Friday, 4 October 2013

Just-in-time systems

By Jackie, Researcher
Topic: Education
Area of discussion: Management and Cost Accounting
Chapter: Cost Management – Just-in-time systems

Question: Discuss the benefits and drawbacks of implementing JIT systems


           Just-in-time (JIT) is a popular lean manufacturing tool especially in supply chain management. Unlike conventional manufacturing practice which utilises “push approach” of which finished goods are completed and stored in advance before customer orders are received, JIT uses “pull approach” whereby the manufacturing of products begins right after the customer places an order with the company (Weygandt, Kimmel & Kieso 2009, p.174). Fundamentally, JIT aims to produce the required items, at the required quantities and quality only when they are needed (Drury 2008, p.556). Essentially, JIT system covers three main areas: purchasing, production and distribution (El Dabee, Marian & Amer 2013, p.140). Some industrial examples of companies which have successfully use JIT are Toyota, McDonald's, Harley-Davidson and Dell. Below are the discussion on the pros and cons of implementing JIT system.


               Firstly, JIT keens to eliminate wastes in time, effort and resources as well as get rid of non-value added activities (El Dabee, Marian & Amer 2013, p.140). For examples: inspecting, moving items, reworks, storing, queuing and waiting. Such activities only add cost without creating additional usefulness to the product; customers will not pay extra for these. Under JIT, the removal of all non-value added activities can be attained if raw materials are converted to finished products with lead times equal to process time (Drury 2008, p.557). For that reason, factory is laid out based on flow line principles instead of batch production functional layout to maintain a continuous flow of components with no stoppages and storage. This will minimise transfer time and shorten the lead time (Bower 2010, p.4).

               Secondly, in pursuing “zero inventories” goal, JIT entails keeping a minimum inventory of raw materials, work-in-progress and finished goods (Scarlett 2010, p.44). As a consequence, it may reduce the number of warehouses that a company maintains or even allow them to completely eliminate all warehouses in one-shot. Subsequently, it layoffs storekeepers as stocks related tasks like counting, recording, checking and arranging are no longer required. Likewise, the number of security guards can also be cut down because there will be limited items for them to safeguard. Besides, it can also reduce direct physical stocks loss and damage caused by burglary and pilferage activities or perhaps in other extents like fire and flood. Therefore, inventory insurance seems to be unnecessary as the risk is at minimal level since companies that are practising JIT will not keep the stocks for a long duration. In short, this enables companies to enjoy a greater saving in warehouse rent, warehousing salaries and insurance payments. Money saved can be used for other better usage like investment. Ideally, this is perfect for companies that are dealing with stocks that expired quickly such as daily newspapers, products that spoiled easily like food as well as electronic items that are quickly outdated.

                 Thirdly, JIT aims for zero defects. This can be achieved if total quality control exists. Vincent (2011, p.3192) points out that quality and productivity need to be refine throughout all manufacturing stages. As per Kanbans - visible signalling systems: if problems happen at a later stage, earlier stage will not receive the pull signal; if problems arise at the earlier stage, the later stage will not have their pull signal answered (Drury 2008, p.558). Total quality control requires workers and supervisors to monitor continuously at every work station. Hence, if any defects are found in any work station, operations will shut down immediately (Weygandt, Kimmel & Kieso 2009, p.175). Then, appropriate corrective action could be taken instantly to rectify the problems at that exact work station. For this reason, the products that are being produced at the end are of high-quality and defects free. So, inspection is not needed anymore and there will be no reworks or replacements of products too. At such, it enables saving in inspection cost and cost of replacement for defective items (Singh & Singh 2013, p.1582).

                Fourthly, Vercio and Shoemaker (2007) state that JIT processes stress on reducing batch or lot sizes to one. Undeniably, production in large batches often causes delays, long waiting time and creates a higher level of inventories. So, producing in smaller batch size will eventually shorten the production cycles, reduce finished goods inventories and enables more customer-specific or customised manufacture (Holl, Pardo & Rama 2010, p.525). Drury (2008, p.558) supports by stating that JIT allows works to flow smoothly to the next stage without the need for storage and to schedule the next machine to accept this item. This facilitates a firm to adapt more readily to short-term fluctuations in market demand and react quickly to customer requests. Not only that, JIT helps in reducing and eliminating set-up times too. For instance, purchase a sophisticates manufacturing machine that allows settings to be adjusted automatically instead of manually. When this happens, small batch sizes will be economical and cost-effective.     

                Al-Matarneh (2012, p.63) highlights that one of the biggest obstacle in implementing sound JIT is lack of integrated cooperation, direct communication and mutual understanding between suppliers and management. Meanwhile, variability in demand patterns caused by random purchases will worsen the situation; sharing accurate, timely and relevant information about sales forecasts remains a challenge due to trust and incompatible information systems (Horngren, Datar & Rajan 2012, p.736). Although significant coordination between them could be improved by having a real time management information system by using technologically advanced software, it is very costly to carry out. For this reason, sometimes the cost of implementing JIT system outweighs the expected benefits derive from its application, making it not worthwhile to do so. Normally, this happens in small organisation during initial start ups. As production is heavily reliant and dependent on suppliers and if stock is not delivered on time, the whole production schedule can be delayed.

             Next, worker competencies are imperative as they are the critical success factor of JIT. Apparently, companies usually will face a lot of employees’ issues. For instance: attitudes, commitment, punctuality, participation, cooperativeness, learning ability, resistance to change and et cetera. Horngren, Datar and Rajan (2012, p.737) state that workers need trainings to be multi-skilled and enable them to perform a variety of tasks like minor repairs and routine equipment maintenance. Hence, companies might need to pay high costs for all the trainings and workshops. It is noted that having a higher proportion of temporarily workers as compared to permanent workers as well as having a high labour turnover rate will further jeopardise the implementation of JIT. This is due to low probability of achieving the peak stage in learning curve to be real efficient which need a lot of time.

             Furthermore, JIT does not provide any provision for mistakes, errors and uncertainties as it aims for perfection. Hence, it could be very dangerous and risky as back-up plans like safety stock are usually not prepared whilst complexity creates confusion. Sometimes companies face difficulties in identifying and categorising which activities are value-added and which are not (Al-Matarneh 2012, p.57). Insufficient precise information leads to inaccurate forecast and prediction too especially when sales and demand fluctuates during festival seasons. In addition, JIT does not take into account of external factors such as weather, congestion and unexpected accidents which can cause serious delay in JIT manufacturing (Cheng 2011, p.276).

                Moreover, high costs are required to implement JIT system. Cheng (2011, pp.276-278) claims that the demand for more frequent long-distance transportation, small-size and premium shipments will definitely cause high transport cost. Thus, it is not economical as carriage inwards will be more expensive (Akbalik & Penz 2010, p.2567). Yet, implementing JIT is not eligible for trade discount because bulk purchases are avoided. Besides, initial investment could be very high as companies need to purchase all those software and equipments such as global positioning system (GPS) and provide trainings for workers too.


                All in all, evidences have proven that JIT really helps in improving organisations’ efficiency, productivity, responsiveness, competitiveness and products quality; at the same time, minimising unnecessary costs and wastes. However, it is costly to implement. Hence, it appears to be unfavourable for small business start-ups. Plus, it requires time to inculcate this philosophy to the existing corporate culture. Although some companies have tried to execute backward and forward integrations to eliminate the conflicts with suppliers and distributors, but consideration on further analysis need to be taken like NPV, CBA and risk assessment to evaluate whether it is worthwhile to do so. Fruitful results cannot be obtained overnight; it needs quite a long time to enjoy the success as it is long-term oriented.


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