The economic order quantity answers the question “how much should we order?” on the assumption that holding some stock is unavoidable. Just-in-time (JIT) challenges that assumption. It asks whether the stock needs to be there at all. If materials arrive precisely when production needs them, and goods are made precisely when customers want them, the money, space and risk tied up in stock largely disappear.
But the saving comes at a price: a business that holds almost no stock has almost no cushion when something goes wrong.
This topic explains JIT production and purchasing, the conditions it relies on, its benefits and challenges, the way supplier relations and demand forecasting must change, and two simpler stock control systems, the two-bin system and periodic review. The syllabus asks for the benefits and challenges of JIT, its necessary principles, supplier relations and demand forecasting, so all of these are covered, with a costing example and exam questions.
In 30 seconds
JIT treats stock as a cost and a risk, and tries to synchronise production and purchasing with actual demand so that stock is close to zero. JIT production makes goods only to meet demand. JIT purchasing brings materials in just as they are needed, from a few reliable suppliers with whom the firm has long-term partnerships.
It only works if demand is predictable, suppliers are dependable, quality is near perfect, processes are flexible, lead times are short, and the workforce is skilled and committed to continuous improvement. Benefits are lower stock costs and better cash flow. The main danger is disruption. Other systems include the two-bin system and periodic review.
What JIT is
Just-in-time is a way of managing stock developed in Japan in the 1970s. It marked a break from older approaches such as the economic order quantity (EOQ) model and re-order point systems, which accept stock as normal. Under JIT, stock that is not needed straight away is waste. It costs money to finance and store, and it may become obsolete or deteriorate, without earning anything. The aim is to remove stock that adds no value.
| JIT production | JIT purchasing | |
|---|---|---|
| Idea | Make goods only when customers need them, so finished goods stock is kept to a negligible level | Buy materials and components only when production needs them, so that raw material stock is not needed |
| Needs | Fast throughput, reliable machines and almost no defects | Close coordination with suppliers so deliveries match the production schedule |
| Result | Little or no finished goods stock or work-in-progress | Smaller, more frequent deliveries, less holding cost and less risk of obsolescence or deterioration |
In a JIT system, stock is entirely demand-driven. Finished goods must be ready the moment an order arrives, and raw materials must be delivered at the exact time they are needed.
Necessary principles and assumptions
JIT does not work in every business. It rests on a set of conditions.
| Condition | Why it matters |
|---|---|
| Stable, forecastable demand | Production and buying are timed closely to demand, so wild swings cause shortages |
| Reliable suppliers | Materials must arrive on time, in the right quantity and quality, or production stops |
| Flexible, efficient production | The process must respond quickly to changes in demand without downtime or waste |
| High product quality | Near-zero defects, because there is no spare stock to replace faulty units |
| Skilled, engaged workforce | Staff must solve problems and improve processes continuously |
| Short lead times | Short times in buying and production keep the flow continuous and reduce the need for buffers |
| Operational continuity | Few breakdowns or labour disputes, because any interruption spreads through the whole supply chain |
| Culture of continuous improvement (kaizen) | Waste must be removed constantly, raising efficiency and quality |
What JIT demands in practice
- Quick production cycles. With no finished goods stock, orders must be completed quickly.
- Reliable production. There can be no bottlenecks, breakdowns or defects. Scrap and rework conflict directly with the aim of removing waste.
- Dependable suppliers. Deliveries must be on time and meet strict quality standards, so that rejects do not interrupt production.
JIT purchasing and supplier relations
JIT succeeds only when production and supply are both efficient. For purchasing, this means building excellent, long-term, cooperative relationships with a small number of key (strategic) suppliers. The firm should not simply choose whoever quotes the lowest price on each order. The emphasis is on consistency and quality rather than the lowest price.
Working with strategic suppliers, a JIT firm aims to:
- cut or remove stocks and work-in-progress;
- reduce order sizes, because output is made to meet specific demand and deliveries are timed to production needs; and
- have deliveries arrive in the factory at exactly the time they are needed.
