Just-in-Time Inventory: A Practical How-To Guide
Just-in-time (JIT) inventory management is a strategy that aims to improve a business's return on investment by reducing in-process inventory and associated carrying costs. In a JIT system, materials, components, and goods arrive at the point of use only when they are needed -- not in advance. JIT originated in the Toyota Production System and is now applied in manufacturing, retail, healthcare supply chains, and construction materials management.
The Business Case for JIT
Carrying cost reduction: Holding inventory costs money -- warehouse space, insurance, obsolescence, spoilage, capital tied up in stock. A 2022 analysis by the Hackett Group estimated that best-in-class manufacturers carry 15 to 30 days of inventory versus 45 to 60 days for typical manufacturers, representing a significant working capital advantage.
Quality improvement: When defects are discovered in a large inventory batch, many defective items may already be in stock before the defect is found. In a JIT system, defects are discovered and addressed much sooner, limiting the quantity of affected items.
Space and complexity reduction: Holding less inventory requires less warehouse space and reduces the complexity of inventory management.
The Conditions Required for JIT to Work
JIT is not appropriate for all supply chains. The conditions that make JIT viable include:
Reliable, frequent delivery from suppliers: JIT requires suppliers to deliver small quantities frequently and on schedule. Supplier delivery reliability is the single most important prerequisite. A JIT system with unreliable suppliers creates stockouts, not cost savings.
Stable, predictable demand: JIT works best when demand is relatively predictable. High demand variability makes JIT inventory management very difficult, as the safety stock required to buffer demand volatility negates many of the JIT benefits.
Short supplier lead times: JIT requires suppliers who can respond quickly to orders. Long lead times require holding more inventory to buffer the supply gap.
Strong supplier relationships: JIT typically requires closer, more collaborative relationships with a smaller number of suppliers -- because each supplier bears a larger share of the supply risk.
How to Implement JIT: A Step-by-Step Approach
Assess current inventory levels and costs. Calculate your current average inventory days on hand, carrying costs as a percentage of inventory value, and stockout frequency. This establishes the baseline and the business case for JIT.
Identify JIT candidates. Not all inventory categories are JIT candidates. Items with short supplier lead times, reliable suppliers, and stable demand are the best candidates. Items with long lead times, unreliable suppliers, or highly variable demand should remain under conventional inventory management.
Develop supplier relationships. JIT requires your suppliers to deliver more frequently, in smaller quantities, on tighter schedules. This requires an investment in supplier relationship management -- shared forecasting, performance measurement, and in some cases technical assistance to improve supplier reliability.
Implement pull signals. A JIT system is triggered by consumption -- when inventory reaches a reorder point, a pull signal (a kanban card, an electronic trigger, or an EDI order) is sent to the supplier. Implement and test pull signals before removing buffer inventory.
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