In the study of Toyota’s JIT system, many people drew the conclusion that invent
ID: 423345 • Letter: I
Question
In the study of Toyota’s JIT system, many people drew the conclusion that inventory should be lowered to expose problems and, thus, force those problems to be fixed. A common analogy was that of a river with rocks. The water represents the inventory and the rocks the problems. If you lower the water (inventory) you can find the rocks (problems). The idea that you should lower inventory to find and fix problems became very popular. Why can’t this be a general rule that can be applied to all firms? And, why is it sometimes best to do exactly the opposite of this policy (that is, raise inventory levels)?
Explanation / Answer
Toyota's JIT system focussed on building efficient production and supply systems. It helped in minimizing the inventory levels of raw materials and reduction in lead times as efficient supply chain mechanisms were built. The supplies were planned as per the orders and the time to market was reduced. The investment in supplies and inventory was turned around in less time leading to faster and efficient business operations.
It can be applied in general to all firms with a steady base of suppliers and raw materials. Higher inventory levels have factors like incorrect forecasting, inadequate marketing efforts, unsatisfactory quality levels or lack of production planning and control.
The causes of high inventory levels need to be identified which lead to increase in costs and space. If the supply chain systems and the market operations are not efficient, lowering inventory levels will not help the business.
At times, it is best to do the opposite that is raise inventory levels if an increase in product demand is expected and business plans to scale up the operations. Other macro environment factors like climatic conditions, political or economic factors may affect the supplies or cost of raw materials. Also, suppliers may get flooded with orders from competitors and may not be able to cater to demand in shorter lead times. In such conditions it helps to raise inventory levels as it also helps in decreasing the overheads. In these conditions, raising inventory levels may help in making the business grow and become more profitable.