Just-in-Time Inventory: What It Is and How It Works

Just-in-Time Inventory: What It Is and How It Works

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Just-in-time inventory (JIT) management has been around since the early 1970s. In manufacturing, it’s more commonly known today as “lean manufacturing” with an emphasis on reducing waste at every level of production.

For e-commerce sellers, just-in-time inventory management offers significant benefits, but there are also risks. Disruptions to the supply chain can create havoc with JIT, and we’ve seen the ripple effect of such disruptions over the past few years. However, when JIT philosophies are applied properly, the benefits can be great.

So, does just-in-time inventory management and delivery work for you? We’ll explore the benefits, potential risks and key components that make JIT work successfully.

What Is Just-in-Time (JIT) Inventory Management?

Just-in-time (JIT) is an inventory management method used by organizations to optimize inventory levels while minimizing holding costs. 

Just-in-time inventory management systems have become a staple for manufacturers and retailers. In the manufacturing process, raw materials are kept to minimum levels to meet current production orders. In the production process, goods are created to fulfill orders. A key concept in JIT is using a “pull” system. Products are only manufactured when there is actual demand, rather than pushed out to be available.

For retailers and e-commerce sellers, this means keeping enough products in the warehouse to meet customer demand but no more than what’s needed. It takes a delicate balance to affect just-in-time inventory management, with a keen eye on customer demand and a reliable supply chain to get the product you need … just in time.

Benefits of Implementing Just-in-Time Inventory

A JIT inventory strategy can minimize holding costs to create efficiencies in the production flow and reduce waste.

Cost Savings Through Reduced Inventory Holding Costs

You know that the key to managing inventory levels cost-effectively is right-sizing your inventory to meet customer demands. Yet, after years of supply-chain disruption and trouble getting raw materials and stock when needed, many companies are now stuck with expiring or excess inventory, eating up storage space and driving up storage costs. 

More than a quarter of companies say they’re being forced to sell excess inventory on the secondary market because of high storage prices. Nearly half of sellers say warehouse costs are their biggest pressure point when it comes to inflation.

JIT reduces your inventory holding costs, but it only works if you can accurately forecast demand and your supply chain can deliver. Your inventory strategy should include diversification of suppliers and dynamic, real-time demand forecasting.

JIT inventory management results in significant cost reductions. When levels stay at minimums to meet orders, it reduces the amount of capital that has to be invested in inventory.

Improved Efficiency and Production Flow

With a JIT strategy, you can focus on streamlining the production schedule on the shop floor and eliminating bottlenecks. You’ll need an efficient throughout to meet demand, paying close attention to cycle times and production flow.

If products aren’t selling or customer demand shifts, it’s easier to be flexible without the sunk costs invested in products. Shorter production runs make it easier to stop producing one product and switch to another to meet changing demand. This improves efficiency for manufacturers. For e-commerce sellers and retailers, it’s also easier to take advantage of emerging trends.

Reduced Risk of Obsolescence and Inventory Waste

We’ve all seen times when consumer demand shifted suddenly, leaving dead stock that will likely never be sold or excess inventory that had to be liquidated. Because you are developing products or buying inventory much closer to the time it’s needed with JIT methodologies, you reduce the risk of obsolete products or inventory waste. 

You are also less likely to waste materials and store excess inventory. With JIT, you’re only delivering materials or goods when they’re needed for production or sale. This reduces waste and improves efficiencies. At the same time, it’s easier and less expensive to make changes in your production or product lines.

Manufacturers and sellers need to keep a careful eye on inventory levels to avoid running out and being unable to fulfill orders. Keeping adequate safety stock levels is key to making just-in-time inventory pay off.

Enhanced Supply-Chain Collaboration and Communication

JIT requires close collaboration between suppliers, manufacturers and sellers. Everyone in the supply chain has a part to play in an efficient creation, production and fulfillment process. Deploying just-in-time inventory management fosters stronger relationships.

