What Is Just-In-Time Inventory?

Several inventory management methods can help businesses thrive and achieve their inventory goals. One method is just-in-time inventory, an increasingly popular method organizations use to meet their inventory needs.

Though more businesses are adopting this strategy, many are unaware of how just-in-time inventory works and its benefits. So what is just-in-time inventory, how does just-in-time inventory work, and how can this method improve businesses? Read more to find out!

What is Just-in-Time Inventory Method?

So, what does just-in-time inventory mean? Just-in-time inventory is an inventory management method where products are received from suppliers on an as-needed basis, rather than traditional methods where organizations stock up on products in advance. With this method, businesses work closely with suppliers to ensure that raw materials arrive as soon as production schedules begin, but not sooner.

Businesses choose a just-in-time inventory system to reduce overall inventory holding costs, which can cause financial distress, especially for small businesses. The ultimate goal of just-in-time inventory is to have enough inventory to meet consumer demand without exceeding this minimum.

Who Invented Just-in-Time Inventory?

Just-in-time inventory was developed in the 1970s at Toyota manufacturing plants by the father of JIT, Taiichi Ohno. Ohno devised this strategy to meet customer demands exactly, handle small inventory batches, and get more variety in parts that could be used in assemblies.

How Does Just-in-Time Inventory Management Improve Business?

You might wonder: is just-in-time inventory dead? Far from it! This inventory management method still thrives today, with plenty of businesses benefiting from the strategy. But why have just-in-time inventory systems become so popular? Below are a few reasons behind its popularity.

Just-in-Time Inventory Lowers Costs

An advantage of just-in-time inventory is its ability to reduce inventory costs, saving your organization big on storage. Exploring Warehouse Improvement Strategies can further enhance these benefits. The more unusable your inventory, the more money you’re wasting on storage. With just-in-time inventory, you not only reduce holding costs – you also lower the amount spent on working capital and labor costs and save money by only purchasing the raw materials necessary to produce the desired product. Overall, this method can save you significant money.

Just-in-Time Inventory Reduces Waste

One of the most notable benefits of just-in-time inventory management is its ability to reduce waste, a big concern with traditional management processes. Traditional strategies have the risk of Overstocking Pitfalls and How to Avoid Them, leading to products sitting on your shelf and either being unsellable or being disposed of after a certain period. Just-in-time inventory saves space and reduces products wasted, ensuring you sell what customers want and eliminate what isn’t usable.

Just-in-Time Inventory Streamlines Production Flow

Companies choose just-in-time inventory because the method streamlines production flow for a more efficient and effective production process. Just-in-time inventory shortens total manufacturing time, and by producing fewer products, manufacturers can identify production errors and correct issues that would lead to more defective products. Just-in-time inventory management reduces delays during other production processes, making it an efficient way to improve an organization’s production flow and meet customer demand.

Just-in-Time Inventory Gives You More Control

Another advantage of choosing just-in-time inventory management is that this method gives you increased control over your production process. With this method, manufacturers have control over the manufacturing process, making it possible to increase production for products with high demand levels and decrease focus on products with lower demand levels. Just-in-time inventory lets you adapt to trends without risking overstocking or Challenges of Understocking and Strategies to Address Them.

How to Implement Just-in-Time Inventory

Implementing a just-in-time inventory system is easy as long as you understand the process of how this system works. Just-in-time inventory occurs in the following steps:

1. Customers place an order for one of your products. As the manufacturer, you receive notification of this order.
2. After receiving the order, the manufacturer orders the raw materials necessary to create products from their suppliers.
3. Once the supplier receives the order for raw materials, they deliver them to the manufacturer.
4. Product assembly begins after the manufacturer receives the components necessary to create the product.
5. Once the order is created and fulfilled, the customer receives the product. If more product orders come in, this process repeats.

Who Uses Just-in-Time Inventory?

So, who uses just-in-time inventory, and can organizations succeed with this method? The answer is yes! Many businesses use just-in-time inventory to meet demand without risking overstocking and waste. Some of the main industries that use just-in-time inventory management include the following:

• Automobile manufacturers
• Retailers
• Restaurants
• Grocery stores
• E-commerce companies
• Healthcare facilities
• Tech manufacturers

How to Calculate Just-in-Time Inventory

You have the answer to your main question: what is just-in-time inventory control? But this isn’t the only component of understanding this inventory management method. Calculating just-in-time inventory will help you navigate and implement this method in your organization.

However, given the nature of just-in-time inventory, there isn’t a strict formula to calculate this process. Instead, you’ll have to consider your annual ordering costs and quantity to determine inventory costs in a just-in-time inventory system. To calculate inventory costs in a just-in-time system, you’ll need to add the annual ordering costs, annual carrying costs, and annual shortage costs together.

• Annual ordering costs = (Annual demand / order quantity) x Ordering cost per order
• Annual carrying costs = (Order quantity / 2) x Carrying cost per unit
• Annual shortage costs = (Shortage quantity / order quantity) x Shortage cost per unit

The Disadvantages of Just-in-Time Inventory

While there are many reasons to choose just-in-time inventory, there are some disadvantages to consider with this management method. Below are a few things to remember before transitioning to just-in-time inventory management.

• Just-in-time inventory management relies on suppliers to be prompt and efficient, and without trustworthy suppliers, you may not be able to meet customer demand.
• Just-in-time inventory processes leave little room for error – small disruptions or demand miscalculations can result in significant delays, missed orders, and other problems that harm your business.
• Just-in-time management makes reworking orders more difficult because inventory is sparse – so if customers change their orders, you might struggle to adapt.
• If supply chain disruptions make it difficult to fulfill orders and meet sale objectives, just-in-time inventory doesn’t have stock to fall back on.
• Just-in-time inventory might result in higher transportation costs because small shipments are required more frequently than bulk shipments. This factor might offset some of your cost savings.

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Just-in-time inventory might result in higher transportation costs because small shipments are required more frequently than bulk shipments. This factor might offset some of your cost savings.