Benefits and challenges of JIT
The syllabus describes the features of JIT and the objectives of forecasting under it. From these, the main benefits and challenges can be set out as follows.
| Benefits | Challenges |
|---|---|
| Lower stock holding costs: less capital tied up, less warehousing, less insurance, and fewer losses from deterioration, obsolescence and theft | Dependence on suppliers: a late or faulty delivery can halt the whole production line |
| Better cash flow: money not locked in stock is free for other uses | Demand uncertainty: sudden jumps in demand cannot be met from stock, so sales and customers may be lost |
| Less waste: no overstocking and less material wasted | Need for near-perfect quality and reliability: defects, breakdowns and labour disputes quickly disrupt output |
| Improved customer satisfaction: prompt delivery builds loyalty and trust | Cost of setting up: technology, supplier development and staff training need investment |
| Operational efficiency: smoother production schedules and supply chain | Possible price premium: frequent small deliveries and close supplier partnerships may raise unit costs |
Demand forecasting for JIT
Because there is no stock to fall back on, accurate demand forecasting is critical in a JIT system. It must be more responsive and precise than conventional forecasting, in order to keep up with fast-changing markets and prevent disruption.
Why forecast
- Reduced waste: accurate forecasts avoid overstocking and material waste.
- Improved cash flow: low stock frees up capital.
- Customer satisfaction: goods are delivered on time.
- Operational efficiency: production and supply run smoothly.
The forecasting process
| Stage | What happens |
|---|---|
| 1. Data collection | Gather historical sales data (for patterns and seasonality), market trends, current customer orders (which signal immediate demand changes), and suppliers’ lead times |
| 2. Demand analysis | Study the trend (long-term growth or decline), seasonality (high and low periods) and demand variability (how much it fluctuates) |
| 3. Forecasting techniques | Qualitative methods (expert opinion, market research, customer feedback), which suit cases with little history; quantitative methods (time series, moving averages, regression); and machine learning models that find complex patterns in large data sets |
| 4. Collaborative forecasting | Involve sales teams (customer preferences and coming orders), production managers (capacity and schedules) and suppliers (lead times) |
| 5. Continuous monitoring and adjustment | Keep checking forecasts against sudden changes in customer behaviour, supply chain disruptions and economic conditions, using real-time data and analytics tools for fast adjustments |
Challenges in forecasting for JIT
- Incomplete or outdated data causes errors that disrupt the system.
- Market volatility from economic swings, changing tastes and competition makes forecasting harder.
- Dependence on suppliers: delays or inconsistent supply upset production and leave demand unmet.
- Technology barriers: advanced forecasting tools need investment in systems and skilled staff.
Good practice
- Invest in analytics and machine learning for accuracy and speed.
- Build strong links with suppliers, sales teams and production managers.
- Use a hybrid approach that combines quantitative models with qualitative judgement.
- Stay flexible so that sudden changes in demand can be handled.
Other stock control systems
The EOQ and JIT are two ways of managing stock and purchase quantities. Others are in use.
Two-bin system
Each item is stored in two containers. Stock is drawn from bin 1 until it is empty, and an order is then placed to refill bin 1. Since delivery takes time, stock is drawn from bin 2 in the meantime. Bin 2 must be large enough to last until the delivery arrives. On delivery, both bins are refilled and issues resume from bin 1. The cycle repeats indefinitely.
Its attraction is that it needs almost no paperwork: an empty bin 1 is itself the signal to re-order.
Example. Demand for an item is 200 units a week and the supplier takes two weeks to deliver. During the lead time, 400 units are used. Bin 2 must therefore hold at least 400 units. A bin 2 holding 500 units gives a margin for unexpected demand.
Periodic review system
Each item has a re-order quantity and a re-order level. Stock is checked at fixed intervals, say every one, two, three or four weeks. If stock has fallen below the re-order level at a review, an order for the re-order quantity is placed at once. A stock level that could last longer than the next review may be left alone until the next check.
Because stock is only checked periodically, the level must cover use over both the review period and the lead time. The minimum level is therefore (review period + lead time) × weekly demand.
