Pros and
Cons of Just-In-Time Inventory
Just-in-time inventory (JIT) is a concept that is growing more and
more popular in global business. Gone are
the days where companies would order in bulk; instead, an increasing amount of
companies are adopting the just-in-time inventory approach, or ordering
inventory on an as-needed basis. Wal-Mart
is one of the biggest organizations who have adopted the just-in-time inventory
system, and they have benefited tremendously from doing so, for the advantages
of adopting a just-in-time inventory system far outweigh the
disadvantages.
Advantages:
Lower
Operating Costs
One of the greatest benefits of adopting a just-in-time
inventory system is the amount of money you save from lowering your operating costs. As you can see in the graph, JIT
costs are minimal compared to that of traditional ordering costs. JIT allows firms to lower costs drastically
due to that fact that carrying costs, which are a big portion of operating
costs, decrease tremendously when adopting this approach. Carrying costs consist of all costs involved
in ordering and holing inventory. With
JIT, holding costs diminish, which saves the organization from needing extra warehouse
space. Excess inventory sitting on a
shelf does the organization more harm than good. JIT gives companies a way to eliminate the excess
inventory, while saving them money in the meantime.
Increased
Productivity
Like the picture above shows, when your inventory levels are
off-track, it creates multiple problems with the overall productivity of the
company. When you have a rocky
foundation, disasters are more likely to happen, and can potentially be fatal
to the company. This picture really
captures the essence of what a failing company looks like, because from the
outside, it looks like smooth sailing; however, when you look below the surface
at the actual operations of the company they are about to crash.
Implementing a JIT inventory system relieves a lot of the
problems listed above, which in turn increases the productivity of the company
as a whole. When the company is more
productive, their operations are more efficient, thus saving time on material
and labor costs, and lowering their operating costs as a whole.
When productivity increase, the morale of the management increases,
thus reflecting on the employees are a whole.
When management is motivated, they tend to put more effort into managing
and empowering their employees, which in return makes them want to work even
more efficiently. Something as simple as
lowering inventory levels, can have a huge impact on the operations of a
company, and create a positive chain reaction throughout the entire
organization.
Supply
Chain Management
Adopting a JIT inventory system benefits the entire supply
chain, not just a single organization. Wal-Mart
is known for their inventory management system, due to its accuracy and
efficiency. Wal-Mart uses an ERP to
automatically deduct a product from inventory as soon as it is scanned at the
cash register. This notifies management
of the inventory levels available for each product, and when they need to
reorder more, and then orders the needed amount. The system saves so much time and money due
to the fact that it keeps a constant track of the inventory so management doesn’t
have to go and physically count everything in the store. Wal-Mart’s JIT inventory system allows
management to focus more on the running/operations of the store, than having to
worry about what products they have excess of and those that they need to
order.
Wal-Mart suppliers benefit from their efficient inventory
system just as much as the store itself does.
The supplier can rely on orders from Wal-Mart more frequently instead of
shipping out huge quantities at one time.
This in turn makes the supplier more efficient, because they don’t have
to rush to complete enormous orders all at once; instead they use their
productivity to efficiently complete the orders on an as-needed basis. This lowers the holding costs not only for
Wal-Mart, but for their suppliers as well, because the suppliers won’t have to
keep as much inventory on-hand to complete huge orders. Instead, the supplier can order the materials
as needed, thus saving on their operating costs as well.
By JIT helping increase the effectiveness of supply chain
management, everyone wins in the long-run.
The time is takes for a product to be manufactured, shipped, delivered
and bought, decreases drastically. This
allows companies to lower tier operating costs, thus increasing their profit
margins, and overall giving the customer the greatest deal they possibly can. JIT inventory management helps Wal-Mart
tremendously in be able to offer their customers the lowest price guaranteed.
Customer Satisfaction
JIT inventory not only affects the organization, customers
are affected by the improvement as well.
When a company has good control over their operations, they are able to
focus more precisely on the wants/needs of their customers. JIT inventory helps the organization supply the
right amount of product for the demand of the consumer. Customers are more likely to build a
relationship with your company if the products they want are available when
they want them. By adopting the JIT inventory, the products that are more
popular will be ordered on an as-needed basis, so they are always available for
the customer.
Increased customer satisfaction is the number one reason
that implementing JIT inventory is beneficial.
Lowering operating costs, increasing productivity, and supply chain
management are all great reasons to implement this system; however, without someone
to buy the products that you are offering, you just have a really good inventory
system. Keeping customers satisfied is
far easier with JIT, and the overall process makes it easier for the company
implementing it which makes it a win-win for everyone.
Disadvantages:
The main disadvantage of implementing a JIT inventory system
is the cost entailed. The implementation
process is very costly, and even though there are lots of advantage, a lot of
companies don’t find it practical or within their means. If the investment shows that implementing a
JIT inventory system wouldn’t be cost-justified for the organization, then
obviously implementing one wouldn’t be practical for that company.
