Just-in-Time inventory is a supply chain, production and distribution strategy which aims to reduce inventory and related carrying costs. By reducing inventory, a company can increase its inventory turnover. It also reduces the amount of assets the company has tied up in inventory, ultimately improving a company's return on assets. Just-in-time requires three importent components: inventory pull system, level production and quality management.
Inventory pull system: Just-in-time uses signals, known as "kanban," between different stages in the production process. The signal lets earlier stages know when new inventory is needed, and can be as simple as a missing part on the shelf. These signals are used by stages in the production process to "pull" inventory from earlier stages when needed.
Level production: Because of the inventory pull system, there is not a stockpile of inventory at different phases of the production process to be used. It is therefore important that intermediate stages of the production process are able to produce parts efficiently and at a consistent rate so that later stages of the production process can rely on parts being available when needed and can work at a consistent rate as well. As a result, parts become available along the production line "just-in-time." Extra inventory does not build up along the production line nor do shortages cause delays in production.
Quality management: Because Toyota uses JIT inventory on its production line, there are no extra parts to use if one part has a defect. As a result, in order to keep the assembly line moving, quality assurance became a key concern for inventory.
Just-in-time focuses on having the right amount of inputs at the right time without using inventory as a cushion. In Japan, the most successful case study on the implementation of JIT is in the Toyota Production System. Toyota's factory response time dropped to approximately a day. As a result, Toyota was able to make vehicles based on changing demand in several days, without the risk they would not be sold. Customers who wanted made-to-order cars could be accommodated more efficiently and at a lower cost.
Because JIT and quality management go hand-in-hand, JIT helps contribute to an overall lean manufacturing strategy. In Japan, where JIT was born, several problems have been identified with the strategy. For one, companies that employ JIT may, in effect, be storing inventory with suppliers (who often charge JIT customers a premium). Similarly, in Japan, the large amount of traffic created by frequent deliveries for JIT manufacturing led to highway gridlock among other problems. As a result, since the 1980s some Japanese companies that previously adopted JIT have moved back to having more traditional inventory.