The popularity of just-in-time (JIT) inventory management is growing in ecommerce – so it’s more important than ever to understand this approach and whether it’s a good fit for your business.
With that in mind, we’ve put together a comprehensive guide on the JIT inventory management method to help you assess what’s best for your situation.
By the end of this post, you'll know:
The key distinctions of the just-in-time system from other inventory management systems
How the JIT inventory system can help you decrease waste and reduce inventory control costs
How to implement JIT in your business (and whether or not JIT is right for you)
Let's dive in.
What is JIT inventory management?
JIT, or just-in-time, is an inventory management method that prioritizes storing minimal inventory and ordering only what is needed to meet immediate customer demand.
It aims to minimize waste and reduce the costs associated with storing and managing large amounts of inventory.
JIT inventory management has its roots in Japanese manufacturing practices that emerged in the 1950s and 1960s.
The term JIT was first coined by Taiichi Ohno, an engineer at Toyota Motor Corporation, who developed the JIT system as a way to improve efficiency and reduce waste in the production process.
In JIT inventory management, production schedules are closely monitored and materials are ordered based on demand, rather than in advance. This helps to reduce the amount of inventory that needs to be stored and managed, freeing up space and reducing costs.
JIT inventory systems rely on close collaboration between suppliers and manufacturers, ensuring that materials are available when they are needed in the production process. This improves efficiency and helps to reduce the risk of production delays due to missing or late deliveries.
Key features of JIT inventory management
The key features of JIT inventory management include:
Ordering on an as-needed basis: JIT inventory management involves ordering raw materials and components only when they are needed in the production process, rather than storing large amounts of inventory in advance. This helps to reduce inventory holding costs and minimize the risk of obsolescence or spoilage.
Lean manufacturing: JIT inventory management is closely tied to the principles of lean manufacturing, which focuses on reducing waste, minimizing inventory holding costs, and improving efficiency in the production process.
Collaboration throughout the entire supply chain: JIT inventory management relies on close collaboration between suppliers and manufacturers, ensuring that materials are available when they are needed in the production process. This helps to reduce the risk of production delays and improve customer satisfaction.
Decreased waste: JIT helps to minimize storage waste, motion waste, dead stock, and raw material waste by reducing stored inventory. This not only helps reduce costs but may eliminate the need to operate large storage facilities.
Local sourcing: JIT inventory management often leverages local sourcing of raw materials and components, which can help lower lead time demand and reduce the amount of safety stock needed (we'll discuss those terms in more detail later in this post).
Emphasis on reliable suppliers: JIT inventory management lives and dies on the reliability of suppliers. Good supplier relations ensure that materials are available when needed in the production process and help to minimize the risk of production delays. This, in turn, improves customer satisfaction.
Advantages of just-in-time inventory management
Lower inventory carrying costs
Storage costs are often some of the largest expenses for ecommerce businesses. JIT helps to reduce inventory carrying costs by minimizing the amount of raw material stock that needs to be stored and managed.
This reduces the amount of money tied up in inventory and improves overall efficiency in the production process.
More efficient production process
By only ordering what is needed, JIT helps to reduce the risk of overstocking or disposing of excess inventory. This minimizes waste and improves overall efficiency in the production process.
Improved cash flow
Cash flow in a business refers to the movement of money into and out of a company over a given period of time. It is the difference between the amount of cash received and the amount of cash spent by the business.
Positive cash flow means that the business is receiving more cash than it is spending, while negative cash flow means that the business is spending more than it is receiving.
JIT, when done well, leads to reduced inventory holding costs, lower production costs, improved inventory turnover ratio, and better alignment with customer demand.
All these factors will inevitably improve your business' cash flow.
Less risk of excess inventory or raw materials
Every day that inventory sits in your warehouse, it gets closer and closer to becoming dead stock. JIT helps you store less raw material stock and raw material inventories, making it an attractive approach for space-limited ecommerce businesses.
Disadvantages of just-in-time inventory management
Every inventory management philosophy has its downsides, and JIT is no exception. Here are some things to watch out for when you're considering a just-in-time system.
Dependence on suppliers and transportation
One of the disadvantages of JIT is the high dependence on suppliers and transportation, which can make the entire supply chain vulnerable to disruptions and challenges.
This is a big risk because if something goes sideways with either of these factors, the entire JIT system could break down, leading to production delays, stock shortages, and a loss of revenue.
This could include an unreliable supplier or a sudden price hike from a transportation provider.
Vulnerability to disruptions
What happens when you receive defective inventory items? What happens when pandemic lockdowns halt production of the small electronics market?
