Inventory levels are too high, and someone suggests just-in-time.
Fewer goods on the shelf, less capital tied up in inventory, and deliveries that arrive when you need them.
It sounds right.
But the advantages and disadvantages of just-in-time depend largely on which items and suppliers you are talking about.
On one item, JIT frees up cash.
On the next, it stops production.
This guide covers the pros and cons without the sales pitch, a worked example that shows when JIT actually pays off, and three questions to ask about every product group before you take the plunge.
Just-in-time (JIT) means you buy, produce or receive goods as close to the point of need as possible. For example, that can mean smaller deliveries more often instead of one large delivery a month.
The principle comes from the Toyota Production System and is one of the foundations of lean inventory management, where inventory is seen as waste that hides problems in the flow.
JIT doesn't have to be all or nothing. You can run JIT on some product groups and conventional inventory management on the rest.
The first advantage is the most obvious one: less working capital tied up in inventory. With smaller, more frequent deliveries, the amount of goods you hold on average between two deliveries goes down. That frees up cash you can use elsewhere in the business, and you pay less for space, insurance and handling.
The second is fewer items gathering dust on the shelf. When you buy closer to actual consumption, the risk of obsolete inventory is lower when a component changes version or customers stop asking for a variant. This matters most for electronics, printed packaging and products with a short life.
The third advantage is less visible: problems come to the surface. Large inventory can hide a supplier who is always three days late, or planning that keeps missing. Reduce inventory and the problems show up sooner.
It is uncomfortable, but it is also the first step to fixing them.
The biggest risk with just-in-time is vulnerability. With low inventory, you have less of a buffer when a container gets stuck, a supplier runs out, or a customer orders twice the usual amount.
You also become dependent on your suppliers in a new way. An unreliable supplier can be easier to live with when you have three weeks of inventory on hand. Under JIT, the consequence of a delay is bigger. It can mean backorders or a stopped line.
So you need to know your supplier's actual OTIF and how much the lead time varies.
JIT can also cost more in transport and admin. More deliveries often mean more freight bills, more goods receipts and more invoices. That part is easy to overlook when the decision is made.
Here is a constructed example. Take a component that costs €20. You use 400 units of it a month and receive one delivery a month. If inventory falls evenly from 400 to 0 between deliveries, you hold 200 units of cycle stock on average. Add 60 units of safety stock and your average inventory is 260 units, or €5,200.
Switch to weekly deliveries of around 92 units and average cycle stock falls to around 46 units. With the same 60 units of safety stock, average inventory drops to 106 units, or €2,120. That frees up €3,080 in working capital.
If we assume in the example that holding inventory costs 20% of its value a year, the lower inventory corresponds to a saving of about €620 a year.
But you now receive 52 deliveries instead of 12.
If each extra delivery costs €80 in freight and handling, that cost rises by €3,200 a year.
In this example, the more frequent deliveries cost more than you save in holding costs.
The numbers flip if the item is expensive, bulky, or the supplier can deliver frequently without extra freight, for example on a fixed milk run or from a local supplier. The point is not that JIT doesn't work. The point is that you need to run the numbers item by item.
Notice also that the example keeps safety stock at 60 units before and after, to isolate the effect of more frequent deliveries. In practice, safety stock should be assessed separately, based on the uncertainty that remains in demand and lead time.
Not necessarily. JIT is about getting goods and materials as close to the point of need as possible, and so reducing the inventory you don't need. How far you can go depends on the uncertainty that remains.
An item with predictable consumption and very stable supply may be able to run with very little or no safety stock. If demand or lead time varies, you may still need a buffer.
So the key is not simply to remove safety stock, but to understand what uncertainty it protects you against. Remove the buffer without reducing the uncertainty, and you increase the risk of backorders or production stoppages.
JIT manufacturing is easiest to make work when the flow is stable: you have relatively short and reliable lead times, you can react quickly to changes, and you don't depend on large batches or long changeovers. The more uncertainty there is in demand and supply, the harder it becomes to keep inventory close to actual need.
JIT is harder to make work when production already stops because materials are missing, or when a critical component has a long or highly variable lead time. JIT does not solve that problem.
For the bigger picture of how raw materials, bills of materials and planning fit together, see how Inact approaches supply chain optimisation for manufacturers.
In wholesale and distribution, JIT looks different. It is more about which items should be held in inventory at all, and which can be special order items you only buy in when a customer asks. That requires sales to know which lead time they can promise on which items.
Ask these three questions about each product group before you switch:
The more predictable the consumption, the more reliably the supplier delivers and the smaller the consequence of a missing item, the better a JIT candidate the item is.
If consumption is hard to predict, the lead time is unstable or the cost of a stockout is high, that doesn't necessarily mean you should keep the inventory level you have today. But you need to understand the risk before you cut back.
The three questions are easy to ask. The hard part is answering them for thousands of SKUs at once. In Inact you categorise your items and get a better basis for deciding how each product group should be managed. You can then adjust service levels, safety stock and reordering by category instead of running one rule for everything.