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Delivery time stock Delivery time

Minimum inventory level

Time

Reorder point

Minimum inventory level

Time

By combining safety stocks and reorder points, the firm maintains a buffer against unforeseen events.

maximizing turnover. The approach began in Japan, and it is a fundamental part of Japanese manufacturing philosophy. As the name suggests, the basic goal of JIT is to have only enough inventory on hand to meet immediate production needs.

The result of the JIT system is that inventories are reordered and restocked frequently. Making such a system work and avoiding shortages requires a high degree of cooperation among suppliers. Japanese manufacturers often have a relatively small, tightly integrated group of suppliers with whom they work closely to achieve the needed coordination. These suppliers are a part of a large manufacturer's (such as Toyota's) industrial group, or keiretsu. Each large manufacturer tends to have its own keiretsu. It also helps to have suppliers located nearby, a situation that is common in Japan.

The kanban is an integral part of a JIT inventory system, and JIT systems are sometimes called kanban systems. The literal meaning of kanban is "card" or "sign," but, broadly speaking, a kanban is a signal to a supplier to send more inventory. For example, a kanban can literally be a card attached to a bin of parts. When a worker pulls that bin, the card is detached and routed back to the supplier, who then supplies a replacement bin.

A JIT inventory system is an important part of a larger production planning process. A full discussion of it would necessarily shift our focus away from finance to production and operations management, so we will leave it here.

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