The following Buzzle article explains what is Just-in-Time (JIT) inventory system by bringing forth its pros and cons. Read on…
Inventory management is one of the most important, and at the same time most challenging jobs in any manufacturing business. All manufacturing units aim at one thing, and that is to minimize the expenditure and costs related to ordering and carrying out inventory.
The carrying out of inventory costs comprise warehouse costs i.e. rent for the storage facility where the inventory is placed, salaries of the employees who manage the warehouse, and certain financial costs that are incurred on the insurance of goods in the inventory and any possible damage to it.
Bringing down these costs is an important part of inventory management and one of the systems in place for this is the JIT system, which was created by the Toyota motor corporation. Let us know more about this in detail, along with its pros and cons.
The Just-in-Time inventory system is based on the concept of zero wastage. According to this system, businesses should order only that much inventory which is needed to carry on their immediate production. In other words, manufacturing units should not store any extra inventory as it leads to additional carrying costs.
For instance, a door manufacturing unit needs to make 100 doors, besides the other parts it keeps around 150 door knobs stored as an inventory. The manufacturing unit actually just needs 100 at present, which means the extra 50 door knobs are adding on to its inventory costs. This is where JIT system comes in. If you apply this inventory management technique in this particular example, it would mean that this manufacturing unit should have ordered for only 100 door knobs i.e. inventory needed for immediate production needs.
Just-in-Time inventory system is applied for finished goods as well. As soon as the goods are manufactured, they are shipped to customers in the shortest possible time. This minimizes storage, insurance, tax, and many other costs on the finished goods.
To apply this inventory management strategy, a clear understanding of how much raw material is needed at any given time to maintain proper flow of production should be there. For this, the time taken by the raw material to reach the manufacturing facility from the supplier should be known, and secondly, the life of the raw material should be clearly determined beforehand. Once this information is handy, procedures should be formulated to ensure that the raw material arrives just in time, before the production starts so that little to no storage time is needed.
Another thing that is needed to properly implement the JIT inventory system, is that there should be good coordination between various points of a production process. There should be constant transmission of “kanban” i.e. signals from one point to another regarding the status of production. Due to this clear and constant communication, each point of the manufacturing process will know when to order for inventory and how much to order, so that it arrives just in time and that too in the required quantity.
This is where the importance of the system lies. It ensures that there is neither wastage of time during the production process, nor there is any wastage of capital or production capacity, thus leading to faster production. When the production is fast, the finished goods reach the market fast too, thereby reducing the ‘waiting time’ for the customer.
Pros and Cons
One of the advantages is that it reduces the operational costs of a business, thus increasing the profits and return on investments. Another benefit is that it eliminates the possibility of making a mistake in the production process. The same product is manufactured again and again, without any change, due to this system. This increases the product quality, and hence profits for the business.
As for the cons, if the raw material that is ordered is not of good quality or gets damaged, the production will have to be stopped as there is no extra stock of raw material available. This leads to time wastage. Secondly, if the inventory forecast is not done properly, lots of financial losses might be incurred. Thirdly, as no storage is allowed under this system, if the raw material costs come down, the manufacturer cannot take advantage of this.
As can be seen, the JIT inventory system has its own share of advantages and disadvantages. So, both should be studied and considered, before applying this inventory control method in any given business.