The Pros and Cons of Just In Time Inventory Control

JIT (just in time) inventory control is an inventory and production control system in which materials are purchased for manufacturing of products so that units can be produced and shipped based on the actual customer demand and confirmed orders in the pipeline. This type of system occurs in real time and the units are produced based on actual orders and current levels of demand. One way to look at this is to imagine if a household never went to the grocery store to stock up the refrigerator and cupboards, except on a daily basis based on daily hunger level. In fact you would have a very small fridge and almost no pantry. So imagine you go to the store every single day to pick up the meals du jour and the specific portions for each member of the household. This is a crude way to illustrate how JIT actually works but the food will be ultra fresh each day.

If you really think about the grocery shopping example and how a household would really implement a daily shopping routine you likely realize there are going to be some advantages and disadvantages. This is the case with JIT. There are many advantages and some big disadvantages. Since raw materials are ordered very frequently, only when production is going to occur, so that units can be produced and immediately shipped the same day means that a company can save on many expenses. A warehouse facility to store raw materials (the refrigerator example) can be a fraction of the previous size. The room needed to store finished units can be drastically reduced as well (the kitchen pantry or freezer) since units will ship the same day, as they are manufactured. So the result in savings is multifaceted. The funds that are not tied up in inventory can be freed up for use elsewhere in the company. The ordering, production, and delivery processes all become much more efficient because of the JIT system. The goal is to have virtually no inventory and to only fire up production if a customer down the line actually places an order.

Think about the daily grocery shopping analogy and I am sure you can begin to imagine some of the drawbacks. Implementing a JIT system could be cost prohibitive for most companies. In order to completely revamp the ordering, manufacturing and delivery processes a hugh capital investment could be required. Completely overhauling a companies manufacturing and business flow process is very expensive. The other big issue centers around the supply chain or the delivery chain. If there is an interruption in the marketplace it could shut down the companies manufacturing activities and with no inventory on hand you have nothing to deliver. So lets say that the raw materials for your manufacturing process become unavailable due to a natural disaster, or some other unexpected event. If there is no raw material on hand the manufacturing could stop with little or no notice, and if you can’t fill a customers order you are sunk. If the method of delivery for goods to the market were unexpectedly interrupted that could be a huge issue as well. If goods can not be delivered and the JIT company has insufficient warehousing they could choke on their own inventory.

Many companies have made the huge capital infrastructure investment so that a JIT system can be implemented successfully. When starting a business that centers around manufacturing of products it would be sensible to explore a JIT model so that the facilities and business plans needed can be modified, prior to upstart of the company.