Risks of Just in Time Inventory Systems Essay

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The Risks of Being Just-In-Time

The following is a guest article written by Nick Koletic, an economics specialist at UCLA. In addition to giving a brief background on Just-In-Time inventory system’s benefits, the article’s main focus is the risks that JIT systems face.

Just-In-Time inventory (JIT) is part of a production system whereby a firm vastly reduces inventory from its production processes so that utilization of production inputs and delivery of finished products are accomplished without incurring significant holding costs. While JIT inventory systems are quite attractive for this reason, they are a double-edged sword. And though a JIT system might even be a necessity given the inventory demands of certain business types,
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Shipping the same quantity of a product to different retail outlets, for example, might not make much sense if the demand for that good is significantly greater at one location relative to another. This approach to delivery cost savings also facilitates decreases in aforementioned holding costs by not overstocking certain locations with a product. The same principle holds for inputs in production; parts are not delivered and held at production centers where they might lay idle.

Some positive externalities may also result from a firm’s decision to implement a JIT system. Suppliers of such a firm, for example, might then be able handle larger orders but fulfill them with smaller shipments. That is to say that for any given order size, supplying a customer that utilizes JIT is typically easier to do because individual shipments tend to be smaller for these customers and thus tend to be less demanding of the supplier. So it might be possible for suppliers, merely by the nature of their customers’ JIT system, to greatly expand their ability to fill larger orders without having to increase production capacity.

Several factors, however, make JIT systems a risky proposition. A key concern here is the extent to which firms are dependent upon particular suppliers under such an inventory system. For example, if a firm were to commission a highly proprietary product to a single supplier (single suppliers being common in JIT), a JIT
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