Benefits and Risks of Just-in-Time Inventory Management

Supply chain management software remains a rapidly growing field, and supply chain managers continue to find new strategies to meet changing demands, boost efficiency, and cut costs.

One notable strategy for inventory management is just-in-time (JIT) inventory. This strategy keeps the minimum amount of stock on hand instead of stockpiling products. In turn, you can reduce inventory holding costs and overall waste throughout the supply chain.

While JIT has many benefits, it also has a few notable drawbacks. Managers should weigh the just-in-time advantages and disadvantages to understand if the strategy best meets your company’s needs. By implementing a vendor managed inventory (VMI) solution, you can maximize the benefits of JIT and reduce risks.

The Benefits of JIT Inventory Management

JIT inventory provides many advantages for supply chain companies wanting to improve inventory management. By only investing in the exact inventory you need, you maintain a fresh and precise stock. These are other advantages of JIT:

• Reduces waste: The JIT strategy eliminates overproduction. You only order exact quantities based on customer orders. In turn, you remove the risk of overordering and accumulating excess stock. You maintain adequate inventory space and only spend money on the items you need. Fewer stock numbers also allow you to dedicate more individualized attention. You can notice defects more quickly and ensure your available stock is high-quality.
• Lowers holding costs: Excess inventory can double your warehousing costs, leading to heightened monthly costs. If the inventory goes to waste, the extra payments become entirely wasteful. With the JIT model, you keep warehousing costs to a minimum. In some cases, you could eliminate the need for warehousing entirely. You only order when a customer places an order, making lengthy storage unnecessary. JIT is especially beneficial in industries with bulky items, like the automotive industry. Storage of items like tires and engines can quickly become expensive, but JIT reduces the need for warehousing.

The Risks of Relying on JIT for Inventory Management

However, JIT has a few risks that reduce its effectiveness. The consistent trend of delays and disruptions makes it challenging to accurately predict shipment times. Companies should evaluate the disadvantages to gauge whether JIT is a suitable solution for their circumstances.

Here are a few disadvantages of just-in-time inventory:

• Low in-transit visibility: The biggest risk for just-in-time inventory is low visibility during transit. As soon as the products leave the supplier, you lose access to their location details. For JIT to succeed, your company must receive replenishments before the current stock depletes. Low visibility makes it challenging to accurately predict arrival times and plan accordingly. You can address this difficulty with consistent communication with multi-model transport providers, import and export brokers, and other suppliers.
• Challenging to rework orders: The JIT strategy keeps inventory to a bare minimum and bases it on customers’ initial orders. This method makes it difficult to alter orders after they have been placed. Consumers might need to rectify mistakes, increase quantities, cancel one or more items, or make other alterations to their orders. You would lose some of the just-in-time benefits when customers make order changes because you would have to place new product orders.
• Complete dependence on supplier performance: Another drawback of JIT is a complete reliance on supplier performance. In the event of disruptions and supplier failures, your company will not have any backup stock to supplement orders. Severe disruptions or supplier delays could result in customer dissatisfaction and significant revenue losses. It’s challenging to predict supply chain trends, which could change instantly. Because of this, a company using JIT might have to navigate extreme unpredictability.
• Difficult to meet changing demands: The supply chain is prone to quick changes in supply and demand. If your consumers show a sudden surge in demand for a particular product, the JIT system might be unable to meet it. You would lose the opportunity to maximize sales and support customer interests.

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How to Maximize Just-in-Time Inventory Management

While the benefits of just-in-time inventory are excellent for companies, the strategy can also present significant risks. Many supply chain managers find it challenging to balance the pros and cons of just-in-time inventory management.

One way to maximize your just-in-time inventory usage is by implementing vendor managed inventory solutions. VMI enhances collaboration between your company and its downstream buyers. By improving communication and utilizing automation, you can optimize supply chain performance and the just-in-time method.

VMI software combines point-of-sale and demand forecast data from both suppliers and sellers. After the system analyzes this data, it provides personalized recommendations for inventory replenishment. You can program the system with agreed objectives and other configured settings to achieve optimized orders that minimize both lead time and inventory investment.

VMI allows you and your supply chain partners to decide upon mutual objectives like:

• Inventory turnover
• Min/max shelf presence
• Vehicle fill rate optimization
• Out of stocks

By clearly communicating desired objectives, you can create an optimized partnership. In turn, you can solidify your JIT techniques and ensure they supply optimal results. For instance, it reduces risks like:

• Over- or under-ordering: VMI platforms offer real-time monitoring and updates into inventory data. It monitors product movement activity and compares it to your desired objectives, providing direct insight into performance. In turn, you can maintain order accuracy and prevent over- or under-ordering. The system can also alert you of anomalies or errors in your data, allowing you to maintain accuracy.
• Miscommunication: Regular and straightforward communication is essential for just-in-time success. A VMI system helps you and your buyers stay on the same page about order statuses and quantities. With stronger communication, you can fulfill customer orders with precision and shorten distribution times. In turn, you increase customer satisfaction.
• Market changes: One of the biggest challenges facing just-in-time methods is rapid changes in supply and demand. VMI software helps you meet the rapid demands of the supply chain by supplying real-time visibility into product movements. With detailed inventory data, you can predict upcoming trends and adapt future shipments as necessary.

Overall, using VMI allows you to access the full benefits of the just-in-time technique.

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