Just-in-time inventory pros and cons
As with every system, there are advantages but also disadvantages when it comes to JIT. Below, we’ll list the main ones.
Advantages of just-in-time inventory
It requires minimal up-front expenditure, low inventory levels, and quick-moving inventory. All while keeping up with customer demand.
If you have a hobby business or side hustle, you most likely already use just-in-time. You will not make hundreds of your products in advance as you are unsure about future demand. You never want to be left with heaps of dead stock. Using a JIT inventory management system greatly reduces this risk.
JIT also protects against dead stock.
This affects products with relatively short shelf life or may go out of style quickly. Perishable goods are the most obvious in this category, but non-perishables, like clothing, can also fall into it. Styles can change quickly, rendering your inventory obsolete.
Having a lot of money tied up in inventory is also a huge risk.
JIT can help free up cash that would otherwise be spent on inventory. Besides, holding inventory is not without its costs. Every item in your stock incurs a carrying cost. There are warehousing and storage fees and the opportunity cost of not investing that money elsewhere.
Disadvantages of just-in-time inventory
The drawback of a just-in-time inventory system is that it can be risky under certain conditions:
- A disruption in the supply chain can take you out of action for a long time — if you haven’t planned for it
- Having too many SKUs also makes JIT difficult
- Your suppliers need to be close to your operations. If you are in the US and ordering materials from overseas, then this might make JIT unworkable
Now, it’s worth pointing out that most businesses do not manufacture hundreds of different items. The most successful companies thrive on only making a handful of specialized products. So, if you find yourself with an overabundance of SKUs, perhaps it’s worth looking into SKU rationalization or considering the 80/20 approach.
To reduce the risk, make just-in-time inventory and supply chain management work together. You can benefit from live inventory management software that tells you exactly what you have in stock and where it is. These systems also allow you to set up reorder points to ensure you always have enough on hand.
This means the best system to track inventory is a perpetual inventory method.
Developing good relationships with your suppliers helps a lot. You could even organize them to store inventory for you. Having alternative supply chains on standby in case one fails is another countermeasure.
Don’t be put off — the potential benefits of just-in-time inventory management outweigh the risks. It is hugely profitable in the long term. Your products can become more affordable, which allows you to increase your market share in your industry.
As long as you are proactive with management, disasters will never catch you off-guard.