demand Forecasting and Planning
- Merchandise Planning
- Retail Visual Merchandising
- Inventory Turnover Ratio
- Stock Replenishment
- Product Bundling
- Important Inventory Management Terms
- Cost of Goods Sold
- Bullwhip Effect
- Reorder Point
- ABC / Pareto Analysis
- Lead Time
- Big Data
- Bundling and Kitting
- Last-In-First-Out (LIFO)
- Current Demand Inventory
- Demand Override
- Days of Inventory on Hand
- Black Box Forecasting
- Inventory Shrinkage
- Moving Average
- Economic Order Quantity
- Cycle Count
- Consignment Inventory
- Introduction to Just In Time
- History of JIT: The Toyota Effect on Global Markets
- Conventional vs. JIT Supply Chain
- Need of replacing old Methods and Effects on Business Economics
- Where does JIT impact on Supply Chain Management?
- Objectives of Lean techniques
- Features as a Business Process Optimization Philosophy
- Advantages of Implementation
- Challenges before organizations
- How to practically implement 'Just In Time Method'?
- Risks associated with this system
- Quick analysis: Yay or Nay for your firm
Introduction to Just In Time
Just In Time (JIT) is one of the most revolutionary instances in industrial history after the advent of mass production. It revolves around optimizing existing processes and retaining only the value-adding factors. Most of the folks find it as a cost-cutting measure. Well, there is a lot more to it. In this article, we are going to decode the history, technicalities, pros, and cons of this industrial marvel. At the end of the article, I also expect that our readers will be able to decide whether to implement it in their firms or not—dive in deeper to explore more.
History of JIT: The Toyota Effect on Global Markets
In the post-WW2 era, Japanese industries were struggling with grave problems. They were short of real estate for their production facilities and warehouses.
On the contrary, inadequate monetary funds made it nearly impossible to function like their western counterparts. They were not in shape to invest vast sums of money in the inventory or sustain long cash cycles. Also employing huge workforces and using conventional production processes was not economically feasible.
A significant breakthrough in solving this existential crisis came from Toyota. Taiichi Ohno is regarded as the father of the TPS (Toyota Production System.) It relies on cutting down redundancies and maximizing ‘value’. TPS revolves around four major parts: agility, flexibility, reliability, and efficient utilization.
As per the principles of JIT, the production is started only after receiving the order. This is followed by procurement, instant production, and immediate dispatch to the customer location. All activities are undertaken precisely as required, and no process shall commence before the prerequisite is satisfied.
The automobile giant eliminated the need for capital large investment and cash money pools by optimizing every process involved in the business. All of these changes revolve around supply chain management.
This heavily influenced all mass production-driven companies, including its then-contemporary competitors like Ford. Currently, significant businesses like Apple, Zara, McDonald’s, and Harley Davidson are amongst the top companies implementing it. E-commerce companies rely heavily on the method to fulfill the same day and next day deliveries, making it a global phenomenon.
Conventional vs. JIT Supply Chain
Conventionally, the companies procure their raw materials before the sales cycle starts. These goods are stored at on-site warehouses for the production process. Upon completion, they were transported back to the warehouses for distribution. On the other hand, the sales cycle starts, and the company shall receive orders from the clients. This is followed by the distribution and product return cycle if the client finds the product not damaged/not useful. Therefore, the company will invest in anticipation and rely heavily on its capital strength before any profits materialize.
On the other hand, the JIT supply chain management system works in reverse chronological order. The production starts only when the order is received from the customer. The company will not hold any inventory of the raw materials and start production only after receiving orders. For instance, if the production is to begin at 12:00 PM, the raw materials will arrive just before the due time. That is around 10:30 to 11:30 AM. As a result, the warehouse is occupied only for a brief period. Once the production is completed, finished products are directly shipped to the customer without keeping them in storage areas for long.
Need of replacing old Methods and Effects on Business Economics
Whenever any commercial entity is considered, we employ specific finance metrics to understand their health and profitability. These metrics give us an idea about how well the company is utilizing its assets and fetching profits from the investments. I am listing down some of the vital finance metrics below:
Return On Total Assets (ROTA)
Return On Total Assets (ROTA) is the measure of a company’s asset utilization. It is calculated by dividing the earnings before interests and taxes (EBIT) by total net assets. Hence, keeping the net assets will result in a higher resultant figure in this case. In simple words, it is the percentage return generated against unit investment. 45% returns mean that the firm booked a profit of 45 bucks per 100 bucks invested.
Cost of Goods Sold (COGS)
The Cost Of Goods Sold includes direct costs of materials and labor used to generate finished products. When the COGS is deducted from the sales revenue, it reveals the operational efficiency of the business. It also gives us an idea about the bottom line since COGS is considered a business expense. Mathematically, it is equal to the starting inventory + purchases during the production cycle – closing inventory.
