Final answer:
Under a just-in-time system, a company would try to reduce and eliminate overhead inventory, which includes items like raw materials, work-in-progress, and finished goods that are not immediately needed to meet customer demand. This helps reduce storage costs, minimize the risk of obsolescence, and improve cash flow.
Step-by-step explanation:
In a just-in-time system, companies aim to reduce and/or eliminate inventory that is considered unnecessary or excessive. This includes overhead inventory, which refers to inventory that is stored for longer durations and is not directly involved in the production process. Overhead inventory includes items like raw materials, work-in-progress, and finished goods that are not immediately needed to meet customer demand.
Reducing and eliminating overhead inventory helps companies achieve several benefits. Firstly, it reduces the cost of storage and handling, as less space and resources are required to manage inventory. Secondly, it minimizes the risk of obsolescence, as the inventory is kept at a minimum level and is more likely to be used before it becomes outdated or unwanted. Lastly, it improves cash flow, as inventory ties up a company's capital, and by reducing it, companies can free up resources for other productive purposes.
For example, a company implementing a just-in-time system might eliminate excess finished goods inventory by producing goods based on actual customer orders rather than producing them in advance. This ensures that there is minimal excess inventory sitting in the warehouse, reducing storage costs and the risk of obsolete goods.