Just In Time Inventory

Inventory management can be quite a perplexing job, given that you need to strike an equilibrium between two major costs that are involved in taking stock (pun unintended!) - ordering cost and carrying cost. Ordering cost is that cost which you incur to place an order for inventory to suppliers, and this may include the cost of stationery, postage, telephone bill, etc. Carrying cost is the cost of storing the inventory once it arrives and this may include warehouse rent (not if you have your own inventory storage space), transportation cost, duties and octroi charges, etc. Also to be considered is the level of demand for the goods, for which the inventory is needed. If you think you can place a bulk order to economize on ordering and carrying costs owing to economies of scale, a lack of sufficient consumer demand may leave a significant part of your capital locked up in the idle inventory. Therefore, the question that arises at such a juncture is, can 'Just In Time' inventory method be the answer to this dilemma? Let's find out.

What is Just In Time Inventory?

Just in time inventory control method is also known as Toyota Production System as this method of managing inventory logistics was pioneered by Toyota Motor Corporation. The objective of just in time inventory is to keep no inventory - zero storage, precisely. The philosophy behind JIT is a contradiction of traditional stock accounting and process costing methods that assume inventory as a store of value. Rather, just in time inventory philosophy regards inventory as a unit of cost and a vehicle of waste of capital. So, what is just in time inventory all about? Just in time inventory seeks to do away with the excess inventory which does not have any use, at a given point of time during the manufacturing process.

Say, for instance, I intend to assemble 25 laptops today (given that my optimum laptop assembling capacity per day is 25 units) and I hold an inventory that, besides various other parts, consists of 30 monitors. Since each laptop will have only one monitor and since I would be assembling only 25 laptops, the remaining 5 monitors are extra inventory which are of no use to me as of today. If I were to follow just in time inventory management method, I would have procured only 25 monitors for today and I would also modify my assembly skills such that no wastage or damage takes place during the assembly that may warrant me to fall back on extra units of inventory. Now that, is precisely what JIT is all about.

How Does JIT Work?

In a manufacturing outfit, the implementation of JIT involves a huge revamping of the existing process coordination. There should be constant communication and clockwork coordination between the various manufacturing processes in order of their functions in the entire production process. Signals or Kanban are transmitted from one point to the next of the production process which convey the current production status so that the next point knows when the subsequent process would be undertaken. This kind of prior intimation enables each process to order for just the required amount of inventory at just the right time so that the next process can be started as soon as the previous process sends in the work-in-progress. This is significantly dependent upon the infallible efficiency on the part of the ordering or purchasing personnel to place timely orders for the right quantity. The effect of such precision is that neither time, nor capital, nor capacity is wasted which leads to faster production. This in turn translates into decreased waiting time for the end customer.

Pros and Cons of Just in Time Inventory

While theoretically, there are many advantages of following the JIT system, its practical application has exposed many problems and difficulties of implementation. Let's take a brief look at both the benefits and lacunae of this system.

Pros

• Simplified inventory flow;
• Set up time is considerably reduced;
• Optimum synchronization of production scheduling, work hour consistency and demand;
• No storage required, as supplies happen throughout the day, as and when needed;
• Improved manufacturing process due to the unavailability of inventory backup in case of production goof ups.

Cons

• Interruptions in supply flow is the biggest concern, especially during the initial phase as well as during periods that bring up business continuity issues (natural calamities, political unrest, etc.)
• If not followed exactly the way it is theorized, which may be impractical at times, following JIT would do more harm than good, as even the slightest gap in precision and coordination can expose the manufacturer to losses, both in terms of capital and time.
• If the part of the supplies are not in good condition, the production would have to wait for fresh supplies, as there is not backup inventory. This may cause a lot of loss of time.
• A fault in inventory forecasting methods can land the manufacturer in huge financial losses.
• Also, the advantage of stocking inventory when prices go down is also lost, as JIT means getting supplies for the present market value.
• Much of the trade discounts on bulk orders are lost.

That should give you a fair idea of what is just in time inventory. No method is perfect and this applies to JIT as well. While it may sound like a pretty rosy technique theoretically, implementing JIT may require a complete overhaul of the existing inventory management system which can be a costly affair. However, after it has been successfully implemented and the personnel involved are extremely efficient, the benefits would far outstrip the initial costs. Consider the business continuity angle though.