Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Just in Time (JIT)

What it is:

Just in time (JIT) is an inventory management method whereby materials, goods, and labor are scheduled to arrive or be replenished exactly when needed in the production process.

How it works (Example):

JIT works best for companies using repetitive manufacturing functions; hospitals, small companies, and other entities may not find JIT feasible. For example, let's assume that Company XYZ is a small car manufacturer. On Tuesdays the company assembles the car chassis, and the workers put the windshield in on Thursdays. With a just in time inventory method, XYZ might have parts delivered exactly one day before they need them. The chassis would be delivered on Monday and the windshield on Wednesdays.

The goal of JIT is to decrease costs by keeping only enough inventory on hand to meet immediate production needs. Thus, in order to effectively employ JIT a company must accurately forecast demand. JIT's encouragement of planning, simplification, and standardization is aimed at reducing carrying costs by eliminating the expense of housing idle materials and lower the costs of defective products, wasted space, extra equipment, overtime, warranty repair, and scrap. JIT also speeds the production process, thereby eliminating long lead times and improving delivery performance.

Companies that utilize JIT often only have a few suppliers. Due to the importance of receiving inventory when needed, a small number of suppliers make it easy to coordinate deliveries. Additionally, the large orders placed by JIT companies encourage suppliers to be committed to meeting delivery and quality requirements and offer bulk discounts, but long-term contracts may counter this benefit.

Why it Matters:

JIT's focus on efficiency emphasizes identification and correction of production obstacles. JIT proponents often claim that inventory hides problems -- JIT prevents a company from using excess inventory to "smooth" operations if a particular task takes longer than expected or a defective part is discovered in the system. This is also why JIT companies invest in preventive maintenance; when equipment breaks down, the entire process stops.

Possible indicators of a company's use of JIT methods are high inventory turnover ratios and high asset turnover ratio ratios. Low inventory balances also mean a company's choice of inventory accounting methods has minimal impact.

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