JIT & Inventory Control

Costs associated with inventory make up one of the most critical cost areas within an organization. Whether the company manufactures goods or sells finished products, inventory carrying costs and their component parts can represent a significant portion of the company's cost structure. In addition, having the wrong amount of inventory on hand can result in severe difficulties. Having too much inventory on hand means that extra warehouse space is needed in addition to the costs associated with the inventory itself. In a manufacturing environment, having too little inventory for input goods means that production slows down, or is even halted. In both manufacturing and retail environments, not having enough inventory on hand to meet consumer demand results in lost sales, and lower revenue than would otherwise be realized. Because of these critical factors, inventory management has become an important part of most organizations. This research examines a particular type of inventory management, just-in-time (JIT), and examines how JIT can be implemented and the costs and benefits associated with this method of inventory control.

The traditional approach to inventory management focuses on the economic order quantity (EOQ), which facilitates the determination of an optimum level of investment in inventory by minimizing the total costs of obtaining and carrying inventory. The costs of obtaining inventory (ordering costs) includ

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losophy by often hiding managerial inefficiencies. There are costs associated with training and retraining workers in order to create the flexible workforce that JIT requires. There may also be nonquantitative costs in this area as workers expand their areas of responsibility, but may not receive any commensurate increase in pay. As a result, employee morale may suffer. The increased emphasis on quality may also have a short-term demoralizing effect as less-competent workers realize the pressure of having to bring their skills up to the company standard (Greenblatt, 1993, p. 42). Because deliveries are made more frequently under a JIT system than in a traditional inventory control system, but the lots which are received are smaller, ordering costs and per unit costs can also increase. Some of these costs can be mitigated through the contract negotiation process, but they remain an area of concern which companies need to address. Building too much into supplier contracts can also be a problem in that such contracts may lock the company into prices that remain in effect even after the supplier's costs decline. New technology may be one factor influencing cost reduction at the supplier; more efficient production methods may b

Category: Business - J