Advantages of Just-In-Time Accounting

By Don Sadler

Selecting the right inventory management system can be one of the best decisions a small business can make.

Accounting for Inventory

Technology and software has rendered obsolete the days of products and raw materials sitting in warehouses and stockrooms. In today's economic environment, businesses must be lean and dexterous.

Carrying costs can eat away at a company's profit margins. Many small business owners - who may be trying to improve customer satisfaction by having a lot of inventory readily available for sale - fail to realize the true cost of carrying inventory. Some of the costs of carrying inventory are:

• Storage
• Handling
• Damage
• Obsolescence
• Spoilage

Almost every goods producing business has to decide how much inventory to carry. This can be a difficult decision to make. Shortages may result in less sales and lower customer satisfaction. Excess inventory can be thought of as excess cash that is not contributing to the operations of a business.

Just-in-Time

How can managers know what the right level of inventory to carry is? Small businesses can implement an inventory management system known as just-in-time (JIT) to help make this decision.

Here's how the just-in-time method works. Inventory is ordered and received as it is needed or ordered by a customer. This compares to a company making inventory, storing it, and then selling as much of it as possible.

As far back as the early 20th century, Ford Motor Company was one of the early prognosticators of the just-in-time method. Today, using sophisticated inventorymanagement software, just-in-time inventory is extremely applicable for small businesses.

A computerized inventory management system can automate the just-in-time inventory process, tracking inventory from the time it is produced to delivery. JIT software can be automated to reorder inventory as soon as it reaches a certain level.

Dell is an example of a company which has adopted the just-in-time inventory system. Employing the just-in-time inventory method, Dell popularized selling custom computers to customers.

Instead of producing computers and storing them on warehouse shelves, Dell receives orders from customers, and builds the inventory after the point of sale. Using advanced inventory management system software, Dell builds computers to exact customer specifications and the entire process takes roughly the same time that it would for a competitor to ship computers from a warehouse to a client.

Benefits of Just-In-Time

Excess or shortages of inventory can be wasteful. The just-in-time method seeks to minimize inefficient uses of inventory, and increase profitability and return on investment by reducing carrying costs. Ideally, just-in-time eliminates traditional inventory because the business only produces items that are set to be delivered to customers.

Just-in-time aims to reduce work-in-progress inventory as well by improving the efficiency of input materials between workstations on the manufacturing floor. The JIT process uses signals between different points in the manufacturing process that tell production when to make the next part.

Supplier Relationships are Crucial

Because there should be little to no delay in the production process (JIT can only work for goods and services that can be produced in a timely fashion), companies that employ just-in-time inventory must have strong relationship with suppliers. Any disruptions along the supply chain will damage the just-in-time process.

These suppliers are partners in the manufacturing or stocking process, and must be willing and able to provide smaller and more frequent deliveries. If a small business is able to match up with such a supplier, and can implement the just-in-time inventory management system, carrying costs can be reduced and excesses/shortages of inventory could be reduced to a minimum.