Just In Time (JIT)

Definition

Just In Time (JIT) is a production strategy that aims to reduce in-process inventory and associated carrying costs. In financial terms, it’s about receiving goods only as they are required in the production process, thereby reducing inventory costs. Essentially, it’s a method to increase efficiency and decrease waste by receiving goods only as they are needed.

Phonetic

Just In Time (JIT) in phonetics is: /ˈjəst ɪn ˈtaɪm/ (J-UH-S-T I-N T-AH-Y-M)

Key Takeaways

<ol><li>Just In Time (JIT) is a production model in which items are created to meet demand, not created in surplus or in advance of need. The purpose of JIT is to avoid the waste associated with overproduction, waiting and excess inventory.</li><li>Because of the high level of coordination required to effectively implement JIT, it is often associated with the Lean manufacturing philosophy. It relies heavily on balance between suppliers’ and manufacturers’ efficiency, and requires very reliable sources of raw materials.</li><li>While the system can increase efficiency and decrease waste, implementing JIT could potentially lead to increased risk with supply chain issues. Without any buffer inventory, production can come to a halt if there are any delays or issues with the raw materials.</li></ol>

Importance

The business/finance term “Just In Time” (JIT) is important as it refers to a management strategy that aligns raw-material orders from suppliers directly with production schedules. The primary goal of JIT is to improve a business’s return on investment by reducing in-process inventory and associated carrying costs. It can help businesses increase efficiency and decrease waste by receiving goods only as they are needed for the production process, reducing inventory costs. Moreover, it encourages improved process and product quality, less rework, and fewer production errors. Therefore, JIT is critical for optimizing inventory control, improving cash flow, and enhancing operational efficiency, directly supporting cost management and profitability objectives.

Explanation

The Just In Time (JIT) principle serves as a strategic tool in operational and financial management, primarily aimed at reducing in-process inventory and its associated carrying costs. This system revolves around the production process being streamlined and optimized such that companies produce or receive goods only as they are needed, hence the term “Just in Time.” This approach eradicates the need for businesses to store excess inventory, freeing up storage space and reducing costs spent on inventory management and obsolescence.JIT is especially useful in reducing capital tied up in inventory, thus improving a company’s cash flow and overall financial health. It can also lead to improved efficiency and productivity as businesses are driven to eliminate inefficiencies and waste in their production processes to meet the just-in-time requirements. Additionally, companies that employ JIT can quickly adapt to changes in demand, ensuring customer satisfaction while mitigating the risk of overproduction. However, the success of the JIT model requires accurate forecasting and dependable suppliers, as there is little room for errors or delays. In the broader economic sense, JIT can contribute to a leaner, more efficient economic system by reducing waste and improving productivity.

Examples

1. Toyota Motor Corporation: The Japanese car manufacturing giant is perhaps one of the most famous examples of Just In Time (JIT) inventory management. Toyota’s JIT approach means that the cars are assembled using parts that arrive at the factory just in time to be integrated into the production process. This means there are no excess components in stock, thereby minimizing storage costs and reducing the risk of items becoming outdated.2. Dell Computers: Dell uses the JIT methodology to deliver a customized product. When a customer orders a specific computer and selects their desired features and components on the Dell website, those instructions are sent to the manufacturing department which gathers the necessary parts just in time to assemble the ordered product, rather than maintaining a large stock of pre-assembled computers.3. McDonald’s: The fast-food chain uses JIT in managing supplies of its ingredients. McDonald’s do not begin to cook or prepare meals until a customer has placed an order. Ingredients such as buns and vegetables, are delivered to the restaurant just in time for them to be used, reducing waste and maintaining freshness, which are key factors in their business model.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Lean Manufacturing
• Inventory Management
• Supply Chain Efficiency
• Demand Forecasting
• Production Scheduling

Sources for More Information

• Investopedia
• Inc
• The Balance Small Business
• The Economist