JUST IN TIME (JIT)

The JIT control system is based on a philosophy that inventory is undesirable. Subscribers to the JIT philosophy believe inventory reductions expose organizational problems and inefficiencies. These problems and inefficiencies may not be brought to management's attention if inventories are not pushed to lower and lower levels. They would remain hidden and undetectable at higher levels of inventory.

JIT production control systems foster automation and reduced levels of inventory. Consequently, raw material inventories and direct labor costs may be too small to warrant separate cost pools-they can be combined with other cost pools.

Additional adjustments may be necessary to accommodate standard costs, which are constantly adjusted to reflect the latest technological changes in production methods. Also, more costs could be traced to specific products and fewer costs would have to be allocated.

JIT production control systems foster automation and reduced levels of inventory. Consequently, raw material inventories and direct labor costs may be too small to warrant separate cost pools-they can be combined with other cost pools.

Additional adjustments may be necessary to accommodate standard costs, which are constantly adjusted to reflect the latest technological changes in production methods. Also, more costs could be traced to specific products and fewer costs would have to be allocated.

The JIT manufacturer will limit the number of suppliers to a few. Long-term contracts are entered into with suppliers. Suppliers' raw material must be top quality with no defects.

Small quantities of raw material are delivered frequently and little or no raw material is maintained by the buyer.

Suppliers must be located close enough to the JIT buyer to deliver small quantities very quickly. The supplier must agree to providing a top-quality product to its JIT customer.

The geographical proximity is important to minimize shipping and handling costs of supplies and materials. Geographical proximity also facilitates frequent communication and joint planning between a supplier and customer.

Push Vs Pull System

Push System: In a push system, releases are scheduled.  So, throughput is determined by an exogenously set re-lease rate (given by the Master Production Schedule).  Since the releases are linked to orders (or forecasts), a push system is controlled by upstream information and is inherently make-to-order. In terms of our nomenclature, open lines are push systems because they have no endogenous restriction on releases to the line.

Pull System: In a pull system, releases are authorized.  That is, there is an endogenous signal based on system sta-tus that determines whether a release is allowed or not.   In particular, the system status that triggers releases is based on stock voids, which means that a pull system is controlled by downstream information and is inher-ently make-to-stock.  In our nomenclature, closed lines are pull systems, because buffer spaces act as stock voids to trigger releases.

Larger levels of inventory exist by design in push production control systems. The inventory buffers permit lower levels of communication between business segments, permit longer production runs, and protect the firm from environmental uncertainties and unforeseen interruptions in production or supplies.

Kaizen and Kanban are each Japanese manufacturing concepts that have been popularized all all over the world. Kaizen is a Japanese term that stands for “improvement”. It is a strategy that believes that alter brings improve-ment. It centers on practices that bring about continuous improvement. Kanban is also a Japanese term however it indicates “signboard”. It truly is a idea that aids in the implementation of lean manufacturing and just in time (JIT) production. Kanban is more like a sophisticated scheduling system in general. It regulates demand and sup-ply. Its implementation is currently limited to achieving lean management and JIT production.

Economic order quantity (EOQ) is that size of the order which gives maximum economy in purchasing any ma-terial and ultimately contributes towards maintaining the materials at the optimum level and at the minimum cost.

In other words, the economic order quantity (EOQ) is the amount of inventory to be ordered at one time for pur-poses of minimizing annual inventory cost.

The quantity to order at a given time must be determined by balancing two factors: (1) the cost of possessing or carrying materials and (2) the cost of acquiring or ordering materials. Purchasing larger quantities may decrease the unit cost of acquisition, but this saving may not be more than offset by the cost of carrying materials in stock for a longer period of time.

The carrying cost of inventory may include:

Interest on investment of working capital

Property tax and insurance

Storage cost, handling cost

Deterioration and shrinkage of stocks

Obsolescence of stocks.

Formula of Economic Order Quantity (EOQ):

The different formulas have been developed for the calculation of economic order quantity (EOQ). The following formula is usually used for the calculation of EOQ.

A  =  Demand for the year

Cp   =  Cost to place a single order

Ch  =  Cost to hold one unit inventory for a year

* = ×

Example:

Pam runs a mail-order business for gym equipment.  Annual demand for the TricoFlexers is 16,000.  The annual holding cost per unit is P2.50 and the cost to place an order is P50. 

