What is Just In Time inventory and when should you use it?

Just In Time inventory management helps companies reduce waste by holding only the minimum necessary stock at the right time. Carmaker Toyota developed the system in the 1970s, and it has since become common practice in many manufacturers and retailers.

Any company can use Just In Time (JIT) to gain a host of benefits, including flexing production to meet demand, reducing working capital needs, and enhancing cash flow.

However, just-in-time inventory management does come with risks and you need to apply it carefully.

What is Just In Time inventory management?

At some point in life, you’ve bought something in bulk because it’s cheaper per unit.

You use some, and put the rest in the cupboard but months later, it’s gone off and unusable.

Companies make a similar mistake when they buy too much stock or hold it too long.

JIT gives you a more efficient system by “producing the right products, in the optimum quantities, at the necessary time.”

Holding the right inventory avoids:

• storing incorrect or poor-quality parts
• unsold stock that you have to discount
• stock that perishes or goes out of fashion.

Who uses Just In Time?

JIT is still a popular technique among assembly-based manufacturers such as carmakers and electrical equipment producers.

But the likes of restaurant chain McDonalds, supermarket Tesco, and clothing retailer Zara are also known for using it in different ways.

Mark Greenhouse, lean manufacturing consultant and trainer, says it can help any type of company—from conveyancing lawyers wanting to reduce property sale completion times to investment managers cutting onboarding times for new customers.

What types of companies use JIT?

Smaller companies tend to have more control over their resources, so have less need for JIT.

As they grow, they are more likely to develop inefficiencies from having too many resources in the wrong place or time.

They are also more likely to have processes that haven’t changed for years.

These companies often benefit the most from JIT.

Mark says JIT is also typically embraced by firms:

• with relatively stable demand, such as supermarkets
• who can control demand—for example, a carmaker that can dictate when your order is available
• with short shelf-life products such as fast food or fashion.

How Just In Time inventory works

A core principle of JIT is ordering only enough parts, and making only enough products, to meet demand exactly.

Say you’re a manufacturer and think you’ll sell 500 assembled products a month.

You might consider buying the parts for all 500 on a single order, or even ordering 1500 every 3 months for a bulk discount.

If arriving parts are poor quality, you might end up with hundreds of wasted items in storage. Or, if demand slips, the stock might perish or go out of fashion.

Aligning inventory with demand more accurately by only buying parts to meet immediate orders helps you avoiding such wastage.

But there are many other aspects to successful JIT implementation, from sourcing more local suppliers, to improving workflow processes, communication across your company, and transport links—these will be explored in later sections.

Once established, you can refine JIT further. Dr Omera Khan, founder and director at OQK Associates, says a good example of this is Zara, which builds design processes into its JIT approach to meet consumer demands faster than competitors.

Using local suppliers and designers allows Zara to have new designs in stores within days, enabling it to introduce more products, and respond to trends quickly, she says.

But this requires close collaboration and JIT to be applied throughout the production chain.

The advantages of Just In Time

Other benefits of JIT include focussing resources only on fast-moving items that generate cash quickly.

Less incoming stock means you spend less cash upfront, and generate receipts faster.

Less Work In Progress (WIP) means workflows are more straightforward, problems easier to spot, and processes easier to control.

If a problem occurs during production, a smaller volume is affected.

JIT can also enable you to scale production faster, speed distribution, and improve customer service.

But it can have even greater impacts on your production processes.

For example, it often requires you to figure out how to reduce batch sizes, enabling work to transfer faster from one production step to another, and reducing idle time.

“All production steps working simultaneously can enable you to complete multiple individual batches in half the time of a single, larger batch,” says Mark. “It can also force businesses to look at many other aspects of their organisation and highlight inefficiencies or skills shortages.”

Disadvantages of JIT

During supply chain disruptions, such as those created by the Ukraine-Russia war, building inventory to cope with problems may be prudent, rather than cutting it.

