Inventory Management

Manufacturing companies take raw materials and turn them into finished products. Merchandising companies buy product and resell it. Both types of companies must manage their inventory. If you order too much, you risk obsolescence, spoilage, or inability to sell. If you order too little, you may lose sales you could have made and risk upsetting your customers. This section will help you understand how companies manage their inventory to minimize overall costs.

Just-in-Time Technique

Just in time (JIT) is a production strategy that strives to reduce in-process inventory and carrying costs in a manufacturing system.

Learning Objective

  • Discuss the benefits and disadvantages of using a Just-In-Time (JIT) inventory system

Key Points

  • JIT focuses on continuous improvement and can improve a manufacturing organization's return on investment, quality and efficiency.
  • JIT relies on efficient coordination of elements in the inventory chain.
  • There are many benefits of JIT. It improves the flow of goods from warehouse to shelves, reduces set up time and efficiently uses human resources.

Key Terms

  • carrying costs: carrying cost refers to the total cost of holding inventory. This includes warehousing costs such like utilities and salaries; financial costs like opportunity cost; and inventory costs related to perishability, shrinkage and insurance.
Just in time (JIT) is a production strategy striving to improve a business return on investment by reducing in-process inventory and associated carrying costs. To meet JIT objectives, the process relies on signals or Kanban between different points in the process. Kanban are usually "tickets" but can be simple visual signals, like the presence or absence of a part on a shelf. Implemented correctly, JIT focuses on continuous improvement and can improve a manufacturing organization's return on investment, quality and efficiency. To achieve continuous improvement, key areas of focus are:

  • flow
  • employee involvement
  • quality.
Noticing that stock depletion requires personnel to order new stock is critical to the inventory reduction at the center of JIT. But JIT relies on other elements in the inventory chain. Therefore, JIT is best implemented as one part of an overall lean manufacturing system.

Benefits of JIT:

  • Reduced setup time. Cutting setup time allows the company to reduce or eliminate inventory for "changeover" time.
  • The flow of goods from warehouse to shelves improves. Small or individual lot sizes reduce lot delay inventories, which simplifies inventory flow and its management.
  • Employees with multiple skills are used more efficiently. Having employees trained to work on different parts of the process allows companies to move workers where they are needed.
  • Production scheduling and work hour consistency are synchronized with demand. If there is no demand for a product at the time, it is not made. This saves the company money, either by not having to pay workers overtime or by having them focus on other work.
  • Increased emphasis on supplier relationships. A company without inventory does not want a supply system problem that creates a part shortage. This makes supplier relationships extremely important.
  • Supplies come in at regular intervals throughout the production day. Supply is synchronized with production demand and the optimal amount of inventory is on hand at any time. When parts move directly from the truck to the point of assembly, the need for storage facilities is reduced.
  • Minimizes storage space needed.
  • Smaller chance of inventory breaking/expiring.


Just-in-time operation can leave suppliers and downstream consumers open to supply shocks and large supply or demand changes. In addition, very low stock levels means shipments of the same part can come in several times per day. This means firms favoring JIT are especially susceptible to flow interruption.