Just-in-Time Approach
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
The just-in-time (JIT) approach is an inventory strategy built around ordering as little as possible, as late as possible.
What is the just-in-time approach?
Under JIT, a company doesn't keep extra inventory sitting around. Instead of ordering ahead of time and storing it, the company waits until a customer actually places an order, then orders the inventory to fulfill it. For a car manufacturer, that means waiting until someone buys a car before ordering the parts to build it.
Why would a company use it?
Holding inventory isn't free — it ties up cash and comes with storage costs, insurance, and the risk that it becomes obsolete before it's ever sold. JIT minimizes all of that by keeping as little inventory on hand as possible.
What's the risk?
JIT trades inventory risk for delivery risk. If there's any delay getting inventory once an order comes in, the customer feels it directly — which can damage customer sentiment. That's why JIT only works when a company has fast, reliable delivery times and strong relationships with its suppliers.
JIT swaps carrying costs for delivery risk. It only makes sense when a company can count on its suppliers to deliver quickly and reliably — without that, the savings on inventory holding costs aren't worth the risk of disappointing customers.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 98 on BEC. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.