Just In Time Inventory Definition, Example and Importance
Just In Time Inventory Definition – “A process of keeping only that much amount of inventory in hand so that current order requirements are fulfilled “.
In simple words, it is a concept which states that a business firm should keep only that much amount of inventory that could fulfill current demands. This results in increasing the operational efficiency of the firm. At the same time, wastage level also decreases.
In JIT approach, firms hold only that much amount of stock which is used in the production process. JIT inventory system only keeps inventory to a level which will meet the current demand of the customers. There is no extra stock kept above it.
Therefore, to apply JIT system of inventory control, it is very important to analyse the accurate number of customer demand. This type of inventory management system requires an effective supply chain management. So, whenever the need arises, the business is able to deliver the product.
Just In Time Inventory Example
Let’s understand just in time inventory definition with the help of an example –
Dell Inc follows the concept of JIT only. Instead of manufacturing the product in advance, they make it according to the demand of the customers. Suppose one of the Dell store in New Delhi receives order of 5 dell notebooks. Now the store will ask various specification what the customer needs in that notebook. Then they will contact their supplier. The supplier will deliver the dell notebooks of similar specifications.
Related Financial Terms of Just In Time Inventory
- Allocation Definition – Allocation Meaning | Example | Importance
- Cost of Capital Definition – Formula, Example and Importance
Importance of Just In Time Inventory
The main advantage of the JIT system is that it reduces the holding or warehousing cost for the company. In addition to this, the fear theft, obsolescence also get eliminated.
However, for using just in time inventory system effectively, it is very important that managers assess the demand of the customers accurately. In case the demand is not assessed carefully, it could even result in shortage of raw material.
In addition to this, JIT also eliminates the problem of switching from one supplier to another for getting the lowest price. As, mentioned above, an effective supply chain is required, so is one supplier is unable to perform effectively, it could disrupt the entire supply chain.
