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Just in Time Inventory Management (JIT)

Published on May 31, 2024

Just-in-time (JIT) inventory management is an approach to managing a business’s inventory so that whatever materials and supplies are required for the production process are received only when they are needed — just in time.

In this article, we explore everything you need to know about JIT inventory management, including:

What JIT is
How JIT works
Examples of JIT
Industries that typically use JIT inventory management
Why JIT is important
The advantages and disadvantages of JIT
Why a business should consider transitioning to JIT inventory management
What makes JIT different from economic order quantity
How QuickBooks can help you manage JIT inventory to lower costs and boost productivity
FAQs

While JIT inventory management can deliver significant benefits and is embraced by several industry sectors, it is important to ensure that the overriding principles of this approach match the unique requirements of your business and sector to maximise its positive impact.

Let’s dig in.

What is just-in-time (JIT) inventory?

For a business that offers products (as opposed to services) to the marketplace, managing inventory, or stock, is crucial. Inventory refers to the raw materials a business needs to develop its products.

JIT inventory management is one of several methods of managing inventory so that goods are received from suppliers only at the point they are required. This helps a business reduce inventory holding costs and increase inventory turnover.

How does just-in-time (JIT) inventory work?

Let’s examine how JIT inventory management works in a typical scenario. JIT is triggered by the placement of a customer’s order. At this point, the manufacturer may hold little to no inventory. On receipt of the order, the manufacturer places orders for materials and resources needed to fulfil the customer’s order — just in time.

Once materials arrive, the manufacturer prepares the order, and the final product is shipped off to the customer.

An example of JIT inventory

Let’s say that a customer places an order for a duffel bag. On receiving the order, the manufacturer orders various materials required to make the duffel bag from their suppliers. Once all materials are received, the manufacturer begins assembling the duffel bag.

The final step is order fulfilment: the order is processed, shipped and delivered to the customer.

Industries using JIT inventory management

Pioneered by Toyota, JIT is well-known, particularly in the automotive sector, and has been around for many years. The keyword in JIT is lean - everything possible done to eliminate waste and achieve increased efficiency.

However, JIT is also popular in several other industries, such as construction, retail, hospitality and technology.

The billion-dollar apparel industry relies on JIT inventory management due to the need to carry an extensive range of products, sizes and styles to meet customer demand. In the fast food industry, orders are prepared only when placed, ensuring minimal waste and fresher ingredients are used.

The importance of JIT inventory management

Businesses can apply several approaches to managing their inventory, such as:

Economic order quantity (EOQ): uses calculations to determine the ideal order quantity
Days sales of inventory (DSI): measures how long it takes to sell all inventory
Materials requirement planning (MRP): forecasts demand accurately

JIT inventory management is one other approach.

Effective inventory management ensures that businesses have the necessary supplies to develop and deliver their products. When managed well, inventory processes are seamless and efficient, saving the business time and money.

What makes JIT inventory management particularly attractive is its strong focus on reducing holding costs while ensuring product availability.

Advantages of JIT inventory management

Here are several advantages of JIT inventory management that allow you to protect your business from supply chain issues:

Reduces inventory carrying and warehouse holding costs: maintaining warehouses is expensive. Reducing these costs can result in savings for the consumer
Reduced need for working capital: reduces financial pressure on the business and requires less cash investment
Reduces inventory waste, loss or damage: with fewer items sitting idle, concerns around waste, loss, damage, degradation or obsolescence are minimised. Defective inventory is easily identified for repair, reducing scrap costs
Reduces dead stock and overstock: businesses remain streamlined and lean
Promotes relationships with local carriers: improved relationships can enhance partnerships, identify areas for improved efficiencies, and create collaborative opportunities
Increases productivity and streamlines inventory management: reduces the time and resources involved in manufacturing a product, simplifying and streamlining the process
Increases inventory flexibility and control: with less inventory on hand, businesses can be leaner, more responsive and flexible to meet demands

Disadvantages of JIT inventory management

On the flip side, it’s important to clarify the disadvantages associated with JIT inventory management:

