The Disadvantages of Just-in-Time Inventory

Updated April 17, 2017

Just-in-time inventory systems, pioneered by Toyota, move inventory through a production system under a pull ideology, with customer orders pulling the inventory through the system. Production begins with a customer order and the order is moved through production with visual symbols, called Kanban, that tell workers to start making the next part. While just-in-time has many advantages, it is important to know that the system has weaknesses as well.

Excess Demand

One of the biggest challenges for companies that have implemented a just-in-time inventory system is responding to periods of high demand. Because production begins with customer orders, if orders outpace production, customers may have to wait for products. This could cause customers unable to wait to go to other suppliers. In traditional inventory systems, companies would build finished goods inventory in anticipation of busy times of the year. In this model, ideally production remains at a constant level throughout the year,

Supply Disruption

Just-in-time inventory systems are especially vulnerable to disruptions in supply. As raw materials are ordered from suppliers only when they are needed to fulfil an order, any delays that the manufacturer experiences are passed along to the customer. This problem can be somewhat controlled by maintaining a list of suppliers that can be used in the case of service disruption. In these cases, the company just moves down the list to the next supplier.

Input Price Changes

Because just-in-time manufacturers do not stockpile raw materials, they can be affected more drastically by the effects of changing prices. Traditional inventory purchasing for goods in volatile markets should increase for periods where prices are expected to be low and decrease in periods where prices are expected to be high. For just-in-time customers, purchases occur when orders occur, so in theory, purchasing is occurring when demand is high. Therefore, the company is forced to pay a higher price on average. This difficulty can be controlled somewhat by entering into long-term supply agreements with suppliers where loyalty is rewarded through price breaks.

Longer Time to Customer

When a customer orders from a just-in-time manufacturer, the production process begins. For companies that use traditional inventory methods, the product may already be made. Certainly, companies with traditional inventory methods may not always be faster to delivery to customers, but just-in-time based manufacturers are starting the production process at a disadvantage. To compete on a time-to-customer basis, just-in-time companies must be especially cognizant of methods to improve production efficiency.

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About the Author

John Freedman's articles specialize in management and financial responsibility. He is a certified public accountant, graduated summa cum laude with a Bachelor of Arts in business administration and has been writing since 1998. His career includes public company auditing and work with the campus recruiting team for his alma mater.