Just-in-time inventory, or JIT, is a process designed to cut business investment in inventory, thus freeing up funds to invest in other parts of the company, such as labor or infrastructure. Companies carry reduced amounts of raw materials, relying on a sophisticated accounting system that predicts future inventory needs and orders them just before they're needed. Deliveries are smaller but more frequent, creating a revolving small stock of fresh supplies. The goal of this system is to have components delivered to the facility shortly before they're needed instead of keeping a large inventory of parts or ingredients on hand. With less money tied up in materials in storage facilities, companies are free to improve or expand more easily.
There are a number of advantages and disadvantages of just-in-time inventory systems. On the plus side, working capital isn't tied up, there's less chance of inventory becoming obsolete in storage and it's easier to change production orders because there's so little product on hand to get through. It's not all positive, however. Even with significant savings across the board, there can be enough disadvantages of JIT to make any business owner take a serious look at the process.
Just-in-Time Inventory Disadvantages
In just-in-time inventory systems, companies order the bare minimum amount of inventory to get through until the next delivery date. A restaurant using this system on a biweekly delivery schedule would only order enough food to last an average of four days' worth of business. Most of these systems are based on comparison figures from the year before, and they assume business will remain relatively static from year to year. If the restaurant's main competitor goes out of business suddenly, it can see a sudden rise in revenue that wasn't planned for in advance. As a result, there may not be enough food left on the shelves to last through the week. Finding alternative sources for emergency food supplies can be impossible or, at best, very expensive.
On the other hand, a sudden and unexpected drop in business can mean excess ingredients on the shelves, possibly spoiling before being used. With an automated system, it can be two or three inventory cycles before a business owner can adjust the amount of product coming in. This also sets up a problem for the next year, since the system will be expecting a drop in business again and will likely not order enough ingredients for the week.
Difficulty With Surprise Extra Business
One of the biggest just-in-time business disadvantages is a lack of flexibility when it comes to good fortune. In most businesses, a customer coming in and wanting to order a massive amount of products is a good thing. For a T-shirt company with a new school account, it can mean making the new client wait longer than he wants to just to get a complete order. Small businesses can't afford to turn down windfalls, but it can be next to impossible to find enough raw materials on short notice to take care of those profitable new customers.
This can be resolved in one of two ways. In the first case, the new customers can get their desired order, but they'll have to wait much longer to get it due to lack of inventory. Depending on the particular type of shirt they want, it can take weeks to find a large enough supply to satisfy the new clients. On the other hand, if the T-shirt shop owner manages to find a ready supply of basic shirts that will satisfy the customer, it's likely that they'll cost more money than the shop's normal supplier will charge. The windfall customer can actually end up costing the company money by lowering the profit margin to next to nothing.
More Planning and Training Required
Many small businesses do inventory and materials ordering by hand using paper and pencil, at least in the beginning. Even those large enough to need or want a computer inventory program do so with simple apps. In most cases, it's enough to take inventory a couple of times a month, just to keep track of what you'll be needing. In these cases, inventory is a simple process and can be easily taught to any employee in a short amount of time.
With a JIT inventory system, the entire inventory process is more complex. Employees must be trained to take highly detailed inventory on a very frequent basis. Accuracy is crucial because the entire ordering system for the company is based on those numbers. Employees will need to learn to use elaborate computer systems, which can be challenging for those who aren't familiar with the computers installed in the office. In order to train and keep employees who can handle these inventory duties, you may have to increase labor costs. In addition, you'll need to find suppliers who are willing to work with you by delivering supplies multiple times each week without adding exorbitant delivery charges to each order. It's also a smart practice to create relationships with lesser suppliers for emergency supplies in case of a break in the inventory/delivery process.
A Tight Supply Chain Means Less Control
Most small business owners are proud of their ability to pivot and to change things up quickly when the economic forces around them call for it. With just-in-time inventory systems, it's much more difficult to do this. A neighborhood bakery will generally know when the local celebrations will happen and will order accordingly. But if the baker finds out that a new wedding planner is looking for an emergency supply of fancy cupcakes, she has little chance of stepping up and reaching out for the job.
