The Quest For Lower Inventory
If you are carrying inventory in your business, you are carrying some heavy costs along with it. Carrying costs are usually estimated at 20% or more of inventory value. For example, a conservative estimate of the annual carrying costs for $100,000 in inventory is $100,000.00 x 20% = $20,000.
That’s a significant expense, but what causes these costs? Space requirements, inventory shrinkage, obsolescence, labor costs to order, rotate, and handle inventory and overhead costs such as utilities and security systems drive the carrying cost equation. Modern businesses utilize a Just In Time inventory strategy to reduce required inventory levels and improve service delivery.
What is Just In Time Inventory?
Just In Time (or “JIT Inventory”) is an inventory management technique leveraged by many organizations to reduce the burden of excess inventory. The key principle of JIT Inventory is to align supply orders with production schedules to deliver input components as needed rather than stockpiling it in a warehouse or onsite storage facility.
Components of JIT Inventory Management
JIT inventory requires a highly synchronized production process – Not only do you need to know what you will produce (and when), but you must coordinate your production planning with key vendors to ensure uninterrupted product supply.
JIT inventory management requires a robust (and accurate) production planning process. Because component inputs are provided precisely when they are needed in the production process, then there is little room to make last-minute changes to production quantities.
As example, let’s assume you plan to produce 10,000 units of a particular product in a given month. By the end of the first week of the month, you realize you grossly underestimated product demand, and you really need to produce 20,000 units.
If you implemented JIT inventory, then it is highly unlikely you will have the raw materials you need to produce that product in such a short time. Your vendors will be prepared to deliver raw materials to produce only 10,000 units in the month, with deliveries staged throughout the month.
Thus, an effective implementation of JIT requires a predictable planning cycle that doesn’t typically generate surprises.
Supplier Relationship Management
The entire concept of just in time inventory hinges upon the idea of placing an order with a supplier for a specific quantity of product for expedited delivery. Companies seeking to implement JIT systems must ensure that their material suppliers are up to the task.
Beyond production capability, it’s important to foster a collaborative relationship with your suppliers. JIT inventory management increases inter-dependency between suppliers and manufacturers, so it’s important to have clear communication channels to provide forecasts and remedy product shortages.
What are the Benefits of Just in Time Inventory?
A just in time inventory management system provides many benefits for any organization looking for a more efficient inventory management system that frees up significant organizational resources to use elsewhere within the company. The benefits of just in time inventory include the following:
1. Lower Carrying Costs
Less inventory results in less space required to store it, human resources to order and rotate it, reduced shrinkage, and lower risk of obsolescence. A reduction in inventory on hand leads to a reduction in overhead costs, such as security systems and insurance premiums. Further, industries with cold storage or other special storage requirements may realize more significant reductions in costs.
Most of the time, when a company is storing inventory, it has already paid for it, tying up cash until the inventory is sold. Reducing inventory makes cash available for other business needs. These are some of the reasons why just in time inventory management boosts profitability and efficiency.
2. Product Flexibility
With less inventory on hand, manufacturers may be able to retool for differing product lines more quickly without worrying about consuming current inventory on hand. This rapid changeover leads to greater organizational agility.
3. Enhanced Inventory Visibility
A significant reduction in inventory levels results in greater visibility with existing inventory on hand. Supplier quality issues are easier to spot and less impactful. Inventory aging is also reduced.
4. Better use of Supply Chain Expertise
With optimized inventory, your supply chain leaders will spend less time managing excess quantities of stock. Instead, your supply chain team now has the opportunity to take on more meaningful supply chain projects, namely focusing on enhanced product quality and reduced supply costs. These projects yield lower costs (and higher profits) for the entire organization.
5. A Focus on Waste Reduction
Just in time can be a catalyst for cultural shift in how the organization thinks about lean management and waste. Many companies that have implemented just in time inventory management principles find that this cultural shift has enabled the organization to discover other waste reduction opportunities.
6. Increased Productivity
An increase in inventory efficiency means staff will spend less time dealing with excess inventory, freeing up time for them to become more efficient in their job.
With all these benefits, just in time is a great strategy for many companies seeking a greater degree of efficiency and a reduction of inventory associated costs. Many world class companies have implemented JIT inventory, including Apple, McDonald’s and Toyota.
JIT Inventory: Toyota Motor Company
Toyota Motor Company spearheaded JIT inventory management in the automotive manufacturing business. Toyota’s implementation of JIT (known as the “Toyota Production System” is credited as being critical to the company’s success.
Toyota developed the Toyota Production System (TPS) after World War II, when it was facing significant decline in demand for automobiles coupled with high production costs. The company was at risk of going bankrupt. While Toyota had implemented a just in time inventory management system some years earlier, it didn’t realize the full benefit until it deployed it across the enterprise in a systematic fashion. Specifically, the company began matching demand with production and using that data to drive raw materials orders.
Toyota states that “The TPS has evolved through many years of trial and error to improve efficiency based on the Just-in-Time concept developed by Kiichiro Toyoda, the founder of Toyota.”
Toyota leverages the TPS to manufacture vehicles as dealers place orders to the manufacturer. The company produces required parts for vehicle manufacturing quickly to limit over production and reduce parts and vehicle inventory.
Toyota built the system on a culture that demands work stoppages to fix problems before they compound down the line, thereby building quality into the process. This culture of addressing issues as they arise is critical, as any defective parts that would need replaced need extra manufacturing because there are no extra parts on hand.
The result of all this for Toyota is a culture that is intolerant of waste and a reputation for quality and value. The company is the second largest auto manufacturer in the world based upon 2019 revenues. JIT was a phenomenal success for Toyota, and is often cited as a best-in-class example of inventory management. Today, every auto maker follows Toyota’s example in their own production processes.
JIT inventory management is a lean inventory management process that will unlock efficiencies at manufacturing companies that require numerous raw inputs as a component to their finished goods. In addition to reducing inventory carrying costs, a JIT deployment may spark a cultural shift of waste reduction efforts at the business. By establishing a culture of lean manufacturing processes, organizations may uncover numerous initiatives to save waste (and money) across the business.