Just-in-time production (JIT) is a business strategy in which a manufacturer produces each item as it is ordered, rather than keeping an extensive amount of surplus products on hand. The chief benefit of the strategy is that it allows businesses to ensure that there is always a buyer for any item produced, keeping inventories low. If there are no customers wanting to purchase an item, production stops.
Key Takeaways
- Just-in-time (JIT) is a production strategy in which a company only produces an item after a buyer has made an order, therefore keeping inventories low.
- Lower inventories make a company look more efficient and also boosts the return on total assets (ROTA), a key measure of how well a company uses funds to boost profits.
- JIT allows companies to spend less on parts and labor, as well as limit the risk of items losing value from sitting around too long.
Why Low Inventories Matter
The JIT production process means inventory levels are kept to a minimum. A low inventory figure on the balance sheet means a higher inventory turnover ratio, making the company look more efficient. The inventory turnover ratio is a metric used in corporate finance to estimate how efficiently a company is selling its products.
By dividing the total cost of goods sold (COGS) by the average inventory over a given period, the inventory turnover ratio reflects the number of times the company has sold its total average inventory. A company with little to no inventory has a much higher ratio than a company with equivalent COGS expenses that utilizes a more anticipatory production strategy.
High inventory turnover ratios are considered a good sign of operational efficiency, effective purchasing management, and productive use of advertising and promotional campaigns aimed at generating sales.
How the JIT Strategy Boosts Profitability
The JIT production strategy has an important effect on other measures of corporate efficiency and profitability. Lower inventory means a reduced total asset figure on the balance sheet, all else being equal. This translates directly into a higher return on total assets (ROTA) ratio. The ROTA ratio divides a company's earnings before interest and taxes by its total assets to determine how effectively the business's operational model utilizes invested funds to generate profit.
The asset turnover ratio is another efficiency ratio that reflects a company's ability to generate revenue by dividing net sales by average assets for a specific time period. Decreased inventory means a smaller denominator in both these formulas, leading to healthier ratios across the board.
JIT Means Lower Costs For Materials and Labor
Apart from the improvement in comparative metrics, the JIT production strategy is advantageous to a company's profitability in many other ways. Sales-contingent production means lower costs for both raw materials and labor. If a business is not looking to produce a backlog of goods for sale, it need only purchase those materials required for items that have already been ordered, leading to a reduction in COGS.
Labor expenses are also reduced since the number of man-hours needed to fulfill orders is likely lower than would be required for full-time production. On-demand production means fewer items sitting on shelves depreciating in value if sales take a downturn, and the risk of losing money if a product becomes obsolete is virtually eliminated. While many companies must invest capital in large warehouses to store products for sale, minimal inventory means almost nonexistent storage expenses. The reduction of these key production and operational expenses means higher gross and operational profits, which directly contribute to a healthier bottom line.
FAQs
The JIT system reduces all expenses incurred by unsold items, such as depreciation, lost opportunity costs, and warehousing charges. Your organization can buy raw materials only when they are needed, allowing it to put its cash to better use. When inventory levels are reduced, so is the amount invested in it.
What are the main benefits of a JIT system? ›
The JIT system reduces all expenses incurred by unsold items, such as depreciation, lost opportunity costs, and warehousing charges. Your organization can buy raw materials only when they are needed, allowing it to put its cash to better use. When inventory levels are reduced, so is the amount invested in it.
Which of the following is a benefit of a just in time JIT system? ›
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 needed for production and do not have to pay storage costs.
Which is a benefit of a JIT just in time system quizlet? ›
Reduced lead times, shorter time to make a product, higher productivity, higher equipment utilisation, simplified planning and scheduling, less paperwork, improved quality of materials and products, less scrap and waste, better morale in the workforce, better relations with suppliers, emphasis on solving problems in ...
What are JIT advantages and disadvantages? ›
Advantages And Disadvantages
| Advantages | Disadvantages |
|---|
| Improves customer service as firms provide a faster and speeder delivery of goods. | Difficult to match the customer's expectations. |
| Production errors are easily noticeable in smaller batches. | Need for multiple or flexible suppliers. |
| The inventory turnover is also high. | |
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What is Just-in-Time (JIT)? Just-in-time, or JIT, is an inventory management method in which goods are received from suppliers only as they are needed. The main objective of this method is to reduce inventory holding costs and increase inventory turnover.
What are the three major elements of JIT? ›
Three basic elements work together to complete a JIT system: just-in-time manufacturing, total quality management, and respect for people.
What is the use of just-in-time JIT? ›
The JIT system is an inventory management system in which a company receives goods or materials as closely as possible to when it needs them. The system is designed to increase efficiency, minimise inventory and reduce wastage, as well as to cut costs such as storage costs.
What is the production performance benefits from JIT implementation? ›
JIT implementation improves performance through lower inventory levels, reduced quality costs, and greater customer responsiveness.
How does JIT production improve efficiency? ›
Just-in-time (JIT) is an inventory management strategy that reduces waste and increases efficiency by receiving inventory only as they are needed for production, not ahead of time. This significantly reduces the 8 wastes in lean manufacturing.
Just-in-time (JIT) purchasing is the purchase of materials (or goods) so that they are delivered just as needed for production (or sales). Benefits include lower inventory holdings (reduced warehouse space required and less money tied up in inventory) and less risk of inventory obsolescence and spoilage.
How does JIT contribute to competitive advantage? ›
JIT helps companies gain a competitive advantage by reducing costs, improving quality, shortening manufacturing cycle time, eliminating waste, and increasing employee involvement in the production process.
What is the use of a just-in-time JIT system for inventory management? ›
JIT inventory management is a strategy in which commerce companies receive the exact amount of inventory they need, right when they need it. The goal is for companies to retain little to no excess inventory at any given time.
What are the key benefits of JIT? ›
Benefits of JIT (Just in Time )
- More cost-efficient production.
- Continuous quality improvement.
- Waste Elimination.
- Improve productivity.
- Improve supplier relationships.
- Improve storage space used.
- Reduce costs associated with storage.
- Reduce manufacturing time.
Disadvantages of JIT manufacturing include:
JIT systems also have little room for error or unexpected demand surges, as they maintain minimal inventory levels. This can lead to production bottlenecks if suppliers experience delays or disruptions.
What is the advantage of JIT compilation? ›
The JIT compiler helps improve the performance of Java programs by compiling bytecodes into native machine code at run time. The JIT compiler is enabled by default. When a method has been compiled, the JVM calls the compiled code of that method directly instead of interpreting it.
What are the major features of a JIT production system such as that of? ›
Short Answer. The main features of JIT production include a pull-based system, reduced inventory levels, continuous improvement, strong supplier relationships, and increased flexibility.
What is the key benefit of keeping inventory levels low in a JIT system? ›
The JIT Strategy
Inventory costs contribute heavily to the company expenses, especially in manufacturing organizations. By minimizing the amount of inventory you hold, you save space, free up cash resources, and reduce the waste that comes from obsolescence.
How can a company benefit through a just-in-time logistics system? ›
Just-in-time logistics (JIT) is an inventory management system that allows companies to optimize inventory levels, reduce waste and improve efficiency by synchronizing the flow of materials with production and consumer demand.
