8/6/2021 Just in Time (JIT) Inventory: How Does It Work?

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CORPORATE FINANCE & ACCOUNTING

ACCOUNTING

Just in Time (JIT)

By
CAROLINE BANTON
|
Reviewed by
JANET BERRY-JOHNSON
|
Updated Apr 28, 2021

What Is Just-in-Time (JIT)?

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8/6/2021 Just in Time (JIT) Inventory: How Does It Work?

The just-in-time (JIT) inventory system is a management strategy that aligns raw-material

orders from suppliers directly with production schedules. Companies employ this inventory
strategy to increase efficiency and decrease waste by receiving goods only as they need them
for the production process, which reduces inventory costs. This method requires producers to
forecast demand accurately.

KEY TAKEAWAYS
The just-in-time (JIT) inventory system is a management strategy that minimizes
inventory and increases efficiency.
Just-in-time manufacturing is also known as the Toyota Production System (TPS)
because the car manufacturer Toyota adopted the system in the 1970s.
Kanban is a scheduling system often used in conjunction with JIT to avoid overcapacity
of work in process.
The success of the JIT production process relies on steady production, high-quality
workmanship, no machine breakdowns, and reliable suppliers.

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Just In Time

How Does Just-in-Time Inventory Work?

The just-in-time (JIT) inventory system minimizes inventory and increases efficiency. JIT
production systems cut inventory costs because manufacturers receive materials and parts as
they are needed for production and so do not have to pay storage costs. Manufacturers are also
not left with unwanted inventory if an order is canceled or not fulfilled. [1]

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8/6/2021 Just in Time (JIT) Inventory: How Does It Work?

One example of a JIT inventory system is a car manufacturer that operates with low inventory
levels but heavily relies on its supply chain to deliver the parts it requires to build cars, on an as-
needed basis. Consequently, the manufacturer orders the parts required to assemble the cars
only after an order is received.

For JIT manufacturing to succeed, companies must have steady production, high-quality
workmanship, glitch-free plant machinery, and reliable suppliers. [1]

Important: The JIT inventory system contrasts with just-in-case strategies, where
producers hold sufficient inventories to have enough product to absorb maximum
market demand.

Pros and Cons of Just-in-Time (JIT)

JIT inventory systems have several advantages over traditional models. Production runs are
short, which means that manufacturers can quickly move from one product to another. Also,
this method reduces costs by minimizing warehouse needs. Companies also spend less money
on raw materials because they buy just enough resources to make the ordered products and no
more. [2]

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The disadvantages of JIT inventory systems involve potential disruptions in the supply chain. If
a raw-materials supplier has a breakdown and cannot deliver the goods in a timely manner, this
could conceivably stall the entire production line. A sudden unexpected order for goods may
delay the delivery of finished products to end clients. [1]

Special Considerations: Kanban Scheduling for Just-in-Time

Kanban is a Japanese scheduling system that's often used in conjunction with lean
manufacturing and JIT. Taiichi Ohno, an industrial engineer at Toyota, developed kanban in an
effort to improve manufacturing efficiency. [3] The system highlights problem areas by
measuring lead and cycle times across the production process, which helps identify upper
limits for work-in-process inventory, in order to avoid overcapacity.

Example of Just-in-Time
Famous for its JIT inventory system, Toyota Motor Corporation orders parts only when it
receives new car orders. Although the company installed this method in the 1970s, [2] it took 20
years to perfect it. [1]

Sadly, Toyota's JIT inventory system nearly caused the company to come to a screeching halt in
February 1997, after a fire at Japanese-owned automotive parts supplier Aisin decimated its
capacity to produce P-valves for Toyota's vehicles. Because Aisin is the sole supplier of this part,
its weeks-long shutdown caused Toyota to halt production for several days. This caused a ripple
effect, where other Toyota parts suppliers likewise had to temporarily shut down because the
automaker had no need for their parts during that time period. Consequently, this fire cost
Toyota 160 billion yen in revenue. [4]

FAST FACT
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The terms short-cycle manufacturing, used by Motorola, and continuous-flow

manufacturing, used by IBM, are synonymous with the JIT system.

Frequently Asked Questions

What Exactly Do You Mean By "Just in Time?"
A just-in-time (JIT) inventory system is a management strategy that has a company receive
goods as close as possible to when they are actually needed. So, if a car assembly plant needs
to install airbags, it does not keep a stock of airbags on its shelves, but receives them as those
cars come onto the assembly line.

Doesn't This Sound a Bit Risky? What If Things Don't Arrive in Time?
A chief benefit of a JIT system is that it minimizes the need for a company to store large
quantities of inventory, which improves efficiency and provides substantial cost savings.
However, if there is a supply or demand shock, it can bring everything to a halt. For instance, at
the beginning of 2020's economic crisis, everything from ventilators to surgical masks
experienced disruption as inputs from overseas could not reach their destinations in time to
meet a surge in demand. [5]

What Types of Companies Use JIT?

The JIT inventory system is popular with small businesses and major corporations alike
because it enhances cash flow and reduces the amount of capital needed to run the business.
Retailers, restaurants, on-demand publishing, tech manufacturing, and automobile
manufacturing are some examples of industries that have benefited from just-in-time inventory.

Who Invented JIT Inventory Management?

JIT is attributed to the Japanese automaker Toyota Motor Corporation. Executives at Toyota in
the 1970s reasoned that the company could adapt more quickly and efficiently to changes in
trends or demands for model changes if it did not keep any more inventory in store than was
immediately needed. [3]

ARTICLE SOURCES

Related Terms

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8/6/2021 Just in Time (JIT) Inventory: How Does It Work?

Kanban Definition
Kanban is an inventory control system used in just-in-time (JIT) manufacturing to track production and
order new shipments of parts and materials.
more

Material Requirements Planning (MRP) Definition

Material requirements planning is among the first software-based integrated information systems
designed to improve productivity for businesses.
more

Do It Right The First Time (DRIFT)

Do It Right The First Time (DRIFT) is a theory from managerial accounting that relates to just-in-time (JIT)
inventory and production management. more

Inventory
Inventory is the term for merchandise or raw materials that a company has on hand.
more

What You Should Know About Best Practices

Best practices are a set of guidelines, ethics, or ideas that represent the most efficient or prudent course
of action for a business or investor.
more

Inside Kaizen: Continuous Improvement

Kaizen is a Japanese business philosophy that focuses on continuous improvement and involves all
employees. Kaizen means "change for the better."
more

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