Example. Weekly demand is 250 units. Stock is reviewed every two weeks, and the lead time is three weeks. The level that triggers an order is (2 + 3) × 250 = 1,250 units. If, at a review, stock is below 1,250 units, an order is placed.
| System | How the re-order is triggered | Main advantage | Main limitation |
|---|---|---|---|
| EOQ with re-order level | Stock falls to a calculated level, and a calculated quantity is ordered | Minimises ordering plus holding cost | Relies on stable demand and constant lead times |
| JIT | Orders are made to match actual demand and production schedules | Almost no stock, less cost and risk | Very vulnerable to disruption |
| Two-bin | Bin 1 runs empty | Simple, little paperwork | Needs bin sizes set correctly. Does not account for changing demand |
| Periodic review | Stock is checked at fixed intervals and compared with the re-order level | Easy to organise, with regular reviews | Stock may fall too low between reviews, so a higher level is needed |
The ideas in more depth
JIT and the accounting records
With little stock, the problems of choosing first in, first out (FIFO), last in, first out (LIFO) or average costing largely vanish, because there is not much stock to value. Materials are charged to production almost as soon as they arrive. The accounting effort shifts instead to measuring supplier performance, quality, delivery times and waste.
A JIT decision is also a cost-benefit decision
JIT cuts stock costs, but it may increase purchase prices and the cost of disruption. A sound decision weighs the saving in holding costs against the extra costs. The example below shows how.
JIT and quality
In a normal system, a defective batch can be replaced from stock. In JIT, it cannot, so quality has to be built in at every stage. That is why JIT is closely linked with continuous improvement and why quality failures are so costly.
Not for every business
A business with highly seasonal or unpredictable demand, a single unreliable supplier, or long delivery times from overseas may find JIT too risky. May do better with an EOQ system and safety stock. A business with steady demand and dependable local suppliers is a good candidate.
Worked example: should the firm adopt JIT?
Scenario. Ibadan Plastics Ltd holds average stock worth ₦8,000,000. The cost of finance is 12% a year. Warehousing and insurance cost ₦700,000 a year, and losses from damage and obsolescence cost ₦300,000 a year. Under a JIT plan, average stock would fall to ₦1,000,000, warehousing and insurance to ₦150,000, and losses to ₦40,000. Suppliers would charge a 2% premium on annual purchases of ₦50,000,000 for frequent small deliveries. Should the firm adopt JIT?
- Current stock cost.
Finance = ₦8,000,000 × 12% = ₦960,000.
Plus warehousing and insurance ₦700,000 and losses ₦300,000 = ₦1,960,000. - JIT stock cost.
Finance = ₦1,000,000 × 12% = ₦120,000.
Plus ₦150,000 and ₦40,000 = ₦310,000. - Saving in stock costs.
₦1,960,000 − ₦310,000 = ₦1,650,000. - Extra purchase cost.
2% × ₦50,000,000 = ₦1,000,000. - Net saving.
₦1,650,000 − ₦1,000,000 = ₦650,000 a year. - Further points. The saving is positive, so JIT looks worthwhile. But the firm should consider the one-off costs of change, the reliability of the suppliers, and the cost of a stoppage if a delivery fails. Release of ₦7,000,000 of cash tied up in stock is an additional one-time benefit.
Common mistakes in the exam
- Describing JIT only as “having no stock”, without saying that production and purchasing are timed to demand.
- Listing benefits without any challenges when both are asked for.
- Forgetting that JIT needs close, long-term relationships with a few suppliers, not the lowest price from many.
- Saying JIT suits any business. It depends on stable demand and reliable suppliers.
- Confusing the two-bin system with a system of two stores.
- In periodic review questions, forgetting to add the review period to the lead time.
- Treating JIT as a purchasing method only. It also applies to production.
Quick revision
- JIT: stock is waste. JIT production makes only what is demanded. JIT purchasing brings in materials just when needed.
- Needs: stable demand, reliable suppliers, flexible production, high quality, skilled staff, short lead times, continuity, kaizen.
- Suppliers: long-term partnerships, few strategic suppliers, quality and consistency over lowest price.
