Understanding JIT Supply Chains

Just in Time (JIT) supply chains represent the ideal warehouse management approach, one that is best defined by low inventory levels, a low cost of financing, and most importantly, an adherence to a doctrine of only having what’s required to meet customer demand. However, does that mean that any company, regardless of its size, its industry, its market, its customers’ demand, and or its product offering, can run this type of supply chain? No, it doesn’t.

The Japanese automotive industry came up with JIT immediately following the Second World War. They were unable to carry large amounts of inventory due to the amount of capital needed to support the expenditures. Therefore, instead of carrying inventory they couldn’t afford, they approached it from a different mindset by only bringing in enough to meet demand.

The Japanese decided to minimise how much inventory they carried and instead focused on increased production throughput by using what they referred to as a Kanban manufacturing process. This strategy became widely known as the Toyota Production System. It is now a strategy that extends beyond production and encompasses an entire strategy of inventory management. We’ll review the reasons why a company may want to run JIT and then we’ll outline what types of companies should run JIT.

Benefits of Pursuing JIT Supply Chains

Ultimately, the interest in JIT can be summed up in four critical points. While there are reasons why a company may run JIT, it doesn’t mean they should. There are several criteria that make JIT successful that are not always present in those companies that try to run it.

1. Low Inventory Counts

First, minimising inventory counts means the company only carries enough inventory to cover its existing backlog on sales. In this case, low inventory counts means lower inventory financing and higher profit margins when sales are made.

2. Minimised Risk

Second, reducing inventory counts reduces risk as companies reduce the likelihood of inventory becoming obsolete, outdated and or damaged due to poor handling and storage processes. When a company carries less inventory, its costs are less because it reduces the probability that damage and poor handling will occur.

3. Lower Receivable Financing

Third, not only is it a matter of lower financing on inventory, but the company’s receivables financing is also reduced; companies running JIT are able to better manage their payables and receivables as they pay vendors, and get paid by clients, within days of one another.

4. Improved Cash Flow

Finally, JIT simplifies how companies manage cash flow. Companies that minimise inventory counts are ones that don’t need to concern themselves with capital being tied up in inventory. With more cash on hand, they can better use that capital internally, and or reduce their inventory costs even further by negotiating prompt payment reductions and incentives with their vendor base.

Criteria for Pursuing JIT Supply Chains

When thinking about the originators of JIT, what’s the first thought that comes to mind? For instance, what is it that makes a Japanese automotive manufacturer, or any automotive manufacturer for that matter, want to run JIT? Ultimately, answering these two aforementioned questions comes down to understanding the criteria for running JIT.

1. Dominant Market Position

First, companies that successfully run JIT have a strong negotiation position with vendors, one that allows them to control and or impose their will on the buyer-seller relationship. This position of power is used because the company running JIT has a steady demand curve and substantial volumes the vendor can rely upon.

The company is able to use its volumes, its economies of scale and its negotiation position to define the terms of service. This extends to the types of supply agreements that are signed, the delivery terms on incoming shipments and the payment terms on receivables. Ultimately, companies that run JIT do so because they can; vendors consider these companies their most important customers.

2. Linear Demand Distribution

Second, it’s fair to assume that companies that run JIT have a market and customer base with continual demand for products. If one were to define the demand curve, it would be linear and consistent monthly, quarterly and yearly. This consistent demand for products means the company is able to match its incoming shipments from vendors to its outgoing shipments to customers within days of one another. They can quickly increase production based on high demand and reduce production in response to low demand.

3. Fixed Product Line

Third, the companies that are most successful with JIT are ones that tend to stick to a smaller product line and or list of products. In this case, they make the same product every day. They limit their offering to their market in order to make sure they constantly manufacture from a fixed set of materials or fixed bill of materials. Manufacturing high-volumes of standard finished goods means the company can better manage its inventory, its vendors’ shipments and its own receivables.

4. Minimal Vendor Lead Times

Fourth, a number of these vendors are situated within hours of the company’s facility. In fact, in a number of instances, the vendors will open up warehousing and distribution locations just to service their biggest customer. In this case, the company running JIT has the flexibility to insist that its vendors minimise transit times on delivery. Ultimately, whatever it takes to reduce delivery times is what the vendor will most likely do. It’s a big carrot to dangle and the companies that successfully run JIT know exactly how to keep their vendors hungry.

5. Operational Efficiency

Finally, JIT demands the most of the company’s internal processes. Inventory stock outs and delays are incredibly costly and entirely unacceptable. The company’s focus is on managing time-critical shipments and ensuring that no delays occur. To be successful means the company has reached the pinnacle of operational efficiency. This isn’t a strategy a company can run with vendors in other countries and with an internal process driven by excel spreadsheets. It’s all about efficiency and the ability to respond immediately.

So, what are some of the characteristics of companies that try to run JIT but can’t do it successfully? Well, they tend to be companies that become enamored with the benefits without taking the time to understand whether they, their market, or their customers, will work with JIT.

Ultimately, companies that fail with JIT tend to be companies that sell finished goods to customers with periodic demand. These companies aren’t a dominant market player, don’t have a fixed product offering, and most importantly, don’t have the clout to negotiate favorable terms on contracts. In addition, their vendors aren’t always close enough to minimise transit times and they often miscalculate the high costs encountered by inventory stock outs. In the end, it best to run a strategy your company and your customers can count on. If JIT is that strategy, then it may just produce the kind of returns your company is looking for.nstead on amalgamating your costs when customers suddenly start calling and you’ve nothing to sell them.

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