An insight into the Just-In-Time strategy

Category: Accounting

Businesses in this world are expanding to limits where they can earn more and more profits. These businesses are adopting new methods through which they can improve their infrastructure and fulfill their aim of increasing their returns. Our business is one of the several businesses in this world which is focusing on new methods and strategies to increase our returns. Such a strategy is proposed to increase the returns of our business and it is known as Just-In-Time. Just-In-Time is a strategy put to practice in accounting principles, which induces increases in investment returns of an industry by decreasing work-in-progress stock and all of its related costs. This strategy of JIT is leading to noticeable improvements in the rate of return on investments, productivity and the level of quality of a manufacturing industry's output. Connected with Japanese management techniques, just-in-time production (JIT) are set of rules which help in carrying out organized plans. According to this philosophy of managing production, manufacturing organizations should not hold or stock material more than that is necessary for quick production or circulation. To be exact, a producer should not take delivery of unprocessed materials or goods from its suppliers when they are not being used. In other words the producer should only take the delivery just hours prior to they will be used in manufacturing, and the output of the firm should be transferred to its consumers as soon as possible after the raw material is completely transformed into manufactured goods and they must not keep a stock of raw or finished goods. Our company depends on a few customers and this strategy is basically being implemented to reduce the costs incurred by us. This report gives details about the fundamental concept to attain JIT production in our firm and its possible effectiveness. It would also relate the concept to societal costs and how they would be affected if JIT is adopted.

Just-In-Time (JIT)

Just-in-time is a very wide philosophy that highlights generalization and incessantly reducing waste in each and every part of production activity. This entails that the purpose of the just-in-time philosophy is best aimed at an organization in its entirety. In order for a proficient Just-In-Time operation the theory of backflush accounting is also adopted. The most important aspects of just-in-time are associated with those of total quality management (TQM). The prime focus is on the removal of waste and activities that are of no use hence manufacturing commodities which possess 'zero defects'. Just like TQM, the just-in-time philosophy centers on the aspect of on-time-delivery to the purchaser. This philosophy would help our company to excel in the area of delivering the commodities to the customers on time. The primary customer of our company would be provided with the best quality of products on the right time. The philosophy enhances the performance of the departments of purchasing, production and sales. It emphasizes on quick sales so that the price of stocking is reduced. The nonexistence of stock render decisions concerning cost-flow conjectures (such as weighted average or first-in, first-out) or stock costing methods (such as absorption or marginal costing) are insignificant. This is because all of the production costs in accordance to a period, surge directly into cost of goods sold. When the old stock is consumed, the information sent to the manufacturing department for the order of new stock by immediate means is the key to the success of JIT philosophy. This would help in saving the warehousing space and costs required to keep the stock for the company. However the commodity levels in stock are determined by usual demands but in case of a sudden ascend in demand the firm can suffer the problem of customer service. Here the Just In Time strategy would not be able to meet the requirements of our regular customers as they order varying amounts of goods from our company. But then again solution to this problem is recommended in which the company can already process the goods which would necessarily be brought by the primary customers. This strategy was used by Ford Motor Company as described by Henry Ford's My Life and Work (1922): "We have found in buying materials that it is not worthwhile to buy for other than immediate needs. We buy only enough to fit into the plan of production, taking into consideration the state of transportation at the time. If transportation were perfect and an even flow of materials could be assured, it would not be necessary to carry any stock whatsoever. The carloads of raw materials would arrive on schedule and in the planned order and amounts, and go from the railway cars into production. That would save a great deal of money, for it would give a very rapid turnover and thus decrease the amount of money tied up in materials. With bad transportation one has to carry larger stocks." The Job costing would also be decreased by the speedy conversion of direct materials to finished good which would be then sold immediately. The established and standard costing systems track costs as goods pass from raw materials, to work in progress, to finished goods and finally to sales. And this type of system is known as 'Sequential Tracking System' because the accounting system entries come in the similar arrangement as purchases and manufacturing. At times the management tries to track both direct material and labor time to individual operations and products and thus this process can prove to be very expensive in accordance to sequential tracking. The execution of a Just-In-Time philosophy can result in a change in the character played by the management accountant. This is because the standard management accounting techniques are rendered to be improper owing to their inaptness for use in conjunction with just-in-time operations. For example, habitual variance study centers on making the most of capacity utilization while trying to lessen costs. The minimization of costs will always remain an important concern. On the other hand, the focus on value appreciation has increased while trying to decrease the costs. Management is as a result required to give financial and non-financial information concerning supplier performance, on-time deliveries, cycle times, and the quantity of faulty items produced. And thus these new duties for the management department have resulted in definite changes in the processes and accounting techniques in order to facilitate the provision of such information. And here comes the application of backflush accounting systems which are very helpful in improving the performance of just-in-time operations. This accounting system centers on the productivity of an organization and then works accordingly while assigning costs between costs of goods sold and inventories. Backflush accounting improves the costing system and it can thus help in disregarding both labor variances and work-in-progress in our company. (C.Drury)

For a flourishing performance of JIT many added conditions can also be sought out for our company. These conditions consist of small lot sizes, short setup and changeover times, proficient and effectual quality controls, and perhaps most of all, planning the whole production process to reduce backups and get the most out of the effectiveness of human and machine labor. The details first and foremost focus on 'assembly' manufacturing. It includes service organizations and administrative departments, making this philosophy applicable. The steps which can be taken to achieve proper and profitable JIT are,

JIT production knowledge includes the knowledge of the profits and fame (i.e. the objective), which are to be achieved with JIT. The objective fundamentally decreases product throughput times. It lessens or diminishes conventional stock and also focuses the mind on quality and set-up times and offers a theoretical structure for tactical growth in many areas

Value stream mapping is an important tool that can assist our company to observe and realize the flow of objects and information as a product or service and it creates way through the value stream.

