Simplifying JIT Inventory Management Practices

Apr 22, 2010 Ian Johnson

JIT Inventory - Vasco Neves Dias

When it comes to running a JIT inventory, companies must make sure it services their
customers and their market.

At the end of the Second World War, and facing a daunting task of competing against its
worldwide competitors, the Japanese devised an inventory management approach that
would mitigate costs, keep inventory levels low, all the while reduce their daily cost of
money. They came up with what inventory managers commonly call JIT, which is an
abbreviation for “Just In Time”.

JIT is not quite as complicated as it might seem, but central to the doctrine of JIT is to
make sure that any inventory purchased, is immediately used or sold. This ensures parts and materials don’t remain
in inventory for too long a period. So, should all companies run JIT, or are there some special requirements that make
JIT work better with certain enterprises?

How Does JIT Reduce Inventory Levels and Costs?

Assume for a moment that a company needs to purchase parts and materials. In doing so, they receive an invoice for
their purchase that stipulates they must pay their supplier within 30 days of receiving product. If those parts and
materials remain in inventory for too long, say a month or more, then it costs the company every day the parts aren’t
used, or shipped out to customers.

 What's the Connection Between JIT & Daily Cost of Money? If that company uses business credit to
finance the purchase of their inventory, then they must pay a yearly interest rate to borrow the money. That
yearly interest rate can be divided into a daily interest rate, and a dollar amount, which is used to determine
a company’s daily cost of money.

How Can Running a JIT Reduce The Daily Cost of Money?

JIT reduces the daily cost of money, and overall inventory costs, by making sure that any product purchased is
immediately shipped out to customers or used in production. By immediately using these parts, and invoicing its own
customers, the company then guarantees that they themselves will be paid within 30 days. Simply put, if a company
purchases products and receives an invoice to pay in 30 days, but then immediately ships those parts out to its own
customers, then that company will be paid at the same time it has to pay its own suppliers. This is the essence of JIT.
This allows companies to use their cash holdings in other parts of their business.

 JIT keeps inventory levels low by using or shipping product as soon as it’s purchased.
 JIT is an excellent way to alleviate the daily cost of money.
 JIT keeps inventory holding cost down.
 JIT frees up important cash reserves so it can be used in other parts of the business.
Can Any Business Run JIT?

While there is no hard and fast rule to succeed with JIT, there are some basic fundamentals that help make JIT a
good fit. A company must have strong volumes of scale or strong purchasing power to make JIT work. Having
consistent demand for products, day in day out, is essential. However, if that company has cyclical demand that
fluctuates, then JIT might not be the right fit.

Companies must also have a committed work-force, able to mitigate mistakes. They also can’t afford any delivery
delays from their suppliers. Without any inventory in place, delivery delays can be extremely costly. This is why
having strong economies of scale is important. Having large volume requirements ensures that companies running
JIT have a position of importance with their suppliers, and always have parts and materials coming in.

 JIT succeeds with strong economies of scale or large purchasing power.

 JIT succeeds when a company has constant linear demand for products.
 JIT needs a committed work-force who'll address issues immediately.

Several companies make the mistake of trying to run a JIT inventory system without first taking the time to review
their operations, their customers ordering patterns and requirements, and the market they service. Several try and
run JIT simply on the premise that if it works for others, it must work for them. Companies without strong purchasing
power, consistent demand for products, and the ability to immediately correct mistakes, simply might not be able to
make JIT work.