Just-in-time (JIT) inventory definition
/What is Just-in-Time Inventory?
Just-in-time inventory is the reduced amount of inventory owned by a business after it installs a just-in-time manufacturing system. The intent of a JIT system is to ensure that the components and sub-assemblies used to create finished goods are delivered to the production area exactly on time. Doing so eliminates a considerable investment in inventory, thereby reducing the working capital needs of a business. This type of system is called a " pull " system. Under the JIT concept, inventory may be reduced by the following means:
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Reduced production runs . Fast equipment setup times make it economical to create very short production runs, which reduces the investment in finished goods inventory.
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Production cells . Employees walk individual parts through the processing steps in a work cell, thereby reducing scrap levels. Doing so also eliminates the work-in-process queues that typically build up in front of a more specialized work station.
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Compressed operations . Production cells are arranged close together, so there is less work-in-process inventory being moved between cells.
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Delivery quantities . Deliveries are made with the smallest possible quantities, possibly more than once a day, which nearly eliminates raw material inventories .
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Certification . Supplier quality is certified in advance, so their deliveries can be sent straight to the production area, rather than piling up in the receiving area to await inspection.
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Local sourcing . When suppliers are located quite close to a company's production facility, the shortened distances make it much more likely that deliveries will be made on time, which reduces the need for safety stock .
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Advantages of JIT Inventory
There are a multitude of improvements related to JIT inventory, particularly in relation to reduced cash requirements and the ease with which manufacturing problems can be uncovered. They are as follows:
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Working capital reduction . The investment in working capital is minimized, because the inventory investment is greatly reduced.
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Obsolete inventory reduction . With inventory levels so low, there is little risk of having much obsolete inventory .
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Defective inventory identification . Defective inventory items are more easy to identify and correct, resulting in lower scrap costs. This is because there are fewer inventory items, making it easier to spot defective items.
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Production speed enhancement . A thoroughly implemented JIT system should shorten the amount of time required to manufacture products, which may decrease the quoted lead times given to customers placing orders.
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Easier engineering change orders . It is much easier to implement engineering change orders to existing products, because there are few existing stocks of raw materials to draw down before you can implement changes to a product.
Disadvantages of JIT Inventory
There is one key problem with JIT inventory, but it is a large one. Low JIT inventory levels make it more likely that any problem in the supplier pipeline will lead to a shortage that will stop production. This risk can be mitigated through the use of expensive overnight delivery services when shortages occur. Another option is to retain a backup supplier for key inventory items.
Evaluation of JIT Inventory
The benefits of reducing the investment in inventory are substantial, which can lead a company to pare away too much inventory. When this happens, any unanticipated disruption to the flow of materials can bring operations to a halt almost immediately. Consequently, JIT concepts should certainly be followed, but be aware that there is a lower limit on how far you can reduce inventory levels.
