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Just-in-Time Inventory

Just-in-Time Inventory – The Ultimate Guide

Every penny counts when it comes to inventory management – overstocking can lead to costly inventory carrying charges, while stockouts can disrupt production and damage customer relationships. This is where just-in-time (JIT) inventory management comes to the rescue.

Every business that deals with inventory – whether it’s manufacturing goods or stocking a retail store – can benefit from JIT inventory management. It helps to decrease the waste and inefficiency associated with inventory, while also minimizing the risk of stockouts.

In this guide, we’ll cover everything you need to know about JIT inventory management, including how it works, its advantages and disadvantages, who should use it, and how it can improve businesses. So if you are looking to streamline your inventory management and save some money, read on!

What is Just-In-Time (JIT) Inventory Management?

The just-in-time (JIT) inventory system is a management strategy that ensures you always have the right amount of raw materials on hand to meet production schedules. This inventory strategy is used by companies and businesses to increase efficiency and decrease waste.

This is done by receiving goods only when they are needed for the production process and this reduces inventory costs. This method requires producers to predict how much demand there will be for their products.

In simple words, JIT is a system where inventory arrives only when it’s needed and not before. This way, businesses don’t have to tie up their money in inventory that may not be used for weeks or months.

JIT inventory management has its roots in the Toyota Production System – an integrated set of company practices designed to minimize waste while maximizing efficiency. The system was developed by Toyota in the 1970s and later adopted by other Japanese manufacturers.

How Does Just-In-Time Work?

To understand how JIT works, we have to know the three types of inventory:

1. Raw materials: Raw materials are the materials and components that are used to make a product. These are the items that a company purchases from suppliers to be used in the production process.

2. Work-in-progress (WIP) inventory: Work-in-progress inventory refers to items that have been started but not yet completed. This might include partially assembled products or products that are waiting to be finished.

3. Finished goods: Lastly, we have finished goods, which are the products that are completed and ready to be sold. These are the items that a company has in stock, waiting to be shipped to customers.

Now that we know the three types of inventory, let’s take a look at how JIT works.

JIT production is based on a “pull” system, where each step in the production process pulls the required materials from the previous step. This is in contrast to the “push” system, where production is based on forecasted demand and materials are pushed through the production process regardless of whether they are needed or not.

In a JIT system, there is no WIP inventory – as soon as a product is finished, it is sent to the next step in the production process or directly to the customer. This way, businesses only produce what is needed, when it is needed.

It helps to reduce wastages and inventory costs, while also minimizing the risk of stockouts. If businesses can accurately predict customer demand, a JIT system can help to ensure that they always have the right amount of inventory on hand without wasting money on excess stock.

Advantages and Disadvantages of JIT Inventory Management

Now that we know how Just in Time Inventory management works, let’s take a look at some of the advantages and disadvantages of using this inventory management system.

Advantages of JIT Inventory Management

Here are some of the key advantages of using a JIT inventory system:

1. Reduced Inventory Costs

One of the biggest advantages of JIT is that it can help to reduce inventory costs. This is because businesses only order the exact amount of raw materials they need when they need them. This eliminates the need for storage space for excess inventory and reduces the risk of stock obsolescence.

This way, businesses can save money that would otherwise be spent on inventory that is not being used.

2. Increased Efficiency

Another advantage of JIT is that it can help to increase efficiency in the production process. This is because there is no need to stop the production line to wait for raw materials to be delivered – as soon as a product is finished, it is sent to the next step in the production process. This can help to reduce production costs and lead to faster turnaround times.

3. Reduce wastage

JIT inventory management can also help businesses to reduce wastage. This is because businesses only order the exact amount of raw materials they need, which reduces the risk of raw materials being wasted. In addition, JIT can also help to reduce the number of finished products that are wasted, as businesses only produce the exact amount of products that are needed.

4. Improved quality

JIT inventory management can also lead to improved quality, as businesses have a better understanding of their production process and can identify and correct any problems more quickly. It not only helps businesses to produce a higher quality product but can also help to improve customer satisfaction. This way, businesses can build a better reputation and attract more customers.

5. Increased inventory turnover ratios

The inventory turnover ratio is the number of times inventory is sold or used in a period so the higher the ratio, the higher the efficiency. JIT inventory management can help businesses to increase their inventory turnover ratios as it helps businesses to sell their products more quickly and efficiently. So if a business has a high inventory turnover ratio, it means that it is selling its products more quickly and efficiently.

