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JIT & Kanban: Systems of Inventory Management

Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and is currently working on his PhD in Higher Education Administration.

Inventory management is critical for companies that sell goods and products. Too little and they lose sales, yet too much can be wasteful and tie up capital. In this lesson, we'll talk about two popular systems to help optimize inventory levels.

The Importance of Inventory Management

Inventory is all the physical material a production facility has in stock at any given time. This includes finished goods, raw materials, and work-in-progress. It's important to have on hand because if there isn't enough raw materials to use in the production process, or enough finished goods to ship to buyers, the company can be losing money.

On the other hand, if there is too much inventory, the company has raw materials and finished goods in storage, taking up space, and since the company had to pay for that material, it sits on their financial statements as inventory, not cash. For these reasons, inventory management, or the process of ensuring the right balance between too much and too little inventory, is a critical part of a company managing its assets.

Just-In-Time Inventory System

During the 1960s and 1970s, Japanese automakers, especially Toyota, with the help of American researcher W. Edwards Deming, started developing new strategies and processes to improve production. One of the things they noted was that if a production process could minimize the amount of inventory they had, it would save space and money. So, work began to develop methods of tracking and forecasting when certain parts and inventory would be needed, so that it was ordered in smaller orders and stocked as the production process required it, not as the vendor was able to supply it. This process became known as just-in-time (JIT) inventory management. As other companies learned this concept, it took some practice to make it effective; one risk of JIT is having a stock out, or running out of a product or material.

While the goal of JIT is to minimize the amount of inventory a company has to store and hold, that means that if they don't forecast demand correctly, they may not have product when the customers are ready to buy, or it may freeze the production line. That costs money as customers will go elsewhere to buy their products. Successful JIT inventory management requires accurate and timely forecasting.

Kanban Inventory System

Kanban is a type of just-in-time inventory management, as it applies to a production process. Kanban is Japanese for ''card'' or ''visual signal.'' When a certain stage in the production process is ready for more work-in-progress, all based on customer demand, then it's shown with their Kanban card, or Kanban table, and the work-in-progress is passed along to them.

In this sense, Kanban is an inventory system that ''pulls'' the inventory through the system, unlike a traditional assembly line that ''pushes'' inventory though the system. When inventory is pushed through the system, it can be inefficient and wasteful. Work-in-progress can get held up at points of constraints, where work-in-progress sits and waits because of a slow step in the process. Then, once it does make its way through, production levels vary, so companies find themselves back in the dilemma of having too much inventory on hand.

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