Just-in-Time (JIT) Inventory Management

Increase Efficiency and Decrease Waste

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Just-in-time (JIT) inventory management, also know as lean manufacturing and sometimes referred to as the Toyota production system (TPS), is an inventory strategy that manufacturers use to increase efficiency. The process involves ordering and receiving inventory for production and customer sales only as it is needed to produce goods, and not before.

This type of inventory management provides many benefits, but is not without its downsides, and relies heavily on factors such as a strong, fast and efficient network of suppliers.

The Purpose of JIT

Ordering inventory on an as-needed basis means that the company does not hold any safety stock, and it operates with continuously low inventory levels. This strategy helps companies lower their inventory carrying costs, increase efficiency and decrease waste. JIT requires manufacturers to be very accurate in forecasts for the demand of their products.

Just-in-time inventory management is a positive cost-cutting inventory management strategy, although it can also lead to stockouts. The goal of JIT is to improve a company's return on investment by reducing non-essential costs.

Some competing inventory management systems exist, including short-cycle manufacturing (SCM), continuous-flow manufacturing (CFM) and demand-flow manufacturing (DFM).

The JIT inventory system represents a shift away from the older "just-in-case" strategy, in which producers carried much larger inventories of stock and raw goods, in case they needed to produce more units because of higher demand.

History of the Technique

The management technique originated in Japan and is often attributed to Toyota. However, many believe that Japan's shipyards were the first to develop and successfully implement this approach. Its origins are seen as three-fold: Japan's post-war lack of cash, lack of space for big factories and inventory and Japan's lack of natural resources. Thus the Japanese "leaned out" their processes, and JIT was born.

News about the process and success of JIT/TPS reached western shores in 1977 with implementations in the US and other developed countries beginning in 1980.

Benefits of The System

JIT offers advantages such as allowing manufacturers to keep production runs short, and move on to new products quickly and easily if needed. Companies using JIT no longer need to maintain a huge expanse of warehouse space to store inventory. A firm also no longer needs to spend large amounts of money on raw materials for production, because it only orders exactly what it needs, which frees up cash flow for other uses.

The Strategy in Use at Toyota

Toyota started using JIT inventory controls in the 1970s and took more than 15 years to perfect its process. Toyota sends off orders to purchase production parts only when it receives new orders from customers.

Toyota and JIT manufacturing will succeed as long as the company maintains a steady production rate, with high-quality workmanship and no machine breakdowns at the plant that could stall production. Additionally, it needs reliable suppliers that can always deliver parts quickly, and the ability to efficiently assemble machines that put together its vehicles.

Potential Risks

JIT inventories can bring about disruptions in the supply chain. It only takes one supplier of raw materials who has a breakdown and cannot deliver the goods on time, to shut down a manufacturer's entire production process. A customer order for goods that surpasses the company's forecasted expectations may cause parts shortages that delay the delivery of finished products to all customers.

An Example of Disruption

In 1997 a fire that took place at a brake parts plant owned by the company Aisin destroyed its capacity to produce a P-valve part for Toyota vehicles. Aisin was the sole supplier of this part for Toyota, and the company had to shut down production for several weeks. Because of Toyota's JIT inventory levels, it ran out of P-valve parts after just one day. 

A fire at the company that was the sole supplier of the part to Toyota and the fact that the plant was shut down for weeks could have devastated Toyota's supply line. Fortunately, one of Aisin's suppliers was able to retool and start manufacturing the necessary P-valves after just two days.

Nevertheless, the fire cost Toyota nearly $15 billion in lost revenue and 70,000 cars. The problem trickled through to other other suppliers for Toyota as well. Some suppliers were forced to shut down because the auto manufacturer didn't need their parts to complete any cars on the assembly line.