Cin7 Team
27 Mar 2020
Just In Time (JIT) is one of the most revolutionary instances in industrial history after the advent of mass production. It revolves around optimizing existing processes and retaining only the value-adding factors. Most of the folks find it as a cost-cutting measure. Well, there is a lot more to it. In this article, we are going to decode the history, technicalities, pros, and cons of this industrial marvel. At the end of the article, I also expect that our readers will be able to decide whether to implement it in their firms or not—dive in deeper to explore more.
In the post WW2 era, Japanese industries were struggling with grave problems. They were short of real estate for their production facilities and warehouses.
On the contrary, inadequate monetary funds made it nearly impossible to function like their western counterparts. They were not in shape to invest vast sums of money in the inventory or sustain long cash cycles. Also employing huge workforces and using conventional production processes was not economically feasible.
A significant breakthrough in solving this existential crisis came from Toyota. Taiichi Ohno is regarded as the father of the TPS (Toyota Production System.) It relies on cutting down redundancies and maximizing ‘value’. TPS revolves around four major parts: agility, flexibility, reliability and efficient utilization.
As per the principles of JIT, the production is started only after receiving the order. This is followed by procurement, instant production, and immediate dispatch to the customer location. All activities are undertaken precisely as required, and no process shall commence before the prerequisite is satisfied.
The automobile giant eliminated the need for capital large investment and cash money pools by optimizing every process involved in the business. All of these changes revolve around supply chain management.
This heavily influenced all mass production driven companies, including its then-contemporary competitors like Ford. Currently, significant businesses like Apple, Zara, McDonald’s, and Harley Davidson are among-st the top companies implementing it. E-commerce companies rely heavily on the method to fulfil the same day and next day deliveries, making it a global phenomenon.
Conventionally, the companies procure their raw materials before the sales cycle starts. These goods are stored at on-site warehouses for the production process. Upon completion, they were transported back to the warehouses for distribution. On the other hand, the sales cycle starts, and the company shall receive orders from the clients. This is followed by the distribution and product return cycle if the client finds the product not damaged/not useful. Therefore, the company will invest in anticipation and rely heavily on its capital strength before any profits materialize.
On the other hand, the JIT supply chain management system works in the reverse chronological order. The production starts only when the order is received from the customer. The company will not hold any inventory of the raw materials and start production only after receiving orders. For instance, if the production is to begin at 12:00 PM, the raw materials will arrive just before the due time. That is around 10:30 to 11:30 AM. As a result, the warehouse is occupied only for a brief period. Once the production is completed, finished products are directly shipped to the customer without keeping them in storage areas for long.
Whenever any commercial entity is considered, we employ specific finance metrics to understand their health and profitability. These metrics give us an idea about how well the company is utilizing its assets and fetching profits from the investments. I am listing down some of the vital finance metrics below:
Return On Total Assets (ROTA) is the measure of a company’s asset utilization. It is calculated by dividing the earnings before interests and taxes (EBIT) by total net assets. Hence, keeping the net assets will result in a higher resultant figure in this case. In simple words, it is the percentage return generated against unit investment. 45% returns mean that the firm booked a profit of 45 bucks per 100 bucks invested.
The Cost Of Goods Sold includes direct costs of materials and labour used to generate finished products. When the COGS is deducted from the sales revenue, it reveals the operational efficiency of the business. It also gives us an idea about the bottom line since COGS is considered as a business expense. Mathematically, it is equal to the starting inventory + purchases during the production cycle – closing inventory.
It displays the efficiency of a company in generating income from its assets. Its mathematical expression is given by A/((B+C)/2) where, A = total sales, B = starting assets, and C = ending assets. Higher figures indicate better utilization and vice versa. As we can see in the expression mentioned above, one needs to consider the purchase and sales of assets before deriving any conclusion. Hence, referring to YOY asset turnover ratio is a better option.
