Just-in-time manufacturing principles and applications

¶ … Accounting

The just-in-time inventory model has become popular in both retail and manufacturing situations in recent years, because it has many advantages that appeal to companies, and because technological innovation has made this system easier to implement. The just-in-time (JIT) system involves receiving goods only when they are needed, in order to avoid a buildup of inventory (Investopedia, 2014). The traditional inventory method was to have a buffer of inventory. This provided security for managers, knowing that they would not have outages (in retail) or downtime (in manufacturing). The buffer approach to inventory, however, comes with high costs that are associated with carries this inventory -- in particular warehouses, additional staff and the risk that the inventory becomes obsolete (MindTools, 2014). This paper will examine the just-in-time inventory concept, and the case study of Wal-Mart, one of the earliest proponents of JIT, will be used.

Just in Time

A just-in-time inventory system seeks to control workflow by ensuring that materials arrive right when they are needed. To implement this system, companies need to anticipate demand, and they need to have close relationships with their suppliers. In many cases, the supplier should be nearby -- it is much harder to implement JIT when your suppliers are overseas. Companies that rely on overseas suppliers, like Wal-Mart, implement JIT more at the retail level, but they also benefit from having a substantial sales volume, so that containers can arrive with a high level of frequency. Smaller companies cannot do this with overseas suppliers.

The just-in-time system therefore makes heavy use of information systems. It is relatively easy to anticipate demand in a manufacturing organization with static demand -- you can do this pretty easily with Snickers bars or Coca-Cola. It is much more difficult when you are running a retail operation with 20,000 SKUs. For such companies, there is tremendous benefit to working with large data sets, as these can provide reasonably accurate demand projections. Working with the demand projections and with suppliers, the company can then take delivery when needed. A company that is running a successful JIT system will have only a few days' inventory on hand, and will therefore have a very high inventory turnover ratio.

Modern technology has made the implementation of JIT much easier. Not only do "big data" applications have the ability to process massive volumes of information to deliver more accurate demand forecasts, but RFID technology has been employed to help companies track their inventory throughout their system. Wal-Mart uses RFID technology to track goods throughout its supply chain, which allows the company to execute its JIT system with an even higher level of accuracy than ever before, redeploying goods to wherever they are needed within the system (Millsap, 2012).

There are a number of advantages to running a just in time inventory system. These systems allow companies to minimize inventory, which reduces overall operating costs and it also helps the company to operate a lower footprint, something that improves the company's sustainability measures. Further, with retailers in particular having less inventory means less risk of having inventory that has to be deeply discounted. The JIT system also allows organizations to be more flexible to operational challenges like a buildup in inventory -- orders can be halted quickly in response to this, something Wal-Mart has done from time to time in response to variable demand conditions (Dudley, 2013).

Wal-Mart

Wal-Mart is a leader in supply chain management, and has pioneered a number of techniques with respect to just-in-time inventory management. The company has a massive amount of data from which to derive demand projections. More important, the company has an inventory management system that allows store managers to understand to the minute how much inventory of an item that they have in store. When these two things are put together, the manager can see immediately that new supplies need to be ordered. In many cases, this process, including the ordering is entirely automated.

The company also strives to constantly improve its inventory management system. In the mid-2000s, in response to challenges finding goods in inventory at the store level and having less than perfect information for managers to make their decisions, the company responded with better RFID in order to track individual items in the store. This made it easier to locate goods in the back room, and allows for managers to have better inventory control. Managers can also know if a good is in the nearby feeder warehouse, at the port in Los Angeles or on a container coming from China. This power allows for much better decision making that would normally be possible without such systems.

Wal-Mart has also implemented things like cross-docking as part of its just-in-time inventory system. The company has many warehouses around the country, and when these warehouses take delivery of goods, in many cases they already know where those goods are going. So they organize with the shippers to deliver at specific times, and then move the goods directly to another truck with almost no time at the warehouse at all. The entire process is highly streamlined, so that goods can get from port to a store to the customer in a very short period of time. This allows Wal-Mart to reduce its cash conversion cycle, delivering higher returns.

The use of JIT at Wal-Mart also supports the company's merchandising efforts. Now that the company can all but automated its ordering processes, Wal-Mart is capable of having the right inventory on hand at the right time. So the company will know that when there is prediction of a snowstorm, it will have extra snow blowers and shovels for sale, and it can arrange this on just a few days' notice. The managers are able to override the system in such situations in order to make the system more responsive.