Storage facilities and large stocks of inventory can be a huge drain on a business. The physical area has to be taken care of, rent has to be paid, and personnel have to spend time overseeing and maintaining all the stock.
That’s where just in time inventory comes in. This method of inventory management allows a company to function without needing a large store of goods. Businesses that use just in time inventory operate by getting the raw goods and items they use as –– and when –– they’re needed.
Just in time (JIT) is a lean approach to inventory management that helps keep costs low while meeting manufacturing and order demands to keep customers satisfied.
Keep reading for a full guide on how JIT works, its pros and cons, real-life examples, and who may benefit from it the most.
Just in time inventory management is a lean production approach to optimize efficiency and minimize waste throughout the supply chain. At its core, JIT revolves around the principle of acquiring or producing goods exactly when they’re needed, in the quantities required, and in the right location.
This strategy synchronizes production schedules and customer demand, in turn reducing excess inventory levels and associated carrying costs.
Key takeaways:
The just in time inventory management technique is dependent on two things: accurate forecasting and reliable suppliers that are nearby.
When it comes to retailers, the just in time approach may mean the manufacturer passing the products directly to the wholesaler or a third-party logistics company (3PL) for order fulfillment. This way, the retailer can streamline operations by avoiding physically handling the items at all.
Here’s generally how the process will look at each step.
The JIT inventory system process should be designed based on demand forecasting results. With trends, averages, and other considerations in mind, the process should involve a very clear understanding of your small business’s needs and customer habits.
Because just in time inventory is demand-focused, a clearly defined process ensures the business is prepared to meet consumer demand — with policies and procedures in place, suppliers ready, and everyone understanding their role.
Management reviews the JIT manufacturing process using total quality management (TQM), which ensures everything runs smoothly from end to end. TQM also ensures continual evaluations to reassess and improve processes as needed.
Vendor relationships are critical to the success of just in time inventory. Finding vendors that provide quality products and services will ensure you’re able to meet customer order needs. Set clear expectations of your vendors and encourage open communication. It’s also important to continually evaluate vendors to ensure they’re meeting set standards.
With systems in place, the customer can now place their order. The retailer receives the order, who will then order from the supplier. This is where good vendor relationships are critical, as a customer is now waiting on a product. The product is pulled, or production starts to fulfill the customer’s order.
The order then ships. Depending on the specific process, orders ship directly to the customer, such as with a 3PL provider, which handles order fulfillment entirely.
Alternatively, the order ships to the retailer, who will then ship the order to the customer. This is all dependent on the specific type of products and the number of suppliers.
Just in time inventory offers numerous benefits, ultimately leading to higher profitability and a more competitive edge in the marketplace. Here’s how:
Perhaps unsurprisingly, all those benefits come at a cost. Here are some drawbacks of JIT to keep in mind:
Challenges like forecasting difficulties, the need for accuracy, and the risk of communication breakdowns can make or break the JIT method.
A robust inventory management system like the Cin7 Omni can help prevent some of the challenges associated with JIT. With a clear view of the market and a robust ecosystem of integration partners, Cin7 Omni can give you more accurate forecasts you can rely on. It also gives a real-time look at inventory levels so everyone is working from the same data set, helping avoid miscommunications.
Supply Chain Disruptions: One of the primary risks associated with just-in-time inventory is the vulnerability to supply chain disruptions. JIT relies heavily on timely deliveries, making businesses susceptible to delays caused by natural disasters, transportation issues, or political instability. This can lead to inventory shortages and halted production, significantly impacting a company’s ability to meet customer orders.
Reliance on Suppliers: JIT’s dependency on a limited number of reliable suppliers can pose a risk if any of these suppliers face difficulties. Issues like strikes, bankruptcy, or quality control problems can disrupt the time delivery system, leading to production delays and potential inventory optimization challenges. Small businesses using JIT might find it challenging to diversify their supplier base, increasing this risk.
Minimal Inventory Levels: While maintaining minimal inventory levels reduces holding costs, it also limits a company’s buffer against sudden increases in consumer demand. If demand spikes unexpectedly, the lack of surplus inventory can result in missed sales opportunities and dissatisfied customers. This is particularly risky in industries with fluctuating demand or unpredictable market conditions.
JIT inventory management is particularly advantageous for industries or small businesses characterized by fast-changing consumer demands, short product life cycles, and a need for cost efficiency.
Industries like automotive manufacturing, electronics, retail, and food service are prime examples where JIT principles can significantly improve operational efficiency, minimize holding costs, and improve overall competitiveness.
Automotive Industry: The automotive industry is a classic example of JIT manufacturing. Companies like Toyota pioneered the JIT inventory system to minimize waste and optimize production schedules. By receiving parts just in time for assembly, automotive manufacturers can maintain economic order quantities and reduce holding costs.
Electronics Industry: In the electronics sector, JIT allows manufacturers to keep pace with rapid technological advancements. By minimizing inventory needs and aligning production with consumer demand, companies can avoid overproduction of outdated models, thus improving inventory turnover and reducing the risk of holding obsolete stock.
Food and Beverage Industry: The food and beverage industry benefits from JIT by ensuring fresh products and minimizing waste. JIT helps manage inventory needs in perishable goods by aligning deliveries with customer orders, thus reducing the risk of spoilage and maintaining optimal warehouse management.
Retail Industry: Retailers use JIT to manage stock levels efficiently, particularly for fast-moving consumer goods. By optimizing inventory strategy and relying on accurate demand forecasting, retailers can reduce excess stock, improve cash flow, and respond quickly to changes in consumer demand.
Just in time inventory management is the perfect system for contractors working on tight budgets because they don’t have to lay out money for raw materials until there are orders to fill. It’s why contract manufacturers who work with large companies like Apple, Toyota, and Zara operate on this system.
Here are a few examples of companies that use JIT inventory practices.
Small businesses can implement JIT as well. Local bakeries or cafes, custom furniture makers, food trucks, and craft breweries are just a few examples of small businesses with either limited storage or where fresh or on-demand products may be beneficial.
To judge if the just in time inventory management method is right for you, ask yourself the following questions:
If you answered yes to several of the above, the just in time inventory management system is probably a good bet for you.
Discover how Cin7 can support your inventory management — no matter which method you use. Learn more about our products.
Just in time inventory control is designed to minimize inventory holding costs and waste by ensuring goods are produced or acquired on an as-needed basis. It aims to synchronize production with customer demand.
One downfall to just in time manufacturing and inventory management is its vulnerability to disruptions in the supply chain. Relying on precise coordination and minimal buffer stocks means any supplier delays or shortages can lead to production bottlenecks and customer dissatisfaction.
Just in time inventory management would most help businesses with fast-changing consumer demands and short product life cycles, like those in the fashion industry or electronics sector. Additionally, businesses with limited storage space or those seeking to minimize inventory holding costs will likely benefit from JIT.
A just in time inventory system is a supply chain management approach where goods are acquired or produced only as needed to fulfill customer orders. It requires strong communication between suppliers and precise order forecasting.
No, JIT doesn’t necessarily mean zero inventory. JIT focuses on minimizing inventory levels to reduce waste and holding costs, but it does allow for some level of inventory maintenance. The goal is to maintain optimal inventory levels that align closely with customer demand rather than completely eliminating inventory.
