Decision Tools for Selecting Components for JIT Replenishment

When purchased components for an assembly manufacturing operation are replenished Just-In-Time the investment in inventory holding of these components is eliminated, but usually with increased fixed reorder cost. It is therefore important in the pursuit of high returns on inventory investment to know for which components JIT replenishment is an optimal policy. In this paper we describe two decision tools that allow identification of candidate components for cost effective JIT replenishment. The first is a simple and easily interpreted coefficient, based on component cost and demand parameters which rank the importance of adoption of JIT replenishment of components. The second is a procedure that can be used by inventory managers to work from the ranking coefficient to an approximate model for profit and return on investment, for a given level of inventory capitalisation, when the highest priority JIT decisions are implemented cumulatively. The significance of this work is that both decision tools are simple enough for a typical inventory manager to implement using standard spreadsheet methods and are therefore capable of guiding real manufacturing companies to higher returns on inventory investment. We illustrate the use of these tools with data from a previously published case study.