Just in time inventory system

Cost/Management Accounting notes

This concept advocates zero inventory and stockless production through just-in-time purchasing and just-in-time production. Organizations create a closer relationship with the suppliers and arrange for more frequent deliveries of small quantities. The objective of just-in-time purchasing is to purchase goods so that delivery is made immediately before their use.

JIT is considered economical since it eliminates the cost of carrying inventory and reduces the inefficiencies that the inventories create. JIT purchasing increases the number of orders as the enterprises order more frequently and in smaller quantities. Holding cost is reduced by a significant proportion as it only arises due to waste and inefficiency created by inventory. It calls for 100 per cent quality. Some of the major features of JIT include:

a) Frequent and reliable deliveries to avoid inventory build up. Penalties are imposed on those who do not meet the deadline.

b) Strategic location of firms. This may be closeness to suppliers and/or customers.

c) Improved communication between companies and suppliers through the use of
computerized purchasing systems that allows for online ordering.

d) Single sourcing and building long-term relations with a few trusted suppliers.

e) Increased supplier involvement in the design aspects of a product to ensure that they
meet the company’s quality requirements.

f) Maintenance of strict quality control by all parties. Suppliers guarantee the quality of stock items.
Benefits of JIT inventory system
The benefits include lower inventory level, emphasis on strict quality control by all parties, faster market response, smaller manufacturing facilities and lower set up costs.

1. Set up times are significantly reduced in the factory. Cutting down the set up time to be more productive will allow the company to improve their bottom line to look more efficient and focus time spent on other areas that may need improvement. This allows the reduction or elimination of the inventory held to cover the “changeover” time.

2. 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. Small or individual piece lot sizes reduce lot delay inventories which simplifies inventory flow and its management.

3. Employees who possess multiple 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.

4. 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.

5. 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.

6. 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.

Leave a Reply

Your email address will not be published. Required fields are marked *