Just-in-Time Inventory Explained for Small Manufacturers
What is Just-in-Time Inventory?
The Just-in-Time inventory system is the philosophy of manufacturing to exactly fill demand. You make goods when orders come in, not before.
The goal of just-in-time (JIT) inventory is to cut down costs from the production process. This is done by careful planning. All waste and inefficiencies are identified and reduced as much as possible.
All resources (human, material, space, and time) are used to create the highest-quality product, while cutting down costs.
Supermarkets use a form of JIT. When you go into a supermarket, there is an unbelievable amount of choice, but only a few of each item. When an item’s SKU runs low, the supermarket system flags this up, so the manager can order more.
Why have just-in-time inventory systems become so popular?
One of the best examples of just-in-time manufacturing is the Toyota Motor Corporation. In 2017, they reported a net profit of over $22 billion. They have been the top-performing automobile company for three years running.
Toyota attribute their meteoric success to their commitment to just-in-time manufacturing. Despite some hiccups, it is clear to see that the use of just-in-time concepts has been a success.
Recent developments in technology allow many small makers to use cutting-edge techniques.
Adopting just-in-time inventory management could help your business reach new heights. Find out how to implement a just-in-time system below.
Perhaps you have started but are not sure where to go next. This is fine. Simplicity is the ultimate form of sophistication. This guide will help you identify and solve issues with just-in-time inventory.
Do you feel like you could use some more floor space, or wish you had more resources? Maybe you feel like something is not quite working in your manufacturing business. Lean manufacturing could help you out of a rut.
The History of the Just-in-Time Inventory System
In the wake of the Second World War Japan was in a dire situation. Most of their manufacturing base had been destroyed.
They had to deal with high unemployment, and an extreme lack of space and natural resources. Japan was facing a post-war stagnation. It seemed impossible to build up any momentum to overcome this.
Meanwhile in the USA, business was booming. Everything was in abundance, as they were relatively untouched by the war. Not to mention demand was sky-high so products were flying out of the door. The philosophy of the day was “more is better”. There was no reason to hold back, so they favored large-scale mass production.
The isolated Japanese needed to get their economy going ASAP.
Manufacturing pioneers stepped up to develop ways to completely lean-up their manufacturing processes. They built small factories which only kept the raw materials needed for existing orders. Having less money tied up in let these manufacturing businesses be far more flexible. They also adopted the best practices from the US, including Ford’s moving assembly line.
The results spoke for themselves. When Japanese manufacturing started to become competitive in the 1970s, people paid attention.
Fast-forward to 2016. Japan is in the top five countries for industrial competitiveness. Companies across the globe adopted just-in-time to replicate this success.
Investment in technology has allowed countries like the US, the UK, and Japan to remain relevant in worldwide manufacturing. Advanced machinery and software modernized JIT so it kept its competitive edge.
Key Features of Just-in-Time Inventory Systems
The just-in-time definition is that it is a manufacturing philosophy, rather than a strict set of rules. This means you can apply as much or as little of JIT as you want.
The key characteristics of just-in-time management are:
Elimination of waste — of all resources;
Continuous performance evaluation — can you do something better?
Continuous improvement — striving for quality and efficiency;
Customer-driven — using a responsive (pull) supply-chain strategy; and
Finely-tuned work environment – clean, focused, with no blockages.
Just-in-Time management uses the resources at your disposal to their maximum potential. Your key resource are the people in your business, including yourself. That’s because it is up to the people to uphold a company’s philosophy.
Your employees need to understand why you are moving to just-in-time inventory. They shouldn't see it as more hoops to jump through. In fact, just-in-time should make your employees’ jobs easier and more enjoyable.
It’s up to you to provide the management and support to communicate the benefits for employees and customers.
Inventory management is one of the most laborious (and tedious) activities in running a business. Imagine what your business can achieve by cutting down on this zero-value task.
Instead of spending endless hours doing stock takes, you can do more productive things like:
Hosting workshops; and
Developing your product line.
