December 30, 2019 Growing & Complex Businesses en_US Learn how businesses use just-in-time manufacturing to keep inventory lean and production efficient. https://quickbooks.intuit.com/cas/dam/IMAGE/A2B5DzupU/4a676f017cf40423424716666df14740.jpg https://quickbooks.intuit.com/r/growing-complex-businesses/just-in-time-inventory-for-manufacturing-purchasing-retail/ What is just-in-time manufacturing and can businesses use it to increase efficiency?
Growing & Complex Businesses

What is just-in-time manufacturing and can businesses use it to increase efficiency?

By Dominic Vaiana December 30, 2019

Just-in-time manufacturing is an inventory management strategy in which materials are only purchased and received when necessary for production—not before.

Businesses use the just-in-time system to increase efficiency and decrease waste by receiving goods only as they need them for the production process, which reduces operating and inventory costs.

Coming up, we’ll cover everything you need to know about just-in-time manufacturing, including the history of JIT, how it works, and how your business can implement it to maximize efficiency and profitability.

What is just-in-time manufacturing (JIT)?

If your business manufactures goods, you understand how critical the production process is and how it requires continuous improvement.

If you’re looking to optimize your supply chain management, one method is just-in-time manufacturing, otherwise known as the Toyota Production System, or TPS (we’ll tell that story later).

The basic premise of just-in-time is ordering and receiving inventory as it’s needed to manufacture a finished product, hence “just-in-time.” This system is commonly referred to as lean manufacturing since it significantly reduces the amount of inventory a business has at any given time.

The just-in-time system focuses on:

  • Reducing excess inventory
  • Improving operational efficiency
  • Production based on demand rather than capability

Mass-market retailers and manufacturers most commonly use just-in-time inventory systems to improve cash flow. However, this method is becoming increasingly popular with smaller retailers and eCommerce companies looking to streamline their order management processes.

Just-in-time vs. just-in-case inventory

Just-in-time manufacturing has a sister philosophy called just-in-case inventory (JIC). With JIC inventory, businesses store large safety stocks to hedge against the risk of stockouts, uncertain demand, and difficult to acquire items. This helps prevent backorders and stockouts, which allows for high service levels and increased revenues.

For example, in October 1998, Dole Food Company lost 70% percent of its 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. Still, they were able to meet demand by increasing productivity in other locations and purchasing inventory from other producers in the region—their revenue grew by 4% in the fourth quarter of 1998.

Just-in-case inventory has its downsides, though, with high inventory costs that can eat into profits, as well as increased spoilage and obsolescence of inventory. Businesses that depend on scarce raw materials or natural resources, like minerals or agriculture, benefit from JIC inventory and retail companies that rely on seasonal sales periods.

History of just-in-time manufacturing

In the 1980s, Harley Davidson was in deep trouble. Japanese motorcycle companies dominated the US market with higher quality bikes at lower prices—with 30% lower operating costs than Harley’s. At first, Harley accused the Japanese of flooding the market to harm U.S. 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 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 shipment dates and papering over defective parts by merely making more. This meant their inventory costs were dramatically higher than those of their Japanese counterparts.

In 1981, Harley began implementing what Japanese manufacturers had perfected. Using just-in-time manufacturing principles, Harley Davidson reduced their inventory levels by 75% while increasing productivity.

Just-in-time inventory disruption during COVID-19

Businesses have become increasingly reliant on just-in-time manufacturing to fine-tune their supply chains and keep costs in check. However, COVID-19 prompted people to rethink the strategy many took for granted.

Just-in-time manufacturing requires suppliers and retailers to be in perfect sync. Inventory must be delivered on time every time for the system to work. But this hyper-efficient model began to break down in the face of lockdowns, quarantines, and social distancing.

Retailers worldwide faced a sudden demand surge for raw materials and similar inventory types, but suppliers could not pivot under strain. This was most evident in the infamous toilet paper shortage in the spring of 2020.

Just-in-time manufacturing is far from being obsolete. That said, now that COVID-19 exposed the potential risks of just-in-time manufacturing, companies may begin to adopt a more balanced approach to their supply chains.

How just-in-time manufacturing works

The key benefit of just-in-time manufacturing is that it reduces the need for a company to hang on to excessive amounts of raw materials. As a result, this improves supply chain efficiency and improves cash flow. To get a better idea of how the process plays out, let’s take a look at a couple of real-life examples.

