Inventory Management and Just In Time (JIT)

Introduction

Supply-chain management plays a pivotal role in ensuring goods, and services are delivered on time to customers. Within supply-chain management, inventory management plays a central role. Inventory involves various cost, investment, space management, etc. Also there are chances that stored inventory may get damaged or get stolen adding to extra cost to the company. Therefore, it is important to have a robust inventory management for an organization.

Inventory Holding

For an organization, it becomes important to hold inventory for the following reason:

  • Inventory holding ensures that operation delay do not impact delivery to customers.
  • It also ensures that company can meet spikes or fluctuation in product demand.
  • It ensures that there is flexibility in production.
  • It ensures that any delay by suppliers do not affect working of the company.

Considering the above inventory holding objectives, next step for the company is to make inventory related decision. Inventory decision involves two major considerations, first is the order quantity of the raw material and second is timing for placing those orders.

Inventory Models

Inventory management is based upon two basic models i.e independent demand inventory model and dependent demand inventory model.

  • Independent Demand Inventory Model talks about raw material demand which is dependent upon prevailing market conditions and is not correlated to any raw material currently used by the organization. Finished goods is an appropriate example for independent demand inventory model.
  • Dependent Demand Inventory Model talks about raw material demand which are integral parts of production and form important part of material resource planning. For example, demand for raw material can be established as the basis of demand of finished products.

Inventory Costs

There are three broad categories of cost associated with inventory; holding cost, ordering cost and set up cost.

  • Holding costs are carrying cost associated with inventory over a period of time. They include insurance, warehousing, interest, extra head-count, etc.
  • Ordering costs are cost associated with purchasing of raw material and receiving raw materials. They include forms, order processing, office maintenance supplies and staff associated with ordering.
  • Set Up Cost are cost associated with installation of machine for production. They include clean- up cost, re-tooling cost and adjustment cost.

Inventory management ensures that organizations are able to minimize cost and maximize profit.

Just In Time (JIT)

Just In Time is set of strategic activities, which are formulated to achieve maximum production with minimal maintenance of inventory. JIT as philosophy is applicable to various types of organization but on implement side it is more relevant with manufacturing operations.

For JIT system to be successful, there are two critical elements, attitude of workers/management and practice.

Fundamentals of JIT

JIT is based on the following fundamentals:

  • JIT manufacturing and ordering
  • Elimination of waste
  • Lean management
  • Signal System (Kanban)
  • Push-Pull System

With the above fundamentals in place, JIT delivers the following:

  • Continuous improvement of production and order processing.
  • Elimination of non-value added activities and procedures.
  • Simplification and advancement of the existing systems.
  • Creation of safety environment and ensuring total quality management.
  • Creation crossed skilled workers.


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