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Green university of Bangladesh

Assignment

On

Accounting Theory

Topic name : just in time approach literature view

Prepared for:

Shahreen Sonia

Lecturer, Accounting Theory

Department of Business Administration (DBA)

Green University of Bangladesh (GUB)

Prepared by:

Anqur Chowdhury

Dept. of Business Administration

ID: 110106027

Program: BBA (11th)

Green University of Bangladesh

Date: Aug 14, 2014

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Table of ContentSL No. Topic name Page No.

I. Letter of Transmittal 3

II. History of Just in Time 4

III. Method of just in time approach 5

IV.Effects of just in time

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V. Main benefits of just in time 6

VI. Just in time Implementation 6,7

VII.Some Key Elements of just in time

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VIII. Purpose of just in time approach 8,9

IX. Advantage of just in time 9

X. Disadvantage of just in time: 9,10XI. Implication of just in time on Accounting 10,11,12,13

XII. Conclusion 13

XIII. Reference 13

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Letter of Transmittal

July 22, 2014Shahreen Sonia

Lecturer, Accounting TheoryDepartment of Business Administration (DBA)Green University of Bangladesh (GUB)

Subject: Submission of an assignment.

Dear Madam,

I gladly present to you the assignment titled “: just in time approach literature view” I have made the assignment as you give me to do by help of your lecture sheet and internet.

I believe the knowledge and experience I gathered during the assignment will be extremely helpful in my future academic life and professional life. I will be grateful to you if you accept the assignment.

Your support in this regard will be highly appreciated.Thanking you.

___________________Anqur Chowdhury

ID: 110106027

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History of Just in Time:

Just-In-Time is a Japanese manufacturing management method developed in 1970s. It was first adopted by Toyota manufacturing plants by Tahiti Ohio. The main concern at that time was to meet consumer demands. Because of the success of JIT management, Tahiti Ohio was named the Father of JIT.

After the first introduction of JIT by Toyota, many companies followed up and around mid 1970s’, it gained extended support and widely used by many companies.

One motivated reason for developing JIT and some other better production techniques was that after World War II, Japanese people had a very strong incentive to develop good manufacturing techniques to help them rebuilding the economy. They also had a strong working ethnic which was concentrated on work rather than leisure, sleeked continuous improvement, life commitment to work, group conscious rather than individualism and achieved common goal. This kind of motivation had driven Japanese economy to succeed.

Because of the natural constraints and the economy constraints after World War II, Japanese Manufacturers looked for a way to gain the most efficient use of limited resources. They worked on "optimal cost/quality relationship".

Before the introduction of JIT, there were a lot of manufacturing defects for the existing system at that time. According to Hirano, this included inventory problem, product defects, risen cost, large lot production and delivery delays. The inventory problems included the unused accumulated inventory that was not only unproductive, but also required a lot of effort in storing and managing them. Other implied problems such as parts storage, equipment breakdowns, and uneven production levels.

For the product defects, manufacturers knew that only one single product defects can destroy the producer’s creditability. They must create a "defect-free" process.

Instead of large lot production - producing one type of products, they awarded that they should produce more diversified goods. There was also a problem of rising cost, the existing system could not reduce cost any further but remember improvement always leads to cost reduction.

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Lastly, the existing system did not manage well for fast delivery request, so, there was a need to have a faster and reliable delivery system in order to handle customers’ needs.

Method of just in time approach:

The just-in-time inventory method is considered a "pull" approach in manufacturing. When sales activities warrant more production, inventory is "pulled" and more manufacturing supplies are ordered. The result is a smooth flow of production and reduced inventory costs. This method relies on signals given at different points in the production process that tell the manufacturer when to make the next part. Stock depletion signals the ordering of new parts. The just-in-time method is used by major auto manufacturers, such as Toyota, who take advantage of synchronized assembly line systems.

Effects of just in time:

A surprising effect of JIT was that car factory response time fell to about a day. This improved customer satisfaction by providing vehicles within a day or two of the minimum economic shipping delay.

Also, the factory began building many vehicles to order, eliminating the risk they would not be sold. This improved the company's return on equity.

Since assemblers no longer had a choice of which part to use, every part had to fit perfectly. This caused a quality assurance crisis, which led to a dramatic improvement in product quality. Eventually, Toyota redesigned every part of its vehicles to widen tolerances, while simultaneously implementing careful statistical controls for quality control. Toyota had to test and train parts suppliers to assure quality and delivery. In some cases, the company eliminated multiple suppliers.

When a process or parts quality problem surfaced on the production line, the entire production line had to be slowed or even stopped. No inventory meant a line could not operate from in-process inventory while a production problem was fixed. Many people in Toyota predicted that the initiative would be abandoned for this reason. In the first week, line stops occurred almost hourly. But by the end of the first month, the rate had fallen to a few line stops per day. After six months, line stops had so little economic effect that Toyota installed an overhead pull-line, similar to a bus bell-pull, that let any worker on the line order a line stop for a process or quality problem. Even with this, line stops fell to a few per week.