6. Faster production rate

When you have a faster production rate, you can serve your customers better and get a competitive advantage. JIT inventory management helps businesses to have a faster production rate as businesses only produce the exact amount of products that are needed. This way, businesses plan their production better and do not waste time on producing products that are not needed.

Disadvantages of JIT Inventory Management

Despite the many advantages of JIT inventory management, there are also some disadvantages that businesses should be aware of:

1. Requires a high level of planning and coordination

JIT inventory management requires a high level of planning and coordination to be successful. This is because businesses need to make sure that they have the right amount of raw materials on hand at all times. This can be a challenge for businesses, especially if they are dealing with a large number of products. You might have to set up a team to coordinate the JIT inventory management process.

2. Can lead to disruptions in the production process

If you fail to plan properly, JIT inventory management can lead to disruptions in the production process. To meet the demands businesses need to have the right amount of raw materials on hand at all times. So if there are any delays in the delivery of raw materials, it can cause disruptions in the production process. And this can lead to losses for businesses as well as customer dissatisfaction.

3. Requires a high level of investment

JIT inventory management also requires a high level of investment to be successful. This is because businesses need to invest in the right infrastructure and systems to support the JIT inventory management process. In addition, businesses also need to train their employees on how to use the JIT system. This can be a costly exercise for businesses, especially if they are small businesses.

4. Missed opportunities

If you only produce the exact amount of products that are needed, you might miss out on opportunities to sell more products. You might save wastage but you might also miss out on the chance to increase your sales. It’s not uncommon for buyers to buy in bulk to get a discount. But if you only produce the exact amount of products that are needed, you might not be able to take advantage of such opportunities.

5. Risk of natural disasters disrupting the supply

JIT inventory management also carries the risk of natural disasters disrupting the supply of raw materials. This is because businesses need to have the right amount of raw materials on hand at all times. So if there are any delays in the delivery of raw materials due to a natural disaster, it can cause disruptions in the production process.

How does just-in-time inventory management improve businesses?

As you can tell by now, there are many advantages of JIT inventory management. But how does this system improve businesses?

To understand how JIT inventory management improves businesses, we need to look at the two main ways in which businesses can improve their operations:

1. Through cost reduction and

2. Through increased sales.

No matter what business you are running, your two main goals are to reduce costs and increase sales. And JIT inventory management can help businesses to achieve both of these goals.

1. Cost reduction

The first way in which JIT inventory management improves businesses is by reducing costs. As we mentioned earlier, businesses can save on storage costs as they only need to store the exact amount of raw materials that are needed. In addition, businesses can also save on production costs as they don’t need to produce products that are not needed.

If businesses can reduce their costs, they will be able to increase their profits. And this is the ultimate goal of any business.

2. Increased sales

The second way in which JIT inventory management improves businesses is by increasing sales. This might seem counterintuitive as we mentioned earlier that businesses might miss out on opportunities to sell more products if they only produce the exact amount of products that are needed.

But the fact is, JIT inventory management can help businesses to increase their sales. This is because customers are always looking for good-quality products that are in stock. And if businesses can provide their customers with what they want, when they want it, they are more likely to make a sale.

In addition, JIT inventory management can also help businesses to build a good reputation. This is because customers will be impressed with the fact that businesses can deliver products on time. And this can lead to repeat business and word-of-mouth marketing.

JIT Inventory Management FAQs

1. What businesses need to use JIT inventory management?

There is no one-size-fits-all answer to this question, however, if you are in the manufacturing business such as the car industry, JIT inventory management can be very beneficial. This is because JIT inventory management can help businesses to reduce their production costs and increase their sales.

2. What companies use JIT inventory management?

Some of the most famous companies that use JIT inventory management are Toyota, Amazon, Tesla, Honda, and Nissan. These companies have been using JIT inventory management for many years and it has helped them to become some of the most successful businesses in the world.

3. What is the difference between Just In Time and Just In Case inventory management?

The main difference between Just In Time and Just In Case is that Just In Time is a proactive approach to inventory management while Just In Case is a reactive approach. With Just In Time, businesses only produce the number of products that are needed while with Just In Case, businesses produce products in advance in case demand increases.

4. How can I implement JIT inventory management in my business?

If you are interested in implementing JIT inventory management in your business, there are a few things that you need to do. First, you need to analyze your business and find out where you can reduce costs.

Second, you need to make sure that you have the necessary resources in place such as the right software and the right team.

And last, you need to make sure that you have a good understanding of JIT inventory management so that you can implement it in the right way.

If you have the budget, you can set up a team to work on JIT inventory management for your business.

Octopos can make a just-in-time inventory system much easier to implement successfully. Watch a demo today.

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