JIT is a way of organising your inventory so that you order raw-material from suppliers only when you need to produce goods.
The point of the JIT inventory system is to avoid the costs and the logistics associated with having a large warehouse full of raw materials and goods, and to avoid tying up a lot of money in your inventory.
An example of the just in time system
Let’s take an example: You’re a woodworker who sells chairs. With the JIT method, you would wait until you receive an order from a client—or you’re certain that you’ll make sales in the near future—before you order lumber, upholstery fabric, screws and so on.
Let’s say a customer wants 6 chairs. Once they’ve placed their order, you’d order the necessary raw materials and produce the chairs, and ship or deliver them to the customer.
If you weren’t using the JIT method, you’d continually order raw material to keep your warehouse stocked with chairs. The upside of this is that you’d always have stock on hand and can cut production time entirely, which means you can get paid quicker.
The downside however, is that you continuously have to spend money on raw materials, spend working hours producing the chairs, and cover the cost of owning or renting a warehouse—all without a guarantee that you’ll sell those chairs.
What’s the benefit of JIT?
There are both pros and cons to JIT. Let’s look at the benefits first:
- Your variable costs will be nonexistent when you don’t have customers. Variable costs are tied to the production of goods and services, so if you don’t have any customers, you won’t have any variable costs.
- You save money because you don’t need a warehouse or other storage facilities for your inventory.
- You don’t tie up a lot of money in your inventory, which means you’re more easily able to cover fixed costs, as well as unforeseen expenses.
However, you have to be very good at forecasting customer demand, or you need customers who are willing to accept longer delivery times.
You also have to ensure that you have a steady production process when orders come in. If equipment or machinery breaks down—or your supplier of raw materials is struggling to deliver—this could lead to angry customers and cancelled orders.