Just in Time (JIT) system: A tool of cost minimization

INTRODUCTION Under intensive global competitive pressure, most companies around the world have applied innovative thinking to management and begun to examine technology that can lead to improved manufacturing flexibility, product quality and production cost (Brox and Fader, 2002 and Chu and Shih, 1992). In competitive world markets most manufacturing companies have learned that survival rests on a commitment to continual process, and product improvement compete with high quality of product and low price (Salehi and Valizadeh, 2007). In todays rapidly changing marketplace a company must deliver low cost together with high quality and reliability of product to ensure retaining an adequate market share. Advancements in information technology (IT) have enabled companies to use computers to carry out their activities that were previously performed manually. Therefore, improvements in the information technology have facilitated the use of cost and management accounting procedures. On the other hand, most of the companies have started to apply just-in-time (JIT) production system as a tool to become competitive. Companies applying JIT production system aim at minimizing all inventory levels and delivering the goods and services to customers on time. In this sense, use of IT has also helped companies apply JIT production system more effectively. The aim of this paper is to identify how improvements in JIT have influenced financial performance of Iranian manufacturing companies. Time-based competition is one of the most important recent trends in a business environment and JIT philosophy plays an increasingly prominent role in the modern industrialised era (Fullerton et al, 2003). JIT is an all-inclusive organisational philosophy designed to achieve high volume production using minimum inventory at the right time and based on planned elimination of all waste and continuous improvement (Fullerton and McWatters, 2001; Peng and Chuan, 2001; and Oral et al,

2003). JITs focus on excellence through continuous improvement requires a performance measurement system that evaluates the changes in quality, setup times, defects, rework and throughput times (Fullerton and McWatters, 2002). JIT should be linked to critical success factors at all organisational levels (Fullerton and McWatters, 2002). JIT philosophy of manufacturing management has received widespread attention over the last few decades and still plays a prominent role in the modern manufacturing era. JIT is also known as Toyota Production System (TPS) and under the label lean manufacturing, the adoption of JIT become more widespread (Swamidass, 2007). One of the main priorities of JIT production is to understand JIT philosophy and its elements. In an intense competitive environment, companies try to find ways to be able become competitive. Just in-Time (JIT) production system has been used as a response to increasing competition. Taicchi Ohno initiated the basic idea of JIT production system, and Toyota Company, which needed to produce different types of cars by using the same production process, first used JIT production system. After the use by Toyota Company, the system was employed by other Japanese companies. The JIT production system then became widespread in many companies in Japan in the late 1970s, and began to be known abroad. Today JIT system is well known throughout the world. The reason why the system is so popular today is a result of its advantages realized by the manufacturing companies. For instance the use of JIT production system leads to better production quality, less inventory, and shorter product lead times (Swenson and Cassidy, 1993:39). The use of JIT production system, therefore, increases customer satisfaction by providing them with high-quality product on time. But these gains require some changes. When a company implements JIT production system, major physical, psychological, and organizational changes occur in the organizations work environment. The company implementing JIT production system develops closer relationships with suppliers; significantly reduces its inventories; and implements simplified manufacturing procedures. The JIT concept also helps reduce the number and type of the accounts used in journal and ledger entries. The concept simplifies accounting records and reduces accounting costs. On the other hand, a reduction in the level of all kind of inventories will minimize inventory-related costs and significantly eliminate inventory-related procedures. The implementation of JIT production system is, therefore, of concern to management accountants.

