- A just-in-time inventory system is an alternative to traditional supply chains that help reduce the overhead costs associated with running a warehouse and storing inventory
- Just-in-time inventory is characterized by low inventory costs, accurate demand forecasts, and a fast, efficient network of suppliers
- JIT inventory means you don’t have to purchase a huge initial stock or rent a big space to store your products
Inventory management is an essential part of running a successful eCommerce business. But, it can also be challenging, time-consuming, and expensive. That’s why companies around the world use a range of alternative inventory management systems that help them cut down on inventory expenses and streamline warehouse operations. A popular method is a just-in-time inventory.
A just-in-time inventory system helps businesses find a good balance between clients’ orders, raw materials, and production needs. But, for this to run smoothly, the company needs to have a well-oiled supply chain in place so that everything happens exactly when it needs to. Easyship can be part of this process by providing access to 250 fast, cost-effective courier services that will ensure your orders get your customers in good time.
To help you figure out if this system will work for you, this article will look at what just-in-time inventory is, its advantages and disadvantages, and how you can create a system for your business.
Table of Contents
What is a Just-in-Time Inventory System?
A just-in-time inventory system is an alternative to traditional supply chains that help reduce the overhead costs associated with running a warehouse and storing inventory. Just-in-time inventory management is a strategy that allows you to order and receive materials or products from your suppliers in a volume that allows you to meet real-time customer demands without having excess inventory.
Just-in-time inventory is characterized by low inventory costs, accurate demand forecasts, and a fast, efficient network of suppliers.
The Purpose of JIT Inventory Management Systems
The purpose of just-in-time inventory is to reduce inventory costs, decrease waste, and increase efficiency. With this inventory management system, a company operates with low stock because goods are only ordered as needed. By not keeping stock in storage, a business can cut costs and be more efficient.
The Difference between JIT Inventory and JIT Manufacturing
Many people confuse JIT inventory with JIT manufacturing, but the two processes are rather different. Here are the two main distinctions you should know:
- JIT manufacturing aims to make only what your customer order; JIT inventory seeks to order and receive just enough materials to be used to manufacture the goods required to meet customer demands.
- The driving force behind JIT manufacturing efficiency is customer value; it aims to eliminate processes that don’t add value to the production process. Conversely, the driving force behind the efficacy of JIT inventory is cost reduction.
The Advantages of Just-in-Time Inventory Management
Just-in-time inventory systems have become increasingly popular because they come with a whole host of benefits. Let’s explore why these systems are favored by many businesses and how they can help.
Why are These Systems So Popular?
Just-in-time inventory systems have become one of the most popular alternative supply chain methods because they reduce inventory management costs, production costs, warehousing fees, and increase a business’s overall efficiency. These systems encourage businesses to order only the supplies they need to create the goods they can sell quickly.
How Does Just-in-Time Inventory Management Improve Business?
We’ve already mentioned that just-in-time inventory systems can come with a host of benefits that can be useful for a small business. Here are just a few ways that this process can help:
- Reduces inventory waste: Overproduction can occur when the supply of a product is higher than its demand; this leads to an accumulation of inventory that can’t or won’t be sold. Just-in-time inventory helps eliminate deadstock, reducing inventory waste.
- Reduces inventory expenses: Warehousing can get expensive, so having a lot of excess goods in storage is essentially just a waste of money. Storing only what you need to meet your customers’ demands can drastically reduce your warehousing costs.
- Maintaining a healthy cash flow: JIT inventory means you don’t have to purchase a huge initial stock or rent a big space to store your products. This frees up funds that can be used in other parts of the business.
- Gives manufacturers more control: With just-in-time inventory, manufacturers accurately forecast their production requirements and product demand, which gives them greater flexibility and control over the production process.
- Encourages local sourcing: Just-in-time inventory encourages the local supply of goods and raw materials because orders can be delivered to customers faster and at a lower cost.
Companies using the JIT system
1. Toyota: This Japanese car manufacturer only orders production parts when customers receive new orders. Even during the production process, parts are not included in the next node until they are required. This helps Toyota lower its inventory costs, and quickly adapt to customers' needs and demands without having to worry about storing and disposing of excess inventory.
2. Harley Davidson: This famous motorcycle brand turned to JIT in the lean years just after World War Two. As a result, their inventory levels declined by 75% and their productivity increased significantly.
3. Dell: This computer manufacturer’s just-in-time inventory system is implemented through negotiations with suppliers who carry inventory on their behalf. When they receive an order from a customer, they request the necessary components from their suppliers and with very short lead times, assemble the product and ship it to the customer.
4. McDonald's: McDonald's keeps all the raw materials they expect to need to assemble their customers’ orders. But, they don't actually assemble anything until a customer puts an order in.
5. Apple: Apple has only one central warehouse in the US and leverages the benefits of the just-in-time inventory through a network of approximately 150 major suppliers.
Disadvantages of JIT Systems
Like any other supply chain system, JIT inventory has its downside. Some of its disadvantages are:
1. Risk of running out of stock: Unless you work with consistent, trustworthy, and reliable suppliers who can make stock readily available within a short timeframe, you may end up running out of supplies in certain situations. This is especially true if you don’t have a good read on your customers’ demands.
2. Supply chain disruptions: It only takes the delay or breakdown of one of your suppliers to shut down the entire manufacturing process.
3. Requires accurate forecasts: If customer orders surpass the businesses' estimates, there may be shortages that will cause delays in production and order fulfillment. That’s why you need to have a good understanding of how much you can expect your customers to order at any given time.
6 Steps to Implementing Just-in-Time Inventory Systems
Implementing a just-in-time inventory system requires careful planning and preparation. Here are the steps you should follow if you’re looking to implement JIT inventory in your business.
1. Come up with a plan: You need to develop production plans - such as optimum production lot sizes and lead times - that can be fed through to your suppliers. It would be best to reorganize your business to ensure that it’s ready to maximize the potential of a just-in-time inventory system.
2. Communicate your plans to your workforce: Communicate with your team to help them see the need to reduce stock levels, and learn to trust the supply chain. Train them where necessary.
3. Gather data and validate current inventory levels: This will ensure that you have the correct information about your current stock levels so that your initial signals to the supply chain are accurate.
4. Communicate with the supply chain: In a just-in-time inventory system, suppliers play a very critical role. Sharing information and data with your suppliers is essential to keep a just-in-time inventory system running smoothly.
5. Establish a signaling system: To ensure your inventory process runs smoothly, you have to create signals that alert you (and potentially your suppliers) when stocks are running low so you can replenish them in time.
6. Documents and Processes: Ensure that your just-in-time inventory system is well documented and that all the participants know about the processes. Keep measuring the performance of your JIT and make changes where necessary to improve it.
Will Just-in-time Work For Your Business?
Just-in-time inventory has a lot of advantages when it comes to reducing warehousing costs, reducing waste, and improving efficiency. It’s seen as one of the best methods to manage inventory and lower costs. While it has its share of risks, it can be very rewarding, especially if you can carry out accurate forecasts on your product demands and build an excellent relationship with suppliers.
Don't forget that a streamlined supply chain is the lifeblood of just-in-time inventory and without a reliable network of shipping partners, JIT can be difficult. Easyship can connect you to over 250 couriers that will keep your JIT inventory system running smoothly so that you reduce your overhead costs and widen your margins.