The “just-in-time” (JIT) inventory system was developed to support the excellent production movement of the Toyota Motor Company. The overall goal of the system is to strictly control the purchase and delivery of raw materials to minimize storage, inventory, and fixed costs. The delivery of raw materials is scheduled based on production needs, such as the arrival of materials as they are needed. For this process it is essential to have a strong relationship with the suppliers of raw materials and a strict monitoring of the level of the materials.
Advantage: decrease inventory
JIT systems, by design, require smaller levels of inventory than most supply chain processes. Information systems are used to support complex orders, deliveries, and supply networks. In theory, lower inventory levels lead to lower fixed costs. Raw material suppliers in some industries build their production plants close to suppliers to better coordinate with them and reduce transportation problems.
Advantage: less waste
JIT inventory processes decrease the amount of handling and storage required for raw materials. General waste and handling requirements are minimized due to lower storage requirements. Additionally, as the needs for production materials change, the amount of materials destroyed or returned will decrease. Quality is the focus of the JIT system for all its steps, especially when it comes to raw materials. Having higher starting quality reduces the amount of rework or scrap caused by poor quality materials.
Risk: production interruption
The biggest disadvantage of the JIT system is the risk of production interruption. If the necessary materials do not arrive in a timely manner, production may be delayed or interrupted until the materials arrive. These delays can reduce productivity and result in lost sales. Raw material suppliers can be delayed by production problems, natural disasters and even political instability. Production interruption can result in higher costs, problems with customer satisfaction, and reduced profits.
Risk: higher costs
Although reducing fixed inventory costs is an advantage of the JIT system, higher costs can also be incurred. Because a close relationship with suppliers is required to maintain the efficiency of the system, exclusive contracts are usually used to ensure continuity of supply. Because suppliers dedicate part or all of the goods produced and usually share responsibility, they may require higher profitability, or a long-term contract. Long-term contracts reduce the ability to get more competitive cost options or take advantage of decreases in material prices.