Asset Turnover Ratio
It displays the efficiency of a company in generating income from its assets. Its mathematical expression is given by A/((B+C)/2) where, A = total sales, B = starting assets, and C = ending assets. Higher figures indicate better utilization and vice versa. As we can see in the expression mentioned above, one needs to consider the purchase and sales of assets before deriving any conclusion. Hence, referring to the YOY asset turnover ratio is a better option.
It is evident that the conventional methodology is far more inefficient when compared to lean manufacturing due to the large investments involved. The latter can achieve the same profits without consuming capital on a large scale as its older counterpart. In layman terms, these indicators can help us understand the need for replacing old systems:
- Old techniques generate a significant portion of the business costs as they are connected to almost every vertical in the company. Hence, it affects all your commercial goals with you having limited control.
- Unnecessary inventory stalls your working capital often.
- Inefficiency causes over-piling of stocks or running short of inventory quite often in fluctuating markets.
- Companies end up with a massive backlog of products to sell when they face market shocks.
Where does JIT impact on Supply Chain Management?
There are some fundamental changes to the supply chain management that every organization undergoes during JIT implementation. They are listed down below:
- The sales initiate the entire supply chain.
- Performance management of individual verticals are aligned to different clusters of supply chain
- The systems design approach to the supply network is adopted instead of creating solutions on an as-required basis.
- Cascading planning replaces isolated management of various departments.
- The ability to absorb/contain fluctuations in demand is generated through an operational model that supports multi-level integration.
- Synchronizing the flow of production and shipment is done to optimize operations and prevent holdups
- Developing and integrating multiple schedules to enable mixed-model scheduling is done to achieve daily production targets.
- The entire model is customer-centric instead of product-centric.
Objectives of Lean techniques
The older methods focus heavily on creating value out of substantial capital holdings. However, lean techniques emphasize higher turnovers to compensate for lesser investments. The following objectives curate the adoption process in all organizations:
- Eliminate redundant processes and handling methods.
- Exercise greater control through better visibility.
- Cut stock carrying costs.
- Strategic use of production facilities to provide a flexible product range and volume.
Features as a Business Process Optimization Philosophy
Here are some of the universally accepted features that explain its relevance as a broader optimization philosophy:
- It is a customer-driven model, and hence all the activities are oriented towards packing maximum value for the end-user.
- The competitiveness in its case comes from the customer insights and sales forecasting in general.
- Prompt marketing of newer product lineup.
- Quick updation of the existing portfolio.
- Slashing the lead times to optimize costs.
- Higher-end quality and faster inclusion of customer recommendations in future production cycles.
- Using ‘delivery time’ as a value proposition.
Advantages of Implementation
Most of the firms do not employ the principles of lean manufacturing and thus make enormous losses without even recognizing them. However, the benefits of using this method are not limited to savings. Some of the most significant areas where companies can gain tremendous advantages are as follows:
- Companies can manufacture tailored products economically as each component is procured exclusively for the customers. Many large companies like Tesla are taking full advantage of this opportunity by utilizing delivery time while acting as a retailer. They are offering customization as value addition, taking lean manufacturing to greater heights.
- The expenses made on the insurance of the stock, storage facility, and maintenance of the equipment are decimated.
- Depreciation and amortization are other areas where firms can save money. This is reflected in both the gross and operational profits.
- Holding lesser deadstock means less exposure to the negative demand shocks and products becoming out of fashion.
- It improves on-demand delivery, delivery within extremely short periods by minimizing supplier lead time.
- Quicker and predictable cash flow.
- Virtually zero cost of emergency maintenance due to the prevention of breakdowns and downtime.
- The higher utilization ratio of the company’s assets and transportation fleet.
When asked about his Model Y ambitions of spinning out a million cars a year, Elon Musk had the following words for his take on Just In Time:
“I’m hopeful that people think that if we can send a Roadster to the asteroid belt, we could probably solve Model 3 production.” –Forbes
Challenges before organizations
Transitioning to such fast-paced systems will cause considerable changes for any organization. They are on both the strategic and operational levels. It is necessary to train the staff members for coping up with the speed and quality mark. I am listing down some of the most common areas which are equally applicable to businesses of all nature. They include:
Some of them include:
- It is imperative to maintain close coordination with all the vendors and suppliers, along with the logistics partners. Having multiple options is also becoming a bigger necessity than ever before.
- You have to develop a dedicated mechanism to ensure that the equipment doesn’t cause downtime owing to breakdowns.
- The inventory management will also require multi-level and multi-modal synchronization for the components used in more than one product.
- Price shocks in the raw materials are one of the biggest challenges for the businesses using this method. The procurement is done regularly instead of storing in large quantities. Thus, the fluctuations in the market arise as potential threats to margins. To safeguard your interests, you can also go for hedging practices.
How to practically implement 'Just In Time Method'?
