Just in Time Inventory and the Supply Chain

Just in time inventory (JIT) is known for its waste reduction and cost saving benefits. Just in time inventory became a way to manage inventory in the 1970s by the Toyota Manufacturing Company. After World War II, Japan was in significant debt; facing a potential crisis in the automobile industry. They had a lack of space and inventory because of a decrease in natural resources. This lead to them changing their process of manufacturing by making it “lean”. Each automobile has more than 30,000 parts. By only keeping enough stock to fulfill demand, Toyota increased its profits, saving itself from potential bankruptcy and now dominating the automobile industry. Just in time inventory continually operates with a low inventory level and less of a safety stock. Just in time inventory is based off the American supermarket model. When someone buys something off the shelf, the store will restock the shelf with product to fill the empty spaces. In a supply chain, the amount of inventory taken for an order is the same amount that is bought to replenish their stock. The result of this is lower inventory carrying costs, and increased efficiency. Over the years, many companies have adopted this technique versus the typical warehousing solution. Just in time inventory has affected the supply chain, changing the efficiency of manufacturing forever. [1]

Implementing just in time inventory is a complicated but rewarding process. The biggest issue a company will face is that they must significantly decrease their inventory. Because of this, communication between manufacturers and suppliers is crucial. After the reduction of stock, management needs to figure out how much of a product is needed for replenishment in just in time inventory quantities. Management also needs to calculate the amount of time in between ordering supplies and receiving them. Or else, they risk not having enough supply to fulfill demand. Because of this, they will also need to figure out how much to keep on hand as backup in case of stock outs. Before, managers had to manually figure out these decisions which was very time consuming. Now, there is software that can be used to keep track of inventory levels, forecast when to order new supplies, and can also help find vendors that suit your needs. Employers need to train staff on how to use the programs so that they can be efficient enough to operate the system. The beginning implementation of just in time inventory is rather costly. The software is expensive, training the employees and employers costs a significant amount of money as well. These issues need to be considered before changing over. While employers and employees are a crucial part of just in time inventory, suppliers play a critical role as well. Suppliers must be efficient enough to ship out materials quickly enough for orders. Suppliers who are willing to comply with the new policies must ship out orders that are smaller and at different, sometimes inconvenient, times. Shipping out smaller orders could also mean higher shipping prices per item. If suppliers cannot comply with just in time inventory, then a change in supplier will be necessary to continue the implementation process. [2]

There are many benefits to just in time inventory. While efficiency and waste control are the biggest benefits, there are also financial benefits. By keeping inventory low to fill future orders, there is a higher inventory turnover ratio which can show potential investors that the company is more efficient. By having low inventory, it will reduce the total asset figure, which will then affect the asset turnover ratio.[3] By implementing just in time inventory, it helps prevent fluctuation in production rates. If production rates increase or decrease it can cause delays, extra work, and significant issues between suppliers and buyers. Just in time inventory helps this because the system helps forecast the needs of the supplier, and creates smooth transitions from the buyer to the supplier. Within the just in time process, there is another method used; the pull method. Supplies are produced in each stage as needed. If the supply is not needed for the next stage, production of that supply stops. Because of this, workloads, waste of products, and costs are all decreased. With just in time inventory, storage spaces do not have to be as large. By only keeping on hand what is needed, there is extra space. Many companies that switch to the just in time method could potentially move to smaller yet effective building, saving the company more money. Because of the amount of item numbers being reduced, machines producing the items can work faster, and more efficiently. This leads to supply being sent out faster. Maintenance of equipment that makes supplies is also beneficial. By implementing the just in time inventory software, routine checks are made on machinery. This leads to more efficient supply orders, and fewer breakdowns causing issues with orders being sent out on time. Through the implementation of the just in time inventory system, reliable suppliers are used and a strong relationship can be created. This leads to the company having a competitive advantage as well. Finally, implementing just in time inventory leads to stronger employee relationships, too. The system encourages flexible and well-rounded individuals that work as a team to help the company have a competitive advantage. [4]

While there is a significant amount of advantages to implementing just in time inventory, there are also some disadvantages. One of the biggest disadvantages to having low inventory levels is that there isn’t enough inventory in case of extra business. For example, during the holidays, sales tend to increase, which increases production and inventory. By having just in time inventory, there is no room for extra business, which is a disadvantage to the company but an advantage to the competitor. Without the proper inventory, customers could be waiting weeks for their orders, the only solution to this is the company will have to pay a supplier extra to get their inventory out as soon as possible. By having a just in time system, there is less control over economic changes. If a supply order requires more than a company has, it causes disruption and can cause customers to choose a competitor that does not have this system. Another issue some companies may have is a need for higher information technology investments. To have this system, computers and software is needed, which requires training for all applicable employees. However, because of the reliance on this computer system to make decisions, an IT specialist should be hired, or on call in case of computer problems like glitches or the system going offline. Another issue is reliance on a single supplier. If this supplier has an issue that delays shipment, it delays your shipment as well. If the supplier raises prices and you are dependent on them, a search for a new one can create confusion and waste time. Also, if a company switches suppliers, they will not have preference over their competitor because there is no relationship built between the supplier and buyer yet. Finally, the last disadvantage is customer dissatisfaction. If an order is late, you can lose a customer’s business. Google, Yelp and twitter reviews can cause issues for the company. If someone sees a bad yelp review as the first review that comes up, it can dissuade people from making a purchase. While these disadvantages can be very negative for a company, plenty of these disadvantages can be solved with proper forecasting techniques in place. [5]

