The Risks of Being Just-In-Time
The following is a guest article written by Nick Koletic, an economics specialist at UCLA. In addition to giving a brief background on Just-In-Time inventory system’s benefits, the article’s main focus is the risks that JIT systems face.
Just-In-Time inventory (JIT) is part of a production system whereby a firm vastly reduces inventory from its production processes so that utilization of production inputs and delivery of finished products are accomplished without incurring significant holding costs. While JIT inventory systems are quite attractive for this reason, they are a double-edged sword. And though a JIT system might even be a necessity given the inventory demands of certain business types, its many advantages are realized only when some significant risks to healthy inventory management are mitigated.
JIT systems have several cost-cutting advantages. As Charles mentioned in his Dell Computer case study, JIT inventory systems, a “financial imperative” for Dell, can radically reduce holding costs. In the case of Dell Computers, this meant that the fewer finished computers Dell holds in inventory, the less money they lose per computer as they “rot” on a shelf.
In addition to these significant cuts in depreciation costs, which for Dell can be up to 1 percent per computer per week, JIT inventory can also cut storage costs. One can imagine how Toyota, a pioneer of JIT systems, might save on storage costs as their finished computers and cars no longer sit idle in warehouses awaiting customers. And these storage cost savings apply not only to these finished goods, but also to parts that Toyota might use as inputs in production. These inventories are kept at a minimum thr ...