After World War II, when the world was slowly recovering from the aftereffects, Japan was contemplating how to regain its strength as quickly as possible. In 1952, Kiichiro Toyoda, founder of Toyota Motor Corporation, initiated the development of a system that could help them surpass American automobile manufacturers without spending a fortune on inventory costs. In the 1970s, Toyota designed and developed the system known as Just in Time or the Toyota Production System. With this system, Toyota produced automobiles with 30% more efficiency and lower inventory costs. How?
Because the concept behind developing this system was to produce and restock inventory only when needed, minimizing costs related to overstocking and waste.
Also, there are myths related to JIT that it is the same as EOQ. But it is not. Later in this blog, we will see how they differ.
Let’s begin by understanding why businesses love the Just in Time inventory management system and why it is a good choice for your business.
What is Just-in-time inventory management?
Just-in-time inventory management is a system where you restock based on customer demand at that time. In JIT, businesses don’t add extra safety stocks just in case. Rather, they only produce or restock based on what’s needed and when (demand-based).
The easiest way to understand this is by looking at coffee shops and bakeries around you. They stock in every day instead of every week to prevent waste (due to spoilage) and overstocking (cutting out margins).
Back in the days when no one ever thought that big companies making large products like automobiles could also operate on such models. But Toyota was the pioneer who applied this model in the automobile industry and successfully reduced costs on the inventory.
This is how JIT works;
- Demand production: Goods are made only after a sale is confirmed.
- Supplier partnerships: Suppliers deliver materials hours before they’re needed.
- Lean inventory: Aim for “zero inventory” where possible.
Is JIT same as EOQ?
Both are inventory-smart techniques that help companies reduce inventory cost. But no, they are not the same.
Economic order quantity (EOQ) helps find the best order size to keep inventory costs low. For instance, a store using EOQ might order 100 units each month because that is the best order quantity that fulfills customer demand while preventing overstocking and stockouts.
Just-In-Time (JIT) takes a different approach by asking, “Why order anything until it’s needed?” A JIT store orders 10 units each week, cutting storage costs by half.
Why businesses swear by JIT?
A business is considered successful when it sees more profits than losses and generates consistent revenue quarterly. That’s why businesses are continuously looking for models and techniques that help them increase productivity without spending more. That’s the reason many companies love the Just in Time model: More productivity, less cost.
According to a McKinsey study, companies with a JIT inventory management model reduce inventory costs by 20-50% while improving overall productivity by 10-30%.
There are a lot of benefits that come with following a just-in-time inventory management model. We will discuss these in the next section. To conclude this section, I would like to make a statement:
More inventory means more capital. You need extra warehouse space to carry old inventory and to adjust new inventory, too. Carrying inventory consumes almost 20% to 30% of the total inventory cost annually. The study conducted by Aberdeen Group stated that businesses with a JIT approach reduce inventory levels by 33%, meaning they don’t need to spend on extra warehouse space, along with an 8.5% improvement in inventory levels.
Now we know why businesses swear by this method, NO?
Benefits of Just in time inventory management
Let’s see the prominent benefits of JIT.
- Slash costs
As we discussed above, companies using JIT report 20-30% lower inventory holding costs. Yes JIT is not dead but companies are still thriving and sharing their success with JIT.
Companies following JIT are reducing their inventory and other production related costs big time
Again we have Tayota the pioneer of JIT. In Toyota Annual Report, its stated that they reduced their warehouse space by 40% after they implemented JIT. Amazing right?
Another company Harley-Davidson also reduced their lead time by 50% and inventory levels by 75% after JIT implementation.
Let’s understand this using an example.
A mid-sized manufacturer with $8 million in inventory can save $350,000 to $700,000 each year by reducing stock by 25% using Just-in-Time (JIT) inventory management.
These savings come from better control over when and how much to reorder. One way to do this is by using the Reorder Point formula:
Reorder Point = Average Daily Use × Lead Time + Safety Stock
For example, if a certain part is used 120 times a day, takes 5 days to arrive (lead time), and the company keeps 300 units as safety stock:
Reorder Point = 120 × 5 + 300 = 900 units
So, when the stock drops to 900 units, it’s time to place a new order. Using this method across all items helps avoid extra stock and cuts storage costs.
- Boost efficiency
JIT approach also improves efficiency. How? When there is no cash tied to sitting stock, companies can invest that capital in experimenting and producing results that again bring efficiency to the process or improvements in the product.
Dell is an example of how JIT improve efficiency and turnover time
Dell has a manufacturing system known as the build-to-order model. This system allows customers to order customized laptops that are made specifically to their specifications. One of the prominent improvements in this model is the delivery time.
Dell can now deliver these custom laptops in just 4 days. This is a significant reduction compared to the previous system, which often took about 3 weeks to deliver a laptop before adopting Just-In-Time (JIT) manufacturing processes.
Dell now has a strong reputation and supplier relationships, along with its own manufacturing plants. Without overstocking parts, they can simplify production or order products based on what is needed to complete the job. This way, they can streamline production, minimize delays, and ensure timely delivery of customer orders.
- Better product quality
Companies can also improve their product quality by adopting a just-in-time (JIT) inventory system.
When companies follow JIT, they can easily control stocks. With less stock in inventory, it’s easy to identify if there is any dead stock that needs to be used or eliminated, and if there are any defects in the products.
