Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy
Just in Time Inventory – The Ultimate Guide for 2024
Key take-aways
- Just-in-time (JIT) inventory management aims to match raw material orders to the company’s production schedule. It reduces waste and improves efficiency.
- It focuses on limiting excess storage supplies, lowering inventory costs, and receiving materials only when needed for production.
- Its advantages include cost savings and increased efficiency. However, it causes production disruptions during raw material shortages.
Like most procurement tools, just in time inventory is another important part of the procurement process that is always taken for granted.
For this article, we are going to talk about just in time inventory. We are going to understand what it means, determine what it can do for the procurement team, and its examples.
After reading this article, you’ll have a full understanding of how to take advantage of just in time inventory.
Defining Just in Time Inventory
The just in time inventory is a management strategy that aligns the raw material orders from suppliers directly with a company’s production schedule. It is a strategy often used by companies to decrease waste and improve efficiency because the company only receives the supplies when there is an actual need for them. In the past, companies would often buy the raw materials in huge quantities and then store them in a warehouse once procurement is done.
The problem with this system is that, depending on the raw material, it is often wasted and the company’s inventory size is also wasted. What is space in the warehouse for other supplies needed for production is instead allocated to simply storing materials that are not yet needed.
With the just in time inventory management system, the company is able to determine how much supplies the company needs, which in turn lowers inventory costs.
It’s also interesting to know that the just in time inventory is also called the Toyota Production System or TPS. During the 1970s, Toyota had issues with inventory costs, which is why they decided to adopt TPS to save inventory space and be more efficient with their inventory costs.
Also, the terms short-cycle manufacturing used by Motorola and continuous-flow manufacturing, which is employed by IBM, are also the same as JIT.
JIT – How Does It Work?
The just in time inventory management system works by cutting inventory costs and increasing production efficiency. A company no longer has to deal with storing supplies after procurement because the materials are used immediately after they’re received by the company.
In turn, management no longer has to concern itself with any leftover materials because the JIT system makes sure that the supplies procured or bought come in at the right quantity.
An example of a JIT management system is when a manufacturer operates on low inventory levels but relies heavily on its procurement process to deliver the parts needed for production on an as-needed basis. In short, the manufacturer only allows the delivery of supplies in certain quantities only and does so when an order is received for a product.
Of course, the JIT management system will only work if a company has high-quality workmanship, error-free machinery, a steady production line, and reliable suppliers.
The Steps for Continuous Improvementfor JIT Inventory
Of course, no management system is complete without a cycle of steps that will help a company in improving its products while using the just-in-time inventory system.
These and everything else are also taught in our Negotiation Course For Procurement Professionals!
But without further ado, here are some of the steps where companies that employ the JIT inventory system can continue to improve their products:
1. Design
The JIT process begins by reviewing the essential manufacturing building blocks. There’s product design, process design, personnel, and manufacturing planning. These plans are then put into motion to avoid disruption, minimalize waste, and build a flexible system.
2. Manage
There should be a Total Quality Management (TQM) review to ensure that there is continuous improvement throughout the process. A management review defines the responsibilities of workers, measures quality control, stabilizes schedules, and checks out load and capacity schedules.
3. Pull
Educate the team on production and withdrawal methods using signaling methods like Kanban. Review lot size policies and reduce lot sizes.
4. Establish
Vendor relationships are vital to the success of JIT. Review vendor lists. Settle on preferred suppliers, negotiate contracts, discuss lead times, delivery expectations, and usage metrics and measures. Learn how to make the most of them in the supply chain.
5. Fine-tune
Determine inventory needs, policies, controls, and reduce inventory movements.
Build: Inform your team about the skills and capabilities it needs to complete its work and conduct team education and empowerment sessions to educate them.
6. Refine
Reduce the number of parts and steps in production by refining, standardizing, and reviewing the entire process.
7. Review
Define and implement quality measures and metrics and conduct a root cause analysis of any problems. Emphasize improvements and track trends to improve every aspect of JIT.
Advantages and Disadvantagesof Just in Time Inventory
The main advantage of the JIT system is that companies no longer have to pay for storage fees or build warehouses because they only concern themselves with procuring materials when there is an order received for the product. The company also has lower inventory costs, since there is no need to store extra supplies. Raw materials procured for an order are immediately used, thus saving inventory space and maximizing efficiency during production.
Of course, if there’s an advantage, there is also a disadvantage. Should there be any problems with the procurement of the raw materials needed for building the product such as an economic crisis or the lack of raw materials, then production comes to a halt completely. The disruption is most likely going to hurt the company that uses the JIT management system since there is no way the company is able to continue its production when there are no raw materials available.
Famous Examplesof Companies that use JIT
1. Apple
Apple’s chief executive officer Tim Cook used his 16 years of supply management experience in order to improve Apple’s manufacturing process. He started working on it back in 1998 while working as Apple’s chief operating officer. During the time, Cook pulled out Apple from manufacturing, closed down the company’s warehouses and factories from all over the globe, and opted to establish just-in-time relationships with independent contractors from China.
By the time Tim Cook sat down as CEO of Apple, the company now has reduced inventory costs. The improvements may look tiny at the start, but today, Apple continues to be a company look on for its growth and profitability.
2. Burger King
Burger King franchisers keep a substantial inventory of hamburger ingredients on hand all the time, but a hamburger is only cooked when it is ordered. This saves waste and gives the chain bragging rights for the freshness of its food.
Conclusion
The functionality of JIT involves cutting inventory costs, optimizing production efficiency, and avoiding excess material storage.
The advantages of JIT, such as decreased storage costs and enhanced efficiency, are presented alongside its disadvantages, including susceptibility to procurement challenges and disruptions.
To illustrate the real-world application of JIT, the article highlights famous examples like Apple and Burger King, showcasing how these companies have successfully employed JIT principles to optimize their operations and achieve growth and profitability.
Frequentlyasked questions
What is Just in Time Inventory?
Just in time inventory is a management system where a company only buys the right quantity of raw materials needed for production.
Why is Just in Time Inventory Important?
It’s a system that allows companies that save money on inventory costs. This is very important for companies that are still trying to grow.
What companies use Just in Time inventory?
Companies that produce products based on orders are the ones that use just in time inventory most of the time.
About the author
My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.