Very few firms in the market understand and acknowledge supply chain management as a business process. It has a direct impact on your product circulation in the market, and hence you should make it flexible enough to contain any changes in the demand. The degree of responsiveness is a function of the overall outlook of the organization and the tools used. I am listing down some of the essential tools and operational changes below:
If you are not using an electronic data interchange (EDI) system, install one right away. The use of RFID and SKU-UPC barcodes in your inventory and POS software solutions pave the way for achieving higher efficiency. As the entire inventory is virtually flowing in JIT, you will require a computerized system to keep track of the operations. The stock is tracked digitally instead of relying on manual counting audits. This is because our intention is to prevent ourselves from holding any safety or buffer stock.
The other essential measure is to raise your quality control and assurance standards for suppliers, manufacturing, and distribution network. As we discussed earlier, the mishap on any level downplays the entire cycle. Consider the reliability of the supplier also because shortcomings on their parts can also derail your production process as a whole. Look for suppliers who can deliver the products under short lead times. You should also strive to make provisions for the components used in multiple products to prevent any bottlenecks.
Many times, we might trade in huge volumes but don’t reap as many profits as we should. One of the probable reasons behind this is not tracing profitability per client. You might end up spending too much and earn a negligible profit despite serving a client. Lean methodologies help exceptionally well in such cases for keeping your balance sheets healthy. The following quote is one of my favorites in this context:
“Don’t get sidetracked stomping on ants when you have elephants to feed.”
Now, coming to the strategic portion, you will need efficient and reliable inputs for sales forecasting. Predictability is at the core of its successful implementation but, lack of trust can dilute the functioning of lean techniques. Exchanging vital information remains a challenge for all the stakeholders, and thus, a technological mediation backed by a legal pact becomes essential. One of the smart ways of dealing with this problem is to store unfinished goods at the supplier’s warehouses. When that isn’t possible, you can go to shared warehouses to cut down the expenses.
Make strategic tie-ups with vendors and logistics firms to boost your ability to ship products and services on-demand. With the help of advanced solutions available in the market, you can integrate supplier and customer data from POS and purchase the software. As far as the logistics partners are concerned, try to keep the warehouses near the distribution centers. While all of these matters are bound to receive your attention, don’t forget the reverse logistics. Speeding up the entire process is imperative to your success, but remember that slower transportation is always cheaper. So, keep the collection of returned goods fast, but opt for slower reverse logistics. Also, I recommend collecting insights regarding the return. In case of damage, you can send it back to the central facility for repairs. But, when customers simply return your articles due to a change of mind, get them back into delivery through cross-docking if possible.
Any change in the operating model will demand extensive training of human resources. Building general guidelines to enforce continuous improvement and cutting down non-productivity form the core of this philosophy. Almost all of the companies who successfully executed JIT have one thing in common- they took their staff into confidence and included them in the problem-solving. All of these measures will play a pivotal role in defining your success.
Risks associated with this system
As a rule of thumb, any of the participating entities need to run to their fullest capacity without any interruption. All of them can potentially cause disruptions in the entire ecosystem formed of suppliers, manufacturers, logistics, and clientele.
- Any shortcoming on the part of suppliers and vendors can derail operations and cause massive losses to exist and future fulfillments. Their failures will translate into the stalling of the entire ecosystem as it impacts all the stakeholders. One of the most famous cases to demonstrate this threat also comes from Toyota itself. Aisin Seiki, the sole supplier of P-valves, was affected by fire in 1997, causing a threat to shut down the Japanese marque’s production for weeks.
- Though the cash on hand required is lesser, you still need to have enough of it in case of unexpected events. For example, if some machinery faces a breakdown, arranging for parts and service is a top business priority.
- One thing that many people fail to recognize about this system is that high efficiency comes with high sensitivity. There is no room for any error as they cause dents on your profitability. It applies to your procurement strategy and order management. Lapses in synchronizing them or forecasting and delivery systems will have effects on the entire operations.
- Failing to interchange data accurately with logistics partners can also cause failure if an adequate backup isn’t made available whenever the need arises for it.
These factors indicate the need for a dedicated solution that is integrated to a large cluster of modules ranging from CRM to accounting software and every vital business process in general. Sectors dealing with time-sensitive delivery schedules need to ensure seamless functioning as a primary function.
Quick analysis: Yay or Nay for your firm
If the answer to some of the below-mentioned questions is a yes, then it’s high time to consider the Just In Time method for reviving your profitability and sustaining market competition.
- Can you improve your forecast accuracy?
- Can you develop a reliable supplier network that isn’t dependent on single parties for single components/raw materials?
- Is your organization currently facing longer lead times?
- Are your competitors offering faster delivery than you?
- Are market fluctuations eating up your profits and hurting your bottom line.
- Does your firm use discontinued items in new products because of them turning obsolete?
Consumerization has driven enormous changes in the economy and businesses will need to adopt competitive techniques to stay profitable. In the current market scenario, companies cannot push selling prices beyond a particular limit. Hence, the focus will rely on looking inwards to cut all costs that don’t contribute to the end value. Thus, Just In Time is one of the most promising and time-tested business philosophies, which will gain more extensive attention in the days to come.