the impact of adopting a JIT approach on a business

4.2 Inventory Management – Just‑in‑Time (JIT)

Learning objective

Understand how adopting a Just‑in‑Time (JIT) approach affects a business’s costs, operations and overall performance, and be able to compare JIT with Just‑in‑Case (JIC) in line with the Cambridge 9609 (AS) syllabus.

1. Why inventory is kept

• To smooth production: buffers allow a factory to keep working when a supplier delivery is late or a machine breaks down.
• To protect against demand variability: safety stock prevents lost sales when actual demand exceeds the forecast.
• To take advantage of economies of scale: buying in larger batches can reduce unit purchase costs.
• To meet contractual or regulatory requirements: some customers or laws require a minimum stock level.

2. Types of inventory (Cambridge 4.2.1)

• Raw materials – purchased from suppliers before production begins.
• Work‑in‑Progress (WIP) – partially completed items waiting for the next operation.
• Finished goods – completed products ready for sale or dispatch.

3. What is JIT?

JIT is an inventory‑management philosophy that seeks to keep stock levels as low as possible by receiving materials only when they are needed in the production process. The aim is to eliminate waste, reduce holding costs and increase responsiveness to market demand.

4. Key principles of JIT

• Produce only what is required, when it is required.
• Maintain very low inventory levels (minimal buffers).
• Develop strong, reliable relationships with suppliers.
• Apply continuous improvement (Kaizen) to eliminate waste.
• Use accurate demand forecasting and flexible production systems.

5. Buffers, re‑order level and lead‑time in a JIT system

Buffer (safety) stock is the extra inventory kept to protect against uncertainties in demand or supply. In a pure JIT system the buffer is deliberately kept very small – often effectively zero – because:

• Supplier deliveries are synchronised with the production schedule.
• Accurate forecasting and short lead‑times reduce the need for safety stock.

Re‑order level (ROL) is the stock quantity that triggers a new order. Under JIT the ROL is calculated so that the order arrives just before the existing stock is exhausted:

\[ \text{ROL}= \text{Average daily usage}\times \text{Lead‑time (days)} \]

Lead‑time is the time between placing an order with a supplier and receiving the goods. JIT aims to minimise lead‑time through:

• Geographic proximity to suppliers.
• Standardised ordering procedures.
• Reliable transport and information systems.

5.1 Interpreting a simple inventory‑control chart

6. JIT vs Just‑in‑Case (JIC)

Aspect	Just‑in‑Time (JIT)	Just‑in‑Case (JIC)
Purpose of inventory	Minimise stock to cut holding costs.	Maintain safety stock to guard against disruptions.
Typical buffer level	Very low or zero.	Significant safety stock (often 10‑30 % of forecast demand).
Vulnerability	High – depends on reliable suppliers & short lead‑times.	Lower – can absorb supply shocks.
Cost focus	Reduce carrying costs, improve cash flow.	Reduce stock‑out costs and lost sales.
Typical use	High‑volume, predictable‑demand environments (e.g., automotive).	Industries with unpredictable demand or long, variable lead‑times (e.g., aerospace, pharmaceuticals).

Many firms adopt a hybrid approach – using JIT for core, fast‑moving items while keeping a limited JIC buffer for critical components.

7. Financial impacts of adopting JIT

• Reduced carrying costs – lower storage, insurance and capital tied up in stock.
• Reduced waste – fewer obsolete or damaged items.
• Improved cash flow – cash is released from inventory to other uses.
• Potential cost increases – more frequent deliveries, possible premium freight or supplier charges.

7.1 Quantitative illustration

Carrying‑cost savings

\[ S_{\text{carry}} = c \times (I_T - I_J) \] where \(c\) = annual carrying‑cost rate, \(I_T\) = average inventory under a traditional system, \(I_J\) = average inventory under JIT.

