Definition and explanation
Just-in-time (JIT) is a management approach that is used to control the flow of inventory to and from a business in order to minimize inventory levels and to improve the efficiency of the manufacturing processes.
The strategy is to arrange the orders of raw materials in such a way that the goods are only ordered when required for production. This is achieved by aligning the orders placed by the customers with the orders placed for the raw material. So, the implementation of Just in time approach makes the level of raw material that will be used and the level of inventory that would be available in the company at a specified time.
The primary focus of the technique is to reduce the time taken between the placing of the order by a company for raw materials and delivering the finished goods to the customers. Therefore a company only buys its raw material when it needs to commence production. This reduces the ‘lead time’ for the company and the holding costs, simultaneously the losses of inventory are significantly minimized which varies based upon the nature of business.
Application of just in time theory:
The theory of Just-in-time is a ‘Japanese Management Philosophy’. It was first adopted by ‘Toyota Manufacturing Plants’ in the early 1970’s. Toyota had to improve their internal systems and external relations with their suppliers and customers to implement the strategy. Because, management of Toyota Company realized that in order to apply JIT effectively, they have to keenly focus on the training and commitment of their employees and enhancement of their systems to their full capacity.
The main limitations that Japanese auto mobile industry especially Toyota tried to overcome by using JIT were that Japanese companies could not produce their products in batches as the size of their industry was very small and had less ‘economies of scale’. Additionally there was no appropriate policy of pricing present due to which it was inevitable to reduce their manufacturing costs.
Now-a-days there are a number of companies that are using just-in-time in their businesses or specific segments of business in order to improve their operational and productive efficiency. One of the examples is McDonalds, an American chain of restaurants which is spread in almost whole of the world. McDonalds implemented JIT in their systems to face the difficulties related to obsolescence of their raw food in restaurants as well as the time required to fulfill an order. The business introduced sophisticated methods of making burger. They shifted to use of frozen food and only completed an order after it was placed and money was received.
McDonalds also had to redesign its procurement function. By making this function centralized each branch of their restaurant was supplied the raw food products based on their specific demand.This approach successfully reduced the cost that McDonalds bore by minimizing the restaurant inventory. Additionally, the customer service and quality of food was also enhanced as the food (usually burgers) are prepared fresh and in minimal time (reduced from 11 minutes per order to 1.5 minutes per order).
Advantages and disadvantages of just in time system
The major advantages and disadvantages of just in time manufacturing and inventory control system are given below:
- Due to a continuous flow of raw materials and inventory the space needed to store these goods reduces. This would mean that the business will not have to buy or lease any large stores or warehouses in order to hold these goods (raw material or/and inventory) unlike the traditional inventory control systems where a certain level of raw materials, work-in-progress and finished goods is maintained. This would decrease the holding cost of the company.
- The chances of losses of inventory (normal and abnormal), wastage or damage of raw materials and the obsolescence of these goods minimizes. This prevents the capital invested in raw materials and inventory from becoming a sunk cost of the business.
- In order to maintain an efficacious just-in-time system the business needs to improve its overall processes and make its human resource more competent. So, by implementing JIT the overall performance of a business enhances.
- The technique is easy to understand by the management of a company. This makes it practical not only for large companies but also for small and/or medium sized entities to implement just-in-time. Additionally, the capital needed to be invested in such systems is less so JIT approach is economically viable for small businesses in this sense.
- By increasing the operational efficiency of the company it provides the management a chance to improve other areas of business too. One of the most important areas being the ‘costumer satisfaction’. As in ‘just-in-time’ each order is produced specific to each costumer so, it provides a chance for enhanced customization in every order thus more space to meet the requirements of the costumers.
The notable disadvantages of implementing a just in time system are given below:
- Although the idea of this technique is easy to understand but it may become difficult to implement in many circumstances. This is majorly because there are no hard and fast rules to follow in JIT approach and each business has to implement it based on its own weaknesses and strengths.
- In order to effectuate just-in-time proficiently, a business needs a very strong supply chain. The reason being, if any of the link in the supply chain i.e. suppliers, manufacture, labor etc. breaks down, it can disrupt the whole production line and could lead to order delays.
- The forecasting of the demand of produced finished goods is difficult. The businesses not only need to forecast the costumers demand but also have to arrange suppliers of raw materials based on their estimated demand. This could create problems if a huge change in demand occur.
- A business need reliable suppliers to sustain JIT approach. These suppliers must meet the deadlines to supply raw materials which is very important in order to fulfill the orders promptly. Additionally, the goods provided by the suppliers must also meet the quality requirements because if the products are faulty or defective, it could lead to delays in production and an increase in losses of raw material and revenues.
- It becomes difficult for businesses that adopt just-in-time technique to maintain the required number of employees required. As the employees are only required to work when an order is placed by the costumer, businesses usually have to employee both permanent and temporary labor based on their needs and market demand.