Calculate economic order quantity (EOQ)

Calculation:

Underlying Assumptions of Economic Order Quantity:

1. The ordering cost is constant.2. The rate of demand is constant3. The lead time is fixed4. The purchase price of the item is constant i.e no discount is available5. The replenishment is made instantaneously, the whole batch is delivered at once.

The purpose of the EOQ model is to identify the least cost quantity of a material to be purchased at each order point. The model explicitly considers the carrying and ordering costs and identifies the purchase quantity that minimizes the total of these costs.Target Costing vs kaizen

Target costing is considered a procedural approach that is used to determine a maximum allowable cost for a product, while kaizen costing is a mandate to reduce costs, increase product quality, and/or improve production process through continuous improvement. Target costing has a large potential for cost reduction in life-long product cost because these costs are embedded in the product during design and development. Kaizen costing has limited potential in cost reduction of existing products, but may be useful in target costing in the future.

Re-order Level or Ordering Point or Ordering Level:

This is that level of materials at which a new order for supply of materials is to be placed. In other words, at this level a purchase requisition is made out. This level is fixed somewhere between maximum and minimum levels. Order points are based on usage during time necessary to requisition order, and receive materials, plus an al-lowance for protection against stock out.

The order point is reached when inventory on hand and quantities due in are equal to the lead time usage quan-tity plus the safety  stock quantity.

Formula of Re-order Level or Ordering Point:

The following two formulas are used for the calculation of reorder level or point.

Ordering point or re-order level = Maximum daily or weekly or monthly usage × Lead time

The above formula is used when usage and lead time are known with certainty; therefore, no safety stock is pro-vided. When safety stock is provided then the following formula will be applicable:

Ordering point or re-order level = Maximum daily or weekly or monthly usage × Lead time + Safety stock

Examples:

Example 1:

Minimum daily requirement 800 unitsTime required to receive emergency supplies 4 daysAverage daily requirement 700 unitsMinimum daily requirement 600 unitsTime required for refresh supplies One month (30 days)

Calculate ordering point or re-order level

Calculation:

Ordering point = Ordering point or re-order level = Maximum daily or weekly or monthly usage ×  Lead time

= 800 × 30

= 24,000 units

Example 2:

Two types of materials are used as follows:

Minimum usage 

20 units per week each

Maximum usage 40 units per week eachNormal usage 60 units per week eachRe-order period or Lead timeMaterial A:Material B

3 to 5 weeks2 to 4 weeks

Calculate re order point for two types of materials.

Calculation:

Ordering point or re-order level = Maximum daily or weekly or monthly usage ×  Maximum re-order period

A: 60 × 5 = 300 unitsB: 60 × 4 = 240 units

Minimum Limit or Minimum Level of Stock:

The minimum level or minimum stock is that level of stock below which stock should not be allowed to fall. In case of any item falling below this level, there is danger of stopping of production and, therefore, the management should give top priority to the acquisition of new supplies.

Formula: Minimum level or minimum limit can be calculated by the following formula or equation:

Minimum limit or level = Re-order level or ordering point – Average or normal usage × Normal re-order period

Or the formula can be written as:

Minimum limit or level = Re-order level or ordering point – Average usage for Normal period

Example:

Normal usage 100 units per dayMaximum usage 130 units per dayMinimum usage 70 units per dayRe-order period 25 to 30 days

Calculate: minimum limit or level

To calculate minimum limit of materials we must calculate re-order point or re-order level first.

Calculation:

Ordering point or re-order level = Maximum daily or weekly or monthly usage ×  Maximum re-order

= 130 × 30

= 3,900 units

Minimum limit or level = Re-order level or ordering point – Average or normal usage × Normal re-order period

= 3900 – (100 × 27.5*)

1150 units

*(25 + 30 ) / 2

Maximum Level or Maximum Limit of Stock:

The maximum stock limit is upper level of the inventory and the quantity that must not be exceeded without spe-cific authority from management. In other words, the maximum stock level is that quantity of material above which the stock of any item should not normally be allowed to go. This level is fixed after taking into account such factors as: capital, rate of consumption of materials, storage space available, insurance cost, risk of deteriora-tion and obsolescence and economic order quantity.

Formula: Maximum level or maximum limit can be calculated by the help of following formula:

Maximum limit or level = Re-order level or ordering point – Minimum usage × Minimum re-order period + Eco-nomic order quantity

Example:

Normal usage 100 units per dayMaximum usage 130 units per dayMinimum usage 70 units per dayRe-order period 25 to 30 daysEconomic order quantity 5,000 units

Calculate maximum limit or level.

