Just-in-time (JIT) production/ procurement, also known as “lean manufacturing” or “Toyota Production System (TPS)”, is a relatively modern technique of inventory management, which is quite different from EOQ model and inventory warning levels approach. JIT management is based on the following principle:
“Holding inventories is nothing but wastage of money in the form of incurring holding costs and opportunity costs of money tied up, as inventories held in warehouses add no value to the business”.
JIT is a very aggressive approach of management which follows that materials should be purchased only when they are needed for manufacturing and not before. In other words, materials should be purchased just in time to be used in manufacturing process, which means that there should be no inventory or stock of materials.
Similarly, finished goods should be manufactured/ purchased only when there is immediate customer demand and not before. In other words, finished goods should be manufactured/ purchased just in time to entertain customer orders, which means that there should be no inventory or stock of finished goods.
Although, the above arguments seem logical but it is definitely easier said than done. To adopt JIT, the following practical implications must be kept in mind:
- Production processes should be very sophisticated and swift as there is no or very minimal stock to entertain customer orders and a business would not want its customer waiting for too long.
- Production processes should be flawless as JIT approach cannot afford any stoppages or delays.
- Special focus is required for managing supply chain as success of JIT is very much dependent on the supply chain. To produce finished goods just in time to meet customer orders, swift delivery of high quality materials and other inputs is required. An entity must have excellent relationships with its major suppliers in order to guarantee efficient supply of high quality inputs.
- An entity adopting JIT would incur extra costs as suppliers would charge more for delivering materials on urgent basis.
Before adopting any approach of inventory management, an entity must consider its pros and cons and its compatibility with the organizational structure and nature of business. Costs and benefits of each approach should be analyzed before deciding and an entity can adopt a mix of two or more strategies as well. For e.g. an entity adopting JIT can modify this approach slightly by maintaining buffer stock just to provide for any unforeseen stoppages or delays in production.