Literature reviewThe direct costs linked with surplus inventories comprise storage and obsolescence costs and the cost of capital.
Additionally,excessive inventories display a bad picture about the company’s management. It shows a poor competence and effectiveness of the supply chain and logistics department of the firm. Organizations should have a reliable logistics department that can predict on the future material requirement before procurement. Therefore, having excess goods in the inventories signals a lack of coordination and partnership among the supply chain partners and also a lack of flexibility to adjust to sudden demand changes. This can result in increasing doubt about future earnings and the prospects for their growth, in that waynegatively affecting the reputation of the firm and its market value.Just in time (JIT) technique has been used in the world with a lot of success. This concept proposes in maximization of production process with minimal cost and inventory usage.
The quality of products is therefore improved by embracing technology that it proposes. With reduced margin for errors, the efficiency in manufacturing is hence made better. The time taken to produce work in a production line is reduced by following the required procedures.
Another objective that JIT sets to counter is the reducing the amount of scrap during production. Lesser material losses will ensure high reliability in manufacturing. Reduced number of inspection represents a more reliable system of manufacturing. Sticking to a few suppliers over a long period will reduce the number of inspections that are carried out. Time lost during inspection is therefore instead used in more productions. Constant change of suppliers leads to uncertainties in their goods or services that are not prevalent in a long term supplier.
This in return enables the operators to take less time in setting up the production line hence higher quality and speed. JIT was first implemented by Toyota in Japan and has since spread to other parts of Japan and the world. Toyota used the approach after realizing that the amount of inventory was more than they could handle and any expansion in inventory will not be cost effective. The technique was meant for production to be done depending on demand from the market. Cars were made following a strong order from a client hence the amount of inventory reduced significantly. Toyota has ever since been a leader in economy as well as premium cars in world (Emilio and Francesco, 1989 pp49). After the world witnessed the success of this technique in Toyota, most companies sought to do the same in bids to increase revenue by reducing stagnant inventories. JIT ensures that there are minimal errors in production by keeping the work-in-progress inventories at a minimum.
The traditional way of manufacturing was the “push” technique while JIT makes use of the “pull” method which is more efficient. The company produces items that already have a market since the customers have put the orders in place. Therefore, this approach ensures that the company can easily act to errors that may be there in the produced item. Few items in the stores that are already half-sold makes this approach better in predicting sales and hence high revenues with the reduced losses. The traditional “push” technique was so unpredictable and the managers were not able to reap full profit from a production due to congested inventories from few sales. JIT is more cost efficient according to Brox and Fader (1997) as recorded by the authors of Journal of Operations Management (Fullerton, Watters and Fawson, 2001 pp385). Errors make the production process an expensive venture for the managers in big companies. A system that has an error probability of 1 in every 5 for example, will lead to so many rejections in a daily production of 1000 work pieces.
Implementing JIT increases the number of customized products in a day which in return leads to lesser errors arising from the production. Measuring performance in a company that is implementing JIT is critical in the success of the method. Accounting reports outlining the progress of the company as after the changes will be used in the performance measurement. For example, the use of efficiency variances will lead to production encouraged by the inventories and not demand. This is negative to the requirements in JIT which works to reduce the amount of goods in the inventory.
According to a research in described in the paper, Long term Impact of just-in-time on inventory performance measures, the author outlines two hypotheses that are analyzed for the study. It is discovered that the use of JIT has long term benefits on a company that implements it. The hypothesis is therefore rejected with a 0.05 significance level (Cindy, Cornelia and Richard, 1999 pp50).
The other hypothesis of companies gaining more statistically as reflected in the financial statements is accepted. Companies that have used JIT in production therefore do record more returns than those that have not embraced the approach. These two hypotheses show how JIT can improve the performance of a company significantly. The success of this invention in a major company such as Toyota characterizes that size is not a factor. The study also showed that the average amount of reduction of inventories to total assets was 8% during the 10 year period. This means that 8% of the previous inventories were theoretically converted to productive assets.
In a multi-billion dollar company, the 8% represents a lot of saving in a year. Shifting 8% of the inventories into another better way of investment is good business that is beneficial in bringing more revenue to the company. Although the study never followed where the saved amount was channeled to, it is worth noting that the saving was proved and the hypotheses answered. In an organization that has implemented the JIT technique of manufacturing; the number of personnel is lesser than the one in non-JIT companies. JIT is a “lean” manufacturing technique and therefore all the components that are associated with them have to be reduced as compared to the non-JIT companies. Due to the redesign and improved systems in the production line, the number of operators required in an organization is reduced significantly. The floor space is maximized with productive activities and machinery that can multi-task hence reducing the work of most workers.
As the company cannot hold onto workers who are no longer necessary, it lets them leave thereby making the workforce lean. Even Toyota had to cut short the contracts of several workers especially these doing supervisory job while promising lifetime jibs to those who remained. Unit manufacturing costs are increased by the adoption of JIT. The use of efficient methods of manufacturing ensures the reduction of the amount of money invested in the unit manufacturing sector (Billesbach and Hayen, 1994 pp62). This saved money can now be directed into beneficial production investments such as automation or buying more equipment for the organization. Control systems such as Total Quality Management (TQM) are basic in the implementation of JIT therefore, making the performance in management better.
Flexibility through the use of JIT has enabled companies to make customized products in a faster rate than before. JIT being a “pull” method of manufacturing, the need to make custom-made products is higher than in a non-JIT company. Custom-made products attract a higher fee compared to the normal goods which makes the company cover for the line-change processes. Clients like being unique and a company that is able to make products of their personal taste will welcome more people hence leading to more returns in terms of revenue. Tobin (1969) argues that inventory reductions due to JIT implementation will lower inventory carrying costs that, in turn, will improve firm financial position. The cost of running an inventory is very high in non-JIT firms that has to the expansion of the inventories into other countries in aims to increase sales. Blind productions are reduced by implementing JIT.
The cost that is used to run the inventories and maintain them can be reinvested. Additionally, he argues that companies highly ratedby the equity market will have a high Tobin’s Q. Thus, if a JIT firm is highly valued cause of the lower costs and high returns, then an organization will have high Tobin’s Q.Studies indicate that within the same five-year pre- and post-adoption periods, evaluation across treatment and control models shows that treatment companies have considerably bigger increase in Q than those they are matched to (David, 1998 pp1110). The results are consistent with the cost of capital theory that suggests that views of the market regarding JIT adoption as having a positive effect on the firm value. In addition, adopting JIT leads to improvement in firm performance as measured by ROA. Despite the purported benefits of JIT implementation, most of the companies in the United States have not embraced the technology.
Lack of knowledge in the implementation of JIT is among the key reasons why this has not been successful. If the suppliers fail to concur with the idea, then the company may find it hard to use the technique. Change is not the best character trait of many Americans especially when they feel threatened by the change. There is a reluctance to face the change among various personalities in the industry.