Just in Time (JIT) Inventory: How Does It Work?

What Is Just-in-Time (JIT)?

The just-in-time (JIT) inventory system is a management strategy that aligns raw-material orders from suppliers directly with production schedules. Companies employ this inventory strategy to increase efficiency and decrease waste by receiving goods only as they need them for the production process, which reduces inventory costs. This method requires producers to forecast demand accurately.

Key Takeaways

  • The just-in-time (JIT) inventory system is a management strategy that minimizes inventory and increases efficiency.
  • Just-in-time manufacturing is also known as the Toyota Production System (TPS) because the car manufacturer Toyota adopted the system in the 1970s.
  • Kanban is a scheduling system often used in conjunction with JIT to avoid overcapacity of work in process.
  • The success of the JIT production process relies on steady production, high-quality workmanship, no machine breakdowns, and reliable suppliers.

How Does Just-in-Time Inventory Work?

The just-in-time (JIT) inventory system minimizes inventory and increases efficiency. JIT production systems cut inventory costs because manufacturers receive materials and parts as they are needed for production and so do not have to pay storage costs. Manufacturers are also not left with unwanted inventory if an order is canceled or not fulfilled.

One example of a JIT inventory system is a car manufacturer that operates with low inventory levels but heavily relies on its supply chain to deliver the parts it requires to build cars, on an as-needed basis. Consequently, the manufacturer orders the parts required to assemble the cars only after an order is received.

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For JIT manufacturing to succeed, companies must have steady production, high-quality workmanship, glitch-free plant machinery, and reliable suppliers.

The JIT inventory system contrasts with just-in-case strategies, where producers hold sufficient inventories to have enough product to absorb maximum market demand.

Pros and Cons of Just-in-Time (JIT)

JIT inventory systems have several advantages over traditional models. Production runs are short, which means that manufacturers can quickly move from one product to another. Also, this method reduces costs by minimizing warehouse needs. Companies also spend less money on raw materials because they buy just enough resources to make the ordered products and no more.

The disadvantages of JIT inventory systems involve potential disruptions in the supply chain. If a raw-materials supplier has a breakdown and cannot deliver the goods in a timely manner, this could conceivably stall the entire production line. A sudden unexpected order for goods may delay the delivery of finished products to end clients.

Special Considerations: Kanban Scheduling for Just-in-Time

Kanban is a Japanese scheduling system that’s often used in conjunction with lean manufacturing and JIT. Taiichi Ohno, an industrial engineer at Toyota, developed kanban in an effort to improve manufacturing efficiency. The system highlights problem areas by measuring lead and cycle times across the production process, which helps identify upper limits for work-in-process inventory, in order to avoid overcapacity.

Example of Just-in-Time

Famous for its JIT inventory system, Toyota Motor Corporation orders parts only when it receives new car orders. Although the company installed this method in the 1970s, it took 20 years to perfect it.

Sadly, Toyota’s JIT inventory system nearly caused the company to come to a screeching halt in February 1997, after a fire at Japanese-owned automotive parts supplier Aisin decimated its capacity to produce P-valves for Toyota’s vehicles. Because Aisin is the sole supplier of this part, its weeks-long shutdown caused Toyota to halt production for several days. This caused a ripple effect, where other Toyota parts suppliers likewise had to temporarily shut down because the automaker had no need for their parts during that time period. Consequently, this fire cost Toyota 160 billion yen in revenue.

The terms short-cycle manufacturing, used by Motorola, and continuous-flow manufacturing, used by IBM, are synonymous with the JIT system.

Frequently Asked Questions

What Exactly Do You Mean By “Just in Time?”

A just-in-time (JIT) inventory system is a management strategy that has a company receive goods as close as possible to when they are actually needed. So, if a car assembly plant needs to install airbags, it does not keep a stock of airbags on its shelves, but receives them as those cars come onto the assembly line.

Doesn’t This Sound a Bit Risky? What If Things Don’t Arrive in Time?

A chief benefit of a JIT system is that it minimizes the need for a company to store large quantities of inventory, which improves efficiency and provides substantial cost savings. However, if there is a supply or demand shock, it can bring everything to a halt. For instance, at the beginning of 2020’s economic crisis, everything from ventilators to surgical masks experienced disruption as inputs from overseas could not reach their destinations in time to meet a surge in demand.

What Types of Companies Use JIT?

The JIT inventory system is popular with small businesses and major corporations alike because it enhances cash flow and reduces the amount of capital needed to run the business. Retailers, restaurants, on-demand publishing, tech manufacturing, and automobile manufacturing are some examples of industries that have benefited from just-in-time inventory.

Who Invented JIT Inventory Management?

JIT is attributed to the Japanese automaker Toyota Motor Corporation. Executives at Toyota in the 1970s reasoned that the company could adapt more quickly and efficiently to changes in trends or demands for model changes if it did not keep any more inventory in store than was immediately needed.

View more information: https://www.investopedia.com/terms/j/jit.asp

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