Ecommerce has emerged as the one true leveler of the playing field of our times. Companies today are increasingly investing in techniques that can help them outsmart their competition. Inventory management is one such key area that has transformed over the past decades for the better.
Companies that can cut down on their inventory costs have a significant edge over the other players, which is why we’re witnessing revolutionary inventory management methods being developed around the world.
“Just In Time” (JIT) is one such highly effective inventory management technique that originated in post-WW2 Japan but has been implemented worldwide and has shown exemplary results.
Just In Time (JIT) inventory management refers to an inventory management technique that focuses on cutting down the inventory by procuring raw materials after receiving the sales order. This way, the companies can reduce their inventory costs by only storing the bare minimum raw materials required for production. JIT is in direct contrast with the Just In Case strategy, where companies beef up their inventory to tackle any increase in sales.
Also known as the Toyota Production System, the JIT was first adopted by the visionary founder of the Toyota Motor Company, Mr. Kiichiro Toyoda. The story of how he stumbled upon the idea is almost serendipitous. Once, during his visit to the United Kingdom, Mr. Toyoda missed his train. Although the train was on time, he was slightly late and hence missed it by a few minutes.
This got him thinking about the parallels between this incident and material procurement & production. He thought- if the material arrives late, it causes unfortunate delays in production and losses, but if the material arrives earlier than required, it causes unnecessary inventory costs. Hence, the material must arrive just in time. However, since Mr. Toyoda wasn’t a native English speaker, the concept was inscribed with a grammatical error and became the “Just In Time” system in 1936.
However, Toyota would not go on to implement this system until the 1970s. Japan was still reeling from the aftermath of WW2. Due to the lack of real estate spaces in the country, companies found it challenging to expand their inventories by setting up warehouses.
Another fallout of the world war was that it left the country’s economy in a mess. So even though the Japanese had the technical prowess to build brilliant engineering products but lacked the necessary funding, something that the western manufacturers didn’t have to face. To overcome this two-fold challenge, a Toyota employee named Taiichi Ohno came up with a bold yet brilliant action plan.
As the world witnessed the stellar success of JIT shown by Toyota, more companies were interested in adopting the model for managing their inventories. The word “JIT” started regularly occurring in popular literature across multiple languages. The spike on the Ngram below shows the sudden rise in JIT’s popularity around the world after the successful implementation in Japan.
Today, apart from Toyota, many other famous companies like Apple & McDonald’s have adopted some or the other variant of JIT as their guiding principle when it comes to inventory management.
A crucial part of JIT’s charm is that it completely revolutionized the traditional supply chain systems. Conventional inventory management talks of procuring the raw materials in advance by predicting the sales and producing the finished goods to meet the demand.
Companies place the order for the raw materials well before they receive the sales order for the product. The raw materials are then stored in the warehouse or the godown, from where they’re taken to the production site. The finished goods are then again moved to the warehouse to build up an inventory, after which the marketing & the sales cycle begins.
However, with JIT, the procurement process begins once the sales order is received. This way, the company only produces the goods that have already been paid for, or at least have been ordered. This way, the raw materials are only procured just before the beginning of the production cycle. The cascading helps cut down the inventory and makes JIT a truly innovative approach, albeit a highly risky one.
In the year 1997, a fire broke out in the factory of Aisin Seiki, a company in Japan that supplied an essential automobile component called “proportioning valves” (or P-valves) to none other than Toyota motors. This incident was the first major event that put the much acclaimed JIT technique to test. Toyota’s JIT allowed them only two to three days of inventory, while the fire at Aisin Seiki was so bad that it had crippled their production capacity for the next few months.
Through this incident, the world witnessed one of the biggest downsides of running a lean inventory. The airtight cascading of different cycles allow for a very little margin of error for companies in case of such unforeseen events. Luckily, Toyota managed to get their production back on its feet, thanks to the vast network of suppliers with whom they had great relationships. This shows how crucial it is to have a diverse network of suppliers if you want to keep your production running in the face of such adversities.
A few other risks associated with Just In Time are:
Theoretically, the Just In Time inventory management system is one of the best things that have happened to manufacturing since the industrial revolution. However, like with everything else, the proof of this pudding lies in the eating. The implementation of JIT is trickier than it comes across as, mostly because it involves letting go of the conventional systems completely. Implement it well, protect the downside by mitigating the risks, and you will see stellar results.