2019-02-01 04:00:29 Growing & Complex Businesses English Learn how JIT inventory is used to better manage stock and reduce capital tied up in inventory. Learn how just in time inventory can work... https://quickbooks.intuit.com/r/us_qrc/uploads/2019/01/Just_In_Time_Inventory_For_Manufacturing_Purchasing__Retail_featured.jpg https://quickbooks.intuit.com/r/growing-complex-businesses/just-in-time-inventory-for-manufacturing-purchasing-retail/ Just In Time Inventory For Manufacturing, Purchasing & Retail

Just In Time Inventory For Manufacturing, Purchasing & Retail

5 min read

In the 1980s, Harley Davidson was in deep trouble. Japanese motorcycle companies were dominating the US market with higher quality bikes at lower prices — with operating costs that were 30% less than Harley’s. At first, Harley accused the Japanese of flooding the market to harm US manufacturers.

But after visiting Japanese motorcycle factories, Harley Davidson realized they needed to reinvent their operations. The Japanese were using a pull system for manufacturing, while Harley Davidson was still in push mode. With a pull system, inventory is only acquired or manufactured when it is needed for the next step of the manufacturing process.

With a push system, inventory is created continuously and is unresponsive to changes in demand. With their push system, Harley Davidson was overproducing inventory to meet planned ship dates and papering over defective parts by simply making more, meaning they had dramatically higher inventory costs than their Japanese counterparts.

In 1981, Harley began implementing what Japanese manufacturers had perfected — Just In Time (JIT) inventory management or lean manufacturing. Using JIT principles, Harley Davidson reduced their inventory levels by 75% while increasing productivity. Today, lean manufacturing has become gospel for manufacturing businesses, the principles of which you can also apply to your business — no matter the industry.

What Is Just In Time (JIT) Inventory Management?

Also known as lean manufacturing, JIT inventory management was first developed by Toyota in the decades after World War II. JIT inventory management focuses on reducing waste, improving operational efficiency, and manufacturing based on demand rather than capability.

Toyota perfected this process first by reducing inventory levels and then by observing where quality issues cropped up during the manufacturing process, giving employees the authority to fix problems they saw on the floor. By eliminating wasteful inventory and increasingoperational efficiency companies were able to manufacture products on an on-demand basis.

This allows businesses to keep inventory costs down while reducing inventory spoilage, obsolescence, and shrinkage. With less capital invested in inventory, businesses have healthier cash flows and higher margins with higher productivity.

Harley Davidson realized the benefits of JIT inventory nearly 40 years ago after those trips to Japan immediately transformed their company by:

  • Focusing on improving supplier relationships, so that suppliers were focusing on meeting Harley’s needs like improved operator controls, product quality standards, and shorter lead times.
  • Increasing their efficiency in managing inventory, which caused their inventory turnover to increase from 5 to 20.
  • Instituting a real-time bar code system to track all of their parts in real time.
  • Improving their factory receiving areas to consolidate parts and free up factory space.
  • Streamlining their employee classifications, reducing them from 65 to 5 to reduce complexity and give employees ownership of their part of the manufacturing process.

Since then, Harley-Davidson hasn’t looked back, with their CEO, Matt Levatich, recently saying, “Lean manufacturing allows us to build motorcycles closer to when they’re needed. We have the flexibility to quickly adjust the mix of products to match retail trends—including product mix and timing of product to market. This is all about producing the right motorcycle, for the right customer, at the right time.”

JIT Inventory Management At Work

If you’re wondering if lean inventory management is right for your business, there are few characteristics to consider:

  • For businesses without complex supply chains or thousands of items in their inventory, JIT inventory is a great way to lower costs and increase efficiency.
  • You have developed good vendor and supplier relationships, you’ll have a decreased risk of experiencing shortages or stockouts with higher priority and more options at your disposal.
  • Your business has constant, steady demand for your products and isn’t at the whim of seasonal demand spikes.

JIT inventory management is most commonly implemented by manufacturers looking to lower costs and increase operations efficiency. Toyota developed and perfected lean manufacturing principles in Japan before it spread to US automakers in the 1980s. It’s also used by companies whose inventory is largely perishable goods, like grocery stores. Drop shipping businesses that have become popular today are only possible today because of JIT inventory management.

Just In Time vs. Just In Case Inventory

JIT inventory management has a sister philosophy called Just In Case Inventory (JIC). With JIC inventory, businesses store large stocks to hedge against the risk of stockouts, uncertain demand, and difficult to acquire items. This helps prevent backorders, stockouts, and keeps customers happy, which allows for high services levels and as well as increased revenues.

For example, in October 1998 Dole Food Company lost 70% percent of their acreage in Central America due to Hurricane Mitch. They had no Just In Case inventory strategy in place and lost over $100 million due to supply interruptions. One of Dole’s competitors, Chiquita Brands, also had similar supply interruptions in Central America, but they were able to meet demand by increasing productivity in other locations and purchasing inventory from other producers in the region — their revenue grow by 4% in the 4th quarter of 1998.

JIC inventory has it’s downsides, though, with high inventory costs, which can eat into profits, as well as increased spoilage and obsolescence of inventory. Businesses that depend on scarce raw materials, like minerals or agriculture benefit from JIC inventory, as well as retail businesses that depend on seasonal sales periods.

Benefits of JIT Inventory

For most businesses, the vast majority of their capital is invested in inventory. With JIT inventory management, owners can reduce costs by having less inventory on hand. This means having more cash to invest in other areas of the business and greater profit at the end of the year.

By only creating inventory when orders are placed, manufacturers have lower storage and carrying costs. Labor and operations costs drop as well because the factory isn’t manufacturing products just to store them on shelves. With increased efficiency, there’s less waste and spoiled inventory.

The Downside of JIT Inventory

Running lean sounds great in theory, but there are tradeoffs when it comes to implementing JIT inventory. With less inventory on hand, you run the risk of increased stockouts, which means lost sales and unhappy customers. For manufacturers, this can mean production shutdowns and delays.

If you run lean, you are also more dependent on your vendors and suppliers because your supply chain is less robust. And if a business goes through high demand seasonal periods, there’s a greater possibility for backorders and lost sales. Any problems with new orders or shipping can cause much bigger problems than if you were running on JIC inventory management.

Final Thoughts

After the dot-com bubble burst in 2000, Cisco had to write off $2.25 billion in inventory, partly due to poor inventory management. While an extreme example, a U.S. Bank study found that 82% of business failures can be attributed to poor cash management, most of which is tied up in inventory. Using the best tools to analyze your inventory enables you to make informed decisions for your business. Managing inventory shouldn’t hold your business back from growth. Take control of your business’s bottom line today.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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