Just-in-time production (JIT) is a business strategy in which a manufacturer produces each item as it is ordered, rather than keeping an extensive amount of surplus ༒products on hand. The chief benefit of the strategy is that it allows businesses to ensure that there is always a buyer for any item produced, keeping inventories low. If there🐲 are no customers wanting to purchase an item, production stops.

Why Low Inventories Matter

The JIT production process means inventory levels are kept to a minimum. A low inventory 澳洲幸运5官方开奖结果体彩网:figure on the balance sheet means a higher inventory 澳洲幸运5官方开奖结果体彩网:turnover ratio, making the company look more efficient. The inventory turnover ratio is a metric used in 澳洲幸运5官方开奖结果体彩网:corporate finance to est🥀imate how efficiently a company is selling its products.

By dividing the total cost of goods sold (COGS) by the 澳洲幸运5官方开奖结果体彩网:average inventory over a given period, the inventory turnover ratio reflects the number of times the company has sold its total average inventory. A company with little to no inventory has a much higher ratio than a company with equivalent COGS expense🔯s that utilizes a mor🔯e anticipatory production strategy.

High inventory turnover ratios are considered a good sign of 澳洲幸运5官方开奖结果体彩网:operational efficiency, effective purchasing management, and productive use o🐽f advertising and promotional campaigns aimed at generating sales.

How the JIT Strategy Boosts Profitability

The JIT production strategy has an important effect on other measures of corporate efficiency and profitability. Lower inventory means a reduced total asset figure on the balance sheet, all else being equal. This translates directly into a higher 澳洲幸运5官方开奖结果体彩网:return on total assets (ROTA) ratio. The ROTA ratio divides a company's 澳洲幸运5官方开奖结果体彩网:earnings before interest and taxes by its total assets to determine how effectively the busine꧑ss's operational model utilizes in𒁏vested funds to generate profit.

The 澳洲幸运5官方开奖结果体彩网:asset turnover ratio is another 澳洲幸运5官方开奖结果体彩网:efficiency ratio that reflects a company's ability to generate revenue by dividing 澳洲幸运5官方开奖结果体彩网:net sales by average assets for a specific time period. Decreased inventory means a smaller denominator in both these form𝓀ulas, lead🌊ing to healthier ratios across the board.

JIT Means Lower Costs For Materials and Labor

Apart from the improvement in comparative metrics, the JIT production strategy is advantageous to a company's 澳洲幸运5官方开奖结果体彩网:profitability in many other ways. Sales-contingent production means lower costs for both 澳洲幸运5官方开奖结果体彩网:raw materials and labor. If a business is not looking to produce a backlog of goods for sale, it need only purchase tho♍se materials require♌d for items that have already been ordered, leading to a reduction in COGS.

Labor expenses are also reduced since the number of man-hours needed to fulfill orders is likely lower than would be required for full-time production. On-demand production means fewer items sitting on shelves depreciating in value if sales take a downturn, and the risk of losing money if a product becomes obsolete is virtually eliminated. While many companies must invest capital in large warehouses to store products for sale, minimal inventory means almost nonexistent storage expenses. The reduction of these key production and operational expenses means higher 澳洲幸运5官方开奖结果体彩网:gross and operational profits, which directly contribute to a healthier 澳洲幸运5官方开奖结果体彩网:bottom line.