Disadvantages of JIT (Just In Time) and Impacts on Costs

[wmarhel]

I still don't understand how that saves a company money though, since your going through the same amount of inventory anyways.

Only way I can see it saving money is if the buying company goes under and you end up with inventory you cant sell so it minimizes your losses.

Dimitri

A few instances:

1) Purchasing inventory that isn't immediately needed prevents you from using that money for additional activities (equipment purchases, investments, etc.)

2) Depending on the companies insurance policy, the amount of assets you have on hand is part of the deciding factor in the final rate (think replacement cost). Lower insurance premiums is a savings.

3) Lower inventory levels reduce the level of risk associated from having that inventory on hand. This could be due to obsolescence, spoilage, etc. Another factor is that the larger the pile of inventory, the greater the chance that there might be defects lurking about.

4) While "cash" and "inventory" are both are considered assets, cash is much more flexible. Having the cash could also preclude the need to assume loans and thereby pay interest.

5) Having an extra million dollars of inventory over the course of a year, because you'll probably get around to using it up sometime, incurs additional cost by virtue of its very existence. The typical range for "carrying costs" is 25-35%. Most people just throw around 25% because it is easy to do the math, but it is usually higher when the full calculation is performed.

Not purchasing unneeded inventory also doesn't tie up other resources in doing tasks that aren't essential to the operation, or don't provide value to the customer in the here and now. In essence, your paying for additional people just so you can have more "stuff" in your warehouse/facility. The cost for the additional people to perform that unneeded work should be calculated at the fully burdened rate.

Something to consider regarding both is the opportunity cost. Having an extra million dollars in inventory on the warehouse floor can't make any money until labor is applied. Having a million dollars in cash that could be invested (if you really want to play it safe, say bonds) can make money quite easily. Cash is just much more fluid.

Wayne

 

[Dimitri]

I see thanks for that, makes alittle more sense now.

Dimitri

 

[Claes Gefvenberg]

Re: Disadvantages of JIT

Welcome to the Cove, tempohk!

I would suppose that, if it is working properly, there are few disadvantages to JIT.

I agree: When JIT was introduced over here, lots of bean counters instantly seized the opportunity to reduce stock all over the place. Unfortunately they did so without realizing that all involved processes must be under control, or problems will follow very soon. Of course it all turned in to a right old mess, and of course JIT caught the blame...

One of the main advantages of properly (gradually) introduced JIT is that it will reveal lots of problems previously hidden by excess stock, and force the process owners to take action, thereby streamlining the process.

/Claes

 

[sspoldir]

Re: Disadvantages of JIT

Thats not a disadvantage... thats ignorance on the part of those who did it. The book "zero inventory" (which is what caused places to start slashing inventories without fixing underlying problems) doesn't really mean no inventory.

Welcome to the Cove, tempohk! I agree: When JIT was introduced over here, lots of bean counters instantly seized the opportunity to reduce stock all over the place. Unfortunately they did so without realizing that all involved processes must be under control, or problems will follow very soon. Of course it all turned in to a right old mess, and of course JIT caught the blame...

One of the main advantages of properly (gradually) introduced JIT is that it will reveal lots of problems previously hidden by excess stock, and force the process owners to take action, thereby streamlining the process.

/Claes

 

[Claes Gefvenberg]

Re: Disadvantages of JIT

Thats not a disadvantage... thats ignorance on the part of those who did it.

Yep, I agree. As I said, I also agree with Brad's "if it is working properly, there are few disadvantages to JIT".

/Claes

 

[Coury Ferguson]

The only possible disadvantage to JIT, in my opinion, could be caused by the need to maintain inventory, which is dollars.

The company I work for had a similar JIT and they agreed to maintain a certain inventory quantity. This can cause some issues due to changes in the drawing/design requirements, therefore leading to obsolete parts. Which in turn causes Scrap (dollars lost).

 

[Wes Bucey]

A few instances:

1) Purchasing inventory that isn't immediately needed prevents you from using that money for additional activities (equipment purchases, investments, etc.)

2) Depending on the companies insurance policy, the amount of assets you have on hand is part of the deciding factor in the final rate (think replacement cost). Lower insurance premiums is a savings.

3) Lower inventory levels reduce the level of risk associated from having that inventory on hand. This could be due to obsolescence, spoilage, etc. Another factor is that the larger the pile of inventory, the greater the chance that there might be defects lurking about.

4) While "cash" and "inventory" are both are considered assets, cash is much more flexible. Having the cash could also preclude the need to assume loans and thereby pay interest.

5) Having an extra million dollars of inventory over the course of a year, because you'll probably get around to using it up sometime, incurs additional cost by virtue of its very existence. The typical range for "carrying costs" is 25-35%. Most people just throw around 25% because it is easy to do the math, but it is usually higher when the full calculation is performed.

Not purchasing unneeded inventory also doesn't tie up other resources in doing tasks that aren't essential to the operation, or don't provide value to the customer in the here and now. In essence, your paying for additional people just so you can have more "stuff" in your warehouse/facility. The cost for the additional people to perform that unneeded work should be calculated at the fully burdened rate.

Something to consider regarding both is the opportunity cost. Having an extra million dollars in inventory on the warehouse floor can't make any money until labor is applied. Having a million dollars in cash that could be invested (if you really want to play it safe, say bonds) can make money quite easily. Cash is just much more fluid.

Wayne

I like a lot of what Wayne has written here.

When I make presentations on "Lean" (Gosh - I dislike that term!), I usually show a grid of the activities, upsides, and downsides for the differerent members of the supply chain and how to exploit the upsides and ameliorate the downsides.

In my experience, most of the folks talking JIT are purchasers looking to save money which can be used elsewhere in the business to EARN more money, rather than lie fallow tied up in storage space and unprocessed inventory.

Inevitably,some steps in the supply chain have a longer production cycle or different rate of production than others, creating a requirement for someone to hold inventory. A first class computer driven turning center can turn out thousands of parts in hours or days, while an assembly operation using those parts may only use a hundred or two hundred per day.

In the classic JIT scenario, the turning center would only operate long enough to provide a day or two of inventory for the assembler and convert the machine to a different part, coming back in a day or two to make more parts for the assembler. Reality rears its ugly head in that the cost of resetting the turning center for each production cycle far exceeds the potential saving in storage space and lost interest on the money for the assembler.

All in all, I would summarize the main disadvantage of JIT to be the inability of most organizations to have adequate knowledge about the true costs and timetables of the various links in the supply chain to make a truly cost effective decision that creates an efficiency throughout the supply chain rather than just for the final purchaser.

When well implemented, the flexibility of being able to revise versions in short cycles and always sell fresh, competitive merchandise is a worthy goal for JIT and one of the reasons so many organizations pay big bucks to supply chain "gurus."

In my own view (not necessarily the same as many others), the primary value of JIT is the flexibility of being able to change or even stop production without being stuck with a boatload of obsolete goods, NOT the savings in inventory carrying costs..