What is Just-in-Time (JIT)?

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Definition:

Just-in-time is an inventory management system meant to make supply chains more efficient by making products available exactly when they’re needed.

🤔 Understanding just-in-time (JIT)

The just-in-time (JIT) system is a way to manage inventory, which is the raw materials and finished goods a company has on hand. It dates back to the mid-20th century, when car manufacturer Toyota introduced techniques to make its manufacturing process more efficient. The principle behind JIT is that materials and products moving from one step of the supply chain to the next should arrive exactly when they’re needed, not before or after. JIT can help companies reduce costs by buying fewer supplies at a time and storing less inventory. This system can also help companies adapt more quickly to customer feedback.

Example

Suppose Sam owns a business that sells handcrafted wooden furniture. Each week, he can build three custom pieces. Sam has his suppliers deliver the exact amount of materials he needs to build those pieces of furniture every week. As a result, Sam doesn’t have to worry about finding a place to store the excess wood. He also doesn’t have to spend money on more inventory than he can sell that week.

Takeaway

The just-in-time inventory system is like grocery shopping weekly instead of monthly...

Some people like to stock up when they’re at the grocery store. That way they can shop once a month and have everything they need. Others would rather shop weekly, or even daily, to make sure they’re only buying what they need and nothing goes to waste. Just-in-time is similar: Companies order only as many products and materials as they need at a particular time, exactly when they need them.

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What is just-in-time (JIT)?

Just-in-time (JIT) is a system companies can use to manage inventory ( the raw materials and finished goods a company has on hand). It helps make the supply chain more efficient by ensuring that products and materials only arrive at the exact time and in the exact quantity that’s necessary.

In JIT manufacturing, a company only orders the materials and supplies it needs to meet current demand. Toyota, for example, doesn’t proactively build a shipment of cars. Instead, the company waits until a dealership places an order. Once that happens, the company orders the necessary materials and produces vehicles. There isn’t a large supply of materials on the production floor waiting to be put to use.

JIT also applies to the amount of inventory a store keeps in stock. Using this system, a retailer only orders as many products as it will sell right away. Suppose a retailer that offers bath products knows it sells 25 bottles of lotion a day. Rather than ordering ahead for the week or the month, the retailer gets a delivery of 25 bottles each day. That way, there’s no chance of anything going to waste.

What is the purpose of just-in-time?

The primary purpose of just-in-time (JIT) is to improve efficiency and reduce costs in the supply chain. By implementing JIT, companies can cut back on wasted raw materials and inventory, ensuring they only order what they’ll be able to use and sell. They don’t have to pay to store large amounts of inventory or risk having products become obsolete, spoil, or get stolen.

Another goal of JIT is to increase responsiveness to customer needs. Imagine you’re going out to dinner at a local restaurant. You plan to order a sandwich, but with the sauce on the side. Because the meal is made to order (in other words, using JIT), the chef can make your sandwich exactly as you like it. Manufacturing isn’t nearly that responsive. But when companies use JIT, they can more quickly adapt a product or method as they get feedback from customers. This adaptability can give the company a competitive advantage.

What are the origins of just-in-time?

The Toyota Motor Company began making cars in 1935. Around 1950, it sent representatives from Japan to the US to study the production process there. They observed that some auto companies were mass-producing more vehicles than customers were buying, putting a streamlined process ahead of customers’ needs.

The Toyota leaders returned to Japan with what they’d learned and started to implement just-in-time (JIT), producing cars in response to demand. In 1973, many of the world’s oil-producing countries announced they would be cutting supply and increasing prices. Auto sales plummeted. Because of its lean production model, Toyota was able to quickly pull back on manufacturing. But manufacturers who weren’t using this production model continued to build cars, even though no one was buying them.

Toyota still uses JIT today, making only the goods that are needed. When the company receives a vehicle order, it collects the necessary parts and begins the production process. The company then replaces the parts it used in the production process.

How does just-in-time work?

