Just in Time Inventory System - Explained
What is the JIT Inventory System?
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Table of ContentsWhat is Just In Time (JIT) Inventory System?How is the JIT Inventory System Used?Modern Evolution of JIT Advantages of JIT:Disadvantages JIT Systems:Academic Research on Just in Time Inventory System
What is Just In Time (JIT) Inventory System?
Just-in-time inventory system (JIT) is an operations management strategy of ordering raw materials/goods, and receiving those raw materials/goods only as they are needed to keep the production process running to meet actual customer demand. That is, no excess stock is ordered, and it should arrive just in time to be utilized in the production process by manufacturers.
How is the JIT Inventory System Used?
Just in Time (JIT) inventory management was first adopted and perfected in Japan in the early 1970s. Taiichi Ohno, the founder of automobile manufacturer Toyota, is credited as being the father of the JIT inventory management system. Toyota Inc. still uses a JIT inventory system.
This system typically relies on long-standing contracts within the local supply chain to deliver the different parts it needs to assemble an automobile. The components required to manufacture the cars arrive just as they are needed. JIT, also nicknamed Toyota production system, is a complete opposite from the Just-in-case strategy that involves a manufacturer stocking inventory just in case there is an unexpected peak in production demand from customers.
Lean manufacturing, the Kanban system, and JIT system are often confused as the same thing. However, they are different concepts that work together.
Lean manufacturing refers to the process of eliminating waste in the production process by identifying what adds value and what doesn't add value.
Kanban -which is a Japanese word for signboard or billboard- on the other hand, is a system that identifies the lead and cycle time for a manufacturing process, then provides an efficient scheduling system for ordering that limits excess buildup of inventory. Therefore, from the preceding, it should be understood that Kanban is an inventory scheduling system within the larger JIT inventory management system.
JIT, on the other hand, can be implemented on its own or adopted as one of the several steps in lean manufacturing. Many reasons have been advanced as to the actual motivation behind the development and application of JIT by Toyota and generally many Japanese manufacturing firms.
The most recurrent reason is a lack of natural resources in Japan which prompted a need to work intelligently in order to survive by eliminating waste in regards to resources. Also, the JIT system was effectively applied because of the strong cultural work ethics associated with Japanese workforce such as;
- Japanese workers are always continually seeking to be better and improve beyond the existing standard as enshrined in their Kaizen philosophy.
- Japanese firms value teamwork in creating ideas that solve problems and achieve set objectives.
- Japanese workers value work over leisure and a majority of the population work for more than fourteen hours a day.
- JIT system was successful in Japan because people tend to keep one employer throughout one's career, therefore, providing a consistent implementation of long term ideas.
Such strong ethics in craft is what enabled Toyota to perfect the JIT system for over fifteen years. Apart from the high-quality workforce, the JIT system incorporates among others;
- Thorough understanding by the manufacturer of sales cycles and the ability to forecast seasonal fluctuations in demand.
- Ability to manufacture and supply goods within a short period to meet demand.
- Establishing a strong relationship with reliable and efficient suppliers with the ability to source and deliver small batches of raw materials on time.
- Having a reliable production system with little or absolute zero breakdowns during manufacturing.
The JIT system aided Toyota in becoming one of the most dominant car manufacturers in the world by achieving lean manufacturing.
Consequently, JIT inventory system started to gain traction in the United States and other developed countries in the early 1980s with case studies reporting a successful uptake. For instance, Omark Industries - a company that manufactures chainsaws, ammunition, and log loaders in the United States - reportedly saved an estimated seven million dollars in inventory carrying costs in the year 1983 with their version of JIT system referred to as Zero Inventory Production System(ZIPS). In addition, a case study conducted by Daman Products on their production facilities in 1999, reported a 97 percent reduction in cycle times and a 50 percent reduction in setup times. Further, flow distance was reduced by 90 percent, and lead times reduced from 4-8 weeks to only 5-10 days after implementing a JIT inventory management system.
Modern Evolution of JIT
JIT inventory management is implemented today by businesses in many industries ranging from retail to fast food to technology, publishing, fashion and many more. For instance, global tech giant Apple has been known to utilize the JIT inventory system. Apple's CEO Tim Cook refers to inventory as milk and should not be kept past their freshness and the motivation behind the company not stocking excess inventory. In fast food restaurants like the McDonalds, all the ingredients for a cheeseburger are kept ready, but a burger is only made the moment a customer places an order. Another example is the self-publishing industry where companies such as Createspace have a master manuscript that is kept ready but a book isnt printed until a customer orders one through Amazon. Also, drop shipping by retailers is an example of JIT inventory management. A retailer doesn't sell stocked goods but when orders for goods are made an arrangement for the products to be shipped directly to the customer from the manufacturer or distributor is processed. The retailer typically makes money through commission or the difference in wholesale and retail price. Today, the JIT system has been incorporated in many businesses with different names such as IBMs Continuous Flow Manufacturing (CFM) or Motorola's short-cycle manufacturing (SCM) and many others. Another recent development with JIT inventory management system has been the increased use of computer programs that automatically order materials as soon as inventory decreases to a specific set level.
Advantages of JIT:
- Minimizes insurance and rent costs by eliminating excess inventory holding.
- Helps to eliminate wastage such as expired or spoiled goods by avoiding warehousing and stockpiling.