Increased dependency on suppliers: JIT requires tight turnaround times and strong relationships with key suppliers. Bottlenecks, supply chain disruptions or unexpected troubles faced by suppliers can create problems for the business
Inventory forecasting challenges: JIT works best with steady demand. Demand spikes caused by seasonal changes, market trends, or new developments can lead to stockouts (an out of stock event) or missed sales opportunities
Higher degree of accuracy required: with minimal inventory, businesses must closely monitor demand. Misreading demand can mean delayed response times
Risk of higher inventory costs if errors occur: errors in order timing, deliveries or quantities can cause significant issues, including increased costs
Risk of communication errors: increased dependence on suppliers necessitates open communication lines to reduce error, miscommunication and incorrect assumptions that could impact the business

Pros and cons of JIT inventory management

Pros and cons of JIT inventory management

Pros

Reduces inventory carrying and warehouse holding costs
Reduces the need for working capital
Reduces inventory waste, loss or damage
Reduces dead stock and overstock
Promotes relationships with local carriers
Increases productivity and streamlines inventory management
Increases inventory flexibility and control

Cons

Increases dependency on suppliers
Creates inventory forecasting challenges
Requires a higher degree of accuracy
Increases the risk of higher inventory costs if errors occur
Increases the risk of communication errors

When a business should transition to JIT inventory management

JIT inventory management may not suit every business. To determine if this approach is a good fit for your business, consider these questions:

1. Turnaround time: Can you make and ship your products quickly and easily?

Products that require longer product development and fulfilment times may not suit a lean inventory management approach.

2. Relationships: Do you have trusted relationships with your suppliers?

Are your suppliers reliable? Do you understand the intricacies of their business well enough to know the corresponding points of impact on yours?

3. Forecasting: Is there a steady demand for your product?

JIT works best when demand is known and steady. If your business experiences spikes in demand or if you cannot predict demand accurately, JIT may create more problems than it solves.

4. Your setup: Have you set your house up well?

Inventory management is just one piece of the puzzle in an interconnected system. Technology should be an integral part of your overall operating landscape. With technology, you can automate processes, reduce errors and manual effort, and receive notifications and alerts. All of this enables better visibility and control across your supply chain, and your business as a whole.

The difference between JIT inventory and economic order quantity

JIT inventory management ensures the optimal quantity of inventory using minimum resources and time. However, economic order quantity (EOQ) is a formula used to identify the optimal quantity at hand, while ensuring costs are minimised and profits maximised.

The EOQ formula is as follows:

Q=√2DK/H

Q= EOQ

D= Fixed costs per year

K= Demand in units per year

H= Carrying costs per unit per year

How QuickBooks can help you manage JIT inventory

Ideal for businesses that sell products and services, not only does QuickBooks Online Plus offer accounting tools, but it also enables you to streamline your JIT inventory management. You can implement a JIT inventory management system that allows you to track costs and quantities, create purchase orders, and review your project profitability.

Features such as automatic stock updates, low stock alerts and customised inventory reports allow you to identify your best-selling and worst-selling items, your most profitable products, and key trends. All in all, these features allow you to make more informed decisions about ordering JIT inventory and communicating with suppliers/manufacturers.

Explore QuickBooks Online Plus (which comes with an inbuilt inventory management feature). Give it a go with our free 30 day trial today.

Learn more on how to add inventory to QuickBooks

Frequently Asked Questions

What is just-in-time inventory?

What is the purpose of JIT inventory?

What is the difference between JIT inventory and JIT manufacturing?

What is the difference between JIT inventory and EOQ?

How does JIT inventory improve efficiency?

JIT inventory management enhances efficiency in several ways. Minimising inventory levels reduces costs associated with holding and managing such inventory. This alleviates the need for significant working capital, thereby reducing financial strain. Additionally, there are fewer associated issues to deal with, such as inventory waste, loss, damage or obsolescence. As a result, businesses can be more responsive and flexible in response to identified demands.

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Just in Time Inventory Management (JIT)

What is just-in-time (JIT) inventory?

How does just-in-time (JIT) inventory work?

An example of JIT inventory

Industries using JIT inventory management

The importance of JIT inventory management

Advantages of JIT inventory management

Disadvantages of JIT inventory management

Pros and cons of JIT inventory management

When a business should transition to JIT inventory management

The difference between JIT inventory and economic order quantity

How QuickBooks can help you manage JIT inventory

Frequently Asked Questions

What is just-in-time inventory?

What is the purpose of JIT inventory?

What is the difference between JIT inventory and JIT manufacturing?

What is the difference between JIT inventory and EOQ?

How does JIT inventory improve efficiency?

Related Articles

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