Just-in-time (JIT) is based on a “pull” approach — the manufacturing process is driven by demand from customers. This is an alternative to a “push” approach, where companies manufacture goods in hope that people will buy them.

JIT uses kanbans (which translates to “signal cards”) — visual cues that let companies know when it’s time to move more products. These signals, often a reorder slip or a computerized version of one, exist at each step of the supply chain, from the raw material suppliers to the customers.

Starting at the end of the supply chain, a consumer signals to the retailer that there’s demand for a product by placing an order or going to a store to buy it. At a certain point, this gives the retailer a cue that it’s time to order more goods. The retailer sends a signal to the manufacturer that it’s time to create and deliver more products. Finally, the manufacturer notifies its suppliers that it needs the materials to move forward with production.

JIT is all about efficiency. A retailer using a JIT inventory system doesn’t want more finished goods delivered until it’s actually ready to sell them. The goal is to avoid unused inventory sitting in a warehouse or storeroom, which can be expensive and result in waste or damaged products. The manufacturer only orders as many raw materials as it needs to produce goods right now, as it doesn’t want supplies sitting unused.

What are the requirements for implementing just-in-time?

There are several elements that have to be in place for a company to effectively use just-in-time (JIT). First, the company’s stakeholders have to be on board, including suppliers, distributors, and managers.

The company’s plants must also be properly set up for JIT. Companies may need to adapt the layout of factories or their method of quality control. Companies also need to have the right systems in place, including project management and technology, to carry out JIT.

Adaptability is a prerequisite for implementing JIT. One of the perks of this production system is that it allows companies to respond more quickly to the market and the needs of customers. To do so effectively, companies need to be willing to change the way they’ve traditionally operated.

What are the advantages and disadvantages of a just-in-time system?

The just in time (JIT) system comes with pros and cons and may not be for every company.

Advantages

In the decades since Toyota created the just-in-time (JIT) system, companies have continued to use it to improve supply chain management. JIT can help companies cut down on waste and costs. For example, because Toyota doesn’t order parts until a customer places an order, the company knows it won’t spend money making products it won’t be able to sell.

JIT also helps to reduce inventory waste. Suppose a clothing manufacturer produces items in bulk, assuming retailers will order them. Once it manufactures the clothing, it sits in a warehouse until orders start coming in. During that time, inventory could be damaged, lost, or stolen, or it could go out of style. If a raw material or product is more perishable, such as fresh food, having too much in stock could result in spoilage. Using JIT, a company would only send as much clothing or other products as it can sell to the next leg of the supply chain.

Finally, JIT allows companies to be more responsive to customers. Suppose a computer manufacturer just put out a new line of computers. But when the first round of customers took their computers home, they found a flaw with the design. If the company was using JIT, it could quickly fix the design to meet customers’ needs, rather than continuing to sell the old model.

Disadvantages

JIT has its downsides as well. There can be a learning curve for establishing JIT in a company. Not only does it take a lot of planning on the part of the company, but it also takes cooperation from stakeholders such as suppliers and wholesalers. Companies have to become really good at forecasting demand so they don’t find themselves short on materials.

JIT can also put companies in a difficult situation if supplies don’t arrive on time. Suppose a manufacturer is expecting a delivery of supplies, and bad weather hits. None of the suppliers can make deliveries. Because the manufacturer uses JIT, it doesn’t have extra supplies or inventory on-hand, so it has to stop production until the weather improves. Even just one supplier failing to deliver would prevent a company from moving forward with manufacturing. JIT could also be thrown off by a sudden increase in demand. For example, protective equipment manufacturers that relied on JIT would be unprepared for a sudden surge in orders due to an event like the COVID-19 outbreak.

Finally, though JIT is meant to reduce costs within a company, it can also increase expenses in other ways. When you go to the grocery store, it’s usually more cost-efficient to buy in bulk — It breaks down to less money per item or ounce. Supplies in manufacturing are often the same way, and by buying small amounts, companies may end up paying more per item. Plus JIT can prevent companies from locking in a good deal on a large amount of supplies, meaning they may be more vulnerable to price hikes.

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