To make it work, you need suppliers that you can depend on for finished products and tight management of demand forecasting, production schedules and inventory levels to make informed decisions and respond to changing market conditions.

Boost in Profitability

When you carry lower levels of inventory, there are fewer assets on the balance sheet. These lower levels can result in a higher return on total assets (ROTA) ratio due to higher and faster inventory turnover. ROTA is commonly used to evaluate the efficiency with which a business uses invested funds to generate a profit.

When companies are not holding excess inventory, they are using their cash more efficiently. When you are purchasing only the goods or materials you need right now, you lower the cost to purchase goods. For manufacturers, you’re not paying for the labor to create goods that haven’t yet been sold. For e-commerce sellers, you’re not tying up capital in inventory you may not need.

Potential Disadvantages of Just-in-Time Inventory

Businesses should also be aware that employing a JIT strategy has potential downsides.

If a supplier is unable to deliver the goods you need at the right time, it can affect production for manufacturers and revenue for sellers. Natural disasters, economic uncertainty and global unrest can all influence supply chains. Automakers and some tech manufacturers have struggled to meet demand due to chip shortages, for example.

Companies may also be limited in their ability to fulfill large-scale, unexpected orders or take immediate advantage of shifting trends. If you do not have the inventory on hand when an order comes in, you may not be able to move quickly enough.

You can mitigate the potential disadvantages by leveraging the right technology and partners. Careful planning, staying close to your customers, and building an agile organization can help make JIT strategies more effective.

Key Components of a Successful Just-in-Time Inventory System

To make a JIT strategy work, you need robust inventory management software and reliable partnerships.

Accurate Demand Forecasting and Inventory Planning

Your inventory management system (IMS) is crucial for analyzing historical data, market trends, seasonal demands and customer behavior to predict demand. Leveraging a real-time inventory model enables you to manage inventory turnover and production/procurement schedules.

When you connect data across the shopper journey and identify trends more quickly, you gain an advantage and respond more effectively.

Reliable and Efficient Supplier Partnerships

You also need reliable suppliers. If you are depending on just-in-time delivery and a partner can’t deliver, you’re losing money and customers. Establishing tight relationships and long-term partnerships can help ensure a steady supply of materials and reduced lead times.

Avoiding supply-chain disruption has been challenging over the past couple of years, even for strong, established relationships. Today, e-commerce sellers are diversifying their supply chains to hedge their bets. In a JIT environment, you cannot afford to depend on a sole source anymore. If that source is unavailable, your revenue will drop.

Another option that sellers are considering is contract logistics services. While in the past, such options stuck mainly to freight logistics, today many providers offer contract logistics across the entire supply chain, including network and supply-chain planning, in addition to typical 3PL services like warehousing, order fulfillment and reverse logistics.

Real-Time Inventory Tracking and Monitoring

A real-time inventory management system is crucial to leverage the power of an OMS/WMS to simplify your supply-chain operation, reduce costs and gain greater inventory and order management visibility. Tracking inventory throughout the supply chain requires tracking mechanisms, such as barcode and radio-frequency identification (RFID) tags, to track movement and monitor stock levels.

Move Inventory More Efficiently Through End-to-End Transportation Management

Just-in-time inventory strategies work best for products that have predictable customer demand. But with the right tools and careful analysis, JIT can be expanded to more categories of inventory. You need a robust OMS/WMS solution to mitigate your risk and optimize your inventory management and the right logistics partner to bring it all together.

Whether you plan to adopt a just-in-time inventory strategy or take a just-in-case approach, Cart can help you improve and streamline your operations. With a nationwide network of distribution and fulfillment centers, enhanced inventory control and end-to-end logistics capabilities from the shop floor to the front door, Cart’s integrated software provides the tech stack you need to drive profitability.

Leverage the power of more than 5.5 million square feet of warehouse space, 13 omnichannel warehouse facilities and one unified order and inventory management system to streamline your operation.

Contact the sales team at Cart today to discuss how real-time inventory tracking and monitoring, end-to-end logistic support, unified analytics and multichannel management strategy can grow your business.