| For companies looking to decide which inventory is | | | | to make JIT work. The best example of this is an |
| best suited to their needs, there are two methods that | | | | automotive company like Honda. They have a few car |
| immediately come to mind; JIT (Just in Time) and Min | | | | models, but extremely large volume across those |
| Max inventory management. The problem occurs | | | | models. |
| when companies decide to manage their inventory | | | | Infrequent & Cyclical Demand: JIT requires |
| based on what they've seen work elsewhere, instead | | | | constant and linear demand for products. Infrequent |
| of matching their approach to their company's business | | | | demand means infrequent volume and a lack of |
| model, and the customers and market they service. | | | | purchasing power. |
| Instead of running the right inventory approach, they | | | | High Freight Costs at Times: If inventory is not |
| run something they believe will work, but ultimately | | | | available, or if that shipment is wrong or defective, then |
| won't. So, given these two options, what should | | | | the company must rush parts into their warehouse, |
| companies choose and why? | | | | receive it, and then ship out again, often at huge costs. |
| The Conditions for JIT | | | | The Conditions for Min/Max |
| For those companies who have large purchasing | | | | The above points pretty much sum up the reasoning |
| volumes of raw materials and parts, and who have | | | | behind why a company might want to run Min/Max. |
| constant, high volume demand for their products, then | | | | Contrary to JIT, Min/Max is based on a minimum and |
| JIT is often the inventory method of choice. Just in | | | | maximum amount of inventory, hence the term Min |
| Time inventory management is based on the | | | | Max. While not as dynamic as JIT, there are fewer |
| assumption that a company can reduce its inventory | | | | problems with defective parts or materials, as |
| costs by ordering only what's needed, when needed. | | | | companies maintain a safety stock. In addition, |
| By managing inventory this way, the company has | | | | companies that run Min/Max often don't have those |
| less inventory remaining at the end of the month, | | | | high freight costs for urgent shipments when there's a |
| because it makes sure to use most of what it takes in. | | | | stock out or late shipment. Min/Max is perfect for |
| Now, some companies that run JIT, can get raw | | | | companies with infrequent and cyclical demand, as |
| materials and parts in one day, and immediately ship | | | | they know they'll get an order, but aren't exactly sure |
| that finished product in the same day. The benefit of | | | | when. Having the inventory ready at a moments |
| this approach is that a company gets paid from its | | | | notice, allows them to service customers immediately. |
| own customers, right around the time it must pay its | | | | In addition, companies can often lower their per unit |
| own invoices. For example, the company orders parts | | | | freight costs and purchase prices, by buying and |
| and materials, receives an invoice, ships out a finished | | | | shipping in bulk. However, like JIT, there are some |
| product the same day, and invoices its own | | | | issues with Min/Max and they are summarized below. |
| customers. Sounds great doesn't it? Well it can be, but | | | | High Inventory Holding Costs: Because inventory |
| there are some inherent drawbacks, and they are | | | | must be available at a moment's notice, the month to |
| listed below. | | | | month holding costs are higher. |
| Defective Product or Delivery Delays: Any poor | | | | Higher Incidence of Damage: Inventory that |
| quality product or delivery delays are huge costs to | | | | remains for extended periods of time runs the risk of |
| JIT, because the company likely doesn't have any | | | | being damaged. |
| safety stock available. Try explaining that to an upset | | | | Higher Incidence of Outdated Inventory: Much like |
| customer! | | | | the point above, holding inventory for longer periods |
| Lack of Purchasing Power: Small companies that | | | | means that inventory could quickly become obsolete |
| lack the volumes in purchasing shouldn't run JIT. | | | | and outdated. |
| Companies that adopt JIT must be able to be the | | | | In the end, deciding which inventory system to run |
| number one priority in their supplier's eyes. You can't | | | | should really be based on the company's business |
| be screaming for product and have nobody listen to | | | | model, its customer's ordering patterns, and the market |
| you. | | | | it services. Match inventory approach to customer |
| Too Many Different Product Lines: Companies that | | | | demand. There are benefits and drawbacks to both |
| have small volumes spread across a large product | | | | approaches, but never assume that what works for |
| portfolio, don't have the necessary individual volumes | | | | another company, should work for yours. |