Advantages and Disadvantages of Just-in-Time Inventory Management
Just in time (‘JIT’) is a lean business strategy first developed by Toyota. While JIT encompasses a variety of strategies that have been applied to anything from manufacturing to logistics, this article focuses on the ‘lean’ aspect of the philosophy and how it applies to inventory management.
What Does Just-in-Time Inventory Management Involve?
In contrast to drop shipping, JIT inventory management does involve the receipt, storage, and dispatch of goods. Goods are delivered to the warehouse, whether from another business or from the manufacturing site or a factory in the same business. However, only the minimum stock amount that is required for manufacturing or fulfilling customer orders in any given period is kept on the premises’ warehouse shelving systems.
Under the JIT philosophy, storing extra ‘back up’ inventory is discouraged. JIT considers high volumes of stock to be a form of waste that contributes to overhead costs and results in unnecessary outlays to purchase the stock. Back up stock also has the effect of requiring extra staff attention to receive and store the stock, which is another form of waste.
The major benefits of JIT include:
- Cost benefits.The key benefit of JIT is associated with cost effectiveness. Cost savings are made primarily through lowering overheads and the reducing the potential for wasted or discarded stock. However, these cost savings can come at the expense of delayed order dispatches, which can negatively impact repeat business and business reputation.
- Low waste. There’s an environmental benefit to JIT inventory management. By deliberately keeping stock low, businesses can reduce energy consumption as well as physical waste in the form of discarded stock.
While JIT has some benefits, these are matched by its potential limitations:
- Difficulty of predicting market demand. While JIT may present cost savings for businesses, this advantage should be weighed against the difficulty of predicting market demand, which consistently fluctuates for most industries.
- Slow dispatch. The JIT system can result in slower dispatch or even an inability to fulfil customer orders on time. This will impact on customer satisfaction and sales.
- Theory and practice. While there’s much written and researched about JIT, for inventory management, it can be a challenging theory to apply. While the theory seems to encourage businesses to stay lean and dynamic, it can make it more difficult for businesses to respond to changing market conditions such as a sudden jump in product demand.
When is JIT Inventory Management Beneficial?
While JIT has been implemented with success in many manufacturing firms, the principle may not prove to be equally successful in a strict inventory management context. As noted above, it’s a constant challenge to accurately predict customer demand levels, which tend to fluctuate throughout each business or consumption cycle. Businesses can run the risk of simply being unable to fulfil customer orders on time with a strict JIT inventory management system.
However, a modified JIT inventory management system can benefit certain manufacturing or wholesale industries where customer demand is highly predictable. In these cases, good pallet racking systems can assist with dispatching stock quickly once an order has been received.