In order to calculate maximum limit of stock we must calculate re-order point or re-order level first.

Ordering point or re-order level = Maximum daily or weekly or monthly usage ×  Maximum re-order

= 130 × 30

= 39,000 units

Calculation:

Maximum limit or level = Re-order level or ordering point – Minimum quantity used in re-order period usage + Economic order quantity

= 3900 – (70 × 25) + 5,000

= 7150 units

Multiple Choice Identify the choice that best completes the statement or answers the question.____ 1. Which of the following is not an ordering cost?

a. cost of receiving inventoryb. cost of preparing the order

c. cost of the merchandise orderedd. cost of storing the inventory

____ 2. The cost of receiving inventory is regarded asa. an ordering cost.b. a carrying cost.

c. a purchasing cost.d. a cost of not carrying goods in stock.

____ 3. A _____________ system of production control is paced by product demand.a. EOQb. ABC

c. pushd. pull

____ 4. Which of the following statements is false concerning electronic data interchange?a. Electronic data interchange (EDI) is essential in a pull system.b. One of the benefits realized by EDI organizations is a faster processing of transactions.c. Electronic data interchange is essential in a push system.d. Electronic data interchange refers to computer-to-computer exchange of information.

____ 5. _____________ is a "pull" system of production and inventory control.a. EDIb. EOQ

c. JITd. ABC

____ 6. In a JIT system, the quality of each product begins witha. a company's vendors.b. employees.

c. inspection of finished goods inventory.d. a good product warranty.

____ 7. Reducing setup time is a major aspect ofa. all push inventory systems.b. the determination of safety stock quantities.

c. a JIT system.d. an EOQ system.

____ 8. Reducing inventory to the lowest possible levels is a major focus ofa. JIT.b. push inventory systems.

c. EOQ.d. ABC.

____ 9. JIT is a philosophy concerned witha. when to do something.b. how to do something.

c. where to do something.d. how much of something should be done.

____ 10. When JIT is implemented, which of the following changes in the accounting system would not be expected?a. fewer cost allocationsb. elimination of standard costsc. combining labor and overhead into one product cost categoryd. combing raw material and materials in work-in-process into one product cost category

____ 11. Striving for flexibility in the number of products that can be produced in a short period of time is characteristic ofa. EOQ systems.b. push systems in general.

c. JIT.d. pull systems in general.

____ 12. Just-in-time (JIT) inventory systemsa. result in a greater number of suppliers for each production process.b. focus on a "push" type of production system.c. can only be used with automated production processes.

d. result in inventories being either greatly reduced or eliminated.

____ 13. The JIT philosophy does not focus ona. standardizing parts used in products.b. eliminating waste in the production process.c. finding the absolute lowest price for purchased parts.d. improving quality of output.

____ 14. In a JIT manufacturing environment, product costing information is least important for use ina. work in process inventory valuation.b. pricing decisions.

c. product profitability analysis.d. make-or-buy decisions.

____ 15. With JIT manufacturing, which of the following costs would be considered an indirect product cost?a. cost of specific-purpose equipmentb. cost of equipment maintenance

c. property taxes on the plantd. salary of a manufacturing cell worker

____ 16. With JIT manufacturing, which of the following costs would be considered a direct product cost?a. insurance on the plantb. repair parts for machinery

c. janitors' salariesd. salary of the plant supervisor

____ 17. Which of the following statements is not true?a. JIT manufacturing strives for zero inventories.b. JIT manufacturing strives for zero defects.c. JIT manufacturing uses manufacturing cells.d. JIT manufacturing utilizes long lead time and few deliveries.

____ 18. The JIT environment has caused a reassessment of product costing techniques. Which of the following statements is true with respect to this reassessment?a. Traditional cost allocations based on direct labor are being questioned and criticized.b. The federal government, through the SEC, is responsible for the reassessment.c. The reassessment is caused by the replacement of machine hours with labor hours.d. None of the above is true.

____ 19. When a firm adopts the just-in-time method of management,a. employees are retrained on different equipment, but the plant layout generally remains unchanged.b. new machinery and equipment must be purchased from franchised JIT dealers.c. machinery and equipment are moved into small autonomous production lines called islands or cells.d. new, more efficient machinery and equipment are purchased and installed in the original plant

layout.

