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CFA Level 1
Corporate Finance

Risks of JIT Inventory Management in Manufacturing

Very Hard Working Capital Management Inventory Management

XYZ Company is a manufacturing firm specializing in the production of consumer electronics. As part of a recent financial analysis to optimize its operational efficiency, the management team examined its inventory turnover ratio, which currently stands at 5. The company has an average inventory level of $2 million. In their analysis, management comes across the method of Just-In-Time (JIT) inventory management and contemplates its implementation. Senior financial analysts have raised concerns regarding the potential effects on liquidity and the company's ability to meet unanticipated demand surges.

What is the most significant drawback of a Just-In-Time (JIT) inventory system that XYZ Company should consider before implementation?

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