What is a Just in Time Inventory?

JIT, or just in time, inventory is a inventory management strategy that is aimed at monitoring the inventory process in such a manner as to minimize the costs associated with inventory control and maintenance. To a great degree, a just-in-time inventory process relies on the efficient monitoring of the usage of materials in the production of goods and ordering replacement goods that arrive shortly before they are needed. This simple strategy helps to prevent incurring the costs associated with carrying large inventories of raw materials at any given point in time.

Another application of a just in time inventory focuses not on raw materials but on finished goods. Again, the idea is to develop a solid understanding of what is needed to produce goods and schedule them for shipment to customers within the shortest time frame possible. As with raw materials, shipping finished goods shortly after producing them leads to minimizing storage costs and any taxes that may be applicable. This dual application of a JIT inventory strategy can significantly cut the operational expenses of a business in regards to the amount of inventory that must be stored at any one time and the amount of taxes that must be paid on larger inventories.

A just in time inventory management process involves understanding how much of a given item is needed to maintain production while more of the same item is ordered. This involves two key factors. First, it is necessary to know how long it will take for the item to be shipped from the supplier and arrive at the manufacturing facility. Second, the anticipated life or usage of the item must be determined. By knowing these two pieces of information, it is possible to establish procedures that allow the item to be reordered just in time to arrive and replace a worn item, without having the replacement set in storage for an extended period of time.

Many purchasing departments employ a JIT inventory for such key items as raw materials and machine parts. This means that records are kept that make it possible to place a new order for a given component when the number of units on hand decreases to a pre-determined point. In times past, this type of inventory control often was accomplished by maintaining a flip card inventory, such as the old Kardex system. Today, this same type of component usage is often managed with purchasing and inventory control software.

The idea of a just in time inventory is not new. Henry Ford of the Ford Motor Company is known to have applied this principle to the purchase of raw materials for automobile manufacturing in the early years of the 20th century. Many small businesses engage in the use of a just in time inventory approach out of necessity. With limited resources on hand, maintaining a small inventory of materials and parts simply makes sense. However, even large corporations today realize that the savings associated with this type of approach can save a significant amount of financial resources, making it possible to redirect those resources toward other revenue generating processes.