Storage Costs

• One of the drivers for JIT inventory is that a manufacturing company and a retailer do not have to spend as much money on storage. Say a company produces a product that takes 10 pieces. Before JIT, the company would order the 10 components and keep large quantities on hand to fulfill an order. Small items such as screws or hinges might not take much space, but consider a cabinet manufacturer. The company would need to store large quantities of wood or laminate and pay for the storage. The JIT model allows the manufacturer to order the amount of materials needed in smaller batches. For example, a manufacturer has the ability to produce 100 products a day. Keeping enough inventory for 50,000 pieces may be very costly. Using the JIT concept, the company makes more frequent, smaller orders of the component pieces. This same concept is true for retailers. Consider back-to-school shopping. The retailer knows that school clothes, school supplies, lunch kits and similar items will have a spike in demand for a short period of time. The store doesn't want to purchase these items in March and hold onto them in a warehouse until July and August when the back-to-school shopping peaks.
  
  

Inventory Costs

• Not only is storage costs a consideration for JIT inventory, but the product cost plays a large role in the benefit of JIT inventory. Consider a home improvement store. The store has three types of generators. The store must pay for the generators and wait to resell them to a customer. While waiting, that money is tied up and can't be used to purchase other products customers may need. To maintain a good cash flow, the retailer keeps only one of each kind of generator on hand. The moment one of the generators is sold, an order is placed for a new generator. If good JIT practices are in place, the new generator will arrive quickly for the next customer.
  
  

Supply Management

• A downside to JIT inventory is managing the inventory. Excellent ordering systems must be in place to ensure that a component is available when needed. Consider a manufacturing company that makes computers. The assembly line is building the computers quickly but comes to a grinding halt if one of the components did not arrive or wasn't ordered. If the hard drive needed for the computer was delayed for any reason, the computer cannot be built. A good JIT process should have backup suppliers ready for such an event. This makes the overall management of a JIT program complex.
  
  

Demand

• Another caution with JIT inventory is product demand spikes. The home improvement store that orders generators may see a spike in demand during hurricane season or during a fierce winter storm. The issue is that all home improvement stores may want more generators in a short period of time. The store may lose sales because the manufacturer simply can't produce that many in such a short time span. Or even if the manufacturer can ramp up production quickly, other component producers down the supply chain must be able to quickly create the parts necessary to build the generator.