Just in time inventory is a game-changing innovation to contain costs and further quality with shorter production runs...with the goal of remaining "at capacity maximum," but managably there for the long haul.
The JIT system demands a clockwork perfection in the supply chain. Parts must arrive as they are needed...not before, not after.
Advantages: production runs remain short, which means manufacturers can move from one type of product to another easily. This method reduces costs by eliminating warehouse storage needs. Companies also spend less money on materials, because they buy just enough resources to make the ordered products and no more.
In old school inventory management, a division of the company might have dedicated 5,000 x $400 = $2 million in tire inventory. Couldn't that capital be used elsewhere? In the JIT way, the capital needed for inventory was miniscule. A few tires here, a few tires there, refreshed every day. Refreshed. Hmmm.
What happens if the inventory of tires runs into a mountain pass snow-storm and can't be refreshed daily?
Yeah, JIT only works when it works really well. You can imagine the enormity of the cost to the manufacturer if the production line ran out of tires. Suddenly, cars back up on the line; there's nowhere to store them…or even move them, because, well...they have no tires.
Then things back up more and more—let's say there's a run on rubber supplies and the company can't get tires for a month. Suddenly, sales from the consumer auto dealerships get canceled and consumers buy another make of car from another company/competitor.
In fact, it was a lot of this fear-of-supplies-being-cut mindset that created the "over-inventory" status that the U.S. automakers had in the '60s and '70s. The children of World War II knew very well that nothing was guaranteed, and they slept more soundly at night with 5,000 sets of tires in the garage.
Imagine what you'd do if milk was only available once a week for you as a young kid. But the economies of the world grew up. The distribution of commodities grew more global and liquid...and supply lines just don't get cut in a world generally at peace.
Related or Semi-related Video
Finance: What is Work In Process Invento...2 Views
finance a la shmoop what is work-in-process inventory well you're a
car assembly company named Shmord for any given car you have to buy a ton or [Lots of cars in a parking lot]
two of steel and four tires couple of windshield wipers a bunch of [Wipers on in the rain]
hoses wires vats a glass carpet and yards of rich Corinthian leather [Pictures of the materials]
with none of this stuff yet assembled into the car you're gonna sell it to a
dealership for twenty eight thousand eight hundred twenty three dollars it's [All the materials in a list]
just the inventory that is work in the process of being built why is it
important well for a lot of companies their inventory is highly valuable and
it comprises a lot of the actual asset value of the company it's also something
that clever accounting can jerk around to make the books look better or worse [Guy reading an accounting book]
than they actually are like there's a mountain of tires sitting in a portable [Tires piling up]
warehouse 12 feet off of the perimeter the border of the factory just sitting [A warehouse covers the tires]
there has Shmord paid for them well they're kind of sort of delivered but
not really so do those tires get counted as inventory what if you dragged the
porter shed twelve to fourteen feet closer to the factory then are they [The warehouse comes up to the factory perimeter]
counted as delivered and then you have to pay for them so then maybe you do so
and you recognize them as an asset maybe okay you get it
lots of accounting tricks that can be played in the short run in this category [Guy juggling balls with dollar signs on]
eventually however work-in-process inventory is work in the process of
being built into a finished product but that's still sitting there in inventory [Someone welding a car]
not yet sellable to people and the big accounting trick of moving the P beneath [A pea is hidden under one of three walnut shells]
the walnut shells only fools investors for so long eventually they're gonna
focus on revenues and free cash flow profits to be sure if you're not [Someone swipes away the walnut shells to reveal the pea]
tricking them well the big idea in this term set is that inventory takes a few
different forms it can be raw like just plain old tires or even the rubber to [Picture of tires]
then go be made into tires like sitting in a shed somewhere inventory can be [Bricks of rubber are thrown into a shed]
half-baked like a semi assembled chassis or like a thousand of them just sitting
around waiting to be uploaded with an engine and body and hydraulics and a [Computer screen showing a progress bar with each component of the car appearing]
steering wheel and it goes along you know the assembly process until finally
at the end of all of that work in process inventory stuff is in fact [Guy talking in front of the Shmord factory]
magically then turned into actual inventory that is sellable to a client [New cars in storage]
got it or a buyer whatever you want to call them okay
we didn't say it had to be pretty inventory just inventory [Guy smiling walking up to a Shmord dealership and a tiny car appears]
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