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December 3, 2019
The just-in-time (JIT) inventory management system was famously pioneered by Toyota in the 1970s. Today, companies like Burger King, Harley Davidson, and IBM have implemented similar strategies into their operations.
JIT’s wide adoption is due to the host of advantages it provides manufacturers. Setting up a successful program, however, requires an understanding of basic JIT principles and preparation for potential challenges.
Following are 5 critical bits of knowledge to help you master just-in-time.
JIT manufacturing is designed to reduce the total cost of the supply chain and optimize logistics.
In practice, this means cutting inventory down to the absolute minimum of what is needed for production. Instead of storing buffer stock in a warehouse to prepare for future demand (just-in-case management), materials are only ordered as needed.
This is a response to the true carrying costs of inventory, which can be as high as 30% of the inventory’s value per year. These costs are derived from:
On-hand inventory is like stagnant cash that generates no profit for a business. JIT strives to liberate cash from being tied up in inventory, enabling more efficient use of working capital for profit-generating investments.
By reducing carrying costs, JIT improves profitability and return on investment.
The basic tenet of JIT is to only receive materials and parts as they are needed. Supplier delivery is directly aligned with production schedules, so that all on-hand inventory is quickly used. Ideally, this increases efficiency and decreases waste.
A leading strategy to achieve JIT is kanban, a system implemented at Toyota in the seventies by company engineer Taiichi Ohno. Though the two terms are often conflated, just-in-time and kanban are not the same; JIT is the goal whereas kanban is a tool to achieve that goal.
Translated from Japanese as “sign,” kanban uses visual cues that prompt a response.
When the amount of necessary parts drops to a level requiring replenishment, a color-coded card notifies workers. The card is passed on to an ordering manager, who orders the precise amount outlined on the card.
This allows manufacturers to measure lead and cycle times in the production process. It also helps determine the upper limits of on-hand inventory, preventing unnecessary overstock.
The kanban system allows manufacturers greater ability to limit ordering to immediate inventory needs while also avoiding shortages. Technology and data processing have led kanban to evolve in ways that provide even greater visibility into inventory requirements.
Moving beyond color-coded cards, electronic kanban systems now provide real-time data for inventory usage and trends. This allows more accurate forecasting of inventory needs, essential to an effective JIT system. Inventory replenishment can be automated, reducing labor needs across the operation.
The mass adoption of just-in-time systems amongst manufacturers is the direct result of its proven track record. Toyota’s success is in part derived from its strict adherence to JIT principles, helping them decrease inventory and reduce costs. Harley Davidson reduced inventory by around 75% under a similar system.
Three of the most notable advantages of just-in-time inventory management are:
Reduced Logistical Costs
According to an article from Norwich University Online, “A well-run JIT inventory system makes it possible to function effectively with virtually no inventory.” This lack of on-hand inventory eliminates the need for large warehousing operations and the costs involved in running them, translating to an immediate reduction in spend.
Reduced Inventory Waste
Only ordering what is immediately needed means manufacturers use everything they receive. The problem with warehouse storage is materials can become damaged, expire, or be misplaced, among other issues. JIT inventory systems make efficient use of all production materials, so nothing is wasted.
More Agile Responsiveness to Markets
Customer needs can often shift unexpectedly. The advantage of JIT in these situations is its ability to rapidly shift with market demands. If a scheduled production is suddenly cancelled, manufacturers with a warehouse full of parts are now left with a large amount of useless inventory. This problem would be avoided under a JIT inventory system.
JIT also improves a manufacturers ability to adapt to new market trends. Instead of being constrained by the need to use purchased inventory, production can shift with demand fluctuations .
It took Toyota fifteen years to perfect their JIT system, demonstrating the precision required for these programs to succeed. Luckily, today’s manufacturers can learn from yesterday’s mistakes.
Understanding how to prepare for the challenges of JIT improves your chances of creating a successful program.
Forge Strong Relationships with Reliable Suppliers
When raw materials are only ordered as needed, on-time delivery is critical. A supplier breakdown or delay can mean stopped production lines.
Manufacturers therefore need to establish strong relationships and communication with their suppliers. Vetting delivery performance helps identify the most reliable suppliers to work with.
This lends itself to supplier consolidation, improving supply chain visibility and lessening the chances of disruptions.
Find Fixed-Price Options to Limit Price Volatility Exposure
Companies without on-hand inventory are more exposed to price volatility. If the price of a certain raw material spikes, they do not have buffer stock to hold them over until the price drops again.
Manufacturers can avoid this issue by going through distributors that offer fixed-pricing contracts for raw materials. This maintains low inventory levels while avoiding financial damage from sudden price spikes.
Long-term agreements with reliable suppliers are an effective way to access this kind of pricing model, especially ones that offer guaranteed availability.
Complete Quality Assurance Before Delivery
One advantage of JIT simultaneously presents a problem. JIT reduces inventory waste because every part ordered is put to immediate use.
However, this means every part ordered must be used since there is no alternative. If any part does not fit perfectly, or necessary documents are inaccurate, production stops.
This highlights the importance of receiving quality assured parts and materials. Having quality inspection and testing done before parts are received improves a manufacturers ability to keep production lines running smoothly.
Just-in-time inventory management can be advantageous to both large corporations and small businesses. Improved cash flow can be used as working capital or to cover start-up costs. But manufacturers should prepare themselves for the challenges of JIT. To improve your chances of a successful just-in-time system, be sure your businesses has:
Assuring these elements are in place will provide you with a just-in-time inventory management system that delivers cost savings and operational efficiency.
However, attaining each part of this checklist requires more attention and resources than many operations can afford.
That is why we are here to help.
As a global leader of supply chain solutions, Wesco Aircraft is well equipped to provide manufacturers and aftermarket enterprises with the tools needed to implement successful just-in-time inventory systems. Elements of our JIT services are modeled after the kanban system, enhanced by proprietary software and easy-to-use data-collection technology.
Learn more about how Wesco can implement JIT in your business.