Everything you need to know about Just in Time inventory management.
You’ve probably heard the term before, but what exactly is Just in Time (JIT) inventory management, where did the concept come from, and how can it benefit businesses?
Just in Time inventory management methodology
Also known as the Toyota Production System, JIT is a common inventory management technique and type of lean methodology designed to increase efficiency, cut costs and decrease waste by receiving goods only as they are needed. JIT was originally formed in Japan as a response to the country’s limited natural resources, leaving little room for wastage.
Today, Just in Time systems are used by many businesses, and it has influenced related lean inventory management techniques like IBM’s Continuous Flow Manufacturing (CFM). The rise of dropshipping has made JIT inventory management more appealing for retailers, as it allows them to sell a product before buying it, then purchase the item from a third party and have it shipped directly to the customer.
JIT inventory management at a glance: the pros and cons
With the right approach, utilizing a JIT inventory management strategy has a number of potential benefits for businesses:
- Lower inventory holding costs – with inventory purchased or produced at short notice there’s no need to have unsold inventory taking up valuable warehouse space.
- Improved cash flow – without the need to store large volumes of inventory at all times, capital expenditure is reduced, and cash can be invested elsewhere.
- Less dead stock – because inventory levels rely on customer demand, there’s less risk of unwanted stock left sitting in your warehouse.
On the flipside, though, Just in Time inventory management isn’t without its potential disadvantages:
- Problems with order fulfillment – if a customer orders a product and you don’t yet have it in stock, you run the risk of not being able to fulfill the order in a timely fashion.
- Little room for error – doing JIT right means having accurate demand forecasts and insights into customers’ buying habits at all times. Any miscalculation could have a significant negative impact on business operations.
- Price shocks – with a Just in Time system, you don’t have the luxury of waiting around for the best prices on goods. When prices go up, profit margins go down.
Just in Time inventory management in action
JIT inventory management is used today by businesses in industries ranging from retail to fast food to tech. Toyota is one of the most famous examples of Just in Time manufacturing simply because it was one of the first to implement this strategy effectively. Here are some other examples of JIT in action:
This consumer electronics giant keeps as little inventory on hand as possible. By lowering the amount of stock on hand, Apple carries a lower risk of overstocking and chalking up dead stock in its warehouses. As explained by Tim Cook, 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.”
Given that Kellogg’s produces mostly perishable goods, it shouldn’t come as a surprise that they use the Just in Time inventory management method as an efficient stock management system. Kellogg’s makes sure that just enough products are made to fulfill orders and limited stock is kept on hand.
Similar to Apple, Xiaomi manages a small inventory by releasing limited quantities of its mobile phones per week. The drawback to this strategy is that eager consumers have to wait for the items to hit the stores – resulting in potential lost sales. Still, Xiaomi still benefits from keeping costs down and eliminating wastage.
Zara epitomizes “fast fashion” by owning their supply chain and being able to bring items to market extraordinarily quickly.
The brand believes that inventory = death. It commits six months in advance to only 15 to 25 percent of a season’s 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 clothes are designed and manufactured right in the middle of the season.
If a certain style or design suddenly becomes popular, Zara reacts quickly by designing new styles and getting them into stores while the trend is still peaking, satisfying seasonal demand and exploiting changing customer preferences.
Despite Tesla’s phenomenal growth in the past few years, the company is still one of the smallest auto manufacturers in the world and cannot independently enjoy the same economies of scale. In contrast, Tesla takes complete ownership of the supply chain and has been vocal in their rejection of the traditional franchise-dealer sales model.
By keeping little inventory and essentially producing on demand, Tesla can minimize the amount of capital and risk tied up with storing excess inventory. In addition, the wait encourages additional customization, a premium that many of their paid customers might not have chosen to pay for if they could immediately drive a stock car off the lot.
JIT inventory management: Your go-to or a no-go?
The Just in Time methodology requires businesses to be extremely agile with the capability to handle a much shorter production cycle – so it’s not for everyone. If you’re considering adopting a Just in Time inventory management strategy, first ask yourself these questions:
- Can my product/s be manufactured or supplied in a very short period of time?
- Are my suppliers reliable and efficient enough to get products to me on time every time?
- Do I have a thorough understanding of customer demand, sales cycles, and seasonal fluctuations?
- Is my order fulfillment system efficient enough to get orders to customers on time?
- Does my inventory management system offer the flexibility needed to update and manage stock levels on the fly?
When you can confidently say yes to all of the above, you’re in a good position to start reaping the benefits of a Just in Time business model.