Example:

• \(c = 0.20\) (20 % of inventory value)
• \(I_T = 10{,}000\) units
• \(I_J = 2{,}000\) units

\[ S_{\text{carry}} = 0.20 \times (10{,}000 - 2{,}000) = 1{,}600 \text{ unit‑equivalent cost} \]

Inventory turnover ratio

\[ \text{Turnover} = \frac{\text{Cost of Goods Sold (COGS)}}{\text{Average inventory}} \] Assume COGS = \$500 000 per year.

• Traditional: \(\text{Turnover}_T = 500{,}000 / 10{,}000 = 50\) turns per year.
• JIT: \(\text{Turnover}_J = 500{,}000 / 2{,}000 = 250\) turns per year.

A higher turnover indicates faster conversion of stock into sales and a stronger cash‑flow position.

Cash‑flow effect

If the unit cost is \$5, the cash released by moving to JIT is: \[ \Delta \text{Cash} = (I_T - I_J) \times \text{Unit cost} = (10{,}000 - 2{,}000) \times 5 = \$40{,}000 \]

8. Operational impacts

• Shorter lead times and faster response to market changes.
• Higher dependence on supplier reliability and transport networks.
• Increased need for accurate demand forecasting and real‑time information systems.
• Greater flexibility in production scheduling.

9. Strategic impacts

• Potential competitive advantage through lower prices or higher quality.
• Increased vulnerability to supply‑chain disruptions (e.g., strikes, natural disasters).
• Requirement for a cultural shift toward continuous improvement (Kaizen).

10. Link to Supply‑Chain Management (SCM)

JIT is an SCM strategy that synchronises supplier deliveries with internal production schedules, creating a “pull” system where each stage only produces what the next stage requests. This reduces the bullwhip effect, shortens overall supply‑chain lead‑time and aligns inventory decisions with customer demand.

11. Comparison of key metrics – Traditional vs. JIT

Metric	Traditional inventory system	JIT system
Average inventory level (units)	High (e.g., 10 000)	Low (e.g., 2 000)
Carrying cost (% of inventory value)	≈ 20 %	≈ 5 %
Stock‑out frequency	Low	Potentially higher – depends on supplier reliability
Order‑processing cost per order	Lower (larger batches)	Higher (more frequent, smaller orders)
Lead time (days)	Longer (buffer stock used)	Shorter (reduced buffers)
Inventory turnover (times/year)	≈ 50	≈ 250

12. Implementation checklist

1. Analyse current inventory levels and identify waste (e.g., excess WIP).
2. Develop reliable supplier contracts with clear, short delivery schedules.
3. Invest in demand‑forecasting software and real‑time data collection (ERP/MRP).
4. Train staff in Kaizen, 5S and other continuous‑improvement techniques.
5. Pilot JIT on a single product line before full rollout.
6. Monitor KPIs: inventory turnover, order‑fill rate, total cost of ownership, cash‑conversion cycle.

13. Potential risks and mitigation strategies

• Supply‑chain disruption: keep backup suppliers and a minimal safety stock for critical components.
• Quality issues: conduct strict quality‑control checks at supplier sites and use incoming inspection.
• Inaccurate forecasts: adopt rolling forecasts, weekly production reviews and adjust orders promptly.
• Employee resistance: communicate benefits, involve staff in improvement projects and recognise contributions.

14. Case study snapshot – Toyota Production System

Toyota pioneered JIT and achieved:

• Inventory turnover increase from 4 to 12 times per year.
• Production lead‑time reduction from 30 days to 5 days.
• Annual cost savings of approximately \$200 million.

15. Summary

Adopting a JIT approach can dramatically lower inventory‑related costs, improve cash flow and give a firm a strategic edge in speed and quality. Success hinges on:

• Very reliable suppliers and short, predictable lead‑times.
• Accurate demand forecasting and real‑time information systems.
• A culture of continuous improvement (Kaizen) and staff involvement.

Businesses must balance the financial benefits against the increased risk of supply‑chain interruptions and should consider a hybrid JIT/JIC strategy where appropriate.