JIT practitioners must have a backup plan for these scenarios, which isn't always easy to coordinate.
It's a bit like having a personal emergency fund -- you have to hope for the best but plan for the worst.
For example, if transportation is disrupted by a natural disaster, this will inevitably delay the delivery of goods, leading to production shutdowns, shortages, and missed orders.
Complex supply chain coordination and communication
If you've ever tried herding cats, that can feel a bit like managing a JIT supply chain. Because you're storing as few products as possible, you're highly reliant on timely communication and collaboration with each facet of your supply chain.
This can be stressful, especially if you're not used to managing multiple dynamic collaborators at one time (or when things go south because of supply chain disruptions).
Risk of stockouts and lost sales
There is a downside to carrying as little inventory as possible – you are significantly more at risk for stock-outs and lost sales.
That's why it's so important to understand consumer demand, have a firm grasp on your expected sales for a given quarter and have oversight into the entire process from manufacturer to end-user.
Should you use just-in-time inventory management in your business?
Here are some good questions to ask yourself when trying to decide whether or not to introduce JIT into your business.
What is the demand for your products? Is it predictable or does it fluctuate greatly?
What is the lead time for your raw materials? Can you receive them quickly enough to meet customer demand?
What is the cost of holding inventory?
What is your production process like? Can you handle the quick turnaround time that JIT requires?
Do you have reliable suppliers?
Do your suppliers guarantee quality, and do you feel confident in their ability to deliver on time?
How to implement JIT inventory management in your ecommerce business
Step 1: Assess your current inventory management system
Begin by evaluating your current inventory management practices, such as order frequency, lead time, safety stock, and inventory turnover. This will give you a better understanding of your business's inventory needs and help you determine if JIT inventory management is the right approach for you.
Step 2: Sketch out your just-in-time inventory strategy
Develop a strategy that is tailored to your business's specific needs, taking into account your product line, customer demand, and suppliers. This should include the implementation of real-time inventory tracking, automatic reordering via software, and the use of barcoding or RFID technology.
Your automatic reordering should be on a product-by-product basis and should align with your predetermined safety stock numbers. For example, you may decide to automatically order more of a product when it reaches 75% of your pre-determined safety stock level.
Step 3: Communicate with suppliers
Good communication with suppliers is critical for the JIT inventory system to be successful. Work with your suppliers to establish reliable delivery schedules and lead times, and make sure they understand the importance of meeting these deadlines.
Step 4: Use forecasting and demand planning
Use forecasting and demand planning tools to help you accurately predict customer demand. This will allow you to make informed decisions about when to order inventory and how much to order.
Step 5: Monitor and adjust
Regularly monitor your inventory levels and adjust your JIT strategy as needed. Make sure to track the success of your JIT implementation and identify areas for continuous improvement.
Bonus tip: Consider a hybrid approach
If you're not sure if JIT is the right approach for your business, consider starting with a hybrid approach. For example, you could implement JIT for your most popular products while maintaining a higher safety stock or traditional inventory holding practices for less popular items.
Key factors for successful implementation
Everything begins with forecasting
Since JIT involves ordering only enough to meet consumer demand, it makes sense that such a system hinges on your ability to, well, actually understand your customer demand.
This is the first and most important prerequisite to making the JIT system work. If you don't have a system for forecasting future demand from historical data, you may be setting yourself up for failure.
Linnworks forecasting provides a robust solution for eCommerce businesses to predict future demand based on historical data. You can track seasonal trends, analyze similar products and replenish your stock in time so you don’t miss out on any revenue opportunities.
Dial in your safety stock
Safety stock is extra inventory you keep on hand in case of unexpected demand. It's a cushion that helps to make sure you never run out of an item, even if sales unexpectedly spike.
When implementing JIT, it's important to be strategic with your safety stock level. Too much safety stock and you'll tie up resources needlessly, but too little and you risk running out of an item.
Develop a strong relationship with suppliers
For JIT to work, you need reliable suppliers that can guarantee the quality and timely delivery of your products. Developing strong relationships with your suppliers is key to ensuring that they can meet your expectations in terms of both quality and quantity.
Monitor inventory levels in real-time
In a JIT system, it's important to track inventory levels in real-time so that you can quickly identify any problems or shortages as they arise. Use inventory management software like Linnworks to keep track of current stock levels and automate reordering when necessary.
Review, update, and adjust your JIT system regularly
No system is perfect and it's important to constantly monitor and review the performance of your JIT system. As you gain more experience with managing inventory using just-in-time techniques, you can adjust your system as needed to ensure it's running smoothly.