- Forecasting: collect data, analyse demand, choose techniques, collaborate, monitor and adjust.
- Two-bin: refill bin 1 when it empties. Periodic review: minimum level = (review period + lead time) × demand per period.
Practice questions
These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer.
Section A style: multiple choice
Question 1. The main aim of just-in-time is to:
- Maximise stock to avoid shortages
- Remove stock that adds no value by matching production and purchases to demand
- Buy from the cheapest supplier each time
- Increase order sizes
Show the answer
B. Stock is treated as waste and a cost.
Question 2. Which is a condition for JIT to work?
- Unpredictable demand
- Reliable suppliers
- High defect rates
- Long lead times
Show the answer
B. Suppliers must deliver on time and to quality.
Question 3. In JIT purchasing the firm should prefer:
- Many suppliers on short-term contracts chosen on lowest price
- A few strategic suppliers with long-term relationships
- Buying only once a year
- Cash purchases only
Show the answer
B. Consistency and quality matter more than the lowest price.
Question 4. A major risk of JIT is that:
- Stock costs rise
- A late or defective delivery can stop production
- Cash flow worsens
- Warehousing costs increase
Show the answer
B. There is no buffer stock.
Question 5. Which of these is a benefit of JIT?
- Higher warehousing cost
- Improved cash flow because less capital is tied up in stock
- Greater obsolescence risk
- Larger order sizes
Show the answer
B. Holding minimal stock frees up cash.
Question 6. In a two-bin system, a new order is placed when:
- Bin 2 is empty
- Bin 1 is empty
- Both bins are full
- The year ends
Show the answer
B. Bin 1 running empty triggers the order, and stock is drawn from bin 2 until delivery.
Question 7. Weekly demand is 400 units, the review period is 3 weeks and the lead time is 2 weeks. The level that triggers an order in a periodic review system is:
- 800
- 1,200
- 2,000
- 2,400
Show the answer
C. (3 + 2) × 400 = 2,000 units.
Question 8. Which is a stage in the JIT demand forecasting process?
- Ignoring supplier lead times
- Collaboration between sales, production and suppliers
- Setting forecasts once and never revising them
- Avoiding data collection
Show the answer
B. Collaborative forecasting is one of the stages.
Question 9. JIT is most suitable for a business with:
- Highly erratic demand and a single unreliable supplier
- Stable, forecastable demand and dependable suppliers
- Long delivery lead times
- Frequent machine breakdowns
Show the answer
B. Those are the conditions JIT relies on.
Question 10. The Japanese idea of continuous improvement, important to JIT, is called:
- Kaizen
- Bin card
- Backlog
- Floating
Show the answer
A. Kaizen means continual refinement to remove waste.
Section B style: written questions
Question 11 (10 marks). Explain the just-in-time approach to inventory management, and state five conditions that must be met for it to succeed.
Question 12 (20 marks). Minna Appliances Ltd is considering a move from an EOQ-based system to JIT.
(a) Distinguish between JIT production and JIT purchasing. (4 marks)
(b) State three benefits and three challenges of JIT. (6 marks)
(c) Explain the relationship the company should aim to build with its suppliers. (4 marks)
(d) Describe the stages of the demand forecasting process under JIT. (6 marks)
A further written question
Question 13 (10 marks). A firm holds average stock of ₦5,000,000. Finance costs 10% a year, warehousing costs ₦450,000 a year and losses from damage and obsolescence are ₦150,000. Under JIT, average stock would be ₦500,000, warehousing ₦100,000 and losses ₦20,000, but suppliers would charge 1.5% more on annual purchases of ₦30,000,000. (a) Calculate the net annual saving or cost of adopting JIT.
(6 marks) (b) Weekly demand for a part is 300 units, stock is reviewed every 4 weeks, and the lead time is 1 week. Calculate the level that triggers an order in a periodic review system. (2 marks) (c) State two non-financial factors to consider before adopting JIT. (2 marks)
Model answers
Show the model answer to Question 11
JIT. Just-in-time is an approach that treats stock as a cost and a risk, because it ties up capital and may deteriorate or become obsolete without adding value. It aims to remove stock that adds no value by timing production and purchasing exactly to demand. In JIT production, goods are made only to meet customer demand, so finished goods stock is negligible.
