The advantages and disadvantages of just-in-time inventory
/What is Just-in-Time Inventory?
A just-in-time inventory system keeps inventory levels low by only producing for specific customer orders. The result is a large reduction in the inventory investment and scrap costs, though a high level of coordination is required. This approach differs from the more common alternative of producing to a forecast of what customer orders might be. By using just-in-time concepts, there is a greatly reduced need for raw materials and work-in-process, while finished goods inventories should be close to non-existent.
Related AccountingTools Courses
Advantages of Just-in-Time Inventory
The use of just-in-time inventory has the following advantages:
There should be minimal amounts of inventory obsolescence, since the high rate of inventory turnover keeps any items from remaining in stock and becoming obsolete.
Since production runs are very short, it is easier to halt production of one product type and switch to a different product to meet changes in customer demand.
The very low inventory levels mean that inventory storage costs (such as warehouse space) are minimized.
The company is investing far less cash in its inventory, since less inventory is needed.
Less inventory can be damaged within the company, since it is not held long enough for storage-related accidents to arise. Also, having less inventory gives materials handlers more room to maneuver, so they are less likely to run into any stored inventory and cause damage.
Production mistakes can be spotted more quickly and corrected, which results in fewer products being produced that contain defects.
Disadvantages of Just-in-Time Inventory
Despite the magnitude of the preceding advantages, there are also some disadvantages associated with just-in-time inventory, which are:
A supplier that does not deliver goods to the company exactly on time and in the correct amounts could seriously impact the production process.
A natural disaster could interfere with the flow of goods to the company from suppliers, which could halt production almost at once.
An investment should be made in information technology to link the computer systems of the company and its suppliers, so that they can coordinate the delivery of parts and materials.
A company may not be able to immediately meet the requirements of a massive and unexpected order, since it has few or no stocks of finished goods.