Reassuring... but expensive.
When is the best time to have an inventory part ready for production?
– Just in time.
When is the best time to have an item ready for the next step in production?
– Just in time.
When is the best time to have a product ready for delivery to a customer?
– Just in time.
So why do manufacturers build inventory of both finished goods and raw materials?
– Just in case!
A buffer of inventory on hand is comforting – and costly.
If you hold a lot of items in inventory, you're locking away a huge amount of cash unnecessarily. These items can be lost, stolen, or damaged, or they can deteriorate. They occupy space, which could otherwise be devoted to operations. And they can become obsolete, particularly when products are improved or changed often (many of us can remember images of airfields full of unwanted, obsolete cars from the 1970s and 1980s.) All of this represents financial loss to the business.
In the 1970s, when Japanese manufacturing companies were trying to perfect their systems, Taiichi Ohno of Toyota developed a guiding philosophy for manufacturing that minimized waste and improved quality. Called Just In Time (JIT), this philosophy advocates a lean approach to production, and uses many tools to achieve this overall goal.
When items are ready just in time, they aren't sitting idle and taking up space. This means that they aren't costing you anything to hold onto them, and they're not becoming obsolete or deteriorating. However, without the buffer of having items in stock, you must tightly control your manufacturing process so that parts are ready when you need them.
When you do (and JIT helps you do this) you can be very responsive to customer orders – after all, you have no stake in "forcing" customers to have one particular product, just because you have a warehouse full of parts that need to be used up. And you have no stake in trying to persuade customers to take an obsolete model just because it's sitting in stock.
The key benefits of JIT are:
By taking a JIT approach to inventory and product handling, companies can often cut costs significantly. Inventory costs contribute heavily to the company expenses, especially in manufacturing organizations. By minimizing the amount of inventory you hold, you save space, free up cash resources, and reduce the waste that comes from obsolescence.
To facilitate a JIT approach, you need a variety of systems in place. The most notable is a kanban . This is a Japanese approach to ensuring a continuous supply of inventory or product. Kanbans were designed to support the JIT philosophy.
A kanban is a visual signal that indicates it is time to replenish stock and possibly reorder. For instance, as the supply of bolts in a bin on the assembly line falls below a certain number, it may uncover a yellow line painted around the inside of the storage bin. This yellow line indicates to the foreman that he needs to prepare a requisition for more bolts. That requisition is given to the purchasing department, which processes the order. This prevents the supply of bolts from dropping below a critical amount and allows production continues to flow smoothly. To read more on kanban, click here for the Mind Tools article on it.
JIT also exists in concert with continuous improvement systems. Total Quality Management and Six Sigma are overarching programs that help you take a detailed look at every point of the production process and identify ways to make improvements. By applying JIT, you are continuously monitoring the production process. This gives you opportunities for making the production process smoother and more efficient.
Because JIT is intended to spread throughout the organization, it can have an impact on many areas through improvements in processes. When the emphasis is on lean production, systems tend to be made simpler and more predictable. From how a product moves through the building to ways to increase worker involvement in system design, JIT improves efficiency.
With JIT, it is necessary that you build strong ties with your supply chain. This will ensure that you have access to the supplies you need when you need them. (A side benefit of this is that you're more likely to receive forewarning of shifts in supply that may have an impact on your business.)
With a secure source of supplies, you can continue to make improvements in your production and inventory systems. This helps you to increase your responsiveness to customer demand. If you need to ramp up production, you can be confident knowing your suppliers will help you.
If your customers demand a newer technology, you can switch product quite easily, without worrying about writing off a large stock of obsolete supplies and finished goods. This means that you can meet changing customer needs more quickly.
Custom orders are simpler with a JIT system. Instead of the customer's widget being built six months in advance and waiting on a shelf, it is built when it's ordered. By delivering product "just in time," you allow for last-minute changes.
Essentially, JIT allows your company to get the right products to the right customers at the right time. In many industries, this can give you a huge competitive advantage, at the same time that it helps you save a large amount of money.
A key drawback of JIT is that it only works if you can rely on your suppliers to deliver when they promise to – otherwise your whole operation may grind to a halt.
What's more, if material costs suddenly increase, then storing them at a lower rate might have been a more economic option. And JIT is also based on historical patterns of need: If orders increase sharply, adjusting to the increased need for supplies may not be easy for you or your suppliers.
Just In Time is a way of managing operations so that they run leanly and efficiently. JIT requires giving up your "Just In Case" safety net, and controlling supplies and inventory to levels that just support production. The main emphasis of JIT is on cost reduction and minimal waste.
The process of implementation requires you to take a very close look at every stage of your production and inventory carrying points. This alone is a useful exercise that will highlight some areas for improvement. Ultimately, the more efficient you are and the higher quality product you provide, the more appealing you will be to customers and clients.
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