JIT Vs. MRP

The Huffington Post reported in 2012 that a company holds inventory for an average of 23.82 days. This time between when a company purchases raw materials and when finished goods are sold can have a significant negative effect on cash flow. The downturn in cash flow affects the money a company has available for capital investment, additional production, sales and owner payouts, not to mention the intrinsic value of a firm. Just-in-time inventory management and material requirements planning reduce order costs and inventory-holding time, which increases a company's cash flow.

Companies implement the just-in-time inventory method to achieve a balance between financial performance as gauged by cash flow and the certainty of a stable supply chain. The JIT manufacturing processes create a demand-pull system in which purchasing, production and distribution is demand-driven and not forecast-driven. This means that rather than maintain large and costly amounts of in-process inventory, a company adopts the “Kaizen” model, which calls for just-in-time production and minimum amounts of in-process inventory to improve the return on investment. In this case, manufacturing processes kick in to respond to actual production orders rather than a production forecast. The order dictates what item is manufactured, the quantity to be created and the time the production should occur. As a result, materials are available in the quantity needed at the time required and not before.

Material requirements planning is a production planning and inventory system based on the dependent demand of the components needed to satisfy master schedule requirements. The primary objective of MRP is to equate the due date of materials and components to the need date to eliminate excess stocks, keep inventory levels low and ensure the availability of products and materials needed for production and customer shipments. The system tracks bills of material and determines parts requirements based on a particular production schedule. The system also plans purchasing and manufacturing activities and delivery schedules. It also reschedules materials on order If production demand fluctuates. The MRP system also manages production scheduling, cash flow, labor capacity planning, inventory and distribution.

The focus of the materials requirements planning system is the projected usage of parts or materials during a predetermined time period based on end-item requirements. MRP systems are suitable for discrete manufacturing environments in which production lines operate on a batch basis and produce output that is countable in discrete units or identifiable with serial numbers. The focal point of the just-in-time system is the current or real usage of parts in a production system, which makes it appropriate for a repetitive manufacturing environment in which each of a series of products passes through the same machinery and the same sequence of operations in a continuous flow over an extended period of time.

Just-in-time manufacturing focuses a company's manufacturing lines on the products its customers want, which contributes to a company's long-term viability. In addition, because materials are made available as needed, inventory shrinkage and redundant functions, including inspections, are reduced. Although inventory and supplies are kept at a minimum, the reliability of materials availability is increased. MRP reduces the work-in-process inventory, while eliminating material shortages by increasing the reliability of materials availability. Both JIT and MRP enable companies to plan for the long term, which enables a manufacturer to plan labor and facility use more effectively. Both systems also reduce lead times and past-due orders.