JIT: Less Inventory, More Capital
Also called lean manufacturing, Just-In-Time Production (JIT) was made famous by Toyota in the 1960’s. This methodology focuses on freeing up capital by holding the minimum amount of inventory on hand, while still allowing the business to perform well. The idea is to have inventory only when you need it and not a moment sooner. With a well-tuned JIT system, it is possible to build products after they are ordered by customers, which allows the supplier to avoid holding massive amounts of inventory on hand. This is called make-to-order manufacturing.
Dell is a great example. By assembling products after they are ordered, Dell invests a minimal amount in inventory. In fact, they don't even have warehouses. JIT is commonly used in the tech industry where finished goods depreciate quickly because who wants a 2-year-old laptop? By implementing this change, Dell was able to undercut its competitors by 10-15%. At the time, HP and Compaq struggled to compete and lost a great deal of market share to Dell.
What are some methods that can move manufacturers towards JIT?
Simplifying manufacturing processes – By simplifying the process, it is possible to cut down on components, which will lead to holding less inventory.
Optimizing facility layout – By rearranging the facility, it is possible to decrease the overall throughput time and thereby cut costs and inventory needed.
Increasing manufacturing efficiency – By creating more efficient manufacturing processes, companies can reduce waste and use less inventory to manufacture the same amount of final product.
What are some problems with JIT?
Increased reliance on suppliers – Since little inventory is kept on hand, JIT may be a risky choice for some companies, leaving them susceptible to stock outs, labor strikes, and spikes in input price.
Supplier involvement – JIT requires management to rethink their supply chain to make sure they can find trusted suppliers who can work with them as demand fluctuates.
Supplier locations – Supplier warehouses/factories should ideally be located near the manufacturing facility. If they are not, then a delayed shipment could lead to a halt in production.
JIT can lead to great savings and free up capital for other projects in the company. However, it requires a great deal of planning and collaboration with suppliers to make it work. JIT isn't a fire and forget solution, it is a commitment that the company must maintain to continually reap the benefits.
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You may also be interested in our free eBook, It’s 8 am, do you know where your inventory is? How today’s manufacturers are taking control of materials, inventory and manufacturing costs from order to delivery. This resource shows you how to take control of your business using ERP, including coordinating inventory and raw materials across the supply chain, managing the cost of production, and getting orders out on time.