It is evident that the conventional methodology is far more inefficient when compared to lean manufacturing due to the large investments involved. The latter can achieve the same profits without consuming capital on a large scale as its older counterpart. In layman terms, these indicators can help us understand the need for replacing old systems:
There are some fundamental changes to the supply chain management which every organization undergoes during JIT implementation. They are listed down below:
The older methods focus heavily on creating value out of substantial capital holdings. However, lean techniques emphasize higher turnovers to compensate for lesser investments. The following objectives curate the adoption process in all organizations:
Here are some of the universally accepted features that explain its relevance as a broader optimization philosophy:
Most of the firms do not employ the principles of lean manufacturing and thus make enormous losses without even recognizing them. However, the benefits of using this method are not limited to savings. Some of the most significant areas where companies can gain tremendous advantages are as follows:
When asked about his Model Y ambitions of spinning out million cars a year, Elon Musk had the following words for his take on Just In Time:
“I’m hopeful that people think that if we can send a Roadster to the asteroid belt, we could probably solve Model 3 production.” –Forbes
Transitioning to such fast-paced systems will cause considerable changes for any organization. They are on both the strategic and operational level. It is necessary to train the staff members for coping up with the speed and quality mark. I am listing down some of the most common areas which are equally applicable to the businesses of all nature. They include:
Some of them include:
Very few firms in the market understand and acknowledge supply chain management as a business process. It has a direct impact on your product circulation in the market, and hence you should make it flexible enough to contain any changes in the demand. The degree of responsiveness is a function of the overall outlook of the organization and the tools used. I am listing down some of the essential tools and operational changes below:
If you are not using an electronic data interchange (EDI) system, install one right away. The use of RFID and SKU-UPC barcodes in your inventory and POS software solutions pave the way for achieving higher efficiency. As the entire inventory is virtually flowing in JIT, you will require a computerized system to keep track of the operations. The stock is tracked digitally instead of relying on manual counting audits. This is because our intention is to prevent ourselves from holding any safety or buffer stock.
The other essential measure is to raise your quality control and assurance standards for suppliers, manufacturing, and distribution network. As we discussed earlier, the mishap on any level downplays the entire cycle. Consider the reliability of the supplier also because shortcomings on their parts can also derail your production process as a whole. Look for suppliers who can deliver the products under short lead times. You should also strive to make provisions for the components used in multiple products to prevent any bottlenecks.
Many times, we might trade in huge volumes but don’t reap as many profits as we should. One of the probable reasons behind this is not tracing profitability per client. You might end up spending too much and earn a negligible profit despite serving a client. Lean methodologies help exceptionally well in such cases for keeping your balance sheets healthy. The following quote is one of my favourites in this context:
“Don’t get sidetracked stomping on ants when you have elephants to feed.”
–Peter Turla.
Now, coming to the strategic portion, you will need efficient and reliable inputs for sales forecasting. Predictability is at the core of its successful implementation but, lack of trust can dilute the functioning of lean techniques. Exchanging vital information remains a challenge for all the stakeholders, and thus, a technological mediation backed by a legal pact becomes essential. One of the smart ways of dealing with this problem is to store unfinished goods at the supplier’s warehouses. When that isn’t possible, you can go for shared warehouses to cut down the expenses.
Make strategic tie-ups with vendors and logistics firms to boost your ability to ship products and services on-demand. With the help of advanced solutions available in the market, you can integrate supplier and customer data from POS and purchase software. As far as the logistics partners are concerned, try to keep the warehouses near the distribution centres. While all of these matters are bound to receive your attention, don’t forget the reverse logistics. Speeding up the entire process is imperative to your success, but remember that slower transportation is always cheaper. So, keep the collection of returned goods fast, but opt for slower reverse logistics. Also, I recommend collecting insights regarding the return. In case of damage, you can send it back to the central facility for repairs. But, when customers simply return your articles due to change of mind, get them back into delivery through cross-docking if possible.
Any change in the operating model will demand extensive training of human resources. Building general guidelines to enforce continuous improvement and cutting down non-productivity form the core of this philosophy. Almost all of the companies who successfully executed JIT have one thing in common- they took their staff into confidence and included them in the problem-solving. All of these measures will play a pivotal role in defining your success.
As a rule of thumb, any of the participating entities need to run on their fullest capacity without any interruption. All of them can potentially cause disruptions in the entire ecosystem formed of suppliers, manufacturers, logistics and clientele.
These factors indicate the need for a dedicated solution that is integrated to a large cluster of modules ranging from CRM to accounting software and every vital business process in general. Sectors dealing with time-sensitive delivery schedules need to ensure seamless functioning as a primary function.
If the answer of some of the below-mentioned questions is a yes, then it’s high time to consider Just In Time method for reviving your profitability and sustaining market competition.
Consumerization has driven enormous changes in the economy and businesses will need to adopt competitive techniques to stay profitable. In the current market scenario, companies cannot push selling prices beyond a particular limit. Hence, the focus will rely on looking inwards to cut all costs that don’t contribute to the end value. Thus, Just In Time is one of the most promising and time tested business philosophies, which will gain more extensive attention in the days to come.
Appreciations