JIT Inventory Controls and the Unhappy Meal

It’s a well known fact that many wines improve with age. Hamburgers, not so much.

Many fast food chains, as a method of inventory control, will pre-cook their hamburger patties and place them under heat lamps and, like puppies waiting for adoption at the pound, would pluck them as customer orders would come in. Many a burger connoisseur would find these well tanned, well aged burgers, for a lack of a better word, gross!
Fresher is not just better for the consumer but better and more profitable for the burger joint as well.

Most fast food restaurants prepare the burger when ordered by the customer. Modern technology has made it possible to prepare a freshly made burger quickly so the need to “store” patties is no longer needed. Now the customer is getting a fresher, tastier product and the burger joint no longer needs to discard the unsold and probably inedible hamburger patties. By preparing the customer’s food when ordered saves the company money by reducing waste. So it is a win-win for the customer and the restaurant!
This is an example of Just-In-Time inventory control.

Investopedia defines Just in Time as: An inventory strategy companies employ to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs. (http://www.investopedia.com/terms/j/jit.asp)

There are many advantages to this method and a few disadvantages to this inventory control method.

On the plus side:

As we can see from the burger example, a business shows itself as more responsive to the customer by producing a better, fresher product. A fresher burger is also a mark of improved quality. Waste is reduced which leads to a higher profit margin. In addition to the savings from reduced waste a company’s holding costs for inventory is reduced. If a business such as a car manufacturer implements a JIT system then the cost of holding and maintaining their inventory is reduced.

JIT allows business to order and receive inventory as they need it. This shortens the time frame for production and, in turn, since the needed items for production are ordered right before they are actually used, the need to warehouse and store these products is greatly reduced. Many companies, using JIT inventory control, can reduce or even eliminate their storage facilities. Again, reduced holding costs equal greater profit margins.
A related advantage to not holding massive amounts of inventory is protection from the very items they are storing from becoming obsolete and thus being stuck with unusable inventory. A prime example of the advantages of a JIT system is to take a look at the automobile industry in the early 1970’s. American auto makers were beginning to face stiff competition form foreign manufacturers in the early 1970s. Especially from the Japanese who pioneered the use of JIT inventory control. Since Japanese car makers did not find themselves sitting on aging inventory they were able to more quickly re-design their products and implement improvements. Chrysler, on the other hand, found itself sitting on thousands of unsold cars and parts. These, of course, became obsolete inventory which incurred heavy holding costs. This lead to the first of Chrysler’s government bailouts. As Chrysler was circling the drain, Lee Iacocca came about when about modernizing the company including implementing a JIT system. JIT inventory controls lead to a reduction of 1 billion in inventory which in turn made it easier to reduce staff and increased profits. (http://www-personal.umich.edu/~afuah/cases/case3.html)

Though the JIT method can lead to reduced operating costs, better customer satisfaction and high profits there can be a downside to JIT.

With JIT, everything moves faster and more groups and departments find themselves interdependent of each other. As the old saying goes, “A chain is only as strong as its weakest link”. Since the JIT depends on speed and the ability of multiple departments working well together. Should one area hit a snag; the downstream effects can be quite troubling for the company. Should there be a communication breakdown downstream or upstream a company can find itself not ordering the correct amount of a particular doodad needed for manufacturing the company’s product. This can snowball into unfulfilled customer orders and production downtime. Rapid increases in orders can throw a JIT system out of whack. If production is not well planned then a spike in orders, such as a Christmas rush, can create a situation where the company simply can’t fulfill orders as they might not have adequate inventory to produce a product. External forces can have a negative impact on JIT systems. Again, a successful JIT operation carries very little inventory. Should there be a labor strike at a supplier or a natural disaster disrupts a shipping route a company with little inventory on hand will simply be unable to meet production quotas.

When adding up the pros and cons of a JIT system of inventory control it seems clear that the JIT method leads to lower operating costs, higher customer satisfaction, improved products and higher profits.

I’ll pass on the double card-board burger with cheese and look for a burger joint that uses a JIT system to satisfy my artery hardening needs.