This process lets manufacturers purchase and receive components just before they're needed on the assembly line. As a consequence, it relieves manufacturers of the cost and burden of housing and managing idle parts. The process reduces the need to build products before they are actually sold, which saves money by reducing the cash investment to build and store products in a warehouse.
Some of the manufactures have streamlined the process with a partnership with their retailers to tell them whenever a product is sold. The minute a product is sold the computers tell the manufacture so that a new product is on order to replace the one that just sold.
The benefits of just-in-time manufacturing are;
- Reduction in raw materials wasted
- Reduction in the cash-flow needed
- Reduction in the cost to store products
- Allow for customizations
The two primary economic factors that make this possible are;
- Low inflation
- Low cost to quickly ship products
Over the last decade many manufactures have found success with the just-in-time concept. But, the fundamentals of the economy are changing very quickly, making the just-in-time concept more difficult and more costly.
The two primary economic factors are no longer supportive. Inflation is out of control and the high cost of oil is pushing shipping costs through the roof. The benefits of just-in-time manufacturing are slipping away. Here is a detailed look at the four benefits of just-in-time manufacturing with respect to the new economy.
1. Reduction in raw materials wasted
The increasing cost of raw materials, like plastic, steel, aluminum, fabric and energy are rising very fast, which makes it more cost effective to buy more raw materials today and store them for the future when prices will be even higher. Inflation is pushing the economic advantage of increasing rather then decreasing the supply of raw materials. Therefore, it is no longer a benefit to reduce raw materials.
2. Reduction in cash-flow needed
Again, inflation is forcing the needed cash-flow to be even higher in the future. Therefore, increasing the cash-flow into the system will result in more profits as products are built with today’s raw material prices and sold years later at much higher prices. Therefore, it is no longer a benefit to reduce cash-flow.
3. Reduction in the cost of storing products
The drastic increase in oil prices is translating to a drastic cost in shipping products. Therefore, it is soon going to cost less to store product in warehouses scattered about the nation then to ship products from one location. Therefore, it is no longer a benefit to reduce the storage of products.
4. Allow for customization
Low inflation results in many options for consumers, because low inflation allows many companies to produce a product at a profit. When a market becomes flooded with products, companies can no longer compete by simply having a good product because there are just too many options for customers to choose from making it very difficult to stand out in the crowd of products. In a low inflationary economy, companies have to get creative to compete and one way to do that is to allow for customizations. Consumers benefit in a low inflationary economy because they have many options all competing for their attention.
High inflation is just the opposite. Inflation causes profit margins to shrink and many companies are forced to stop producing products that they cannot profit from. The result is a reduction in consumer products available. Companies are forces to focus on their higher profit products and abandon their low profit products. As the number of products are reduced, consumers find themselves lucky to find one product on the shelf that they are looking for and customizations become a distance memory. Therefore, it is no longer a benefit to support customizations in a high inflationary economy.
If inflation continues to increase at a fast rate, it will be very difficult for manufactures to adjust. Most manufactures adjust to economy changes very slowly and some never adjust. This could put some of them out of business and create opportunities for new manufactures to start with a business model based on high inflation.
It will be very interesting to watch the fledging US manufacturing industry rebuild from years of off-shoring and decades of low inflation. The US manufacturing industry needs to find its feet and begin adjusting for high inflation.