Another problem that can occur for which suppliers or buyers have no control over; natural disasters. Because of natural disasters, suppliers may not be able to receive orders, or ship them out causing delays and customer dissatisfaction. While companies cannot change the course of a natural disaster, they can prevent issues by sending out orders earlier, and having extra stock just in case. While many companies have contingency plans in place, some companies didn’t. One study stated that before 9/11, only 60% of companies have contingency plans in place, and these numbers did not change afterwards. Because of the increased airline security, orders were delayed, and competitors used this to their advantage. For example, Ford had to shut down numerous plants due to not being prepared for alternate transportation. During this time, Chrysler had thought ahead and switched most transportation over to truck services instead. While these disadvantages can dissuade some from implementing the lean supply chain, there are many examples of companies thriving with using this inventory style [6]

While Toyota is the most well-known for using just in time inventory, there are other companies that have successfully implemented it, too. Dell is an excellent example of a company using the lean supply chain. Each part in a computer is separate, and with customers ordering online, realistically it should take a long time for the computer to come in. However, Dell figured out a way to increase productivity without adding inventory. Dell negotiated with its suppliers to carry inventory at a supplier warehouse, not with Dell. Because the items are already on site with the supplier, lead times are significantly decreased. Dell has become successful because of their strong relationship with suppliers, and short lead times; leading to faster output and more satisfied customers. Harley Davidson is another company that has utilized just in time inventory. After World War II, Harley Davidson had paired with an inefficient manufacturer, costing the company money. By changing to a manufacturer that had inventory on hand, lead times were shortened, and customers were receiving orders at quicker rates. Harley Davidson’s inventory level dropped a drastic 75% because of this, but productivity increased. By using the lean supply chain, Harley Davidson stopped losing money by having inventory on hand with an inadequate manufacturer. These are only a few examples of companies that have implemented the lean supply chain system. Many other companies have too, like fast food chains, other car manufacturers, Apple and Amazon. [7]

Just in time inventory has become a popular cost saving and waste reduction style around the world. This new system of inventory shifts away from the “just in case” mentality. Instead of making products to “stock” a warehouse, companies are making products to fulfill orders.  Only keeping a small amount on hand, and restocking said amounts when the products have been bought by someone, just in time increases output, productivity and decreases customer dissatisfaction. By using just in time inventory, orders are shipped out at rates significantly faster than a make to stock environment. If it is financially feasible for a company to switch over to the lean supply chain system, it is worth it. Implementation costs are high; however, the result is worth it. More productivity and output means more revenue for a company. It can be beneficial for companies that are just starting out and cannot buy items in bulk, and it can be beneficial to bigger companies like Amazon and Apple. Just in time inventory has eliminated the need for increased stock levels, saving each company more money by having virtually no stock left over by the end of the year. The potential risks and disadvantages do not come close to outweighing the benefits and advantages. If a company strives for success in the ever-changing marketplace, just in time inventory is the best solution for success.

Works Cited

[1] PEAVLER, R. (n.d.). Just-in-time (JIT) manufacturing ZERO INVENTORY PRODUCTION SYSTEMS (ZIPS). Encyclopedia of Production and Manufacturing Management,845-845. doi:10.1007/1-4020-0612-8_1065

[2] 20, 2. J. (2018, January 20). Understanding and Using Just-In-Time Inventory Management. Retrieved from https://www.score.org/resource/understanding-and-using-just-time-inventory-management

[3] Investopedia. (2015, April 02). What are the main benefits of a JIT (just in time) production strategy? Retrieved from https://www.investopedia.com/ask/answers/040215/what-are-main-benefits-jit-just-time-production-strategy.asp

[4] The Benefits of the Just-In-Time Approach. (2017, June 09). Retrieved from https://www.unleashedsoftware.com/blog/benefits-jit-system-approach

[5] Bailey, V. (2018, August 13). The Disadvantages of Just-in-Time Inventory. Retrieved from https://bizfluent.com/info-8667476-disadvantages-justintime-inventory.html

[6] Articles | GBR. Retrieved from https://gbr.pepperdine.edu/2010/08/just-in-time-to-just-in-case/

Investopedia. (2015, April 02). What are the main benefits of a JIT (just in time) production

[7] https://davidkigerinfo.wordpress.com/2016/02/22/analyzing-top-examples-of-just-in-time-inventory-and-production-management/

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