- Maintains low working capital as it operates on a need basis.
- Maintain healthy cashflow by ordering small stocks only when necessary.
- By using local suppliers, production lead time is reduced.
- JIT emphasizes on getting it right the first time and therefore rework, and inspection cost is minimized.
- Just in Time adoption result in the elimination of overproduction and only manufacture goods as demanded, therefore resulting in a higher return on investment.
- Better control of the market, as the company can increase production of on-demand goods and reduce the manufacturing of products that are experiencing low sales.
Disadvantages JIT Systems:
- Little room for mistakes, making re-work difficult in practice, as inventory is kept to a minimum level.
- Possible idling and downtime when there during the off-peak production season.
- Chances of not meeting an unexpected peak in demand for units as there will be no stored inventory to complete the order.
- Transaction costs would be comparatively high depending upon the frequency of transactions.
- The JIT inventory model exposes enterprises to the potential of spikes in raw material costs which in turn lead to a surge in profit as the final products are usually preordered.
- High reliance on suppliers, can lead to a shutdown in case the suppliers fails to avail the required raw material on time. A case in point is when Toyota shut down its production for two days in 1997 because one of its suppliers had a fire incident and couldn't supplier on time
- Risk of losing revenue in case of a mishap in the supply chain. During the two days shut down by Toyota an estimated fifteen billion dollars in revenue was lost and over 70,000 car units of unfilled order.
It should be noted that a JIT inventory management system is not easy to implement and carries the potential risk of production shutdown leading to losses. However, if executed meticulously, the benefits that can be realized outweighs the impending risks involved.
Academic Research on Just in Time Inventory System
- Just-in-time inventory control and the economic integration of Japanese-owned manufacturing plants with the county, state and national economies of the United , Reid, N. (1995). Regional Studies, 29(4), 345-355. The paper presents an argument that the adoption and implementation of the just-in-time (JIT) inventory management system have spatial implications in the United States. The article concludes that JIT systems encourage the spatial clustering of the members of a JIT network based on survey data collected from 239 US-based Japanese-owned manufacturing plants.
- An inventory model under just-in-time purchasing agreement, Pan, A. C., & Liao, C. J. (1989). Production and Inventory Management Journal, 30(1), 49. The article discusses the just-in-time (JIT) inventory model as a whole and how it works to achieve set goals by businesses.
- The Implications of Just-in-Time Inventory Policies on Carr, Bagchi, P. K., Raghunathan, T. S., & Bardi, E. J. (1987). Logistics and Transportation Review, 23(4), 373. The article looks at the implications that are realized with the adoption of the just-in-time (JIT) inventory management system on carr.
- Impact of just-in-time inventory systems on OEM suppliers, Kros, J. F., Falasca, M., & Nadler, S. S. (2006). Industrial Management & Data Systems, 106(2), 224-241. The paper looks at the impact that the utilization of justintime (JIT) production systems by different original equipment manufacturers (OEMs) especially the ones in automotive, electronics, and aircraft industries on the inventory profiles.
- An analysis of mode choice for shippers in a constrained network with applications to just-in-time inventory, Benjamin, J. (1990). Transportation Research Part B: Methodological, 24(3), 229-245. The paper analyses the adoption of the just-in-time (JIT) inventory system by shippers in distributing materials and examines the impact. Following the review, the author goes on to suggest possible criterion such as storage, cost of shipping and production for transportation decisions.
- Just-In-Time inventory control: a subset of channel management, Rosenberg, L. J., & Campbell, D. P. (1985). Journal of the Academy of Marketing Science, 13(3), 124-133. The paper advocates for just-in-time (JIT) inventory system for marketing managers instead of the conventional Economic Order Quantity (EOQ) method of inventory control.
- Will Just-In-Time Inventory Techniques Dampen Recessions?, Morgan, D. P. (1991). Federal Reserve Bank of Kansas City Economic Review, 2, 21-33. The paper discusses the possibility of just-in-time (JIT) inventory system adoption leading to better efficiency and reduced productions cost and whether such benefits can logically dampen the effect of the great recession in the United States.
- Management of Materials Under Just-in-Time Inventory System, Bagchi, P. K. (1988). Journal of Business Logistics, 9(2), 89. The paper examines how just-in-time (JIT) inventory management system aligns materials with production lines as it cuts on wastage and unnecessary inventory/material costs.
- The impact of just-in-time inventory systems on small businesses, Sadhwani, A. T., & Sarhan, M. H. (1987). Journal of Accountancy, 163(1), 118. The paper looks at the implementation of the just-in-time (JIT) inventory system and the impact it has on small businesses.
- Just-in-time inventory systems innovation and the predictability of earnings, Carnes, T. A., Jones, J. P., Biggart, T. B., & Barker, K. J. (2003). International Journal of Forecasting, 19(4), 743-749. The paper examines the possible profit earning benefits that accrue to an enterprise that adopts and implements the just-in-time (JIT) inventory management system.
- A comparison of just-in-time inventory and the quantity discount model in retail outlets, Aghazadeh, S. M. (2001). Logistics Information Management, 14(3), 201-207. The paper examines the just-in-time inventory and the quantity discount model as well in relation to retail outlets. The article makes a comparison after examination both systems, and the author concludes that JIT is not the appropriate inventory system for a retail outlet and the optimal solution based on reasons such as demand for retail chains is to implement the quantity discount model.