JIT, QR, etc. or...is it IT?  (Originally published Spring 1994. V1, I1)

Just In Time (JIT), Quick Response (QR) or any other current buzz words for efficient controlling of your costs are just other terms for expressing the basic concept of Inventory Turnover (IT).

The lower you can keep your average inventory value, without losing business, will result in a greater IT.  (Total Inv.sold/Aver.inv.  This value should be 4 or greater).

Imagine doing $100,000.00 worth of business during the year (I like to use easy round numbers).  If your raw materials represent 36% (remember easy numbers) and your sales were equally spread over the twelve months, you would only have to place 12 orders for $3000.00 each to be delivered on the first of each month to generate an IT of 12.  Since your sales for each month are $8,333.33 and your customers all pay upon receipt of the invoice, you will have $5,333.33 to pay the other expenses and yourself each month.  Being in business for yourself is too easy a way to make money.  Of course you might have noticed that several of the above assumptions might not exactly apply to the way your business actually runs.

With very few exceptions, no one has sales that are evenly distributed throughout the year.  No one knows what the year's sales will be by product (you may have a good idea of dollars, but not which item will sell).  You might also have noticed that it was assumed that all your purchases were delivered exactly on time.  Might you also have a customer or two who is a little slow in paying?

The one thing that is true: you should have in place a mechanism to track your raw material inventory as well as your finished items.  This will help you increase your IT.

IT keeps your cash working to pay your other bills.  Think of your inventory as you might think about electricity or the phone bill.  If you spend $200.00 in January on telephone calls, would you feel comfortable giving the phone company  $2,400.00 on January 1 to cover a year's worth of calls  you MIGHT make?  If on February 1, ZOOMFONE comes out with a communication method that is one quarter the cost of the phone company, you could be out $2,200.00.  This is exactly what happens to many companies who base their purchases on price alone without knowing if they have use for all their purchases.  Out-dated inventory is worth much less than yesterday's newspaper.

Remember that your year-end inventory is an asset of your company, and excessive increases to this inventory are profits.

Note: This was originally written as a guide for manufacturing inventory control, but the basic concept also holds for wholesaling and retailing.