Just in time inventory is a game-changing innovation to contain costs and further quality with shorter production runs...with the goal of remaining "at capacity maximum," but managably there for the long haul.
The JIT system demands a clockwork perfection in the supply chain. Parts must arrive as they are needed...not before, not after.
Advantages: production runs remain short, which means manufacturers can move from one type of product to another easily. This method reduces costs by eliminating warehouse storage needs. Companies also spend less money on materials, because they buy just enough resources to make the ordered products and no more.
In old school inventory management, a division of the company might have dedicated 5,000 x $400 = $2 million in tire inventory. Couldn't that capital be used elsewhere? In the JIT way, the capital needed for inventory was miniscule. A few tires here, a few tires there, refreshed every day. Refreshed. Hmmm.
What happens if the inventory of tires runs into a mountain pass snow-storm and can't be refreshed daily?
Yeah, JIT only works when it works really well. You can imagine the enormity of the cost to the manufacturer if the production line ran out of tires. Suddenly, cars back up on the line; there's nowhere to store them…or even move them, because, well...they have no tires.
Then things back up more and more—let's say there's a run on rubber supplies and the company can't get tires for a month. Suddenly, sales from the consumer auto dealerships get canceled and consumers buy another make of car from another company/competitor.
In fact, it was a lot of this fear-of-supplies-being-cut mindset that created the "over-inventory" status that the U.S. automakers had in the '60s and '70s. The children of World War II knew very well that nothing was guaranteed, and they slept more soundly at night with 5,000 sets of tires in the garage.
Imagine what you'd do if milk was only available once a week for you as a young kid. But the economies of the world grew up. The distribution of commodities grew more global and liquid...and supply lines just don't get cut in a world generally at peace.
Related or Semi-related Video
Finance: What is inventory?2 Views
Finance allah shmoop What is inventory Well it's Just stuff
you have for sale in one form or another An
auto dealer Well all those cars she has sitting out
there in the sun is a dive bombing targets for
the birds Yeah while their inventory to the car dealership
the cars are inventory the loads of nose hair trimmers
sitting on the shelves at the well appointed nostril fine
store best nostril trimming store in the world Yet their
inventory albeit kind of gross ish inventory especially after use
the four thousand yards of denim cloth sitting in the
weaving factory waiting for thirteen year old girls in thailand
toe weave it all together to make levi's for the
gap Yep that cloth is inventory It isn't finished inventory
It's just a work in process not yet ready for
prime time or a prime thigh or whatever But it's
an asset for the company who owns it and it
is held as inventory on the balance sheet Work in
process right there at the balance sheet right there Okay
And when that inventory is sold and turned into revenues
it'll just become part of the expenses line on the
income statement usually has cost of goods sold or caw
Gse that's What people in the accounting bids say Cocks
thie Inventory is a good but inventory is always good
Of course as many a customer has learned after taking
a hefty shock straight to the hunger And that hurts
Up Next
Inventory turnover...way less delicious than an apple turnover. So...what is it?
Work-in-process inventory is just inventory... that is in the process of being built. In other words, it accounts for the inventory's asset value.
How is inventory managed for cash flow purposes? In order to avoid the cost of carrying slow moving or out of favor inventory that would take space...