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 Inventory Turnover?2 Views
Finance allah shmoop What is inventory turnover All right well
this is inventory and this is a turnover Okay so
what is it really Well you have inventory I'ii stuff
you want to sell and then you sell it You
started the year with a thousand edible necklaces The pumpkin
spice model promises to be very popular anyway You sold
them for ten dollars each So you have ten grand
in inventory But you did five hundred eighty thousand units
of sales inventory turnover Big Really big five hundred eighty
times big Okay different story Your tesla You have one
hundred tires in inventory You had that same number january
one in april twelfth In july twenty third and december
Thirty one of this year One hundred tires steady state
But you sold fifteen thousand cars in a year We'll
let four tires apiece Yeah That's a sixty thousand tires
And we're not counting that thing in the trunk It's
Not really a tyre anyway It's More like a bicycle
tire Enormous inventory turnover Sixty thousand over one hundred or
six hundred Ex enormous inventory turnover Very efficient use with
the capital spent on those hundred tires Well so why
Does inventory turnover even matter Alright Yeah it's about capital
We hinted you there Think about your capital needs Like
if you have to raise tons of money to store
tons of inventory that you take forever to sell Well
then you're not using your capital very efficiently Like why
not make the tire manufacturers who are actually in the
business of building distributing and planning for tyre demand Why
not make them hold all the inventory using their capital
not yours Well not all inventory turnover numbers mean the
same thing like what's inventory in an oil rig leasing
company Well you keep eight rigs on hand you know
you'll have to tow them out to the middle of
the ocean At some point they're crazy expensive to build
and maintain and some years when oil is really cheap
there just won't be any demand for your rigs for
drilling so you'll have to store him and oil them
and wave to them kindly So how do you make
sense out of that number like oil rig Turn over
when you're comparing it to say a grocery stores turnover
where the average six pack of diet coke last like
fifty three hours on the shelves made so inventory turnover
is really more of a quote relative to last year
unquote thing or a quote relative to our hated competitors
bob unquote kind of thing And there are ways to
game this data point as well the easiest of which
is well too Just let your inventory amount fall like
if you started the year with a thousand naked cupid
hood ornaments and let supplies dwindled to just two hundred
while then via industry norms of just taking the average
quarterly inventory levels through the year Well you might show
an average inventory of six hundred units this year thereabouts
and you'd be going into the next year with only
two hundred and generated a lot of cash along the
way Like you turned all that money that was tied
up in your inventory in the cash on your bottom
lines that good Is it bad Well just like pretty
much everything in from of finance videos and diapers it
depends Well it's good to have low inventory to a
point What happens if you run so low that customers
can't buy from you because you can't fill orders for
three months and then they go to bob than the
cost of not having enough inventory was massive You lost
sales profits and market share or power or theft and
it hurt your brand like people don't respect it as
much anymore Yeah sorry just keeping it real But in
general high turnover is good It means you're using your
inventory capital of the capital you spent to build your
inventory efficiently and that when you make it to the
top of the hill you're you know able to keep 00:03:43.925 --> [endTime] your balance Yeah
Up Next
Work-in-process inventory is just inventory... that is in the process of being built. In other words, it accounts for the inventory's asset value.
How is inventory managed for cash flow purposes? In order to avoid the cost of carrying slow moving or out of favor inventory that would take space...
What is inventory? From a financial perspective, inventory usually consists of A) raw materials for manufacturing products, B) products in the mids...