By following these steps, you can make sure that your JIT inventory system is successful and that you have the right amount of stock at the right time without overstocking or understocking. With the right planning and execution, JIT can help you reduce costs and increase efficiency in your business.
Set up automatic reorder points
One of the most important components of a JIT system is having automatic reorder points. These are inventory levels that trigger an order to your suppliers when they're reached. This helps ensure that you always have enough stock on hand without overstocking or understocking.
Review supplier agreements regularly
Supplier agreements should be reviewed and updated regularly to ensure that they meet your business needs. This includes not only the terms and conditions of the agreement but also the delivery times, quality requirements, and other specific needs. Regularly reviewing these agreements can help you avoid unnecessary problems down the line.
Challenges to JIT inventory management and how to overcome them
The biggest challenge to JIT inventory management is dealing with unexpected demand. Since you don't have extra stock on hand, it can be difficult to quickly meet the sudden increase in orders.
To overcome this, develop relationships with reliable suppliers who can deliver items quickly and maintain a safety stock for those times when your forecast is off.
Another common problem with JIT is that it's difficult to quickly adjust your inventory levels when needed. To combat this, set up automatic reorder points and review supplier agreements regularly to ensure that you're able to get the items you need on time.
Finally, if your forecast is inaccurate or incomplete, it can lead to significant problems down the line. To avoid this, it's important to take the time to develop accurate forecasting models and review them regularly.
By taking the time to do this upfront, you'll be better prepared if an unexpected demand arises.
FAQs about just-in-time inventory management
What is JIT manufacturing?
Just-in-time manufacturing is a production method where manufacturers produce and deliver products at the exact time they are needed. This helps reduce costs by eliminating storage and cutting down on overproduction.
What is the Toyota production system?
The manufacturing process created by Toyota, known as the Toyota Production System (TPS), is one of the most well-known examples of JIT. It emphasizes Just-in-Time production, continuous improvement, and lean manufacturing principles.
Developed in the 1950s by Taichi Ohno, it was an innovative approach that focused on eliminating waste and improving efficiency for Toyota's Japanese auto factories. This system has since been used by many other companies around the world to improve their production processes.
How does the JIT inventory management model affect inventory costs?
The JIT inventory management model can reduce inventory costs significantly by eliminating excess warehouse space and other storage costs.
Additionally, it helps to reduce overstocking and understocking of items which can add up quickly. By using JIT techniques, companies are able to order exactly what they need at the right time, reducing their overall costs.
How do I know if my supply chain can support just-in-time inventory management?
To determine if your supply chain can support JIT, you'll need to review your suppliers and their capabilities.
Start by determining how quickly you want to ship products out to your customers. This is known as your lead time, and it will determine how quickly your suppliers need to deliver goods.
Then, work backward from there. If you want to get your products out to customers in four days or less, you'd need to have them shipped at least one day before that, and your supplier would need to have the items delivered one day before that.
By understanding your lead time and working backward, you should be able to determine if your suppliers can provide goods on time consistently. If not, it may be worth considering other options.
What is continuous flow manufacturing?
Continuous flow manufacturing is a method of production where goods are produced at a steady pace. Unlike JIT, continuous flow relies on a steady stream of materials being sent to the production line. This allows for greater efficiency and labor cost savings, as products can be produced faster with fewer resources.
However, it can also lead to greater inventory costs as large amounts of materials need to be stored. Additionally, it can also lead to increased waste if production is not closely monitored.
Does JIT result in higher inventory turnover?
Yes, JIT inventory management can result in higher inventory turnover because stock levels are kept low and products are only ordered when they are needed. By eliminating overstocking and understocking, companies can reduce their carrying costs significantly.
As a refresher, your inventory turnover ratio is a measurement of how quickly inventory is sold and replaced. By using JIT techniques, companies can often reduce their inventory turnover and increase profits in the process.
Do you need inventory management software to implement the JIT system?
In general, inventory software can be extremelyhelpful when it comes to implementing JIT principles. It can help you track stock levels and keep accurate records of your production process, among many other things.
While we're not going to say it's impossible to implement JIT without dynamic, dedicated inventory management software, it'd be a serious challenge (and probably cause quite a few headaches).
That's where Linnworks comes in.
Our automated inventory management software makes it easy to implement JIT principles and ensure your supply chain is running smoothly. We provide powerful, customizable features that help you track stock levels and manage orders with ease.
So if you're looking for an effective way to reduce costs and increase efficiency with JIT inventory management, don’t hesitate to get in touch with us today. We’d love to help!