THE CONCEPT AND DEFINITION

Abrahamson (1996 and 1997) described management philosophies such as JIT, Total Quality Management (TQM), quality circles, business process re-engineering, management by objectives, job enrichment, empowerment and downsizing as management fashions. Before Ford, most automobile plants fashion by master craftsmen and after Ford, the span of worker control was condensed, production was rationalised, efficiency soared and the world was put on wheels Krafcik. Krafcik (1988) further argued that many of Fords principles are still valid and form the basis of Toyota Production System (TPS), which is later called just-in-time (JIT) manufacturing. JIT manufacturing has received widespread attention and has been widely reported on over the last few decades. The first article on JIT manufacturing was published in late 1970s (Keller and Kazazi, 1993). The JIT concept was founded in 1937 by Kiichiro Toyoda, whose basic thought was just make what is needed in time, but not make too much (Toyoda, 1987). The basic idea of JIT was brought in to high level of sophistication by Taiichi Ohno at the Toyota Motor Company in Japan and the JIT approach was first called Toyota Production System (Sohal, et al, 1988). JIT manufacturing is a philosophy of operations management based on planned elimination of all waste for the purpose of cost reduction and continuous improvement of quality, productivity and customer satisfaction. Ohno (1982) defines JIT as: Having the right part at precisely the right time, and in the right quantity, to go into assembly Schonberger (1982) defines JIT as: Produce and deliver finished goods just-in-time to be sold, sub assemblies just-in-time to be assembled into finished goods, fabricated parts just-in-time to go into the sub assemblies and purchased materials just-in-time to be transformed into fabricated parts. Chakravorty and Atwater (1995) claims: The core of JIT philosophy is continuous improvement through the elimination of waste. APICS (1992) provides a broad definition of JIT manufacturing as:

A philosophy that encompasses the successful execution of all manufacturing activities required to produce a final product, from design engineering to delivery and including all stages of conversion from raw material onwards. The primary elements include having only the required inventory when needed; to improve quality to zero defects; to reduce lead time by reducing setup times, queue lengths and lot sizes; to incrementally revise the operations themselves; and to accomplish these things at a minimum cost. Voss and Robinson (1987) developed comprehensive definition to JIT concept as: A production methodology which aims to improve overall productivity through the elimination of waste and which leads to improved quality. In the manufacturing/assembly process JIT provides for the cost-effective production and delivery of only the necessary quality parts, in the right quantity, at the right time and place, while using a minimum of facilities, equipment, materials and human resources. JIT is dependent on the balance between the stability of the users scheduled requirements and the suppliers manufacturing flexibility. It is accomplished through the application of specific techniques which require total employee involvement. More recently, Heizer and Render (2004) defined JIT as: A philosophy of continuous and forced problem solving that supports lean production, driven by the pull of the customers order. JIT involves a series of operating concepts and techniques that identifies operational problems systematically, finds solutions and corrects problems so that defects are never sent to the next process. The main objective of JIT is to supply the right materials at the right time in the right amount at each step of the production process in the most economical manner. It covers all activities of the production system, from the design of the product through production to delivery to the customer.

ADVANTAGES OF JIT
The advantages of the JIT philosophy are many. Giunipero et al, (2005) say that JIT has led to several benefits which include lower production cost, higher and faster throughputs, better product quality, reduced inventory costs, and shorter lead times in purchasing. According to an American study of U.S. Manufactures, companies can expect improved performance in lead

times, quality levels, labour productivity, employee relations, inventory levels and manufacturing costs (White, Pearson, and Wilson, 1999). Fullerton and McWatters (2001) summarised benefits in to five categories: quality benefits, timebased benefits, employee flexibility, accounting simplification and firm profitability. The increase in performance is usually attributable to a decrease in inventory levels, smoother production flow, lower storage cost and ultimately a decrease in average cost per unit (Hall, 1989). Callen et al. (2000) reported that JIT plants have significantly less WIP than non-JIT plants. JIT plants also store fewer finished products and have lower variable and total costs than the non-JIT equivalent. Callen and co-workers further found that JIT plants are significantly more profitable than non-JIT plants, but are neither successful at minimising WIP and costs nor maximising profits. It is possible to observe that traditional performance measurement system is inconsistent with JIT system benefiting from technological innovations at a maximum level and also that it prevents or hides broad-based effectiveness of new production methods. In this sense, the restrictions of traditional measurement system in JIT environment might be listed as follows: a) Continuous development in production process is basic element in JIT manufacturing environment. To reach this aim easily, its intended to make flow of production possible with minimal parties and decreasing stock levels to a minimum. Yet, production and productivity measures of traditional understanding have reported that the productivity is low when small-lot production is made (Drury, 1990). For this reason, traditional accounting system suggests increasing batch capacity rather than decreasing lot size, which leads to raising stock levels, long supply process, increasing cost and declining customer satisfaction (Mcnair, Lynch and Cross, 1990). b) As in standard costing, appropriate operational control of traditional accounting system cannot be carried out in todays production environment (Allott, 2000; Cheatham and Cheatham: 1996; Ezzamel, 1992). Besides, due to the reliability and consistency of manufacturing processes in JIT environment, deviations do not exist or exist in quite low level and it also leads to less use of deviation analyses.

