Chapter 8
Inventory Valuation
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when shipping costs lag inventory. This indicates that the company is not shipping out as many
items as it is receiving in inventory.The missing items might have been taken by thieves.
All companies should be in the practice of noting these red flags and ensuring measures are in place
to prevent or detect theft. Furthermore, all businesses should implement security measures that
properly safeguard inventory on their premises.
Perhaps no business philosophy captures the spirit of high inventory turnover more than Just In
Time, also known as JIT.
The Japanese first started developing JIT in their manufacturing industries afterWordWar II. The goal
was to gain a competitive advantage by reducing the amount of inventory a company had in storage at any
given time, since inventory is often a larger but less liquid asset than other assets on the balance sheet. JIT
made its way to North America and has been used to improve manufacturing efficiency in many different
industries.
At the heart of JIT is a comprehensive approach not just to reducing inventory, but to managing a
business. Under JIT, it is the customer that drives the manufacturing process. That is why JIT systems are
often implemented in conjunction with what is known as Total Quality Management, or TQM. Under such
philosophies, everything is done to ensure that the customer gets quality goods and services on time, every
time.
To that end, JIT systems mobilize efforts to coordinate manufacturing processes and reduce waste. The
goal is to have virtually no excess inventory on hand at any time. This can only be achieved if a company
thoroughly understands what the customer wants and when they want it. Receiving and shipping schedules,
assembly parts, and labour flexibility are all adapted to ensure that customer demand is met while enhancing
organizational efficiency and profitability.
JIT stresses the importance of reducing a company’s inventory while enhancing customer service. It is a
comprehensive approach that has achieved success on a global scale.
INTHE REAL WORLD
