Costs associated with inventory make up one of the most critical cost areas within an organization. Whether the company manufactures goods or sells finished products, inventory carrying costs and their component parts can represent a significant portion of the company's cost structure. In addition, having the wrong amount of inventory on hand can result in difficulty. Having too much inventory on hand means that extra warehouse space is needed in addition to the costs associated with the inventory itself. This research examines a particular type of inventory management, just-in-time (JIT), and examines the costs and benefits associated with this type of inventory control.
Reduction of inventories is the main reason that companies have sought alternative inventory management methods. The use of smaller batches leads to the need for less inventory at any particular point in the production process. Cash flow is improved due to less capital investment in inventory. Less inventory on hand leads to savings in other areas as well, such as smaller space requirements, decreased materials handling costs, decreased record keeping costs, decreased insurance and tax obligations, and less scrap and obsolescence (Larson, 1998, p. 44).
JIT as practiced in American companies has actually been imported from Japanese companies. These companies, such as Honda and Nissan, are admired for their ability to generate high levels of quality products while maintaining a high level of employee productivity, as well. As American executives began researching what led to this, they discovered the Japanese commitment to quality, and as a subset of that, the use of JIT systems.
Quality is an integral part of the JIT philosophy, and American managers have introduced some Japanese operating principles (such as quality circles) wholesale into American companies. In other cases, companies have studied the underlying principles of JIT to understand how t...