c) JIT manufacturing system changes will bring about changes in information requirements (Upton, 1998). As it is known, normally traditional performance reporting is prepared monthly or weekly and cannot detect on time real reasons of processes that are not realized as expected. Yet, in JIT production system there is a possibility of short production cycle, so it requires information for the problems coming out in accordance with one-day or real time principal.

The summary of main benefits of JIT is listed below:

minimized space requirement; w of products;

employees;

roved consistency of production scheduling; and

Effects of JIT on Cost and Management Accounting:

Many changes brought by the JIT production system require alterations in the existing information systems and traditional accounting practices (Bailes and Kleinsorge, 1992:29). The application of a JIT production system will change the cost structure of a firm as well as cost allocation procedures and recording system. In addition, performance measurements and reporting systems must be changed in a JIT environment. The following paragraphs describe how JIT concept may affectively be used in cost management. Implementation of JIT in a company will lead to cost reductions in the production system. In fact, a JIT production system is very effective in eliminating mainly non-value-added activities and thus, non-value added costs. The non-value-added activities are the activities such as moving materials and parts from one place to another; setting up a machine; storing materials, parts and finished goods; inspection, rework and purchasing. These activities, although consume resources, do not add value to a product produced. Therefore, the JIT production system is quite helpful in this attempt because it minimizes the non-value-added activities as explained in the following sections:

Reducing Inspection and Ordering Costs: As discussed above, the use of a JIT system requires dealing with few dependable suppliers by establishing long-lasting, reliable relationships. Because high quality in production requires close relationships with vendors to ensure that the firm receives defect-free raw materials (Martin et.al., 1992:10). Working with dependable and reliable suppliers ensures the acquisition of high quality raw materials and eliminates the need for inspection, because company can make sure that raw materials that particular supplier is providing are defect-free raw materials. In addition, as company deals with the same supplier, there is no need for a search for the best supplier, detailed paperwork, and the ordering process every time. That is why, cost of purchasing and ordering is minimized. According to a study conducted in Oregon Cutting Systems (a company producing chain saws, timber harvesting equipment, and sporting equipment), number of suppliers was reduced from seven to one after implementing JIT system (Bailes and Kleinsorge, 1992:31). Therefore, application of a JIT production system reduces the number of suppliers that company deals and the costs related to establishing relationships with these suppliers.

Minimizing Moving Activity: Machines,producing similar products are grouped into production cells under a JIT setting. In these cells, machines are close to each other so that work-in-process does not need to move long distances (Hilton et.al., 2000:463). This decreases both the moving activity and its cost to a minimum level. Minimizing Setup Activity: As technologically advanced machinery, which can produce various products without requiring frequent, or no setups is used in a JIT setting, cost of a setup will also be minimized. There is a positive relationship between the percent of operations converted to JIT and the reduction in set up time (Swenson and Cassidy, 1993:46). This means that, application of JIT leads to a decrease in set up time and set up related costs such as cleaning and readjusting the machinery, etc. Minimizing Storing Activity: Work-in-process inventory does not pile up in front of the operators since pull method is used in a JIT production system. Also, as quality improves, workin-process inventory buffers can be reduced (Swenson and Cassidy, 1993:45). Emerging reductions in work-in-process inventory will bring the reductions in storage costs such as employee salaries and wages; rent, electricity and depreciation costs for warehouses; and infactory transportation activity costs. In addition to reductions in work-in-process inventories, there will be reductions in finished goods inventories and similar storage costs attributed to them. Last but not the least, company that employs a JIT system will also save some resources tied up holding excessive inventories. Minimizing Rework Activity: As explained above, in a JIT environment there is no need to have large inventories to buffer the plant from disruptions caused by poor quality because of effective quality control programs in use. This means when an operator discovers a defective product, he pauses the process and only few parts are at risk of being scrapped. However, in case of having a large amount of work-in-process inventory, and parts from the previous operations that are determined as being defective, many more parts must be scrapped. As a result, a great amount of loss is likely to occur. On the other hand, when an operator reduces the number of defective units, he is able to reduce product costs since this reduction decreases the number of inspectors and employees doing rework. Also an increase in productivity is gained. It has been claimed (Hayes, 1981:63) a 2% reduction in defects is usually accompanied by a 10% increase

in productivity. Therefore, it can be said that rework costs and cost of lack of productivity are minimized in a JIT setting.

