Just-in-Time (JIT) as a Management Control System

Just-in-Time (JIT) – Introduction

Just-in-Time(JIT) technique tries to ensure that there are no zero inventories, and goods are produced or ordered only when they are needed. Hence the name, Just-in-Time. In actual practice zero inventories may not be possible but the term Just-in-Time states the direction in which lot size should be headed. Just In Time (JIT) is an inventory strategy implemented to improve the return on investment by reducing in-process inventory and its associated costs. The Just-in-Time inventory system is all about having “the right material, at the right time, at the right place, and in the exact amount.”

In the Just-in-Time inventory philosophy there are views with respect to how inventory is looked upon. Inventory is seen as incurring costs instead of adding value, contrary to traditional thinking. Under the philosophy, businesses are encouraged to eliminate inventory that doesn’t add value to the product. This system sees inventory as a sign of sub par management as it is simply there to hide problems within the production system. These problems include backups at work centers, lack of flexibility for employees and equipment, and inadequate capacity among other things.

The process is driven by a series of signals, or Kanban that tell production processes to make the next part. Kanban are usually simple visual signals, such as the presence or absence of a part on a shelf. When implemented correctly, Just-in-Time can lead to dramatic improvements in a manufacturing organization’s return on investment, quality, and efficiency. New stock is ordered when stock reaches the re-order level. This saves warehouse space and costs.

Main drawback of the just-in-time system is that the re-order level is determined by historical demand. If demand rises above the historical average planning duration demand, the firm could deplete inventory and cause customer service issues. To meet a 95% service rate a firm must carry about 2 standard deviations of demand in safety stock.

Salient Features of Just-in-Time (JIT)

1. Reduce buffer inventory: Buffer inventory exists partly because a manufacturing workstation may breakdown and partly due to uncertain supply from suppliers. When these events happen, production in following workstation is disrupted unless there is an inventory on which they can draw. The amount of buffer inventory can be reduced if steps are taken to minimize machine breakdown and improve product quality. The purpose of just-in-time is to ensure that every workstation produces and delivers to the next workstation the right items in the right quantity at the right time; if this purpose is achieved there would be no need for buffer inventory.
2. Decrease set-up costs: With computer controlled machine tools, set up involves simply inserting a new computer program into a machine. Thus, after the computer program has been created, the cost of setting up for all succeeding lots becomes trivial.
3. Decrease procurement costs: Just-in-time also aims at decreasing procurement costs. Traditionally, procurement involved issuing requests for bids form many vendors, analyzing bids, placing an order with the best (usually the cheapest) vendor, and receiving and inspecting the incoming goods. As per the just-in-time philosophy companies now reduce the cost of each of these components by establishing relationships with one or two vendors for each item.
4. Relation with customers: Just-in-time also aims at establishing permanent relationships with customers for automatic ordering. Some manufacturers have systems in which their salespersons automatically place orders from retailers or other customers on the basis of preset formulas that determine reorder time and quantities; this reduces the customers’ ordering costs and also cements a relationship between the customers and the manufacturer.

Just-in-Time (JIT) as a Management Control System

1. Work-in-process inventory becomes so insignificant that it is disregarded. The only inventories are for raw materials and finished goods.
2. There is reduction in record keeping because, job-cost system is transformed into a process-cost system with only one cost center and elimination of the tedious task of calculating “equivalent production”, which is necessary to find  work-in-process inventory amounts when the inventory consists of partially completed products.
3. Just-in-time system focuses management attention on time in addition to the traditional focus on cost. A reduction in cycle time can lead to a reduction in cost.

Effects of Just-in-Time (JIT)

1. A huge amount of cash released as in-process inventory is built out and sold.
2. The response time of the factory falls, resulting in improved customer satisfaction.
3. Products may be built to order; completely eliminating the risk they will not be sold. This dramatically improves the company’s return on equity by eliminating a major source of risk.
4. Dramatic improvement in product quality.
5. In the commercial sector, it eliminates one or all of the warehouses in the link between a factory and a retail establishment.

Benefits of Just-in-Time (JIT)

• Set up times are significantly reduced in the warehouse. Cutting down the set up time to be more productive will allow the company to improve their profits, to look more efficient and focus time spend on other areas that may need improvement.
• The flows of goods from warehouse to shelves are improved. Having employees focused on specific areas of the system will allow them to process goods faster instead of having them vulnerable to fatigue from doing too many jobs at once and simplifies the tasks at hand.
• Employees who possess multi-skills are utilized more efficiently. Having employees trained to work on different parts of the inventory cycle system will allow companies to use workers in situations where they are needed when there is a shortage of workers and a high demand for a particular product.
  
• Better consistency of scheduling and consistency of employee work hours. If there is no demand for a product at the time, workers don’t have to be working. This can save the company money by not having to pay workers for a job not completed or could have them focus on other jobs around the warehouse that would not necessarily be done on a normal day.
• Increased emphasis on supplier relationships. No company wants a break in their inventory system that would create a shortage of supplies while not having inventory sit on shelves. Having a trusting supplier relationship means that you can rely on goods being there when you need them in order to satisfy the company and keep the company name in good standing with the public.
• Supplies continue around the clock keeping workers productive and businesses focused on turnover. Having management focused on meeting deadlines will make employees work hard to meet the company goals to see benefits in terms of job satisfaction, promotion or even higher pay.

Problems of Just-in-Time (JIT)

• The major problem with Just-in-Time operation is that it leaves the supplier and downstream consumers open to supply shocks.
• Just-in-time requires  a business to resupply frequently instead of holding excess stocks. In practice JIT works well for many businesses, but it is not appropriate if ordering cost per order is not small.
• Any delay in delivery means that additional ‘safety stocks’ need to be held if a stock out is to be rendered very unlikely.

Credit: Management Control Systems-MGU