____ 20. Which of the following describes the effect on direct labor when management adopts the JIT philosophy?a. Each direct labor person performs a single task, thereby allowing that person to reach his

or her theoretical potential.b. Because each person runs a single machine in a JIT environment, there are more

employees classified as direct labor.c. The environment becomes more labor-intensive.d. Machine operators are expected to run several different types of machines, help set up for

production runs, and identify and repair machinery needing maintenance.

____ 21. Kaizen meansa. doing it the Japanese way.b. continuous improvement.c. employee empowerment.d. implementation of a centralized organizational structure.

____ 22. Kaizen costing is used for which of the following types of products?

New products Existing products

a. yes yes

b. no yes

c. no no

d. yes no

____ 23. A mandate to reduce costs, increase product quality, and/or improve production processes through continuous improvement is known asa. kaizen costing.b. activity-based costing.

c. the theory of constraints.d. mass customization.

____ 24. The projected sales price for a new product (which is still in the development stage of the product life cycle) is P50. The company has estimated the life-cycle cost to be P30 and the first-year cost to be P60. On this type of product, the company requires a P12 per unit profit. What is the target cost of the new product?a. P60 b. P30 c. P38 d. P42

____ 25. Which of the following formulas is the best representation of the concept of target costing?a. target cost + profit margin = selling priceb. selling price - target cost = profit marginc. selling price - profit margin = target costd. target cost - standard cost = profit margin

____ 26. Kaizen costing helps toa. reduce product costs of products in the design and development stage.b. keep the target cost as the primary focus after a product enters production.c. keep profit margin relatively stable as product price declines over the product life cycle.d. reduce the cost of engineering change orders during each stage of the product life cycle.

____ 27. The Whitehead Co. produces quality jewelry items for various retailers. For the coming year, it has estimated it will consume 500 ounces of gold. Its carrying costs for a year are P2 per ounce. No safety stock is maintained. If the EOQ is 100 ounces, what is the cost per order?a. P40 b. P20 c. P5 d. P25

____ 28. The Whitehead Co. produces quality jewelry items for various retailers. For the coming year, it has estimated it will consume 500 ounces of gold. Its carrying costs for a year are P2 per ounce. No safety stock is maintained. If the EOQ is 100 ounces, what would be the estimate for Whitehead's total carrying costs for the coming year?a. P200 b. P250 c. P100 d. P1,000

____ 29. A firm estimates that its annual carrying cost for material X is P.30 per lb. If the firm requires 50,000 lbs. per year, and ordering costs are P100 per order, what is the EOQ (rounded to the nearest pound)?a. 5,774 lbs. b. 4,082 lbs. c. 1,732 lbs. d. 1,225 lbs.

____ 30. Z Corp.'s EOQ for Material A is 500 units. This EOQ is based on:

Annual demand 5,000 unitsOrdering costs P12.50

What is the annual carrying cost per unit for Material A?a. P0.50 b. P2.00 c. P2.50 d. P5.00

____ 31. Z Corp.'s EOQ for Material A is 500 units. This EOQ is based on:

Annual demand 5,000 unitsOrdering costs P12.50

What are Z Corp.'s total annual ordering costs for Material A?a. P6,000 b. P600 c. P125 d. P1,000

____ 32. Clear View Co. manufactures various glass products including a car window. The setup cost to produce the car window is P1,200. The cost to carry a window in inventory is P3 per year. Annual demand for the car window is 12,000 units. What is the most economical production run (rounded to the nearest unit)?a. 6,000 units b. 3,000 units c. 9,295 units d. 3,098 units

____ 33. Clear View Co. manufactures various glass products including a car window. The setup cost to produce the car window is P1,200. The cost to carry a window in inventory is P3 per year. Annual demand for the car window is 12,000 units. If the annual demand for the car window was to increase to 15,000 units,a. the number of setups would decrease.b. the total carrying costs would increase.c. the economic order quantity would decline.d. all of the above would occur.

