The advantages and disadvantages of just-in-time inventory
/What is Just-in-Time Inventory?
A just-in-time inventory system keeps inventory levels low by only producing for specific customer orders. The result is a large reduction in the inventory investment and scrap costs, though a high level of coordination is required. This approach differs from the more common alternative of producing to a forecast of what customer orders might be. By using just-in-time concepts, there is a greatly reduced need for raw materials and work-in-process, while finished goods inventories should be close to non-existent.
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Advantages of Just-in-Time Inventory
The use of just-in-time inventory has the following advantages:
Reduced obsolescence. There should be minimal amounts of inventory obsolescence, since the high rate of inventory turnover keeps any items from remaining in stock and becoming obsolete.
Greater responsiveness. Since production runs are very short, it is easier to halt production of one product type and switch to a different product to meet changes in customer demand.
Reduced storage costs. The very low inventory levels mean that inventory storage costs (such as warehouse space) are minimized.
Reduced working capital requirements. The company is investing far less cash in its inventory, since less inventory is needed.
Reduced inventory damage. Less inventory can be damaged within the company, since it is not held long enough for storage-related accidents to arise. Also, having less inventory gives materials handlers more room to maneuver, so they are less likely to run into any stored inventory and cause damage.
Faster quality enhancements. Production mistakes can be spotted more quickly and corrected, which results in fewer products being produced that contain defects.
Disadvantages of Just-in-Time Inventory
Despite the magnitude of the preceding advantages, there are also some disadvantages associated with just-in-time inventory, which are as follows:
Can foul up production. A supplier that does not deliver goods to the company exactly on time and in the correct amounts could seriously impact the production process.
Negative impact of natural disasters. A natural disaster could interfere with the flow of goods to the company from suppliers, which could halt production almost at once.
Investment in supporting systems. An investment should be made in information technology to link the computer systems of the company and its suppliers, so that they can coordinate the delivery of parts and materials. This investment assumes that suppliers are capable of using the supporting systems to schedule their deliveries, which may not be the case.
Sales inflexibility. A company may not be able to immediately meet the requirements of a massive and unexpected order, since it has few or no stocks of finished goods. Instead, it can only quote a relatively long delivery time, since that is what its available inventory supply lines can handle.