Where did the concept come from, and how can it benefit businesses? Just in time is a common inventory management technique and type of lean methodology designed to increase efficiency, cut costs and decrease waste by receiving goods only as they are needed. The rise of dropshipping has made JIT inventory management more appealing for retailers, as it allows them to sell a product before buying it, then purchase the item from a third party and have it shipped directly to the customer.
With the right approach, utilizing a JIT inventory management strategy has a number of potential benefits for businesses:. JIT inventory management is used today by businesses in industries ranging from retail to fast food to tech. Toyota is one of the most famous examples of Just in Time manufacturing simply because it was one of the first to implement this strategy effectively.
Here are some other examples of JIT in action:. This consumer electronics giant keeps as little inventory on hand as possible.
By lowering the amount of stock on hand, Apple carries a lower risk of overstocking and chalking up dead stock in its warehouses. If it gets past its freshness date, you have a problem. Kanban is crucial when it comes to eliminating manufacturing waste due to overproduction. More traditional mass production methods use push inventory strategies based on the estimated number of expected sales. Kanban uses cards paper or digital to track the progress of production on a factory floor.
Companies often adopt JIT inventory management as a cost-cutting strategy. When implemented correctly, JIT can create more value than traditional methods that require more extensive inventories. Learn more about inventory management controls. Just-in-time inventory management reduces waste, improves cash flow, increases flexibility, optimizes human resources and encourages team empowerment.
Companies that are successful at JIT inventory management maximize profits by keeping investment in stock as low as possible. They use data to manage inventory. They use an ERP system to gather information on shipping, customer satisfaction, loss prevention, warehousing, purchases, reorders, goods in storage, receiving, stock turnover and more. JIT inventory management relies heavily on precise forecasting and strong relationships with key suppliers. That could mean lost revenue and, potentially, lost customers.
The primary risk of JIT comes from its philosophy. JIT inventory management requires everyone in an ecosystem and supply chain to commit and work cohesively.
If any part of that arrangement breaks down, it risks the entire infrastructure. JIT inventory management has its pros and cons: less inventory saves money but relies on strong coordination between workers and suppliers. Also, strict protocols and forecasting requirements produce value, but various factors can disrupt it. Overall, the pros historically outweigh the cons unless there is a global supply chain disruption:. Before converting to JIT inventory management, assess if the entire organization is ready.
Consider these six factors: turnarounds, forecasting, flexibility, vendors, workforce and technology. Shifting to JIT or any new system requires preparation, research and buy-in. Find out how to increase profits and streamline productivity by reading the guide to inventory planning. Commonly associated with manufacturing, various businesses—from automakers to health care—use JIT inventory management.
Harvard Business Review. University of Cambridge, Institute for Manufacturing. Toshihiro Nishiguchi and Alexandre Beaudet. Accessed Sept. Organisation for Economic Co-operation and Development. Taiichi Ohno. CRC Press, Accessed April 27, Company Profiles.
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Total annual cost is the function that we want to minimise by choosing an appropriate value of Q. Note here that, obviously, there is a purchase cost associated with the R units per year.
However as this is just constant as R is fixed we can ignore it here. The diagram below illustrates how these two components annual holding cost and annual order cost change as Q, the quantity ordered, changes. As Q increases holding cost increases but order cost decreases. Hence the total annual cost curve is as shown below - somewhere on that curve lies a value of Q that corresponds to the minimum total cost.
We can calculate exactly which value of Q corresponds to the minimum total cost by differentiating total cost with respect to Q and equating to zero. Hence total annual cost is 2Rc o c h 0. The Economic Order Quantity is by definition the order quantity that minimises total annual cost and hence on cost grounds should always be the quantity that we order. Is there not a contradiction? If fact there need not be.
In particular if we can reduce the cost of ordering c o then the EOQ reduces. For example, if we were to reduce c o by a factor of 4 we would reduce total cost by a factor of 2 note the EOQ would change as well, being halved. This, in fact, is one of the ideas behind JIT to reduce continuously c o and c h so as to drive down total cost. Hence if, for example, we were to build close links with our suppliers so as to reduce ordering cost dramatically it becomes, just by a straightforward application of the EOQ formula, much more attractive to have small order quantities.
In the limit if c o is zero, i. Note too from the formula 2Rc o c h 0. These shipments total about 30 million metric tons per day and GM spends about 1, million dollars a year in transport costs on these shipments figures. JIT implies frequent, small, shipments. When GM moved to JIT there were simply too many lightly loaded trucks attempting to deliver to each assembly plant. GM's solution to this problem was to introduce consolidation centres at which full truckloads were consolidated from supplier deliveries.
This obviously involved deciding how many consolidation centres to have, where they should be, their size capacity and which suppliers should ship to which consolidation centres suppliers can also still ship direct to assembly plants.
I believe that this is an incorrect analysis - MRP is a system based on fulfilling predicted usage in a set time period. JIT is a system based on actual usage - parts of the production system are "linked" together via kanbans as the system runs. JIT need not be applied to all stages of the process. For example we could keep large stocks of raw material but operate our production process internally in a JIT fashion hence eliminating work-in-progress stocks.
The classic JIT diagram is as below. There the company the boat floats on a sea of inventory, lurking beneath the sea are the rocks, the problems that are hidden by the sea of inventory. However you should be absolutely clear that implementing a JIT system is a task that cannot be undertaken lightly.
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