All these activities can help you boost your business’ brand. They add value to your business.
This is the key tenet of just-in-time management. Eliminate all waste, including time wasting. Less materials management and transportation reduces lead times.
If some aspect of the sourcing and manufacturing process does not add to the finished product, then get rid of it.
If a chaotic work environment is causing delays, then what is the point of keeping it around?
Ask yourself: “Why does this happen? What benefit does it bring to customers?” for every part of your sourcing, manufacturing, and distribution.
If you cannot think of a good enough answer for why something is there, then maybe you don’t really need it. This is true for physical objects, processes, and rules.
Avoid unproductive money sinks. Too much inventory can suffocate your business.
Just-in-Time Inventory Pros and Cons
Advantages of Just-in-Time Inventory
Just-in-time sounds great for the small manufacturer.
It requires minimal up-front expenditure, low inventory levels, and quick moving inventory. All while keeping up with customer demand.
In fact, if you have a hobby business or side hustle, you most likely already use just-in-time. You are not going to make hundreds of your product in advance, because you don’t know for sure about demand.
You never want to be left with heaps of dead stock.
Using a just-in-time inventory system greatly reduces this risk.
It also protects against stock obsolescence. Imagine you are running a dairy business. Don’t have stock laying around too long, or it will go bad.
If your assets are all in your inventory, there's not much they can do. But freeing up your cash gives you choices and flexibility.
*There’s no need to struggle to make payroll again.
*You can take advantage of changes in the market.
*Don’t regret passing-up on opportunities for your business.
Disadvantages of Just-in-Time Inventory
The drawback of just-in-time inventory system is that it can be risky, under certain conditions. A disruption in the supply chain can take you out of action for a long time — if you haven't planned for it.
Having too many SKUs also makes JIT difficult. However, most small businesses do not manufacture hundreds of different products. The most successful businesses thrive on only making a handful of specialized products.
With JIT, your suppliers need to be close to your operations. If you are in the US, and are ordering materials from overseas, then this might make JIT unworkable.
In order to reduce the risk, make just-in-time inventory and supply chain management work together.
Use an inventory management system that lets you tell exactly what you have in stock, and where, at all times. This allows you to set up reorder points, and keep stock replenished.
This means the best system to track inventory is perpetual inventory.
Developing good relationships with your suppliers helps a lot. You could even organize them to store inventory for you. Having alternative supply-chains on stand-by in case one fails is another countermeasure.
Don’t be put off - the potential benefits of just-in-time manufacturing outweigh the risks. It is hugely profitable in the long-term. Your products can become more affordable, which allows you to increase your market share in your industry.
As long as you are pro-active with management, disasters will never catch you off-guard.
Examples of Just-in-Time Inventory in Practice
Just-in-time inventory systems can be seen in some of the biggest product-led businesses on the planet.
Ford, Toyota, and Harley Davidson all adopted this and have retained a large market share while surviving their share of emergencies.
In the computing world, Apple and Dell use JIT, and they are also at the top of their game. But what about the use of just-in-time inventory in small business?
Just-in-Time Inventory in Small Business
Let’s take a look at how JIT is applied in small manufacturing businesses. We will go through a just-in-time inventory case study.
The leather design studio you see in this article uses just-in-time inventory to full effect. They manufacture high-end leather goods like bags, purses, wallets, and accessories.
They are artisan goods, and so their raw materials are expensive. If they made loads of stock in advance, the business would be unsustainable.
Instead, they make to order.
Customers can customize their orders to their heart’s content. This bespoke feature is a major selling point. It gives a great sense of exclusivity to their products.
They value transparency — customers make orders with the full knowledge about the length of the production process.
This allows them to develop great relationships with their customers while giving each order 100% care and attention.
Just-in-time manufacturing was made for the small business.
Is Just-In-Time Suitable for Your Small Manufacturing Business?
We know that any major decision about your business is not to be taken lightly.
Maybe you are considering alternatives to just-in-time management, like MRP or OPT.
