Developed by Toyota in the early 1970s and popularized by Dell in the 1990s, the just-in-time (JIT) supply chain methodology is used by many manufacturers across the world. The principle is simple with firms only moving material right before it’s needed. As a result, warehousing costs are reduced due to manufacturers only having on hand as much as they need.
While other methodologies may lead to organizations having small safety stock, to help offset any supply chain shocks such as spikes in customer demand or strikes at a supplier. With JIT, however, the business attempts to eliminate the need for safety stock by synchronizing its processes perfectly.
While there are huge benefits, particularly cost advantages, to implementing a just-in-time supply chain, the coronavirus reiterates the fundamental flaw of just-in-time in a crisis. The problem is that firms operating with a just-in-time concept don’t hold significant levels of inventory. When their manufacturing hubs shut down, those firms did not have enough parts in order to fulfil the orders they already had booked. As a result, many factories had to close down for a significant period of time as they were unable to source parts.
As a result, this has led to some firms switching away from the JIT supply chain and has divided the opinions of supply chain professionals. Do they stick with the just-in-time methodology that has been working, or do they look for an alternate option?
Benefits of the JIT supply chain
With supply chain sustainability remaining a key trend for the industry, using the JIT system to manage inventory helps to eliminate overstocking and excess inventory by keeping inventory levels as low as possible. This therefore helps reduce the risk of inventory sitting unsold or unused in the warehouse and ultimately being sent to landfill. It also minimizes waste by easily identifying and addressing defective inventory items when production volumes are low.
By reducing product defects, through the identification of defects while production values are low, and automating processes, JIT inventory management can help eliminate bottlenecks and delays across the entire production cycle. JIT production scheduling ensures that jobs are scheduled exactly when they are needed, meaning that production runs start and end just in time for shipping. This allows for shorter production cycles due to lack of delays and leads to on-time deliveries. The result of this is likely to lead to increased customer satisfaction.
Reduces Holding Costs
The main benefit to using JIT is the reduction in the costs associated with storing inventory. Storing large amounts of inventory can be costly but lowering the amount of inventory you keep stored can reduce carrying costs. Companies that implement JIT inventory models can ultimately reduce the number of warehouses they need to maintain, or even enable them to get rid of the warehouses entirely.
The disadvantages of JIT
Supply chain shocks
While there is nothing any firm can really do to completely mitigate the impact of a supply chain shock, firms that use JIT are more vulnerable to feeling the impact as demonstrated by the coronavirus pandemic. There are two main types of shock that firms are vulnerable to. These are supply/demand and price shocks. Supply or demand shocks are those that were experienced by firms in the height of the pandemic. Whether a firm faced a supply or demand shock depended on the product they sold. For example, firms that supplied equipment for home offices faced demand shocks as the demand was higher than the supplies the firms had/could get hold of.
On the other hand, firms also face price shocks. This happens because it is assumed that prices in the production process remain constant, however, because orders are placed in smaller quantities prices may fluctuate between orders. When these price shocks occur, they can greatly affect a firm’s profit margin.
Dependency on Suppliers
Only having enough stock needed to fulfil requirements of the business at a particular time means that firms have to rely on their suppliers to deliver orders when needed. This puts a firm at risk of delaying the customer’s receipt of goods. This could be for example if a customer places a large order which a supplier is unable to deliver timely or if a supply chain shock hits like the coronavirus pandemic or the Evergiven getting stuck in the Suez Canal.
While a firm may be able to manage customers’ expectations, if a large order is going to take time. This is harder to do if a supply chain shock hits because the length or disruption remains unknown. By not meeting customer’s expectations this could lead them to take their business elsewhere and may damage the reputation of the brand.
This is why it is important to choose reliable suppliers and have a strong relationship with them so that firms can make sure that they have the materials they need to meet their customer demands.
While using JIT methodology can save a business money, it could cost a business money. JIT usually results in producing in smaller quantities to prevent the need for having to store large volumes. While producing goods in smaller quantities means spending less per shipment of raw materials, it may actually cost the business more. At high production levels, businesses will benefit from economies of scale. As a result, as production increases, the average cost of producing each individual unit decreases. This could be for example due to discounts for bulk purchases. This may therefore result in businesses that utilize JIT may have to pay more per item because they make smaller albeit more frequent orders that do not qualify for these discounts. Then add to that the additional shipping, delivery and possibly even customs charges that accompany more frequent ordering this could have an important impact on the bottom line, as well as on the environment.
Just in Case
The alternative to operating a just-in-time supply chain is to operate using a just-in-case (JIC) supply chain. JIC operates completely differently to JIT. It is an inventory management strategy that focuses on keeping a large standing inventory. Just-in-case supply chains operate by anticipating demand. By anticipating demand this should help reduce the risk of stockouts due to large-scale disruptions and complexities .Companies adopt just-in-case strategies to build supply chain resilience, which could be suggested to be very beneficial following the pandemic.
Just in time and Just in Case inventory management systems are complete polar opposites of the spectrum but it would be wrong to suggest that a firm has to choose one or the other. By adopting a digital approach and utilizing inventory optimization software, businesses can find a nice middle ground, which will allow them to carry the right amount of inventory to help them to have some buffer while keeping holding costs low.
Is this the end of the Just-in-time supply chain? Probably not. While the coronavirus pandemic has highlighted the flaw in the just-in-time system, there are still plenty of benefits to some businesses continuing to use JIT. However, some businesses will consider that the system no longer works for them and may look to switch to an alternative instead.