Long-term factors, such as extreme weather events, may also lead firms to consider keeping more stocks.

Working with smaller volumes also leaves no spare stock to meet a sudden demand spike, such as there was for hand sanitizer or PPE demand during Covid; or cope with something going wrong during manufacturing.

This issue forces businesses to increase quality control at each production stage.

They then only pass forward correct items, rather than discovering later that a large batch was faulty.

Buying in smaller sizes can be more expensive per unit, and redesigning your processes to accommodate smaller batches can be costly and time-consuming.

But Mark says such redesigns are often worth it in the long term, perhaps even revealing dramatic benefits you did not expect.

A great example is when Starbucks started grinding coffee in smaller, more frequent batches, which enhanced customer experience by spreading the aroma of ground beans in its shops.

What are the risks in implementing JIT?

One risk is poor implementation, which can lead to service and reputational issues if customers don’t receive goods in time.

“I’ve seen companies thinking JIT is only about reducing stock levels, taking it too far and not adopting other practices necessary to ensure it works,” says Mark. “They end up with a ‘just too late’ system—waiting on a single component to assemble units, or applying it to areas where a buffer is actually necessary because of how they operate.”

Another risk is not including other teams in implementation, so they don’t understand how it works.

This can lead to problems if, for example, the finance team sets production targets that are too inflexible for JIT to work.

Not monitoring stock movements closely can be a mistake, especially in a sophisticated JIT system. “Businesses with 100% JIT-based operations continually track transport movements to their sites,” says Mark. “Delays can play havoc with production plans.”

Another challenge is that JIT can lead to some people becoming redundant, or needing retraining.

JIT methods work well in stable conditions, when demand is more predictable, but some have been less viable recently as business uncertainty has increased.

Omera says: “The pandemic was a wake-up call for automotive supply chains, as it showed that if your chain is too lean, it can fail. JIT can still be advantageous but must be managed differently to the way it was. Establishing decoupling points [that allow production steps to work autonomously] is necessary for success as it enables you to cope with unexpected events. It avoids the system crashing if a key component does not arrive in the right place or time.”

FAQs

Will it work on all our parts and products?

Not necessarily. But once you get used to it, you may be surprised how much you can apply it to—even in companies with low volumes, or large mixes of tailored products.

What tools do we need?

Visual control (indicators that record progress) and jidoka (automation with human intelligence) are often implemented alongside JIT to give manufacturing teams more control and allow them to stop if they find defects.

Kanban inventory systems also support JIT adoptions—these are signals from one process to another to control WIP.

Who needs to be involved in implementation?

Mark says implementation must include:

• sales, to understand demand and how changes are communicated
• production and schedulers, to assess issues such as how to produce smaller batches, and which kanbans to use
• procurement, to find out how suppliers can meet your JIT requirements
• distribution, to ensure their systems can cope
• finance, to model JIT’s impacts on cash flow.

How quickly can we implement it?

Mark says: “I’ve seen results in 2 to 4 weeks from implementation—not the full system but the start of one that’s under control and only producing what’s needed. It may take many months to refine.”

Inventory management software from Sage

Cloud-based inventory management software makes tracking and managing your stock easier.

This empowers you to run an accurate JIT system more effectively.

It gives a real-time view of inventory levels across locations, helping you avoid overstocking and understocking.

This enables you to avoid lost sales due to understocking or marking down unsold items.

The software also allows you to use data and analytics to predict demand accurately, which is vital to successful JIT.

Final thoughts: JIT benefits make it a critical consideration

Just-in-time methodologies may have been around since the 1970s, but they evolve constantly. New insights, practices, and technologies make it easier than ever to make JIT work for your business.

The more uncertain trading environments can make JIT harder to implement, but it also increases pressure on medium-sized businesses to improve efficiency and agility.

So, it’s now more important than ever to consider whether Just In Time can enhance your business and how.