Fast food

You’ve probably heard the phrase “made-to-order” on some fast food commercials. Made-to-order simply means the meal only gets cooked when a customer orders it instead of pre-prepared meals.

Apple

When Tim Cook started as Apple’s COO in 1998, his first order of business was closing Apple’s warehouses and factories worldwide. Instead, he forged just-in-time relationships with independent manufacturing contractors, many of which were located in China.

The result? Apple’s inventory sat on the company’s balance sheet for days instead of months—a critical factor in Apple’s unprecedented growth.

Harley-Davidson

Harley Davidson realized the benefits of just-in-time nearly 40 years ago after those trips to Japan transformed the company. They saw the benefits of:

  • Improving supplier relationships, where suppliers focused 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 ratio to increase from 5 to 20.
  • Instituting a barcode inventory 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 five to reduce complexity and give employees ownership of their part of the manufacturing process.

Harley-Davidson CEO, Matt Levatich, recently said, “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.”

Just-in-Time (JIT) manufacturing benefits

JIT manufacturing systems can give businesses an edge in an increasingly competitive marketplace. Here are three advantages that stand out:

1. Cost reduction

For many businesses, much of their capital is invested in inventory. With just-in-time manufacturing, owners can reduce storage costs by having less inventory on hand. This means having more cash to spend in other business areas and higher 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.

2. Waste reduction

Quicker turnarounds for stock reduces the likelihood of inventory becoming damaged or obsolete. For example, you wouldn’t want to waste 25% of your retail space on items that don’t generate much revenue.

3. Improved operational efficiency

JIT manufacturing makes production runs shorter, allowing manufacturers to jump from one product to another. Furthermore, keeping less raw materials on hand means you don’t need as much storage space. You may even be able to downsize, freeing up funds for other aspects of your business.

Risks of using just-in-time manufacturing

Running lean sounds excellent in theory, but there are trade-offs to consider when implementing a just-in-time strategy.

Running out of stock

With less inventory on hand, you run the risk of increased stockouts, which means lost sales and unhappy customers. For manufacturers, this can mean manufacturing shutdowns and delays.

Vulnerability to external variables

If you run lean, you are 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.

Best practices for implementing JIT

The following checklist will help you make the most of JIT if your business decides to implement it:

  1. Maintain good relationships with your suppliers to ensure you’re in good standing in the event of unexpected demand surges.
  2. Look into Kanban, a Japanese “workflow management method designed to help you visualize your work, maximize your efficiency, and be agile.” Taiichi Ohno developed the system to help improve continuous-flow manufacturing. Kanban analyzes the entire production process, highlighting problem areas in terms of both lead and cycle times. This allows management to identify the maximum levels of their work-in-process inventory.
  3. Properly train your employees. Since just-in-time management requires agility and quick response times, it’s vital that team members know what to and how to do it.
  4. Keep production operations as stable as possible. JIT works best with minimal variability. This is why JIT is not ideal for companies that experience stark peaks and valleys in demand.
  5. Be willing to delegate responsibility to workers on the floor. Some companies struggle to adapt to JIT because leaders are hesitant to give up the reins to folks handling the day-to-day operations at the warehouse or manufacturing facility.

Is JIT right for your business?

If you’re wondering if lean inventory management is right for your business, there are a few reasons the method might be appealing:

  • For companies with low inventory, small batch sizes, or a non-complex supply chain, just-in-time is a great way to lower costs and increase efficiency.
  • Just-in-time can help develop good vendor and supplier relationships, which will give you a decreased risk of experiencing shortages or stockouts with higher priority and more options at your disposal.
  • Your business has constant, steady customer demand for your products and isn’t at the whim of seasonal demand spikes. Because you can forecast demand, you avoid situations like overproduction.

Final thoughts

A recent 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. This is a testament to the importance of staying as efficient as possible when managing materials and planning production.

Implementing a JIT system can be beneficial for growing businesses. The setup times associated with JIT manufacturing can be lengthy but worthwhile if you’re in an industry with relatively stable demand.

With increased efficiencies in production and inventory, you can free up resources to invest in other areas of your business to continue growing.

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Dominic Vaiana is a writer and bibliophile based in St. Louis. In addition to writing for QuickBooks, Dominic has developed content and campaigns for global brands such as Mastercard, GoDaddy, and InVision. Read more