For example, Toyota, when implementing the JIT approach, saw a 90% drop in defects in their production process. And it has become easy for them to change their processes in the initial phase, allowing them to produce better quality products.
4- Sustainability
When companies do overproduction, it comes with a lot of other issues too, like more warehouse space, extra products, seasonal shifts, and product-related waste like carbon emissions in manufacturing. But with in-time production, companies can reduce carbon emissions and promote sustainable production practices. But keep in mind that where JIT promotes sustainability, it’s also not 100% beneficial because with frequent production you need frequent deliveries that increase transportation, which can contradict its environmental benefits.
5- Less Waste:
With JIT model you dont have to worry about overstocking. Because your products don’t sit around collecting dust or becoming obsolete. Industries with perishable goods or fast-moving tech are mostly follow JIT because of the nature of their products.
6- Better cash flow:
When no extra cash is stuck in inventory, a business can have working capital that can be used for marketing, staffing, or expanding its product line.
7- Improved responsiveness
With less pressure about the inventory that piles up and reaches the roof of your warehouse, you can move faster when trends or customer preferences change. You don’t have to offload outdated stock; you just need to brainstorm what’s next.
Is JIT beneficial for every business?
JIT also comes with certain challenges and drawbacks. Let’s see what those are and how we can fix them.
1- Supply Chain Disasters
Just-In-Time (JIT) inventory heavily depends on stable supply chains, which means that after receiving an order and to meet customer demand on time, businesses must ensure that every aspect of raw material sourcing, delivery, or production occurs within a specific time frame.
Even a small disruption in the supply chain, such as a delay in getting certain parts of a product, can cause a business to lose revenue.
One example is what happened in 2011 when a tsunami hit Japan. Reuters published that during this time, Toyota lost $450 million in revenue because it couldn’t get the automobile parts in time.
Fix:
To reduce such risks in the future, companies should work with local suppliers. This helps them get materials closer to where they make their products. Also, using blockchain technology can make things easy and allow companies to track their inventory in real-time throughout the supply chain. For instance, the IBM Food Trust shows how blockchain can improve supply chains and make sure materials are available when needed.
- High setup costs
To keep inventory in check and to make sure they have enough safety stock to prevent stockouts, businesses need inventory management software to make the process error-free and fast.
And its one of the reasons why most SMBs might not see the benefits of JIT inventory systems because of the high cost related to these softwares. For example, some inventory management software can cost about $499/month, which is a lot for smaller companies to handle.
Fix:
For SMBs, a smart move is to start with budget-friendly inventory management tools. Take Seebiz, for example. It offers a free plan, and its basic plan starts at only $55/month. Plus, you can always use simple tools like spreadsheets to keep track of inventory (But it is susceptible to manual errors) until you’re ready to upgrade to something fast and reliable.
- Demand forecasting errors
Accurate demand forecasting is very important in the JIT system, as miscalculations can lead to stockouts and lost sales.
Fix:
To make demand forecasting more accurate, businesses can get help from the latest technology. There are AI tools that can predict demand with about 95% accuracy, which helps avoid stockouts and keeps inventory in sync with what customers actually want.
How you can implement JIT right now
1- Audit your current inventory:
Start by auditing your current inventory. Know what you have in stock, how fast it moves, and where the inefficiencies are.
2- Choose reliable suppliers:
See how good your relationship with your suppliers is. Communicate your needs with them. Make sure your suppliers can deliver quickly and consistently based on customer demand.
3- Use forecasting tools:
Invest in software where you can feed your sales data to predict future demand and match your consistent product needs.
4- Sync inventory with sales:
A centralized inventory management system like Seebiz can be used to connect inventory and sales channels and order data to make quick decisions.
5- Test with one product line:
You don’t have to go all-in. Start with a fast-moving product with high turnover to test how JIT works for you. And then expand it.
Conclusion
JIT is not just some method everyone is talking about but its a direct money saving approach. From SMBs to multi-chain businesses, primarily are operating on JIT, including Toyota, Dell, Apple, and fast-food chains like McDonald’s. In 2006, there was a survey conducted where up to 43% of respondents voted that they follow the JIT model. This number is much higher today.
Companies generate and save millions of dollars after adopting a just-in-time inventory management model. But it’s entirely up to you to use this method. If you think this is your sign to start using JIT, take it!
FAQs
What is JIT in inventory management?
Just-in-time inventory management is a system where you restock based on customer demand at that time. In JIT, businesses don’t add extra safety stocks just in case. Rather, they only produce or restock based on what’s needed and when (demand-based).
What is the difference between JIT and EOQ?
Both are inventory-smart techniques that help companies reduce inventory cost.
Economic order quantity (EOQ) helps find the best order size to keep inventory costs low. For instance, a store using EOQ might order 100 units each month because that is the best order quantity that fulfills customer demand while preventing overstocking and stockouts. Just-In-Time (JIT) takes a different approach by asking, “Why order anything until it’s needed?” A JIT store orders 10 units each week, cutting storage costs by half.
What is JIT and its advantages?
JIT or just in time method means ordering or manufacturing products in time of need. Its advantages include;
- Flexible production
- Fast fulfilment of customer demand
- High-quality products
- Less waste of products
- No excess inventory
