Just-in-Time Manufacturing (JIT)

Just-in-time (JIT) manufacturing is a production method in which each stage receives materials and parts only when it needs them, in the quantity it needs, and makes goods only to meet actual demand. The aim is to keep inventory close to zero, so that money, space and time are not tied up in stock that is waiting to be used. JIT is one of the two pillars of the Toyota Production System, alongside building quality into each step.

JIT is part of the wider philosophy of lean manufacturing and is often contrasted with the large-batch, high-stock approach of mass production. Its opposite is sometimes called "just-in-case" production, in which firms hold buffers against disruption. The balance between the two became a major policy and business question after the supply chain shocks of 2020 to 2022.

Think of a sandwich shop that bakes bread every few hours instead of once a week. It never has stale loaves piling up in the back room, and it does not need a big storeroom. But if the flour delivery is late, it runs out of bread by lunchtime.

JIT works the same way. A factory orders parts so they arrive shortly before they go into the product. That saves money and space and makes mistakes visible fast, because there is no pile of spare parts to hide them. The price is that the factory depends on every supplier and truck arriving on time.

JIT runs on a "pull" signal. Instead of producing to a forecast and pushing goods into storage, each process replaces only what the next process has used. At Toyota the signal was a kanban, a card attached to a container of parts; when the container was emptied, the card went back upstream as an order for exactly that amount. Today the same signals are often electronic.

• Small lots and quick changeovers. Machines are set up to switch between products in minutes, so making small batches is not costly.
• Level production. Output is spread evenly across the day and week, so suppliers see steady orders rather than spikes.
• Close supplier relationships. Suppliers often locate near the plant and deliver several times a day, sometimes straight to the assembly line.
• Quality at the source. With no spare stock, a defect stops the flow, so problems must be fixed at once.

Firms judge how lean their stock is with inventory turnover, which compares the cost of goods sold over a year with the average inventory held:

The number of days' stock on hand is then:

Suppose a factory's cost of goods sold is $120 million a year. If it holds $20 million of stock on average, turnover is 6 and it carries about 61 days of inventory. If JIT cuts average stock to $5 million, turnover rises to 24 and stock covers only about 15 days. The $15 million released is cash the firm no longer has to borrow or tie up, which improves cash flow and frees liquidity for other uses.

JIT lowers storage and handling costs, reduces losses from obsolete or damaged stock and shortens the time from order to delivery. Because there is little buffer, it forces firms to find and fix the causes of breakdowns and defects, which tends to raise productivity over time. Lower inventory also reduces the opportunity cost of money sitting on shelves, a cost that rises when interest rates are high.

At the level of the whole economy, the spread of JIT and better supply chain software is one reason why inventory swings, once a big driver of the business cycle, became smaller in many advanced economies from the 1980s, a period economists call the Great Moderation.

The weakness of JIT is fragility. With little stock, any interruption upstream stops production downstream. Japan's 2011 earthquake and tsunami halted output at carmakers around the world when parts plants were damaged. During the COVID-19 pandemic, factory closures, port congestion and container shortages created a global supply shock; carmakers that had cancelled chip orders in 2020 could not get them back quickly when demand recovered, and many lost production through 2021 and 2022.

Those events pushed many firms toward a mix of JIT and buffers: holding strategic stocks of scarce components, adding second suppliers and moving some production closer to home ("nearshoring"). Governments also began treating parts such as semiconductors and critical raw materials as a matter of industrial policy and national security. Critics of the shift warn that higher inventories and duplicated supply chains raise costs and may add to inflation; supporters reply that the cost of a shutdown is far higher. Gauges such as the Global Supply Chain Stress Index are watched to judge how much strain supply chains face.

JIT also depends on reliable transport. The rise of containerization and a dependable freight forwarding industry made it possible to run tight schedules across borders, and disruptions to shipping lanes show up quickly in manufacturing output.

• Toyota: Toyota Production System
• Federal Reserve Bank of New York: Global Supply Chain Pressure Index