Conclusion
In todays competitive environment, companies have to find ways to be competitive. They have to maximize the customer satisfaction in order to be able to survive. JIT manufacturing system is one of the tools that can be used to become competitive. The use of this new production system reduces inventory related costs, increases quality, reduces lead-time, and reduces manufacturing costs by minimizing non-value-added activities and their costs. All these represent the benefits offered by the implementation of JIT production system. By reducing costs and reducing leadtime, companys response to customer needs increases. JIT production system causes some changes in the company implementing it. One of the areas that are affected by JIT implementation is cost and management accounting. First of all, JIT has emerged as an effective cost management tool because it helps to achieve significant costs savings. In addition, the JIT system simplifies the cost accounting processes since it eliminates direct labor and inventory accounting. In a JIT environment there is little or no work-in-process and finished-goods inventories. Furthermore, use of JIT requires management accountants to change their performance measurement systems. Performance measures based on production efficiency should be replaced by measures based on lead-time reduction, setup reduction, increased quality and others that help the JIT system to function in the best way.

REFERENCES
1) Abrahamson, E. (1996), Management fashion. Academy of Management Review, 21(1), pp. 254 - 285. 2) Ahmad, A., Mehra, S. and Pletcher, M. (2004), The perceived impact of JIT implementation on firms financial/growth performance. Journal of Manufacturing Technology Management, 15(2), pp. 118 - 130. 3) Alles, M,. Datar, S & Lambert, R. (1995) Moral Hazard and Management Control in Just-In-Time Settings. Journal of Accounting Research, 33, 177-204. 4) Allott, A. (2000) Some Academics Say Management Accounting Has Not Changed in The Last 60 Years; Others Say It HasHugely Whos Right, Asks Anita Allott? Management Accounting: Magazine for Chartered Management Accountants Vol. 78 No. 7, pp. 54-56. 5) APICS (1992), APICS Dictionary. in Cox, J. F., Blackstone, J. H. and Spencer, M. S. Falls Church, VA: American Production and Inventory Control Society, Inc. 6) ATRILL, Peter, McLANEY. Management Accounting for Non-Specislists, 3rd edition, Prentice Hall, 2002. 7) Billesbach, T., Harrison, A. and Morgan, S. C. (1991), Just-in-time: A United States - United Kingdom comparison. International Journal of Operations & Production Management, 11(10), pp. 44 - 57. 8) Bond, T. C. (1999), The role of performance measurement in continuous improvement. International Journal of Operations & Production Management, 19(12), pp. 1318 - 1334. 9) Callen J.L., Morel, M. and Fader, C. (2005) Productivity Measurement and the Relationship between Plant Performance and JIT Intensity. Contemporary Accounting Research, Vol. 22, No.2, pp. 271-309. 10) Chakravorty, S. S. and Atwater, J. B. (1995), Do JIT lines perform better than traditionally balanced lines? International Journal of Operations & Production Management, 15(2), pp. 77 - 88. 11) Chakravorty, S. S. and Atwater, J. B. (1995), Do JIT lines perform better than traditionally balanced lines? International Journal of Operations & Production Management, 15(2), pp. 77 - 88. 12) Charantimath, P. M. (2006), Total Quality Management. Dorling Kindersley (India) Pvt. Ltd. Delhi, India. 13) Cheatham, C.B. and Cheatham, L.R. (1996) Redesigning Cost Systems: Is Standard Costing Obsolete? Accounting Horizons, Vol. 10, No. 4, pp. 117-125. 14) Cobb, I. (1993), JIT and the Management Accountant: A Study of Current UK Practice, CIMA, London.