The benefits of the just-in-time (JIT) production strategy are well-documented, but it can also have some serious disadvantages. The chief issue with this production process is evidenced in its name. "Just in time" means that the success of this business strategy depends largely on precise coordination between businesses and their suppliers to ensure prompt delivery. Because there is no inventory buffer, business can suffer greatly if any one element of production is delayed.

Key Takeaways

  • Just-in-time (JIT) is a production strategy in which a company only produces an item after a buyer has made an order, therefore keeping inventories low.
  • While this stream-lined approach can cut down on costs and increase efficiency during business-as-usual, it is susceptible to both supply and demand shocks.
  • When global supply chains are disrupted for one reason or another, JIT production can leave factories unable to meet demand and worsen an economic downturn.

Just-In-Time

The JIT production strategy means that businesses do not produce items for sale until they have been ordered by customers, meaning inventory is low or nonexistent. While low inventory can be beneficial to a company's bottom line in a number of ways, running a business this way requires a great deal of coordination. From obtaining the raw materials needed for manufacturing to ensuring timely delivery, every aspect of JIT production must be synchronized. This often means businesses must invest in the implementation of information technology to enable automatic notification to suppliers when orders are received.

Supply Shocks

Under standard inventory-based production models, businesses place large orders for materials from wholesalers, and many items can be produced from one shipment. As production depletes the first shipment of raw materials, another order is shipped, creating a convenient time buffer. On-demand production means companies must find suppliers that are willing to fulfill small, frequent orders on very short notice, which often means using local suppliers to reduce shipping time and expenses. With no back stock of inventory or materials, any supply chain issue can lead to delivery delays and angry customers. A sudden increase in the price of raw goods due to issues with material sourcing, shortages, natural disaster or political upheaval (called supply shock) can also pose a serious threat to the ability of a company to service its customers effectively.

Demand Shocks

Because JIT production is based entirely on existing orders, it is not the most efficient system for dealing with the unexpected. A company that uses this strategy may be ill-equipped to handle a sudden surge in demand for a product. The lack of back-up inventory means customers must wait for the company to receive supplies and manufacture the product. This can mean extended delays, dissatisfied customers and potential forfeit of part of all of an order if any supply chain issues arise.

Large Orders

Inability to fulfill large orders in a timely manner can cost a business money, but there are other hidden expenses inherent in the JIT strategy that are just as important, though less dramatic. Producing goods for sale in smaller quantities means spending less per shipment of raw materials, but it can actually end up costing a company more. Businesses that have high production levels benefit from the economy of scale: as production increases, the average cost of producing each item actually decreases. This is partially because large wholesale purchases often come with generous quantity-based discounts. Businesses that utilize the JIT production strategy may pay more per item because they must make smaller, more frequent orders that do not qualify for these types of price breaks. The additional shipping and delivery charges that accompany more frequent ordering can also have an important impact on the bottom line, as well as on the environment.