Definition: Just-in-time inventory (JIT) is a management strategy that aims to increase a firm’s operating efficiency and decrease the level of waste by only keeping enough stock on hand to fulfill current orders or maintain production. With a JIT inventory system, the firm purchases only the level of inventory that it uses in the production process.
What Does Just in Time Inventory Mean?
What is the definition of just in time inventory? JIT inventory requires good planning of production and an accurate estimate of consumer demand. By relying on long-standing contracts with suppliers, the strategy eliminates the problem of switching between suppliers to lock the lowest price.
JIT lowers the inventory levels by setting up fast equipment times, lowering scrap levels, and using local suppliers; therefore, it minimizes the working capital and eliminates obsolete and/or defective inventory. On the other hand, if not implemented properly, it may cause a shortage in the raw materials and a delay in production.
Let’s look at an example.
Example
Following an acquisition by a competitor, Company ABC is forced to close down one of its plants and consolidate the manufacturing processes. The company works closely with a local supplier, who considers the acquisition an opportunity to make more money as orders will be coming in from a single location and delivery times will be shorter.
The supplier considers a JIT strategy to increase cost savings, but also to smooth out the uncertainty following the merger. The supplier takes over the responsibility of making shorter delivering of raw materials to the consolidated plant and lowering the production costs.
After a few months, the implementation of the JIT method has helped the Company ABC to achieve a competitive advantage in its pricing policy, lower its incoming shipments, lower its inventories, and use its people in more tasks than distributing and shipping products. Furthermore, the lower inventory levels have created additional space to stock the finished goods and the raw materials, but it has also led to an increase in the company’s working capital that could be used for research & development or for building new outlets.
Summary Definition
Define Just-in-time Inventory: JIT inventory is a system of ordering only the stock needed to keep the production process going. No excess stock is ordered and stored. It arrives just in time to be placed in the manufacturing process.