Material requirements planning (MRP) allows you to plan well ahead in time but lacks some of the flexibility of JIT. It allows for a high-degree of control of the production process and works to prevent stockouts.
Optimized Production Technology (OPT) takes every detail of your production process and uses algorithms to cut out bottlenecks and other delays. The software is powerful but packed full of features. In short, it is overkill.
These alternatives are designed for large enterprises. The software may seem too prescriptive and burdensome for the small business’ needs. They most likely used a batch-orientated materials planning and control system, for large-scale manufacturing. They can afford to have tons of stock laying around for a rainy day.
Many small manufacturers feel unable to try just-in-time inventory. Don’t let limitations hold you back. You always have the option to find the best fit for your business.
We built Katana — The Smart Workshop Software to bring lean manufacturing straight into the hands of small manufacturers. It carries on the Kanban tradition – everything is accessible, nothing is wasted.
Find out what you need to know straight away, without rummaging around convoluted software.
Katana shows you how to implement just-in-time inventory. It makes everything clear as can be.
Tips for Adopting the Best Just-in-Time Practices
Shop around — Don’t feel tied down to suppliers. Negotiate and let them know your expectations. Be prepared to look elsewhere to get a good deal. Maybe another supplier is more expensive on paper but is more supportive of just-in-time inventory;
Limit SKUs — The more product variations you have, the higher the pool of different materials and components you need to access. This makes tracking and organizing your stock that much more difficult. A profitable business doesn’t have to have hundreds of different products. Look at your sales records and decide which products are worth continuing, and which cost you more than they make;
Break down your manufacturing — setting up separate stages in your production process makes it easier to manage. The process becomes more open, and staff more skilled as they are not constrained to one place. Reduce lead-time by assigning staff to the required stage. Katana lets you do this easily;
Reduce on-hand stock — There's no need to keep a mountain of backup stock. Don’t believe us? Apple cut down on warehouses and are now selling more than ever with a maximum of six days of on-hand stock at one time. Could your workshop use some de-cluttering? Try it and see if your business is more efficient;
Use Perpetual Inventory — Katana keeps constant track of all your inventory: raw materials; work-in-progress; and finished goods. You have absolute knowledge of numbers and commitments down to the last item. This makes it easier to do just-in-time inventory, as you always know where you stand;
Repurpose empty space — Once you have cleared excess stock, you can find a way to make that space make money, rather than cost you;
Plan to minimize commitment — Retail giant Zara never plan inventory more than six months in advance, and have 50% come in mid-season. They haven’t succeeded in spite of this, but because of it. Using a just-in-time system allows them to be so much more agile. They can be the most up-to-date with fashion trends. They always stay several steps ahead of their competitors who have to get rid of all their stock before they reorder more; and
Have a backup plan — All of the above is contingent on your ability to deal with a supply-chain breakdown. You don’t sign up to AAA after your car has stranded you in the middle of nowhere. Your business should be no different. Plan a course of action for all the things that could go wrong using just-in-time inventory.
Make to Order and Never Run Out of Stock
Using just-in-time inventory is positively correlated with business success. Despite this, many small business owners think that it isn’t for them — the pitfalls and consequences seem like too much of a burden.
This is why we have brought lean manufacturing to the small makers and artisans. Your resources are limited, and it is important to use them in the most effective way possible.
When you understand the philosophy of JIT, the application to your business should become clear to you.
Katana makes your lean process even leaner. There is no need to do calculations by hand, figure out the best time to reorder stock, or micromanage staff. Everything is managed in one piece of software.
Having automatic reorder points set up lets raw materials come into your workshop when needed.
Staff get on with the most logical tasks, based on current inventory. Katana lets your management become more effective, as it takes care of the repetitive tasks. Your time can be spent on more challenging tasks.
Everything flows, and lead times are kept to a minimum. When a customer places an order, you can be sure it will get fulfilled in time.
Make to order without feeling like you’re taking a risk.