The just-in-time (JIT) manufacturing process is a method for inventory management that involves working closely with suppliers to reduce inventory by accepting continuous stock. For manufacturers, speed to market and the cost of production are what makes or breaks profits. With JIT, businesses can reduce flow times within their production systems and free up cash that would have been previously tied to inventory on the shelf (also known as safety stock). And with greater cash flow, businesses have the leeway to invest in value-added activities or handle emergencies as they arise. Businesses implement the just-in-time manufacturing process as a strategy for cost-cutting. If implemented correctly, this method can create more value than manufacturing systems that require holding excess stock.
However, when considering just-in-time manufacturing, the question is never should my business or shouldn’t my business dive headfirst into this strategy. Rather, businesses should ask, “how close can our operations come to eliminating safety stock without adding to the level of risk we are taking on?”
To help your business recognize process optimization opportunities, this blog post highlights red flags to look for in your procurement processes and provides guidance to eliminate deadstock, the ultimate cost killer.
Traditional vs. Just-in-Time Manufacturing
To understand how the just-in-time manufacturing process can provide benefits such as saving resources by streamlining production systems and reducing capital tied up in stock, let’s outline the differences between how most businesses operate and how the proposed JIT system works. In a traditional manufacturing setting, your sourcing team will create a forecast based on whatever historical data you can surface and any other trends you see on the horizon.
This leaves room for error, as not all data can be easily surfaced or turned into useable insights. The result is that sourcing teams will order large quantities of supplies. The theory is that savings are a result of ordering large quantities, making for a more advantageous negotiation scenario and improved assembly line production.
As a note, consider that previously manufacturing would be done in large batches resulting in large bottlenecks in the process. Consequently, these gaps in the process can be distilled to:
Longer lead times which we intend to transition into a continuous production stream rather than one “dump” of stock that requires manufacturing
Too much safety stock and therefore, higher carrying costs
For these reasons, traditional manufacturing is often referred to as “just in case” manufacturing, with the intent that through some optimization can be adjusted for a “just in time” model.
The difference is that just-in-time manufacturing requires the ability to surface all the background data to help keep factories and suppliers synchronized in a model that redistributes risk, so it isn’t just on the onus of the purchasing organization. One of the most common methodologies is min/max, which requires sophisticated communications and visibility to ensure stock is maintained in a given range.
Building the Foundation
Reducing inventory involves several steps to ensure that your business is making a value-added decision and executing the plan according to strategy.
First, your team will need to provide the business case for implementing just-in-time manufacturing. This will include calculating the warehousing expenses that your team is currently paying and determining how much those expenses could be reduced. After proving funds are being wasted, you can position a strategy towards JIT as an opportunity to reduce warehouse carrying costs.
The second consideration you will need to make is your technology. Holding less inventory means your team must be able to forecast future demand, fulfil orders quickly, and easily communicate with suppliers when exceptions in the procurement process arise. Without these functions, your team will likely mismanage and fail to deliver on your orders.
Finally, implementing a JIT manufacturing management system will require you to look at your suppliers. If your suppliers are often late delivering products, a certain amount of safety stock will need to be kept on hand. Additionally, the just-in-time manufacturing process often relies on local suppliers to fill needs since shipments can be made and received more quickly, enabling you to remain agile.
After considering your current business landscape, technology and suppliers, your team should have a pretty good basis for implementing a JIT (or close to it) manufacturing system.
Areas of Caution
While the benefits for the just-in-time manufacturing process are many, businesses must also consider the risks, namely:
Unforeseen circumstances and other disruptions in the supply chain, which may halt or stall production. Disruptions relating to an act of God, such as a worldwide pandemic, cannot be foretold and may be more difficult to adapt to.
Forecasts must be foolproof. Otherwise, shortages or overages may cost your business when quick decisions must be made instead of strategic ones.
In strategies such as min/max, visibility becomes crucial in ensuring proper levels are maintained and emergency orders are executed when necessary.
Commodity costs must be relatively consistent. Otherwise, profit margins will also be subject to fluctuation.
Although these risks are worth consideration, they shouldn’t be a deterrent. Consider that making a move to JIT manufacturing likely means your business has already achieved a certain level of efficiency, is working in a good rhythm and has at least some of the visibilities necessary to achieve the benefits of this model.
Focus Areas for JIT Manufacturing
Mitigation comes into play with leaner operations. Leaner operations are needed for just-in-time manufacturing since there is little to no room for error. Although a lack of preparedness now becomes a greater risk, maintaining careful attention to detail and greater transparency can ensure the process occurs smoothly.
A couple of key areas that your team should focus on are:
Sourcing higher quality products: Higher quality products will result in fewer defects, meaning fewer returns and greater consistency in order fulfilment.
Load consistency: Levelling out orders so they are received in a stable, even schedule can help businesses become less reliant on large, critical orders that, if delayed, can greatly impact production.
Employee support: Your team members must all be dedicated to the goals of a just-in-time system for it to be successful. If not, quality may suffer, and objectives might not be met.
Finding a Solution That Works
To reduce safety stock, businesses must first equip their teams with real-time inventory and supplier data to respond to changing market conditions quickly. In practice, this might look like a cohesive dashboard that gives employees access to inventory levels and a portal for two-way communication between buyers and suppliers.
Leveraging an SAP backend, whether on-premise or on cloud, ConvergentIS helps provide this full-service approach starting with an understanding of current business processes through Design Thinking and finishing with the Operational Procurement Portal for Indirect Procurement.
Leveraging the just-in-time manufacturing process is just one optimization opportunity manufacturers can consider. More information on reducing costs can be found by downloading the white paper below.