In 1970, Toyota revolutionised its production line by adopting Just in Time (JIT) manufacturing. A novel idea at the time, it challenged many well-established concepts on how inventory should be managed and used in the manufacturing process.
Four main reasons are often cited behind JIT gaining momentum in Japan in the early 60’s and 70’s: shortage of cash for bulk orders, lack of storage space in the country, limited natural resources available for manufacturing, and high unemployment.
By addressing all four constraints, companies like Toyota successfully managed to create robust manufacturing lines that would compete globally in the years to come.
How it works
The concept behind JIT is simple: to have as few inventory items in storage as possible. This way the manufacturer can achieve savings in storage costs and inventory management.
Two different approaches are usually used with JIT. Firstly, orders from suppliers are only placed when the manufacturer receives orders from its clients. For example, aeroplane manufacturers would only order the number of wings needed to complete its latest order from the airline. To continually stock a large number of wings, would be extremely costly and achieve little benefits.
The second approach is when there’s a continuous flow of components to the manufacturing line and the manufacturer only stores enough inventory to last for a few days, or a few hours. This approach is used when there’s a constant demand for the product and accurate estimations can be made on units required each day, month, or year.
Main advantages of JIT are balanced cashflow and reduced inventory management costs. Modern inventory and supply management technologies have perfected this process to minutia.
Virtually all basic manufacturing requires substantial amounts of capital to support its continuous operations and ever-growing complexity in engineering. Having little to no costs for inventory storage, companies can better deploy existing cash resources to target other aspects of their business.
By not having to warehouse many items, manufacturers can also better manage risks such as accidents, fire, or natural disasters that could result in stocks being destroyed and immediately impacting its ability to continue the manufacturing process.
Despite numerous benefits of JIT, it has its drawbacks too. Most manufacturers operate very complex supply chains, where it can take hundreds or sometimes even thousands of suppliers to deliver just in time.
Any disruptions on the supplier side would almost immediately be felt by the manufacturer. It also requires careful vetting of suppliers, as they must be as reliable as possible if a steady flow of parts is be expected.
Sudden increases in demand can slow down the manufacturing process, as suppliers may not be able to match their output to the unexpected demand. The problem can amplify quickly if the supply chain consists of many smaller manufacturers with limited scalability options.
Foreign exchange risks
With continuous flow of components, manufacturers will no longer need or want to make large payments covering long periods. They are more likely to use more frequent intervals of payments (monthly/quarterly vs annually/semi-annually).
Increased frequency in payments may not necessarily match the fluctuations in foreign exchange rates and cost adjustments required by the supplier. For instance, a year’s worth of manufacturing can be planned, and costs agreed on current exchange rate. However, a few months down the line, changing economic circumstances may send a currency’s exchange rate to completely different levels.
In such situations, manufacturers can minimise currency fluctuation risk by using forward contracts. By doing so, manufacturers avoid unnecessary risks and ensure that previously calculated profit margins would remain the same.
Companies involved in low volume, specialised, and expensive product manufacturing may benefit from setting up ‘limit orders’ – an acceptable target rate, where a transaction would automatically be executed upon reaching the target.
It’s not uncommon for product components to cross multiple countries, where different manufacturing plants would add additional pieces to them before they can be shipped to the end manufacturer. Complex supply chains and advanced inventory management introduce unparalleled operational challenges that must be overcome to have a successful implementation of JIT.
Cross border travel of components and multisite manufacturing of components inevitably requires a robust currency strategy that can be deployed during normal times as well as during times of crisis. Supply chains in global, interconnected economies require careful planning and timely execution.
Currency strategy is an important part of any successful manufacturing process using JIT, as it helps to achieve more accurate financial planning and manage the risks related to cross-border money transfers.More Insights