Just-in-Time Inventory The goal of the just-in-time (JIT) inventory model is to cut down on the

Just-in-Time Inventory The goal of the just-in-time (JIT) inventory model is to cut down on the

firm’s need to keep inventory on hand, coordinating the supply of raw materials with the production and marketing of the goods. In JIT, the raw materials are only acquired precisely when they are needed—just in time. The idea of JIT is to have zero inventory or as near zero as possi- ble without adversely affecting production or sales. The goal of this strategy is to cut down on inventory costs:

1. Holding less inventory, so that there are lower storage costs, lower lev- els of spoilage, and less risk of obsolescence.

2. Coordinating with suppliers to minimize the cost of reordering inven- tory.

JIT requires coordination between a firm and its suppliers. To make JIT work, you must have timely, reliable delivery of goods and materi- als. Further, you must have a predictable production process so that you can determine your input needs in advance, which requires a high degree of production automation. In addition, demand must be predict- able. If production is constantly modified to suit the demand for your product, JIT will not work well or may not work at all.

JIT is a strategy of coordination between suppliers, production, and marketing to minimize the amount of inventory to the point where it is always possible to supply exactly what consumers demand. Supplies and raw materials are delivered only when needed for production. The firm produces only those items that are needed for anticipated demand. This requires lots of coordination and falls apart if there is poor quality in any one part of the process—a defective bolt can gum up the works.

MANAGING WORKING CAPITAL

JIT works hand in hand with two other management techniques, total quality control (TQC) and employee involvement (EI). TQC is the principle that quality goods and services be a goal of all efforts of the firm—production, accounting, marketing, etc. Part of TQC is recogniz- ing that some personnel of the firm are customers of other personnel. For example, the financial manager serves the production management by evaluating the expansion of the production facilities, whereas the accounting staff serves the financial manager, supplying financial data necessary for the financial manager’s evaluation of the expansion.

EI is the philosophy that employees at all levels should be involved in the firm’s decision making. By participating in decision making, employees are able to understand and perform their tasks better. Also, employees make significant contributions to the decision making pro- cess due to their unique perspective regarding the decision.

This management strategy of just-in-time inventory management is similar to the zero-balance account disbursements technique for cash management. Both are based on the idea that we can reduce costs if we carry a lower balance. And both require coordination and planning to make them work.

JIT has been used extensively in Japan, but now many U.S. firms are adopting JIT principles to inventory management. For example, Ford Motor Company allows its suppliers to tap into its inventory manage- ment system computer so they can figure out what supplies are needed and when to deliver them to Ford’s production plants. This helps Ford’s suppliers in their own planning, which benefits Ford through more effi- cient delivery of the goods it needs.