Just in Time (JIT) Inventory

What Is Just-in-Time (JIT)?

The just-in-time (JIT) inventory system is a management strategy that aligns raw-material orders from suppliers directly with production schedules. Companies employ this inventory strategy to increase efficiency and decrease waste by receiving goods only as they need them for the production process, which reduces inventory costs. This method requires producers to forecast demand accurately.

How Does Just-in-Time Inventory Work?

The just-in-time (JIT) inventory system minimizes inventory and increases efficiency. JIT production systems cut inventory costs because manufacturers receive materials and parts as needed for production and do not have to pay storage costs. Manufacturers are also not left with unwanted inventory if an order is canceled or not fulfilled.

One example of a JIT inventory system is a car manufacturer that operates with low inventory levels but heavily relies on its supply chain to deliver the parts it requires to build cars on an as-needed basis. Consequently, the manufacturer orders the parts required to assemble the vehicles only after an order is received.

For JIT manufacturing to succeed, companies must have steady production, high-quality workmanship, glitch-free plant machinery, and reliable suppliers.

The JIT inventory system contrasts with just-in-case strategies, where producers hold sufficient inventories to have enough products to absorb maximum market demand.

Advantages and Disadvantages Just-in-Time (JIT)

JIT inventory systems have several advantages over traditional models. Production runs are short, which means that manufacturers can quickly move from one product to another. Also, this method reduces costs by minimizing warehouse needs. Companies also spend less money on raw materials because they buy just enough resources to make the ordered products and no more.

The disadvantages of JIT inventory systems involve potential disruptions in the supply chain. If a raw-materials supplier has a breakdown and cannot deliver the goods promptly, this could conceivably stall the entire production line. A sudden unexpected order for goods may delay the delivery of finished products to end clients.

Example of Just-in-Time

Famous for its JIT inventory system, Toyota Motor Corporation orders parts only when it receives new car orders. Although the company installed this method in the 1970s, it took 20 years to perfect it.

Sadly, Toyota's JIT inventory system nearly caused the company to come to a screeching halt in February 1997, after a fire at Japanese-owned automotive parts supplier Aisin decimated its capacity to produce P-valves for Toyota's vehicles. Because Aisin is the sole supplier of this part, its weeks-long shutdown caused Toyota to halt production for several days. This caused a ripple effect, where other Toyota parts suppliers likewise had to temporarily shut down because the automaker had no need for their parts during that time period. Consequently, this fire cost Toyota 160 billion yen in revenue.

At the start of the coronavirus pandemic and its ripple effect on the economy and supply chain, things like paper surgical masks, toilet paper, and hand sanitizer experienced disruption. This was because inputs from overseas factories and warehouses could not reach their destinations in time to meet a surge in demand due to the pandemic.

Special Considerations

Kanban is a Japanese scheduling system that's often used in conjunction with lean manufacturing and JIT. Taiichi Ohno, an industrial engineer at Toyota, developed kanban in an effort to improve manufacturing efficiency.

The Kanban system highlights problem areas by measuring lead and cycle times across the production process, which helps identify upper limits for work-in-process inventory to avoid overcapacity.

What Exactly Do You Mean By Just in Time?

A just-in-time (JIT) inventory system is a management strategy that has a company receive goods as close as possible to when they are actually needed. So, if a car assembly plant needs to install airbags, it does not keep a stock of airbags on its shelves but receives them as those cars come onto the assembly line.

Doesn't This Sound a Bit Risky? What If Things Don't Arrive in Time?

A chief benefit of a JIT system is that it minimizes the need for a company to store large quantities of inventory, which improves efficiency and provides substantial cost savings. However, if there is a supply or demand shock, it can bring everything to a halt. For instance, at the beginning of the 2020's economic crisis, everything from ventilators to surgical masks experienced disruption as inputs from overseas could not reach their destinations in time to meet a surge in demand.

What Types of Companies Use JIT?

The JIT inventory system is popular with small businesses and major corporations alike because it enhances cash flow and reduces the capital needed to run the business. Retailers, restaurants, on-demand publishing, tech manufacturing, and automobile manufacturing are examples of industries that have benefited from just-in-time inventory.

Who Invented JIT Inventory Management?

JIT is attributed to the Japanese automaker Toyota Motor Corporation. Executives at Toyota in the 1970s reasoned that the company could adapt more quickly and efficiently to changes in trends or demands for model changes if it did not keep any more inventory in-store than was immediately needed.