The just-in-time, or JIT, inventory ordering process has been around since the 1970s, but much newer examples show how much more efficiently a business can run when it adopts the practice of ordering what is needed only when it is needed. Companies that are successful in using just-in-time methods minimize inventory, maximize efficiency, and increase profitability.
The JIT inventory system is popular with small businesses and major corporations because it provides more efficient use of working capital and enhances cash flow. The JIT system can be especially helpful to small businesses that are just starting out. It can reduce the amount of capital required to get the business up and running. Companies tie up less money in unused inventory and need less storage space. Obviously, using this sort of inventory method works only if a company has an efficient inventory management system and reliable suppliers.
In this article, we'll review different examples of how companies—both large and small—are implementing a JIT inventory strategy.
- A just-in-time (JIT) inventory system is a management strategy that enables a company to receive goods as close as possible to when they are actually needed.
- A chief benefit of a JIT inventory system is that it minimizes the need for a company to store large quantities of inventory, thereby improving efficiency and providing a substantial cost saving.
- The JIT inventory system is popular with small businesses and major corporations alike because it enhances cash flow and reduces the amount of capital needed to run the business.
- Retailers, restaurants, on-demand publishing, tech manufacturing, and automobile manufacturing are some examples of industries that have benefited from just-in-time inventory.
Examples of the Just-In-Time (JIT) Inventory Process
Many mass-market retailers use JIT strategies to minimize their inventory costs and provide their customers with large quantities of merchandise at just the right time. For example, big-box retailers Target Corporation (TGT) and Walmart Inc. (WMT) schedule their seasonal merchandise to arrive just as demand is beginning to pick up for specific items. As the season draws to a close and demand wanes, shelves are cleared to make room for the next season's items.
Even smaller retailers can take advantage of the JIT method to streamline the delivery process. For example, a company that markets office furniture but does not manufacture it may order the furniture from the manufacturer only when a customer makes a purchase. The manufacturer delivers it directly to the customer. The retailer has saved the cost of storing inventory.
Burger King franchisers keep a substantial inventory of hamburger ingredients on hand all the time, but a hamburger is only cooked when it is ordered. This saves waste and gives the chain bragging rights for the freshness of its food.
Apple's chief executive officer (CEO) Tim Cook parlayed the 16 years of supply management experience he gained working at IBM and Compaq Computers to entirely revamp Apple's manufacturing process. Starting as Apple's chief operating officer (COO) in 1998, Cook pulled the company out of manufacturing, closing Apple's warehouses and factories around the world. He opted instead to establish just-in-time relationships with independent manufacturing contractors, many of them located in China where labor and cost of goods were much cheaper.
Cook's supply chain improvements reduced the amount of time Apple's inventory sat on the company's balance sheet, which went from months to days. Cook credits these changes as a key factor in Apple's growth and profitability.
On-demand publishing is a prime example of the JIT inventory method, and it has become popular with independent publishers and self-publishing businesses. Master manuscripts of books are kept on hand, but texts are only printed and assembled as needed when a retail sale is made. This reduces book store returns and wasteful pulping of unsold inventory.
Where the JIT Inventory System Began
And, of course, the JIT inventory system can be found in automobile manufacturing, where it was first developed by Toyota Motor Corporation (TM). Executives reasoned that the company could adapt more quickly and efficiently to changes in trends or demands for model changes if it did not keep any more inventory in-store than was immediately needed.
Moreover, Toyota's executives realized that it was more cost-efficient to replenish parts or finished goods only when they are immediately needed for daily production or pending retail orders. This meant a manufacturer didn't need a warehouse full of windshields and brakes. It could have those parts delivered hours before they were scheduled to be used on the assembly lines. And it could have the parts delivered to the right assembly station immediately before they were scheduled to be installed.
Kanban, which is the Japanese word for "sign," is a just-in-time inventory control system developed by Toyota that allows employees to quickly signal when it's time to order new shipments of parts.
While the benefits of JIT are well-documented, the COVID-19 pandemic has revealed the method's weaknesses. As trade was disrupted by lockdowns and travel bans, companies have found managing its supply chain to be incredibly difficult.
Companies have been forced to reconsider their JIT strategy, as it has proved unable to adjust to circumstances in which the suppliers themselves are under strain either due to increased demand or transportation difficulties.
While the pandemic has certainly caused many supply chain problems, the industry can protect itself from future disasters by committing to a more adaptable, innovative approach to JIT.