In JIT purchasing, materials and components are delivered just when production needs them, so raw materials are not held in stock.
Conditions for success (any five):
- (1) demand is stable and can be forecast
- (2) suppliers are reliable and deliver on time at the right quality
- (3) production is flexible and efficient, able to respond to changes without downtime
- (4) product quality is very high with almost no defects
- (5) the workforce is skilled and committed to continuous improvement
- (6) lead times are short
- (7) production is rarely interrupted by breakdowns or labour disputes
- (8) there is a culture of continuous improvement (kaizen)
Show the model answer to Question 12
(a) JIT production means making goods only when needed to meet customer demand, so that finished goods stock and work-in-progress are kept to a minimum. JIT purchasing means buying materials and components so that they arrive just when production needs them, so that no raw material stock is held and delivery is timed to the production schedule.
(b) Benefits: lower stock holding costs (capital, warehousing, insurance, obsolescence); improved cash flow; reduced waste and overstocking; better customer service through prompt delivery. Challenges: heavy dependence on suppliers, because a late delivery can stop production; no stock to cushion sudden demand rises; the need for near-perfect quality and reliable machines; the cost of investing in systems, supplier development and training.
(c) Supplier relations. The company should aim to build long-term, cooperative relationships with a small number of key suppliers. It should not choose suppliers only on lowest price. The emphasis should be on consistency, quality and reliable delivery. Working closely, the company and its suppliers can reduce stocks and work-in-progress, cut order sizes by timing deliveries to production, and ensure that deliveries arrive exactly when needed.
(d) Forecasting process. (1) Data collection: gather historical sales data, market trends, current customer orders and suppliers’ lead times. (2) Demand analysis: analyse trend, seasonality and variability of demand. (3) Forecasting techniques: use qualitative methods (expert opinion, market research, customer feedback), quantitative methods (time series, moving averages, regression) and possibly machine learning. (4) Collaborative forecasting: involve sales teams, production managers and suppliers so that forecasts reflect orders, capacity and lead times.
(5) Continuous monitoring and adjustment: keep checking forecasts against changes in demand, supply disruptions and economic conditions, using real-time data.
Show the model answer to Question 13
(a) Net saving.
- Current stock costs.
finance ₦5,000,000 × 10% = ₦500,000 - plus warehousing ₦450,000 and losses ₦150,000 = ₦1,100,000.
- JIT stock costs.
finance ₦500,000 × 10% = ₦50,000 - plus ₦100,000 and ₦20,000 = ₦170,000.
- Saving in stock costs.
₦1,100,000 − ₦170,000 = ₦930,000. - Extra purchase cost.
1.5% × ₦30,000,000 = ₦450,000. - Net saving = ₦930,000 − ₦450,000 = ₦480,000 a year.
(b) Level = (review period + lead time) × weekly demand = (4 + 1) × 300 = 1,500 units.
(c) Non-financial factors (any two):
- the reliability of the suppliers
- how stable and predictable demand is
- whether production is flexible and free of defects
- staff skills and willingness to support continuous improvement
- the risk and cost of a stoppage if a delivery fails
Pathfinder on Just-in-time and other inventory systems
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
From the previous syllabus. Part (a)(i) asks for brief notes on just-in-time systems (2 marks), alongside other costing topics that belong elsewhere.
Revise first: What JIT is
Multiple-choice items can test JIT conditions, benefits and risks, supplier relations, two-bin and periodic review systems. Check Section A of every diet you practise.
Revise first: Necessary principles and assumptions
JIT can appear as a part of a longer question, for example benefits and challenges or supplier relations. Look for it inside multi-part questions on inventory.
Revise first: Benefits and challenges of JIT
Source: ICAN Pathfinder, Management Accounting. Diets covered: May Diet, 2017 (previous syllabus). May Diet, 2025 and November Diet, 2024 are not covered here.
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