Even if she manages to get the cupcake order, if the baker's supplier of silver cake decorations is out of stock, she has fewer options to offer the potential new customer. Any sort of disruption in the supply chain anywhere in the system will ultimately impact the bottom line of the small business using this system. With fewer options to offer customers and fewer opportunities to change business plans on short notice, just-in-time inventory can curtail opportunities that might otherwise grow a small business.
Problems With Natural Disasters
Tornados, hurricanes, floods and other natural disasters can have a huge impact on any business, as can civil unrest or police actions. The difference with just-in-time inventory systems is that the effect can be felt much more harshly. The danger isn't only what happens when emergencies arise near the business, but also when they happen in other areas where a business's supplier happens to be.
A local coffee shop utilizing JIT ordering will generally keep enough beans on hand for three or four days' worth of average sales. They may stock an additional day's worth of supplies but not more than that. If their roaster, located in the next state, is hit with a tornado or a fire, the coffee shop owner will have little time to scramble and find a new commercial bean supplier. If his customers are used to a certain mix of proprietary blends, he may not be able to keep his doors open for more than a few days before running out of inventory.
The Need for Higher IT Investments
Just-in-time inventory systems are so complex that they're virtually impossible to utilize without a computer and dedicated programs. Companies will need inventory tracking, order creating, sales predicting and a host of other programs to make this system work properly. This means a large investment in both hardware and software plus training time for management and employees. There will be extra labor costs, extra supervisory duties and more time needed for inputting data.
Once all these systems are installed and the people have been trained, the entire company now relies on the computer system to work flawlessly. In most cases, they do, but problems do arise. That's the reason IT departments exist. Any business with a JIT system needs to have a relationship with an IT professional who is familiar with the hardware it has installed, as well as a familiarity with the professionals working for the JIT company. No company can afford to have their inventory system offline for days, whether it's because of a bug in the software or a glitch in the computer. Emergency repair can be expensive and might not even be available on nights or holidays. Smart business owners create a backup plan for emergencies, but they're temporary stopgaps at best.
Necessary Reliance on One Supplier
Setting up a JIT system requires creating relationships with major suppliers who will deliver the weekly raw materials a business needs. While these business ties can be a benefit to any company, there are downsides to this arrangement as well.
A pizza restaurant owner who relies on one restaurant supply company has the advantage of knowing how much she will pay for pepperoni and flour each week, making it easier to control food costs. On the other hand, she's limited in her ability to look around at her supplier's competitors to see what prices they offer for the same products. If a supplier across town is offering pepperoni for half price that week, she can't simply place a single order before going back to her steady supplier. She can change suppliers, but there's no way to simply shop around to find the best prices each week.
The same problem happens if the supplier decides to raise prices. The pizza shop owner is stuck paying the higher prices until she can find a similar supplier that offers better prices and who is willing to work with her on her ordering schedule. Either way, JIT inventory severely cuts a business owner's ability to find the best cost for raw materials on a timely basis.
Problems With Customer Satisfaction
When just-in-time inventory systems work, they work well. However, when these systems break down, businesses can suffer on multiple fronts. Lack of inventory means loss of business, but that's only the immediate effect. Dissatisfied customers who can't get what they want or who have to wait longer than usual to have their orders fulfilled are a real problem in today's business environment.
The internet has a huge influence on almost every small business, and unhappy customers hold a larger amount of power to hurt businesses than ever before. Review sites like Yelp and Facebook, Twitter and other social media sites give customers a voice that they've never had before. One bad review, if written in an amusing or shocking style, can be enough to severely hurt any small business today. Viral business reviews are the stuff of internet legend, and some have been repeated for years. In an age where every customer has the power to shut a business down if he's motivated enough, business owners are going above and beyond to keep them happy. Keeping enough inventory in stock to keep customers satisfied can be a large part of this strategy.