Just-in-time (JIT) inventory definition
/What is Just-in-Time Inventory?
Just-in-time inventory is the reduced amount of inventory owned by a business after it installs a just-in-time manufacturing system. The intent of a JIT system is to ensure that the components and sub-assemblies used to create finished goods are delivered to the production area exactly on time. Doing so eliminates a considerable investment in inventory, thereby reducing the working capital needs of a business. This type of system is called a "pull" system. Under the JIT concept, inventory may be reduced by the following means:
Reduced production runs. Fast equipment setup times make it economical to create very short production runs, which reduces the investment in finished goods inventory.
Production cells. Employees walk individual parts through the processing steps in a work cell, thereby reducing scrap levels. Doing so also eliminates the work-in-process queues that typically build up in front of a more specialized work station.
Compressed operations. Production cells are arranged close together, so there is less work-in-process inventory being moved between cells.
Delivery quantities. Deliveries are made with the smallest possible quantities, possibly more than once a day, which nearly eliminates raw material inventories.
Certification. Supplier quality is certified in advance, so their deliveries can be sent straight to the production area, rather than piling up in the receiving area to await inspection.
Local sourcing. When suppliers are located quite close to a company's production facility, the shortened distances make it much more likely that deliveries will be made on time, which reduces the need for safety stock.
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Advantages of Just-in-Time Inventory
There are a multitude of improvements related to JIT inventory, particularly in relation to reduced cash requirements and the ease with which manufacturing problems can be uncovered. They are as follows:
Working capital reduction. The investment in working capital is minimized, because the inventory investment is greatly reduced.
Obsolete inventory reduction. With inventory levels so low, there is little risk of having much obsolete inventory.
Defective inventory identification. Defective inventory items are more easy to identify and correct, resulting in lower scrap costs. This is because there are fewer inventory items, making it easier to spot defective items.
Production speed enhancement. A thoroughly implemented JIT system should shorten the amount of time required to manufacture products, which may decrease the quoted lead times given to customers placing orders.
Easier engineering change orders. It is much easier to implement engineering change orders to existing products, because there are few existing stocks of raw materials to draw down before you can implement changes to a product.
Disadvantages of Just-in-Time Inventory
There are several disadvantages associated with running a just-in-time inventory system, which are as follows:
Risk of supply chain disruptions. JIT relies on timely deliveries from suppliers, so any delays due to transportation issues, raw material shortages, or supplier problems can halt production. For example, if a key supplier experiences a strike or shipping delays, the company may run out of materials, causing missed deadlines and lost sales. Unlike companies with larger inventories, JIT manufacturers have little to no buffer stock to handle disruptions.
Higher risk of stockouts. Since businesses using JIT keep minimal inventory, they are more vulnerable to unexpected demand spikes. If customer orders suddenly increase beyond forecasts, the company may not have enough inventory to meet demand, leading to lost sales and dissatisfied customers. This can be especially problematic in industries with seasonal demand fluctuations or unpredictable market trends.
Increased dependence on suppliers. Companies using JIT must rely heavily on suppliers for frequent, on-time deliveries of raw materials and components. Any inconsistency in quality, timing, or reliability can disrupt production and affect product quality. This level of dependence requires strong supplier relationships and careful monitoring, adding complexity to supply chain management.
Higher transportation costs. Since JIT requires frequent, smaller shipments of inventory, transportation costs may increase compared to bulk ordering. Businesses may have to pay higher per-unit shipping fees, especially if they need expedited deliveries to avoid production delays. This can offset the savings from reduced storage costs, making JIT less cost-effective in some cases.
Limited ability to handle economic shocks. In times of economic uncertainty, such as recessions, pandemics, or natural disasters, businesses using JIT may struggle to maintain operations. With no excess inventory to fall back on, even minor disruptions can cause major production stoppages. Companies with traditional inventory systems may fare better in crisis situations, as they have extra stock to sustain operations.