I noticed that a number of visitors are inquiring about Just-in-Time and Min-Max supply chain strategies, the difference between the two, and the pros and cons of each. So, aside from the posts already on the site, I decided to sum up the benefits with a quick description of each and then define the benefits and drawbacks of both in point form. If any reader needs further information, they can simply read the attached article at the bottom of this post, or contact me directly.
What is Just-in-Time?
The basic premise of Just-in-Time (JIT) is to lower the monthly holding costs of inventory by making sure that a company only takes in what it is guaranteed to use and sell. This ensures that what a company takes into its warehouse is used up and gone at the end of the month. Therefore, with Just-in-Time, the idea is to minimize inventory counts, thereby minimizing the company's costs of capital. So how does this strategy reduce a company's costs of capital? In order to answer this question, consider the following scenario.
In most business-to-business markets, invoices must be paid within 30 days. If your company purchases product from a supplier, you have 30 days to pay that invoice. If you then take that product and sell it to one of your own customers, you will be paid in 30 days as well.
So, the idea goes that if you only purchase from your suppliers what you know you will use or ship to your own customers, then you’ll pay your own invoice from your supplier, and get paid from your customer, around the same time. In this case, you are matching your payables to your receivables.
Conclusion For JIT
The types of companies that run this supply chain strategy, or as some call it “push-pull inventory”, include the automotive industry or companies like Dell Computer. In a number of cases, they set up a production or manufacturing facility and have most of their suppliers in close proximity to their location in order to deliver parts within the hour, or same day. While there are lower month-to-month holding costs, this can also be offset by the costs of urgent shipments when product is unavailable or a stock-out is encountered. Companies that successfully run this supply chain strategy typically have huge purchasing volumes spread across a small product line. They have consistent demand for their products and large economies of scale.
To learn about the costs of holding inventory in JIT supply chains, please go to: What Are the Costs to Hold Inventory in Just In Time - JIT?
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What is Min-Max?
The opposite of Just-in-Time is a Min-Max system of inventory management. Like the name implies, it is based on keeping a minimum amount and a maximum amount of inventory. Somewhere in between the min and max values is the ideal area. The benefit of the this approach is that stock-outs are not as frequent as with JIT. It guarantees that you’ll have inventory when needed, and it is great for businesses with cyclical demand – you know you’ll get order, but exactly when is up for debate.
So, if you know you’ll get some orders for a product every quarter (3 months), but aren’t sure which month it will fall under, then Min-Max is your inventory of choice. In addition, this strategy allows you to capture opportunistic sales by employing a safety stock in inventory. This protects against material shortages and ensures your company never misses out on sales.
To learn about the costs of holding inventory in Min-Max supply chains, please go to: What are the Costs of Holding Inventory in Min-Max Supply Chains?
Companies that have cyclical and infrequent demand should not be running a Just-in-Time system. A number of companies choose to run JIT, when they are much better served running a Min-Max approach. There are several benefits to running Min-Max that make it a far easier system to manage.
While the costs of inventory can be higher, as you hold inventory longer, you can lower the per-unit cost of freight coming into your warehouse with bulk shipments. The per-unit freight of incoming parts is a big cost of inventory. If anyone needs to read more, here is the link to the other article, "JIT Versus Min-Max Inventory Management Practices"
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