Inventory is one of the largest current assets on the balance sheet. There's also a cost of holding inventory. So, the less time inventory spends on the shelves, or in the warehouse, the less working capital is restricted and tied up in inventory. Just in time inventory, or JIT, is an inventory system that allows business owners to reduce the amount of time inventory is kept on hand. In JIT inventory, the inventory is ordered as needed, which is when the customer orders it.
Dell provides an example of JIT inventory. As a computer manufacturing company, Dell allows customers to purchase computers directly online. Everything from the hard drive to features such as color and screen width is custom ordered. As soon as the order is finalized, the raw materials and parts are ordered. The raw materials are then assembled and made ready for the customer in a relatively short period of time.
Many fast foods restaurants don't cook -- or reheat -- the food until it is ordered. Everything is ready for quick assembly when the order is taken, but little inventory of finished burgers or sandwiches is kept on hand. Yet McDonald's, like Dell, is known for speed and dependability. Every time you go to McDonald's you get the same experience, which is the model that has made the company a household name.
Wholesalers sell to distributors or retailers. They keep the inventory on hand in a warehouse. You purchase only what you need and can reasonably store. Drop-shipping, therefore, is a JIT inventory strategy that allows distributors and retailers to order after the customer has placed an order. The drop-shipper then sends the item directly to the customer. In this way, the reseller maintains little risk and the drop-shipper will even put the resellers name on the package so the reseller maintains and builds the customer relationship.
Toyota is well known for their work with JIT. The Kanban System is the inventory system that efficiently orders materials for production as they are needed. The system refers to the preceding process to know which inventory to purchase. Also referred to as the "supermarket method" because of the use of product name, code, and storage location on control cards, the Kanban System brings mass merchandising to auto manufacturing and inventory management.