Just-in-time inventory is a common strategy used by production and resale businesses to balance customer service with lean operational objectives. With JIT, companies only keep enough inventory on hand to meet near-term demand. This inventory management strategy is effective at controlling costs, but it also presents some supply risks.
Resource and Space Savings
A primary driver of JIT is the goal of saving money, resources and time. Holding excess inventory in a retail location or business facility has many costs. You pay for the extra people and utilities to manage the inventory. It takes more pallets and moving equipment to receive, move and transport excess inventory in a storage area. By ordering only enough inventory to meet near-term demand, you minimize these costs, which increases profit potential on product sales.
You also reduce waste with effective JIT. When customer demand falls short of inventory on hand, excess products get discounted or thrown out. Marking down prices reduces gross profit and can even cause losses on sales of goods. By avoiding excess, you minimize markdowns. Companies that sell perishable items or goods that expire also minimize waste. If a retailer has too many apples, for instance, it may end up throwing some out.
Missed Sales Opportunities
The risk of operating with a limited inventory buffer is that you could miss sales if demand is unexpectedly high. In some cases, environmental factors drive much more business than a company anticipates. It is often difficult to get new inventory in stock before you run out. Missed sales not only impact revenue, but you alienate customers who may never come back. This challenge is amplified when your business relies heavily on suppliers, since you can't always control their response times on new orders.
Like other business processes, JIT requires planning and oversight. Trying to balance the right amount of inventory, especially across multiple locations, is a burden. This burden puts stress on company managers, and it also distracts them from long-term strategic planning and other ongoing leadership responsibilities. A business with JIT is also forced to maintain ongoing communication with suppliers. You may also have to open up your computer inventory systems to suppliers, which creates confidentiality risks.
- Mind Tools: Just In Time (JIT)
- Academic Mind: Just-In-Time Inventory Management Strategy & Lean Manufacturing
- Masao Nakamura, Sadao Sakakibara and Roger Schroeder. "Adoption of Just-in-Time Manufacturing Methods at U.S.- and Japanese-Owned Plants: Some Empirical Evidence," pages 230-231. IEEE Transactions on Engineering Management, 1988.
- Electronic Code of Federal Regulations. "Regulation S-X, 17 CFR Part 210: Sec. 210.5-02 Balance sheets." Accessed Aug. 1, 2020.
Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.