JIT inventory management is being used by most businesses as an inventory tool to manage optimum inventory levels.
What is just-in-time or JIT inventory management? JIT is also referred to as lean management. JIT means an inventory management system whereby raw materials are ordered just before production but not before that. The objective of JIT is to have minimal inventory in hand so production can begin and then get the raw materials and inventory as the need arises. JIT depends heavily on supplier efficiency and so isn’t an inventory management option for all types of businesses. However, its advantages far outweigh its disadvantages which makes it an inventory management technique to consider.
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JIT requires you to have the stock before production begins so that it is available to the customer after he places an order. The key is to have the stock just as you require but not way in advance. You must have long-term contracts with your suppliers to ensure JIT works for your business. Of course, you want to factor in the reliability of the suppliers because only those who always fulfill demands and ensure timely delivery must be considered to ensure you get the stock on time with zero delays. JIT requires stellar collaboration because every person involved has to do his job correctly for inventory management to work.
This is important because people need to regularly inform each other and talk to each other to ensure production flow and supply flow are taking place as they should. This dependence will bring the benefits that are associated with JIT and ensure that the process is working smoothly without any bottlenecks. JIT requires constant monitoring and improvement for its continuous success. The aim is always to have sufficient stock to avoid wastage and to ensure product quality while reducing unnecessary costs and expenses along the way. JIT can be implemented in a variety of ways but there are some general steps that every business must take.
JIT starts with the design process whereby the required manufacturing components are determined and identified. The next step is to manage and this is where the roles are defined. The pull step is when the team is explained about the production methods. The next step specifies the supplier list and negotiations also take place. The next step requires refining of controls and identification of inventory requirements. Then the teams are informed about their roles and responsibilities in the JIT process. Once all of these steps are complete, the refining stage takes place whereby the production is made more efficient. The last step is to review and implement after thorough analysis.
JIT inventory management has several advantages as follows.
Leads to higher efficiency
JIT lowers raw material inventories as you are not storing more than required raw materials in your warehouse. It improves inventory turnover ratios which is beneficial for your business. It promotes local sourcing which lowers delivery times and eliminates the need to store extra stock.
JIT ensures there is minimal waste because you order only what is required. This decreases and eliminates dead stock. It keeps unsold stock to the minimum because you have the inventory you require. It lowers scrap costs as damaged and defective products can be more easily identified.
Decreases expenses and costs
JIT lowers costs as you have lower inventory carrying costs. It lowers how much working capital is required and also lowers the cash expenditure due to lower levels of inventory. It reduces labor costs and due to freeing up of resources, you can direct them elsewhere.
It cuts down the time required to manage extra inventory. This improves product turnaround. JIT improves the ability to make changes to existing products. It cuts down on production runs as manufacturers become capable of delivering products.
Businesses can focus on quality which in turn ensures higher customer satisfaction. As the number of defective products will decrease due to them being less prone to damage, it will ensure a better quality of products. JIT helps to lower the number of work-in-progress products too.
JIT improves production flow because it will lower the number of delays that take place in the supply chain. It reduces the time it takes to manufacture products and shortens the production runs. It lowers scrap levels too.
JIT inventory management has its set of pitfalls as follows.
Heavy reliance on forecasting
A forecast cannot be trusted completely because demand can suddenly arise. This can weaken your business’s ability to meet those demands. In such cases, you can lose your customers and revenue because you won’t be able to satisfy your customers.
Disruption causes delays and inefficiencies
When you use JIT inventory management, you must be ready and prepared for disruption. But sometimes even the most prepared businesses can become paralyzed due to disruptions that directly impact the production process.
Costs and expenses can rise
JIT depends on the constant ordering of inventory to lower inventory costs. This means you will be affected when the prices of raw materials change and this means higher costs when the prices rise above normal. You won’t have much time to shop around which can increase expenses.
Supplier delays stalls production
Even if your supplier always sends inventory on time, it can falter and this can affect the entire production. When this happens you won’t be able to fulfill customer orders as production delays will take place.
Just in time inventory management is useful in a variety of scenarios and a wide range of businesses can use it. It is used in health care sectors to keep their costs and expenses low. Publishing uses JIT, especially authors who publish their books. This ensures they don’t have to deal with the wastage of unsold books. The construction industry uses JIT as storing inventory costs can add up quickly causing a sharp rise in expense. Using JIT enables the industry to minimize materials movement and keep expenses minimum. The automotive industry uses JIT and this was one of the first industries to use JIT. It helps maintain competition.
The apparel industry uses JIT as it must ensure it is aligned with the trends that change rapidly. This allows them to store only what is necessary and reduce unnecessary expenditure on clothes that may be out of fashion. The fast-food industry especially franchises use JIT because it allows them to use fresh ingredients rather than store ingredients for long periods. Retail uses JIT because it allows it to store sufficient inventory thereby cutting costs of storing more than necessary. Another industry where JIT is used is manufacturing where production costs are high and using JIT minimizes inventory to improve efficiency.
As stated earlier, JIT is excellent and many renowned brands have found success with this inventory management method. But JIT is not for every business. If you want to convert to JIT, then there are a few factors you should consider. You should only move forward if all of these requirements are met.
Are your suppliers reliable?
If you have worked with suppliers who have always delivered on time and delivered safely, then you can try JIT. You should be capable of fulfilling orders even when there are delays in the supply chain.
How willing are your employees to change?
JIT requires your employees to understand the process and it requires quite some work from your end as you have to properly train your employees. JIT works best when everyone is on board.
Do you have forecasting abilities?
JIT also depends on the forecasting capabilities of the business. Do you have the tools and the information you need to forecast demand? If yes, then JIT may be for your business.
Can your supplier fulfill demand quickly?
Strong supplier relationships form the basis of JIT's success. If you are working with your suppliers for a long time and they are capable of fulfilling your demand quickly then you can consider JIT.
Can you deal with disruptions?
What if natural disasters take place? Will your supplier be able to fulfill your demands at that time? You need to be capable of dealing with sudden problems that can arise before converting to JIT.
Do you have agile inventory management software?
You need trustworthy inventory management software to manage your inventory with JIT. The software should be capable of giving you insights on trends, stock movement, aging analysis, profitability, re-order status, etc.
TallyPrime is an accounting system with a robust inventory management system. It comes with a host of inventory reports and utilities to manage your business inventories efficiently. It easily adapts to your business needs to give you incredible performance every single day. With its insightful reports, you can make decisions that truly matter and make a difference to your business. TallyPrime has features such as warehouse management, bill of materials, batch-wise and stock-wise management, reorder level, job-work management, and much more. Try TallyPrime today.