The just in time (JIT) inventory method controls the movement of material into a specific location at the required time, i.e. just before the material is needed in the manufacturing process.
The technique works when each operation is closely synchronized with the subsequent ones to make that operation possible.
JIT is a method of inventory control that brings material into the production process, warehouse or to the customer just in time to be used, which reduces the need to store excessive levels of material in the warehouse.
Reduced Inventory Needs of JIT
The just in time method of manufacturing and inventory control helps to reduce the amount of inventory throughout the supply chain, therefore it is highly thought of as a cost savings methodology. However, in order to execute JIT correctly, not only does each operation within a manufacturing or supply chain process need to be synchronized - but customer demand in each operation needs to be forecast accurately.
In non-just in time methods, unforecast spikes in customer demand are offset by safety stock. Safety stocks also provide insurance against failures in production or quality issues. But with JIT, safety stocks are often not used, as the synchronization of operations is meant to preclude the need for added inventory.
While the theory of just in time is attractive to many in supply chain and finance, the practice is difficult to implement. To have an optimized supply chain, an organization must supply its customers what they want, when they want it - and spend as little money as possible getting that done. Those customers may be internal customers or external customers.
In either case, one of the biggest challenges of supply both internal customers and external customers is understanding the demand of those customers. The key to understanding that demand is communication - either by direct means or through systems such as enterprise resource planning (ERP) and materials resource planning (MRP).
If you're trying to decide to whether to go forward with JIT methodology or to build safety stocks, you may be tempted to measure the time and cost of a supply chain or production process without safety stocks. And compressing lead times by assuming JIT delivery of components and raw materials.
How JIT Works
By calculating that compressed lead time and reducing the cost of carrying a safety stock inventory, you will likely come up with an attractive projection. JIT methods appear to give the promise of leaner lead times and lower inventory costs, however, consider the indirect cost of maintaining the systems and communications to know what materials and components need to be delivered just in time.
When there's a production issue or quality issue that impacts supply or a demand spike that suddenly creates a short supply scenario, just in time methods can cause unexpected and unbudgeted costs to exceed those original projections.
When JIT fails, the expedite fees and the impact on other products, production lines, and customer demand can have a severe negative impact on business operations.
In many cases, because of the need to react to a failure in just in time practices, suppliers will need to sacrifice customer supply for either other products or other customers completely. In those cases, the hidden costs of JIT are hard to measure, but over time have caused many companies and supply chain organizations to eschew just in time as a viable operational process.
The goal of any optimized supply chain is to deliver to your customers what they want when they want it - and accomplish that by spending as little money as possible. JIT is just one tool that some supply chain professionals use to get that done.