____ 34. A company has estimated its economic order quantity for Part A at 2,400 units for the coming year. If ordering costs are P200 and carrying costs are P.50 per unit per year, what is the estimated total annual usage?a. 6,000 units b. 28,800 units c. 7,200 units d. 2,400 units

____ 35 A company annually consumes 10,000 units of Part C. The carrying cost of this part is P2 per year and the ordering costs are P100. The company uses an order quantity of 500 units. By how much could the company reduce its total costs if it purchased the economic order quantity instead of 500 units?a. P500 b. P2,000 c. P2,500 d. P0

____ 36. A company annually consumes 10,000 units of Part C. The carrying cost of this part is P2 per year and the ordering costs are P100. The company uses an order quantity of 500 units. If the company operates 200 days per year, and the lead time for ordering Part C is 5 days, what is the order point?a. 250 units b. 1,000 units c. 500 units d. 2,000 units

____ 37. Which of the following tells management "when" to order?a. safety stock levelb. order point

c. the economic order quantityd. the Pareto inventory analysis

____ 38. Which of the following affects the order point?a. daily usageb. lead time

c. safety stockd. all of the above

____ 39. A decrease in the lead time would reduce thea. order point.b. safety stock.

c. economic order quantity.d. ordering costs.

____ 40. The size of the safety stock is directly affected by all of the following, except thea. cost of a stockout.b. probability of a stockout.

c. carrying cost of stock.d. economic order quantity.

____ 41. If no safety stock is carried, the average inventory is equal to thea. order point/2.b. order point x 2.

c. economic order quantity/2.d. economic order quantity x 2.

____ 42. The role of safety stock in an organization is toa. reduce the lead time for an order to be received.b. reduce the probability of a stockout.

c. reduce the order point.d. decrease the economic order quantity.

____ 43. The optimal size of the safety stock is defined by the point where thea. costs of carrying the safety stock equal stockout costs.b. setup costs equal stockout costs.c. ordering costs equal stockout costs.d. reorder point equals safety stock.

____ 44. If a company carries safety stock and its annual carrying costs per unit are P0.30, what formula yields the total annual carrying costs?a. P0.30 x [(EOQ/2) + Safety stock)]b. P0.30 x (EOQ + Safety stock)

c. P0.30 x [(EOQ x 2) + Safety stock)]d. P0.30 x (EOQ - Safety stock)

____ 45. Blanchard Corp. operates its factory 300 days per year. Its annual consumption of Material Y is 1,200,000 gallons. It carries a 10,000 gallon safety stock of Material Y and its lead time is 12 business days. What is the order point for Material Y?a. 10,000 gallonsb. 38,000 gallons

c. 48,000 gallonsd. 58,000 gallons

____ 46. Blanchard Corp. operates its factory 300 days per year. Its annual consumption of Material Y is 1,200,000 gallons. It carries a 10,000 gallon safety stock of Material Y and its lead time is 12 business days. If the EOQ for Material Y is 30,000 gallons, and the carrying cost per gallon per year is P.25, what is the total annual carrying cost for Material Y?a. P3,750 b. P7,500 c. P6,250 d. P10,000

____ 47. Blanchard Corp. consumes 1,200,000 gallons of Material Y per year. Its order quantity is 30,000 gallons. It maintains a safety stock of 10,000 gallons and its annual carrying costs are P0.25 per gallon per year. If the ordering cost is P20 per order, what are the total annual ordering costs?a. P600 b. P800 c. P8,300 d. P1,200

____ 48. R Corp.'s order quantity for Material T is 5,000 lbs. If the company maintains a safety stock of T at 500 lbs., and its order point is 1,500 lbs., what is the lead time assuming daily usage is 50 lbs.?a. 30 days b. 100 days c. 10 days d. 20 days

____ 49. R Corp.'s order quantity for Material T is 5,000 lbs. If the company maintains a safety stock of T at 500 lbs., and its order point is 1,500 lbs., what would be the total annual carrying costs assuming the carrying cost per unit is P0.20?a. P1,000 b. P600 c. P100 d. P1,100

____ 50. For Raw Material B, a company maintains a safety stock of 5,000 pounds. Its average inventory (taking into account the safety stock) is 8,000 pounds. What is the apparent order quantity?a. 16,000 lbs. b. 6,000 lbs. c. 10,000 lbs. d. 21,000 lbs.

Just in timeMULTIPLE CHOICE

1. D2. A3. D4. C5. C6. A7. C8. A9. A

10. B11. C12. D13. C14. A15. C16. B17. D18. A19. C20. D38. B50. B51. A53. C65. C69. C81. B82. C83. A84. A

85. C86. D87. B88. C89. A90. A91. B92. D93. A94. D95. C96. B97. A98. A99. D

100. C101. B102. D103. B104. B105. C106. D107. D108. A109. D110. B111. B112. C