Pros and Cons of Just In Time Inventory Management

You might have looked at the shelves of an overstocked warehouse before and wondered: Is there a better way? Thinking of how much a company spends to store inventory that sometimes sits for weeks, months, or even years, you might wonder if there’s a system that brings inventory more closely in line with demand.

For many businesses, that better way does exist and it’s called just-in-time inventory management, or JIT. It’s a radical departure from the traditional philosophies of inventory management, but it’s actually used by many of today’s biggest names in retail and industry. However, the philosophy can be challenging to implement and isn’t right for every business. Could it work for you? We’ve lined up some of the major pros and cons of just-in-time inventory systems for you to consider. First, though, let’s establish our terms: What, exactly, is just in time inventory?

What is Just in Time Inventory Management?

The most basic principle of JIT is to directly align inventory and production with demand. Standard inventory systems are said to be “just-in-case” systems, meaning that they keep significant reserves of resources on hand in case of spikes in demand. A just-in-time system is the opposite: one that (ideally) stores and uses only the resources necessary to fulfill its current and expected orders.

Today’s JIT systems are largely based on the Toyota Production System (TPS), a revolutionary production process designed by Toyota Motor Company in the mid-20th century. This process can apply to manufacturing, fulfillment, or both. The core of TPS is preventing overproduction through the use of the “pull system,” often explained using the basic metaphor of a grocery store. A pull system process “pulls” materials from a queue, like a customer pulling an item off the shelf in a grocery store, which is periodically restocked from a central storage facility. However, materials inventory never goes over a predetermined level necessary to fill current orders.

JIT is attractive to many businesses for its ability to pare down a manufacturing or fulfillment process to its core elements. This approach produced such great results for several large firms that it became foundational to the strategy that we now know as lean manufacturing. In our list of pros, we’ll look at why it can be so successful. In our list of cons, we’ll talk about some common difficulties to watch out for.

Pro: JIT is a great way to right-size your capacity and reduce waste.

Implementing JIT practices can be great for efficiency and productivity. The entire strategy revolves around using only the tools and materials necessary for the task at hand. By using JIT to map their manufacturing or warehouse operations to demand levels, many companies have achieved great results in minimizing costs of storage and fulfillment such as:

• Warehouse labor and utility costs
• Shipping and fuel costs
• Unsold inventory
• Inventory insurance costs

JIT offers great potential for creating a lean supply chain, especially when it’s deployed along with other waste-reducing practices such as using reusable and high-efficiency packaging products and custom designing your packaging to eliminate inefficiency.

Pro: Both large and small businesses can benefit from JIT.

Another great thing about JIT is how well it works across different scales. Many small businesses love the JIT system because it gives them the agility to react appropriately to changes in the market. It can also significantly lower their startup capital costs. By reducing the inventory stored on hand, they can often increase their available liquidity—vital for a small business just starting out.

But it’s also used by many of the world’s biggest businesses like Walmart and the aforementioned Toyota. Walmart, in particular, has had great success with JIT thanks to its “cross-docking” strategy that allows inbound trailers to transfer their inventory directly onto outbound ones. In Walmart’s case, its JIT strategy relies on its incredibly sophisticated distribution network to operate efficiently at scale.

However, as effective as they can be, JIT systems can also present unique risks and difficulties. The following are some of the issues typically associated with implementing JIT. They aren’t necessarily built-in cons of every JIT system; rather, they’re relevant concerns that you should be sure to address if you’re interested in implementing one of these systems in your business.

Con: You’ll need five-star coordination between many stakeholders.

If your company has communication issues, you should focus on fixing those before you try a radically different system. A functioning JIT system requires many different departments and third parties to communicate honestly and effectively, potentially including:

• Raw materials suppliers
• Manufacturing plants
• Warehouse staff
• IT departments
• Supply chain personnel
• Brick and mortar retailers

One advantage of the traditional just-in-case system is that errors can sometimes be remedied by shuffling around extra inventory. A JIT system often has less of this capacity and thus can be less prepared when the unexpected strikes. That’s why a business using this kind of system can’t afford to be reactive and instead has to commit itself firmly to a proactive approach.

Con: It requires truly proactive thinking.

On its surface, just in time might seem like a highly reactive way to manage your inventory and production. If it doesn’t have the right leadership behind it, that’s exactly what it can turn into. A reactive, inflexible mindset will produce a reactive, inflexible system.

However, JIT at its best is powered by a proactive approach. This includes investments in several key areas. Accurate demand forecasting is an absolute must, as is a logistics network that can keep up with moving many small shipments frequently. (Consider working with a third-party logistics provider that specializes in just-in-time inventory management.) Remember that JIT isn’t about preparing less, just about preparing the right things.

Is Zero Inventory Possible?

Zero Inventory, like just in time inventory systems is hardly new, but they can be a revelation for businesses looking to banish inefficiency from their supply chains. They do, however, require communication, strong leadership, and trust. Only you and your leadership can determine whether JIT is right for your business, but the outcomes can be outstanding for those who implement it successfully.

About the author

Cory Levins serves as the Director of Business Development for Air Sea Containers. Cory oversees the development and implementation of ASC’s internal and external marketing program, driving revenue and profits from the Miami FL headquarters.