Just-In-Time method, sometimes referred to as Toyota Production System (TPS) is one of the inventory management strategies businesses use to increase their operations’ effectiveness.
Historically, JIT method meant reducing the inventory expenses by ordering goods (raw materials, components etc.) only when they are needed for the manufacturing process.
This means, both parties - supplier and manufacturer (or retailer, in our case) enjoy high efficiency and decreased warehouse costs, because both production, delivery and sales processes and schedules are tightly synchronized. Under this method, manufacturers and retailers do not have to invest large sums of money in inventory, money is not tied up, and they can choose a better asset allocation - say, business development or expansion. Everyone knows, that the best way to increase cashflow is by learning how to properly invest!
Just-In-Time inventory management tool was developed fifty years ago by Toyota. Japanese car manufacturer took the supermarket retail as a model of warehouse management. When a customer comes to buy, say, an apple in the supermarket, he takes one, two, three apples from the shelf and pays at the cash desk. What happens next? Supermarket replenishes its stock with one, two or three apples. Let’s change the roles a bit. Let a customer be a manufacturer, and a supermarket be a supplier of raw materials or components. A manufacturer takes the amount of products he needs - say, one, two or three components. A supplier replenishes the amount taken. No storage costs, no overstocking, no tied-up warehouse assets.
This is a very simple illustration of the method Toyota took and perfected it. Car manufacturer developed their supply cycle in such a way that they kept their inventory levels relatively low, and ordered car assembly parts only when an order from an end customer was placed. Yes, they depended greatly on the reliability of the supplier, but this technique allowed them to save money on warehouse facilities and car components - they ordered only the amount they needed.
They started using this method in 1970, and today JIT is widely spread around the world. Companies from McDonalds to Apple and Zara actively use it in their operations. By the way, JIT method is extremely popular among fast-food chains. They keep their french fries, hamburgers, cheese and other ingredients in refrigerators and they take them out and start cooking only when a customer places an order at the cash desk!
Being opposite to a traditional inventory management strategy, sometimes being called “just-in-case” method, where inventory and supplies are being purchased in advance to meet anticipated market demand, JIT has some vivid benefits. It also has drawbacks, let’s talk about them a bit later.
Benefit 1: Sufficient reduction of warehouse expenses
Companies using JIT can reduce their storage expenses and costs associated with warehouse management (its rent, upkeep, storers etc.). Low level of stock makes it much easier to classify items and keep them in order. Defected or spoiled items are easier to identify and find. With JIT businesses can invest in HR quality (staff education, flexibility) rather than in staff quantity, as the number of people involved in warehouse management is definitely lower than in traditional models.
Benefit 2: Saving money spent on extra stock
JIT users can save money spent on extra stock that is lying on the shelves waiting for an order to come. Inventory levels are relatively low, so is the risk of having extra stock. This also means a benefit for the customer - as the lowered operational costs may bring a drop in end prices, which brings more demand and more market share.
Benefit 3. Time is money
JIT implies that the amount of time needed for supply chain turnover is small. The quicker retailer or manufacturer ships the order to an end customer, the better. And logically, the quicker he gets the components or goods from a supplier, the better. JIT strategy helps to quicker adapt and react to customer demand change, increasing the sales of top-demand bestsellers while lowering the production or supply of unwanted goods.
Every coin has two sides, so is JIT. As promised, here are some drawbacks of this technique. To illustrate, here is a story dating back to 1997. One of the suppliers of Toyota - Aisin company - passed through a detrimental fire which destroyed one of its power supplier, and the company was no more able to produce a component they had been selling for Toyota cars. Toyota was using JIT method, and it’s easy to figure out that the inventory came at a close very quickly. The losses Toyota met were around 15 billion USD, 70 000 cars. This situation points very clearly to the fact that any breakdown in supply chain - can ruin the whole system.
Disadvantage 1: Domino effect
If a steady, consistent and stable supply chain is broken, the losses are terrible. If any problem occurs - either a force majeure, or a human-caused issue, or a time gap - the damage is considerable for each player. Schedules are tough, and any delay or shift can again damage the supply chaiт triggering a domino effect.
Disadvantage 2: No room to fail
The schedules are so busy and the processes are so synchronized that neither retailer/manufacturer nor their stock analytics has a right to mistake. If a demand or customer consumption trends are forecasted inaccurately, this can lead to a considerable loss of money. To prevent these situations, it’s highly recommended to use sophisticated inventory analytics and tools.