Inventory is one of the most crucial components of any business and therefore managing the same effectively has a direct bearing on the profitability of the business. The investment made in inventory is non-yielding and hence it is important to minimise it. For inventory management to be effective, it is necessary to strike a fine balance between the ordering costs, the carrying costs and the shortage costs. The most common inventory management systems deployed by the businesses across the world use Economic Order Quantity (EOQ) and Just-In-Time inventory management (JIT) principles. Whilst both these methodologies aim to reduce the ordering and holding costs, the approach adopted by each is different.
JIT was pioneered by Toyota, the Japanese car manufacturer in the 1970s, with a view to reducing the delay in meeting the demands of the customers. Since then, many businesses across the world have emulated this method. JIT is a made-to-order or pull-based method, wherein, the inventory is supplied only as required. In fact, in the JIT system, the sales activity makes a demand for the finished goods and this triggers the pulls on the various stages of production. The inventory is supplied based on the demand made. This results in savings in inventory costs on account of the fact that only the minimum inventory is held in the supply chain. For the successful implementation of the JIT system, the following have to be ensured:
- High level of co-ordination between the sales and the production team.
- A well-planned production system with accurate assessment of requirements.
- No delays or glitches in production schedules.
- Effective communication between the clients and the servers.
- Effective control over the quality at every stage of production.
- Proximity between the supplier and receiver of inventory.
- Timely and reliable delivery of raw materials.
- Availability of adequate human resources.
Some of the key features of the JIT system are listed below:
- There exist few reliable vendors that can deliver high quality inventory within very short timeframes.
- Inventory is supplied in the nick of time in small lots which drastically reduces the carrying costs.
- Long term purchase contracts are entered into with suppliers at economical prices which curtails the paperwork and negotiation time associated with arriving at the supply price.
- The inspection of inventory takes place as and when received, paving the way for a lean inventory management department.
- Transportation costs with regard to the movement of inventory from the storage locations to the production sites can be avoided.
- Goods are produced as per the requirement of the end-user and hence over-production and the resultant excess holding of inventory can be avoided.
- Payments are made for batches of goods supplied as per contract terms, rather than for small lots, which leads to effective working capital management.
- The production cycle becomes shorter, as the waiting time and interruptions due to delays are avoided.
- Wastage due to production of defective products is eliminated as the output at every stage of production is inspected, before passing on to the next stage.
The important advantages of implementing the JIT system are improved productivity, efficiency, cash conversion cycle and profitability, by way of a shorter production cycle, elimination of wastages, and decrease in finance costs, inventory costs and labour costs.