Managing inventory often feels a lot like a Goldilocks situation. Too much, and you get burned by inflated costs. Too little, and your sales go cold for lack of inventory.
Instead, you’re trying to achieve that level that’s just right. Ideally, you have enough products to meet customer demand but not so much that you have a hard time selling them all.
One of the ways you can strike this just right balance is by using the just-in-time inventory management system. So, how does it work? And is it right for your business?
Let’s take a closer look to find out.
What is Just-in-Time Inventory?
Just-in-time inventory (JIT) means that you order products to arrive right before you need them.
Managing inventory levels with this method means you can spend less money on storage space and improve your inventory turnover or how fast you sell items after stocking them.
As such, JIT involves ordering smaller batches of inventory but placing orders more frequently.
Just-in-time is the opposite of the just-in-case inventory system, which relies on having extra materials and supplies (also known as safety stock) on hand in case they are needed.
The just-in-time inventory system was first by Toyota in the 1970s. Now it’s used by companies of all sizes to reduce waste, improve productivity, and lower costs.
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Does JIT Mean Zero Inventory?
These two terms aren’t exactly the same—Zero inventory is based on JIT inventory strategies but takes it to an extreme level.
While the goal of just-in-time inventory is to have zero excess inventory sitting around, zero inventory wants zero inventory that is not in the active process of moving toward the customer.
Outside of dropshipping—where a business doesn’t keep any items in stock and instead fills orders on demand—true zero inventory is nearly impossible to achieve.
How Do You Get Just-In-Time Inventory?
To get just-in-time inventory, you reorder products or raw materials to replace the ones that you expect to sell or use by the time the new order arrives.
Ordering time frames vary based on how long your suppliers take to get new products to you. For instance, if your supplier typically delivers new items in 10 days, you can place an order 10 days before you think you’ll need it.
If you want to be on the safe side, you can order earlier to have a buffer in case there’s a delay, but that will likely increase your storage costs.
This usually means making more frequent smaller quantity stocking orders. Using this method of inventory control means you’re not spending money storing excess items and materials for extended periods.
Another way to get just-in-time inventory is by waiting for a customer order before you order the item or materials to make the item yourself.
Here’s how that would look.
What Is an Example of a JIT Inventory System?
One example of a JIT inventory management system would be if a construction company received a roofing job and ordered the shingles with a lead time set to just before the job start date.
The supplier delivers the shingles directly to the job site a day or two before the job starts, the roofers arrive on site and complete the work, and the company doesn’t have to store or transport inventory.
Another example of JIT inventory is in the restaurant business. Since much of their inventory is perishable, they need it to arrive just before it is used, or they have increased food waste. Many restaurants receive orders several times a week.
Why Use Just-In-Time Inventory?
Companies use just-in-time inventory to work more efficiently, keep inventory costs low, and improve overall profits.
Here’s a closer look at the benefits of the JIT inventory system.
- Cost savings: Optimizing inventory to match up with customer demand means you lower warehousing and storage costs because you’re not holding on to extra items. You can also avoid costs associated with having to discount overstock items to sell them.
- Better cash flow: Your products are assets you turn into cash by selling them. When you’re able to sell items quickly after ordering them, you have a better flow of cash into your business. And when you have more cash on hand, you’re able to pay off your short-term expenses on time and avoid late fees.
- Easy product switching: When you order small batches of inventory, you can easily adjust to customer preferences. If buyers don’t like a particular item, you can stop ordering it and switch over to the products that are more popular.
- Better quality products: Ordering in small batches makes it easier to inspect the quality of each product as they come in so you can catch defects or imperfections and make sure those items aren’t sold to customers.
- Less waste: JIT inventory reduces excess stock levels, which means less waste. This is especially true for items that have expiration dates or those that may go out of style as time passes.
That being said, there’s always the flip side of the coin.
Before you can figure out if the JIT model is the right inventory strategy for you, it’s helpful to consider the downsides.
Possible Disadvantages of Just-In-Time Inventory
Disadvantages of a JIT inventory system include the possibility of inventory shortages, increased reliance on your suppliers, and more time spent on planning and forecasting customer demand.
Let’s break each of those down to see how they can impact your business.
- Inventory shortages (stockouts): Having less inventory on hand may increase your risk of running out of a product and missing a sale.
- Reliance on suppliers: JIT inventory means that you have to count on your suppliers to deliver orders accurately and on time. If there’s a supply chain disruption, such as a production run shortage or a production line breakdown at your supplier’s facility, you may be left without needed stock.
- More planning and forecasting work: The JIT system requires more work upfront. You have to find reliable suppliers and plan ahead to predict what you’ll need to fill upcoming customer orders.
Now that you know the benefits and drawbacks of the JIT system, let’s look at who can benefit from it.
Who Should Use a JIT Inventory System?
Companies with consistent or predictable customer demand can consider using the JIT inventory system.
This can include small businesses, like construction companies, that operate on defined schedules, so they know when they’ll need certain materials.
The JIT method is also helpful for businesses that use local sourcing and have limited storage space for excess inventory. Local sourcing is helpful because it is less susceptible to transportation disruptions.
Other examples of companies that would benefit from JIT inventory include:
- Food trucks
- Coffee shops
- Car dealerships
- Car repair shops
- Retail and e-commerce stores
The JIT system may not be right for you if you source heavily from international suppliers. Customs at border crossings and long transit distances add uncertainty to arrival dates and can make it hard to be sure your items will arrive in time to fill customer orders.
Tips for Using the JIT Inventory Control System
If you think JIT is right for you, use these tips to fine-tune your inventory management.
- Use inventory management software with inventory automation features that can track your stock levels in real-time and let you know when it’s time to reorder something. That can help you avoid stockouts.
- Build good vendor relationships by paying your bills on time. This way, they’re more likely to see you as a high-value customer and prioritize your orders.
- Be transparent with customers if there’s a product shortage. Good communication—like letting them know when you can expect the item, what you can do for them in the meantime and empathizing with their situation—can go a long way in keeping customers in the long term.
If you’ve been reading about the JIT inventory methodology, you may have also come across just-in-time (JIT) manufacturing, which is a similar approach used by businesses that produce their own goods.
What is JIT Manufacturing?
The just-in-time manufacturing process means that you create items as they are ordered instead of creating large batches and then trying to sell them.
One common example is a pizza shop, which has raw materials (ingredients) on hand but only uses them for baking pizzas after receiving an order.
JIT manufacturing can be used as a step in the lean manufacturing process, which relies on continuous improvement of production schedules and the overall process.
The goal of JIT manufacturing is to reduce excess inventory, while the goal of lean manufacturing is to create more efficiency in the production process to improve value for the customer.
For example, by working more efficiently, you can reduce your costs and then sell the same quality product to your customers at a lower price.
JIT is more focused on business benefits, while lean manufacturing focuses on how production affects the customer.
Choosing the Right Inventory System for Your Business
JIT inventory means that you order products in response to customer demand. Its benefits include lower storage costs, higher product quality, more overall efficiency, better managed working capital, and better cash flow.
If your business has predictable sales levels, JIT inventory may help improve your bottom line. To get the best return from it, consider using inventory management software and remember to create good relationships with your suppliers and customers.