Pros & Cons of the JIT Inventory System

by John T. Williams, Demand Media
Weigh the pros and cons before committing to a JIT inventory system.


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Historically, businesses have attempted to match supply to anticipated demand and smooth out the production cycle by stocking inventory. Managers kept the workforce busy pushing materials and goods down the assembly line and off the docks, counting on the marketing department to create more demand. This led to ever-growing inventories of unneeded and even obsolete product, with manufacturers unable to shift production to meet changing tastes. A newer system developed within the Japanese auto industry. Just-in-time (JIT) systems can eliminate waste for over-consuming manufacturers left with production overruns and retailers with overstocked backrooms. However, JIT requires high initial investment and long-term commitment from a company determined to implement it, and it comes with some risks and few guarantees of success.


JIT systems control work flow by bringing in materials and sending out goods on demand—ideally, just enough to provide what consumers want and no more. With JIT, the ultimate goal would be zero inventory. Companies typically hold inventory in three locations: raw materials; work-in-process inventory of partially worked materials or sub-assemblies for workstations to complete; and finished goods to be shipped out to customers. However, a company ties up resources in both materials and product that sits in multiple storage areas, not to mention the utilities and space costs incurred in keeping the product from perishing.


By minimizing inventory, JIT frees up resources to employ elsewhere in the company. A retail store using JIT can remodel the warehouse space into more retail sales floor space without expanding the physical store. A manufacturer gets more space to produce goods. Both companies free the workforce to focus on primary tasks, from making goods to interacting with customers rather than stocking merchandise. Manufacturers can train employees to work at different stages of the assembly line or at different workstations, to meet shifts in demand. A better-trained, more flexible workforce focusing on quality production can mean faster set-up or customization of workstations and lower defect rates, which lower costs and increase customer satisfaction.


The primary disadvantage to JIT is its relative complexity. Management must rethink the entire work flow of the company, from initial intake of raw materials to final output of finished product. Supply-chain relationships require retooling that involves multiple suppliers, closer locations, or companies that can supply materials with little advance notice. Companies ordering smaller amounts of goods may encounter difficulty meeting minimum orders, requiring a different contract or a way to break up a large order over time or among several smaller manufacturers. All goods must meet quality requirements to avoid shutdown due to defects. Staff must understand more of the entire process and shift to where they are needed as work flow ebbs and surges to meet customer demand swings. This overhaul requires a sizable commitment of time and money initially, plus a change in mindset and a commitment to stay the course in implementing JIT, at the risk of the system's never gaining traction within the corporate culture.


Japan’s auto industry meant JIT to operate within a culture of continuous improvement, as one way to eliminate waste. JIT may be a good way to introduce continuous improvement or quality management, but it is very difficult to implement as a stand-alone process. Managers in charge of ordering or purchasing may need to familiarize themselves with alternative shipping methods such as less-than-truckload (LTL) carriers who consolidate loads and routes to fill a trailer. This may even require coordinating with other companies operating within the area, as in an industrial park. Personnel managers need to communicate with staff, stressing the importance of JIT to providing quality products and services and reducing costs, as well as convincing staff of the benefits in rounding out skill sets by taking on different tasks.


Conventional wisdom holds that inventory provides a buffer to ensure smooth operation against supply chain disruptions, from delivery delays through individual workstation breakdowns to unanticipated consumer demand. However, a carefully planned and systematically executed JIT system can eliminate waste and encourage higher-quality output. Workers take ownership as they comprehend that nothing goes to waste and that they control the process—there is no cushion or margin of error to fall back on. All workers, tools and processes work with one purpose: gaining and keeping customers. Anything or anyone not contributing to that purpose can be whittled away.

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