Most business owners would agree that effective inventory management is crucial to the success of their business. But managing an ever-increasing amount of inventory isn’t easy, and mistakes can be costly for any business.
Instead of continuously trying to manage higher and higher inventory levels, what if business owners focused on keeping inventory levels at a minimum? That’s the concept behind Just In Time, or JIT, inventory management.
What is Just In Time (JIT) inventory management?
Just In Time (JIT) inventory management is a strategic approach to managing inventory where materials or supplies are ordered based on customer orders, as opposed to ordering based solely on forecasts and storing excess inventory until it’s purchased.
The goal of JIT inventory management (also known as lean inventory management) is to have just enough materials and resources to fulfil incoming orders — and to have as little as possible left in storage.
Developed by Toyota in the 1930s, JIT has been adopted by numerous corporations around the world. Even for small growing businesses, adopting JIT inventory management practices can be beneficial.
In this guide, we’ll cover everything you need to know to implement a Just In Time inventory system.
How does JIT inventory management work?
First, here’s a quick rundown of JIT inventory management for a single purchase instance:
your company, holding little to no inventory, receives an order from a customer
you then order the materials, resources, and/or products necessary to fulfil your customer’s order
you receive the materials and immediately begin preparing the order for delivery — with said materials spending minimal time in storage.
On paper, it looks simple — but getting JIT inventory management right is a much more involved process.
The fundamentals of JIT inventory management involves the following steps:
1. Assess
Identify the essential personnel, equipment, resources and other assets involved in your inventory management, purchase order management and procurement processes.
2. Manage
Gain a holistic and comprehensive understanding of your current inventory management processes. Begin identifying specific areas that'll need to be improved, removed or completely overhauled as you implement JIT practices.
3. Get buy in
Start thinking about your approach to change management as you properly introduce this “new way” to your team.
4. Connect
Strong relationships with reliable suppliers are a cornerstone of JIT inventory management. This requires not just finding the right suppliers for your needs, but also setting their expectations regarding your future needs.
5. Build
Though your employees will be involved throughout the initial stages of JIT implementation, they’ll also need to receive formal training in these new practices. While there are numerous JIT training courses available, you’ll want to tailor your sessions to your specific circumstances.
6. Refine
Always be looking for ways to become more efficient at every step of the process.
What are the benefits of JIT inventory management?
Lower warehouse holding costs
Inventory management can be costly, and it gets more expensive as inventory levels grow larger.
In addition to the cost of storage space, there’s also the cost of shelving, moving and maintaining inventory over time.
By adopting a leaner inventory management process, you’ll be able to shrink these costs. While there’s more to cutting inventory management costs, overall, your costs specifically related to storing inventory will be lower when you adopt a just-in-time approach.
Decreased total inventory costs
Buying inventory only as you need it means you don’t have value capital tied up in excess stock.
Improved cashflow
If you’re spending less on materials and inventory management, you’ll have more cash-on-hand to invest into your business.
Whether you use it to optimise JIT-related processes or invest it into other areas of the business, the money you save can be better directed toward growth-related business activities.
Less inventory spoilage
Since most of the inventory you’ll be holding will already be designated for use, there’s a much lower chance of waste, should you operate a business that holds products that can go off, become obsolete or depreciate when not sold within a certain timeframe
While spoilage can still occur due to cancelled orders, human error, and other factors, JIT inventory management will help eliminate most instances of time-based spoilage.
Less dead stock
Even if unsold stock doesn’t “officially” expire, demand for said products will almost certainly fade over time.
If you’re left with more product than you’re able to sell, you’ll be forced to make a choice:
hold onto it in the hopes that demand will increase again
sell it at a loss
get rid of it completely.
Unfortunately, many companies end up throwing away unsold inventory. A lean approach mitigates this problem. In fact, the entire purpose of JIT is to make sure that materials and products are “live” from the moment you order them from the supplier to the moment you deliver them to the customer.
Improved product quality
Though we haven’t talked much about how JIT benefits the consumer, we do need to mention the impact it has on product quality.
All products delivered via JIT processes are made to order, in some way or another, so they’re almost guaranteed to be higher in quality than their mass-produced counterparts.
More efficient inventory management processes also mean less chance of accidental damage, ensuring every product is delivered to the customer exactly as expected.
What are the potential drawbacks of JIT inventory management?
As beneficial as a just-in-time approach to inventory management can be, there are also a number of drawbacks to keep in mind.
Greater susceptibility to supply chain disruptions
The pandemic has illustrated just how fragile the global supply chain can be.
Unfortunately, businesses operating with a just-in-time philosophy were hit hard by the shutdown.
Even during “normal” times, though, the slightest disturbance in the supply chain can interfere with your JIT processes. With such a small margin for error, everything must go according to plan to guarantee you have what you need, when you need it.
More vulnerability to local sourcing costs
Teams using JIT inventory management often partner with local suppliers in the interest of minimising lead times and other transport-related risks.
The trade-off is often monetary in value. Unless your suppliers can source their materials locally, chances are you’ll be paying a higher price than you would from a big-name global supplier.