The 5S program can be introduced which can ascertain a well-organized, proficient, safe and sound place of work.

Line integration has a setup of a flow model, which can prove to be very significant to mark troubles right away. It can also help to eradicate or decrease intermediate stock which would help to save costs of warehousing.

One-piece flow production is when parts are made one at a time and passed on to the next process. It helps to detect the defects immediately and prevents a huge amount of loss. It is also known as make one, move one. This kind of production can help us to gain loyalty of our customers.

Pull system is in which a production method is organized in which the production of an item starts only when there is actual demand from a customer. It is the next vital step to ensure that goods are not pushed into the manufacturing process any longer (hoping some date they will come out at the other end), but 'pulled' the time the purchaser asks for it. This is very important to follow the strategy of Just-In-Time and this can greatly help in coping up with the varying demands of the customers.

Line balancing is the process of aligning processes within a definite manufacturing line, and feeder lines to consuming lines that reduces variations in production levels and operation downtime.

Standardization is the procedure of keeping procedures and equipment as constant as achievable.

But on the other hand Just in time (JIT) cannot be stated as a direct solution to all the problems in our company. Implementing this strategy could make the company change all the ways in which a company works. The strategy in this way of working comes from many different disciplines including statistics, industrial engineering, production management and behavioral sciences. In JIT inventory is seen as incurring costs or waste instead of adding value. In JIT environment, industries are encouraged to eliminate inventory that does not reimburse for production issues and to build up processes that help in keeping a low amount of inventory. This strategy concerns all about containing “the right material, at the right time, at the right place, and in the exact amount”. When JIT was newly introduced all the deliveries were done by bicycles which were handled by humans, although with the rise in scale came the adoption of van and lorries for the deliveries. And this in turn has other problems which were highlighted by Cusumano (1994). Firstly the time which is wasted while the vans are stuck in traffic jams, this can result in late deliveries, the inventory which is used in transporting inventory and lastly the scrap material which is wasted (e.g. petrol or diesel burned). This can also affect the societal costs in a way as would be discussed subsequently. JIT unconditionally presumes a level of input cost constancy such that it is advantageous to stock inputs at today's prices. If input prices are anticipated to rise storing inputs may be sought-after.

If the stock levels reach the minimum there are many consignments of the same part coming all over the day, there is a possibility that they may incur an interruption in the flow of supply and as our company expects this kind of varying demands then it can be difficult for us to implement the strategy. And thus to tackle this kind of problem the firm has to use many suppliers to have the desired goods at the required time. Toyota uses two suppliers in order to avoid any disruption in the course. Toyota believes in keeping up high value relations with its total supplier network. Therefore, a strong, long-standing relationship with a small number of suppliers is chosen to temporary, price-based relationships with contending suppliers. Toyota has also been using a durable relationship with its old suppliers. And they also send their workers to their suppliers to enhance the performance of the supply. This long-term relationship has also been used by Toyota to send Toyota staff into their suppliers to improve their suppliers' processes. These involvements are lasting for twenty years and therefore result in better margins for Toyota, the supplier and as well as lower final costs and a more consistent supply sequence. As noted by Liker (2003) and Womack and Jones (2003), it would finally be advantageous to establish coordinated flow and associated JIT all the way back through the supply flow. However, nobody followed this in detail all the way back through the procedures of the raw materials. Most of the raw materials cannot be grown or discovered instantly and hence require time in accordance with the weather and natural play.

Just-In-Time can also play a role in affecting the societal costs if implemented in our company. Societal costs can be defined as the private and external costs both which can be both beneficial and costly. Firstly the impact that the warehousing and stocking would have otherwise on the societal costs would be decreased if the strategy is implemented. As mentioned above warehousing of the goods would be decreased and thus the private costs of the company would be reduced. And similarly the manufacturing of raw materials would only be done when the products are being needed by the consumers. This would also decrease the external costs of the company as raw materials would not be processed unnecessarily and if any pollution may be caused during the manufacturing process would be avoided. Similarly the labor needed to manufacture goods would also be decreased as individuals would only be needed for times when there is a relative demand for products and yet again the private costs of the company would be decreased. One factor which can increase the private and external costs both in implementing this strategy is the increase in the transportation charges. This would be either because of the variable demands of the customers as transportation would be needed to transport the raw material to the manufacturing plant and then from there to the consumers. This factor can increase both the external and the private costs. But in my view this factor is negligible when implementing the strategy.

Conclusion

The strategy can be implemented in our company successfully if some factors are kept in mind. Firstly the consumers who have a fixed demand should be given a fixed quota of manufactured commodities in our company. Secondly the consumers should be told about the implementation of this strategy so they can inform beforehand that they will place an order for a certain product. The societal costs of the company can greatly be decreased if the strategy is implemented and the consumers will get the same product at a less price. Just in Time is rapidly getting fame in the world of business. People frequently articulate JIT as a ‘Complete management’.