What is Just In Time (JIT)? Its Benefits & Limitations.

What is Just in Time (JIT)?

Just in time inventory (JIT) system is the approach to inventory management; it suggests inventory should be only purchased for production of Products to satisfy customer demands. Otherwise, no inventory should be purchased for storage. In Just in time system ideal inventory is Zero. Buffer stock is only need for inventory anticipated to become short in supply.

How Just in Time (JIT) affects the business?

Just In Time is beyond than just in inventory system it changes the way business is structured, its culture and its management philosophy, like focus shifts from production to customer. Effects of Just In time Inventory System on Business are.

It requires many changes in the way business operates.

Consideration of factors like availability of raw material or use of alternative material. (Limitation)

Machinery maintenance has to be carried out more frequently to avoid machine break downs resulting in idle time, which ultimately delay the deliveries to customers.

It affects the selection of markets to sell products. Markets situated at remote places make it difficult for the business to deliver goods on time. (Limitation)

It takes managerial time and costs (limitation) to implement JIT. Direct cost as well as opportunity cost of using the time elsewhere to gain competitive advantage.

Production process has to be changed to avoid bottleneck (constraints), so that no work-in-process (WIP) arises. There is no need of separate sub-department because goods do not change hands from start to finish.

Retraining (limitation) may be necessary, JIT involves the use of multi-skilled workers so that time taken in moving the goods from one department to another is eliminated.

Change management may be necessary to implement JIT. Existing culture may not be appropriate for JIT implementation; employees may resist change (limitation) from the fear of learning new thing.

Information technology plays a vital role implementing JIT. It provides the efficiency needed for time ordering of inventory, so that inventory can be quickly purchased. Ex, POS (Point of sale) systems are required through which purchase orders are automatically dispatched when inventory falls below a certain level.

It requires the use total quality management (TQM) in place of traditional standard costing which provides allowance for wastage and idle time. Wastages and idle time can delay delivery to customers.

It also need horizontal value chain to be reconsidered for activities like material handling and finished goods inspection which takes time but does not add value to the product no longer needed due to the use of TQM. In TQM production and inspection are done at the same time. In JIT inventory goes straight to production department where it is needed.

Supply chain both up side and down side has to be changed. Supplier chose should be able to make deliveries on time. Distribution of goods should be done in-house or outsource to some reliable logistics firm (firm which handle business operations on clients behalf).

Traditional inventory cost allocation systems like perpetual inventory systems using FIFO or LIFO in which needs inventory needs to be tracked from raw materials to WIP to finished goods. Just In time employ Backflush costing system in which raw material to directly transferred to finished goods when manufacturing is completed or goods are dispatched.

What are the Benefits of Just In Time (JIT) System?

There are many benefits of Just In Time (JIT) inventory system.

• It reduces the requirement for working capital as in practice minimal level of inventory has been kept.
• It reduces the risk of inventory obsolesce, fire, flood and theft.
• It improves liquidity position of the company as cash or bank will increase instead of inventory which is a less liquid form of asset.
• Excess capital can be invested elsewhere to grab the adhoc (unplanned) opportunities or invested for short term to receive interest.
• It reduces record keeping costs as inventory is not tracked as backflush costing system is used.
• It reduces material handling and finished goods inspection cost.
• Goods are Manufactured what is demanded by the customer. It reduces the risk of manufacturing product which has no sufficient demand.
• It reduces the inventory holding cost, while inventory ordering cost is control by the use of information technology.
• It facilitates long term planning by fixing the material prices in advance.

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