Risk versus Reward: The promises and pitfalls of Just-In-Time Inventory

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What do mega successful multinational companies such as Dell Computer, Toyota and Harley Davidson have in common? They all use Just-in-Time (JIT) inventory management to meet their inventory challenges.

JIT is considered by some as the ultimate inventory management solution to lower or even eliminate inventory-carrying costs. Others are quick to warn of the highly volatile and risky nature of JIT over other, more entrenched and traditionally accepted models of inventory management. But just what exactly is JIT, and what are its advantages over more contemporary inventory management practices, if any?

Just-In-Time inventory in a nutshell:

Just-In-Time inventory management is a system of inventory control whereby goods are only ordered and received – either for manufacturing or retail sales – as they are needed, and not before. The objective is to keep the holding costs usually associated with keeping inventory on stock as low as possible.

A company that does not have to deal with all the costs that keeping inventory on hand generally entails – storage, shipping, loss as a result of obsolescence, tampering, damage and theft etc. – will generally find their profitability maximized. Also, the flow of goods from source to customer is streamlined and more efficient.

The logic is that by reducing or eliminating costs that are not absolutely essential to the business, vital cash flow can be freed up and profitability boosted significantly.

What are the advantages?

The overarching advantage of using Just-in-Time inventory is that it allows businesses – small and large – to serve their customers better whilst lowering the costs of doing so. It achieves this by affording businesses the following advantages over typical inventory management models.

Lower warehouse costs

The most notable advantage using a Just-in-Time inventory system affords businesses is that it contributes to substantial decreases in warehouse costs. Operations that utilize a JIT inventory management protocol find that they are able to reduce the number of warehouses they currently operate, or eliminate their need of warehouses altogether.

Streamlined supply chain

Just-In-Time Inventory management demands a radical restructuring of the supply chain. The end result should be a supply chain that is optimized to function as efficiently as possible.

The savings, in the form of lower costs, throughout a well-structured Just-In-Time inventory management system can contribute to a more robust bottom line, as well as improved customer service.

This is because when lower cost benefits trickle down the supply chain – from manufacturing to the end consumer – the price of goods can be offered at a far more competitive and attractive price.

Customer satisfaction also spikes, because more attractively priced goods find their way to customers a lot quicker, so customer service targets can be improved upon and met with confidence.

Promotes market resilience and responsiveness

A business that has a sizeable portion of its cash flow tied up in unnecessary and out of demand (obsolete) inventory finds itself hamstrung when it is hit by fluctuations in consumer demand or sudden commodity price hikes or dips. A business that is unable to adjust quickly to surges in demand or other market variables will suffer the costly consequences.

Companies that are able to operate a JIT (known as ‘pull’) inventory system effectively find that they are better able to adjust and meet the needs of their customers in a time-efficient and cost-effective way. This is because JIT inventory systems enhance a business’s ability to respond to market and demand fluctuations far more fluidly than operations holding a lot of stock in their warehouses.

A business holding on to excessive stock levels is much like a heavily laden ship at sea – when the wind changes and an unforeseen storm blows the ship it’s left foundering and unable to react to the sudden change in circumstances in time. Not so for a business operating with little or no excess inventory. It is able to maneuver swiftly and skillfully to meet the change in circumstances head on.

What are the dangers?

Whilst Just-In-Time Inventory management is geared toward reducing a company’s surplus stock levels to zero, it requires a huge commitment both in terms of initial investment as well as time. But that is not all – any business looking to switch to Just-In-Time inventory would do well to consider the following possible pitfalls.

Change the way you do everything

JIT systems are notoriously complex to operate effectively. The business needs to completely restructure its supply chain from beginning to end. Often this means sourcing out several suppliers who are both closer in location, as well as able to manufacture and supply product with little or no notice whatsoever.

Renegotiate the basics

Minimum Order Quantities (MOQs) with existing suppliers may be impossible to meet when switching over to an inventory management model that demands only the quantity required to fulfill a customer’s order be purchased. Apart from possibly leading the business to a stock out – since it will be unable to secure the inventory required – it might lead to crippling price hikes. This is because the business can no longer purchase the quantity of goods required to capitalize on lower cost advantages offered with MOQ terms.

No margin for error

Unlike with more conventional inventory management systems, JIT leaves no margin for error. The ripple effect throughout the supply chain when something goes wrong is immediate. One glitch in the supply chain and the business could find itself facing a stock out in peak season.

Whilst Just-In-Time inventory has proven to be remarkably effective at cutting costs and boosting profitability when implemented successfully, businesses that remain wary of the risks involved should consider implementing a powerful inventory management software system instead. Inventory management software solutions enable businesses to track, trace and count their inventory in real time with pinpoint accuracy effectively removing the risk of carrying surplus inventory or running into a stock out if demand surges. It is also a great way to start taking charge of inventory, and moving your business one small step closer towards JIT/Lean.

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Melanie - Unleashed Software

Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.

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