Higher levels of supplier dependence
With the above in mind, it should be clear that implementing JIT inventory management means you’ll be at the mercy of your suppliers.
Obviously, a less-than-reliable supplier can cause major problems. And, as we discussed above, your more reliable options will also likely be among your most expensive.
In any case, you’ll need to become even more dedicated in your search for the right suppliers for your business — and in your efforts to maintain your relationships with said suppliers over time.
More exposure to forecasting errors
In looking to capitalise on current trends and other opportunities, many teams unwittingly compromise the “made-to-order” aspect of JIT inventory management.
If signs show a certain trend will likely continue well into the future, you’ll at least want to consider ordering higher volumes to handle the additional upcoming orders.
But, there’s always the chance that your demand forecasts are off, which can leave you with the same overstock problems you started with.
When should a company transition to a JIT inventory management system?
JIT inventory management isn’t fit for every business. So, before you dive into this lean process, there are a number of questions to ask yourself.
Can your products be produced and supplied quickly?
Your customers don’t want to wait forever to get the products they order from your company.
If long production and fulfilment times are an issue for your team, you’ll want to troubleshoot the reasons before you adopt JIT inventory management and lean production.
Otherwise, you could end up disappointing your customers — and potentially losing their business altogether.
Do you have accurate demand forecasts?
JIT inventory management requires accurately predicting:
what future demand will be for your product
how much product or material you’ll need to cater to demand
how much inventory space you’ll need at any given moment.
If any of these predictions are off — or if your prediction methods aren’t all that strategic — “going lean” will be nearly impossible.
Is your supply chain able to absorb sudden disruption?
Before you get started, you’ll need to make sure your current supply chain is stable — and that you have proper fail safes in place should problems arise.
Do you work with reliable suppliers and vendors?
If you’re unsure of your suppliers’ ability to handle your new lean initiatives, you should probably trust your instincts.
Your options are to strengthen your current supplier relationships in some way, or to find more reliable vendors to work with moving forward.
Do you have buy-in from the workforce?
If your warehouse and fulfilment teams don’t understand JIT, can’t implement JIT — or don’t want to implement JIT — it just isn’t going to happen.
Before throwing your team into something they’re not ready for, you’ll need to get them on board through effective change management and employee training.
Do you have the right technology in place?
By today’s standards, technology is all but a requirement for effective inventory management of any kind. And it becomes even more important as you implement JIT.
Some key tools to consider include software for:
Inventory management
Supplier relationship management
Customer relationship management
Once you’ve strengthened your tech stack, you can begin implementing a JIT system.
Which industries use JIT inventory management?
Though it looks relatively similar in each industry from a high-level perspective, it’s worth taking a closer look at some of the key differences from industry to industry.
Automotive
The automotive industry is where JIT inventory management was first developed and implemented.
In Toyota’s case, switching to JIT led not just to more efficient and cost-effective inventory management processes, but also to a higher-quality product. Lean inventory management means there’s little room for error, which ultimately means products are built with greater accuracy and precision.
Manufacturing
Manufacturers of all kinds have also implemented JIT inventory management practices, and one key reason manufacturers opt to go lean is to avoid spoilage or dead stock.
In contrast, those who stockpile materials in anticipation of future orders run the risk of materials decreasing in quality or becoming obsolete.
Construction
Construction companies often implement just-in-time inventory management workflows as a means of avoiding both storage and transportation costs.
Since they’re purchasing the necessary materials only after having signed onto a project, construction companies using a JIT system can have the materials delivered to the building site instead of transporting them from a storage location.
Retail
JIT inventory management has become popular in the retail world, especially for niches where demands and trends are constantly in flux.
Fast-fashion brands, for example, use JIT practices to capitalise on seasonal trends as they emerge, without carrying excess inventory.
JIT inventory management FAQs
What is the purpose of just-in-time inventory management?
The overarching purpose of JIT inventory management is to keep all inventory management-related costs to a minimum.
While implementing JIT can bring many other benefits to your business, the main focus is on developing the most efficient inventory management workflows and practices possible.
How does just-in-time improve efficiency?
JIT inventory management improves efficiency by reducing superfluous inventory storage — and, in doing so, reducing superfluous operations.
In turn, your warehouse team will be able to focus more on accomplishing the tasks that truly support your business objectives.
What’s the difference between JIT inventory management and JIT manufacturing?
Though both operate under the lean principle, JIT inventory management and JIT manufacturing aren't the same thing.
While JIT inventory management focuses on the movement and storage of materials and products before delivery, JIT manufacturing focuses on the actual production process to make sure the development team has exactly what they need to construct the product in question.
Proper inventory management is necessary to streamline production, while efficient production is required to deliver orders exactly as planned.
Boost productivity and lower costs with a JIT inventory management system
You can’t expect to get your JIT inventory management initiatives up and running without a little technological assistance.
We’re here to help you get started.
With MYOB’s inventory management software you can start planning a more lean future for your business.
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