Just in time (JIT) is an inventory management system, used to manage the stock that is kept in storage. It involves receiving goods from suppliers as and when they are required, rather than carrying a large inventory at once.
Advantages of just in time inventory management
Companies like to use JIT as it is seen as a more cost-efficient method of holding stock. Its purpose is to minimise the amount of goods you hold at any one time, and this has numerous advantages:
Less space needed: With a faster turnaround of stock, you don’t need as much warehouse or storage space to store goods. This reduces the amount of storage an organisation needs to rent or buy, freeing up funds for other parts of the business.
Waste reduction: A faster turnaround of stock prevents goods becoming damaged or obsolete while sitting in storage, reducing waste. This again saves money by preventing investment in unnecessary stock, and reducing the need to replace old stock.
Smaller investments: JIT inventory management is ideal for smaller companies that don’t have the funds available to purchase huge amounts of stock at once. Ordering stock as and when it’s needed helps to maintain a healthy cash flow.
All of these advantages will save the company money.
Disadvantages of just in time inventory management
JIT unfortunately comes with a number of potential disadvantages, which can have a significant impact on the company if they occur.
Risk of running out of stock: By not carrying much stock, it is imperative you have the correct procedures in place to ensure stock can become readily available, and quickly. To do this, you need to have a good relationship with your supplier(s). You may need to form an exclusive agreement with suppliers that specifies supplying goods within a certain time frame, prioritising your company. JIT means that you become extremely reliant on the consistency of your supply chain. What if your supplier struggles with your requirements, or goes out of business? Can you get the products quickly from somewhere else?
Lack of control over time frame: Having to rely on the timeliness of suppliers for each order puts you at risk of delaying your customers’ receipt of goods. If you don’t meet your customers’ expectations, they could take their business elsewhere, which would have a huge impact on your business if this occurs often.
More planning required: With JIT inventory management, it’s imperative that companies understand their sales trends and variances in close detail. Most companies have seasonal sales periods, meaning a number of products will need a higher stock level at certain times of the year due to higher demand. Therefore, you need to factor that into planning for inventory levels, ensuring suppliers are able to meet different volume requirements at different times.
If run properly, JIT inventory management is seen as one of (if not the) best ways of managing inventory. While it is not without risks, it has significant rewards, and is ideal for those who are able to plan carefully in advance, and build strong relationships with suppliers. If you’re interested in forging a career in accounting and finance, thorough knowledge of JIT is essential, and our CIMA and ACCA courses will equip you with the skills and insights needed.
