Accounting Best Practices, Fifth Edition

16–35. Adopt Just-in-Time Purchasing

A core inventory reduction problem is a company’s reliance on a demand forecast, which inherently introduces a risk of demand inaccuracy based on the perceptions of the people creating the forecast.

The only way to eliminate inventory fluctuations based on an inaccurate forecast is to eliminate the forecast. This requires the complete reorientation of the purchasing (and manufacturing) system from one that pushes materials through the production process based on a forecast, to one that pulls items from production based on actual customer orders. Under this demand-pull approach, when a new customer order is received, the manufacturing operation is authorized to build exactly enough units to fill the order, which in turn requires an order to a supplier for the exact amount of materials needed to fill the company’s purchasing requirement.

This is an advanced best practice requiring the completion of the following activities prior to its implementation:

1.	Certify supplier quality levels. It makes no sense for suppliers to deliver shoddy goods directly to the production department, so every supplier’s production process must be certified in advance.
2.	Communicate materials needs to suppliers. Suppliers need to know exactly when materials are needed, so the company must find a way to communicate this information to them. A sound approach is to allow them on-line access to the company’s materials planning database.
3.	Alter the accounts payable ...