The result was a factory that has been studied worldwide. It has been widely emulated, but not always with the expected results, as many firms fail to adopt the full system.[4]

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The just-in-time philosophy was also applied to other segments of the supply chain in several types of industries. In the commercial sector, it meant eliminating one or all of the warehouses in the link between a factory and a retail establishment. Examples in sales, marketing, and customer service involve applying information systems and mobile hardware to deliver customer information as needed, and reducing waste by video conferencing to cut travel time.[5]

Main benefits of JIT:

Reduced setup time. Cutting setup time allows the company to reduce or eliminate inventory for "changeover" time. The tool used here is SMED (single-minute exchange of dies).

The flow of goods from warehouse to shelves improves. Small or individual piece lot sizes reduce lot delay inventories, which simplifies inventory flow and its management.

Employees with multiple skills are used more efficiently. Having employees trained to work on different parts of the process allows companies to move workers where they are needed.

Production scheduling and work hour consistency synchronized with demand. If there is no demand for a product at the time, it is not made. This saves the company money, either by not having to pay workers overtime or by having them focus on other work or participate in training.

Increased emphasis on supplier relationships. A company without inventory does not want a supply system problem that creates a part shortage. This makes supplier relationships extremely important.

Supplies come in at regular intervals throughout the production day. Supply is synchronized with production demand and the optimal amount of inventory is on hand at any time. When parts move directly from the truck to the point of assembly, the need for storage facilities is reduced.

Minimizes storage space needed. Smaller chance of inventory breaking/expiring.

Just in time Implementation:

To implement Just In Time (JIT) the first things we need to do is lower inventory levels, to do this we have to tackle several issues, the first to tackle is almost always the issue of setup times. In most companies the size of the batch is driven by the time taken to setup the machines, often many hours to change from one production item to the next. This time has to be paid for so it is allowed for within the cost and an economical batch quantity is defined, normally a few weeks worth of production or more depending on the industry.

The way to tackle setups is to use a lean manufacturing tool called SMED, Single Minute Exchange of Die. The aim of SMED is exactly what it says, it wants to reduce setups to single minutes or seconds. It achieves this by eliminating all of the obvious waste in the setup and

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separating the “internal” and “external” factors of the setup, the aim being to have as much work done for the setup whilst the machine is still running so that the down time is minimized.

Once setups can be reduced to this level the size of the batch can be reduced, this gives the opportunity to bring operations closer together and enable materials to flow between them. This reduces the need for transportation and excessive amounts of space. The reduction in batch sizes immediately reduces your lead times as each batch will take less time to be processes before you

Some Key Elements of just in time:

1. Reduce or eliminate setup times :

Aim for single digit setup times (less than 10 minutes) or "one touch" setup -- this can be done through better planning, process redesign, and product redesign.  A good example of the potential for improved setup times can be found in auto racing, where a NASCAR pit crew can change all four tires and put gas in the tank in under 20 seconds.   (How long would it take you to change just one tire on your car?)  The pit crew’s efficiency is the result of a team effort using specialized equipment and a coordinated, well-rehearsed process.

2. Reduce lot sizes (manufacturing and purchase):

Reducing setup times allows economical production of smaller lots; close cooperation with suppliers is necessary to achieve reductions in order lot sizes for purchased items, since this will require more frequent deliveries.

3. Reduce lead times (production and delivery):

production lead times can be reduced by moving work stations closer together, applying group technology and cellular manufacturing concepts, reducing queue length (reducing the number of jobs waiting to be processed at a given machine), and improving the coordination and cooperation between successive processes; delivery lead times can be reduced through close cooperation with suppliers, possibly by inducing suppliers to locate closer to the factory.

4. Preventive maintenance :

use machine and worker idle time to maintain equipment and prevent breakdowns.

5. Flexible work force :

Workers should be trained to operate several machines, to perform maintenance tasks, and to perform quality inspections.  In general, JIT requires teams of competent, empowered employees who have more responsibility for their own work.  The Toyota

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Production System concept of “respect for people” contributes to a good relationship between workers and management.

Purpose of just in time approach:

Companies use a Just-in-Time manufacturing and inventory management system to improve the efficiency of the company and reduce costs. The system requires manufacturers to purchase only when customer orders create a demand. Companies must develop a relationship with vendors to ensure parts reach the facility in time to manufacture products for the customer request. Businesses only produce inventory when there is a customer order in place. The system does not allow the business to produce or store excess inventory. Just-in-Time systems work in large and small organizations and those that produce products or services. With adjustments, the principles of Just-in-Time inventory management and manufacturing can work in any business.

Given below main key of the purpose of just in time approach:

Reduce Inventory Costs Lead Time Reduction Efficient Manufacturing Layout Improve Customer Satisfaction

Reduce Inventory Costs:

Using a Just-in-Time inventory system reduces the amount of material on hand in the production facility. Companies can reduce the cost to store and maintain excess inventory and eliminate the risk of materials becoming obsolete while in storage. High inventory quantities tie up company funds, which could otherwise benefit other areas of the business such as the research and development of new products. With the reduction in inventory costs, companies can expand and grow their businesses.

Lead Time Reduction:

Just-in-Time manufacturing also uses a pull system to move materials through the production cycle. For example, in a manufacturing business, materials do not move to the next step on an assembly line until that step or station is ready. This reduces the stockpiling of unfinished product at any stage in the production process. When the company eliminates bottlenecks, production speed or lead-time is faster. Process engineers must determine the maximum quantity any station in the production process can have waiting. While workers may sit idle waiting to move production to the next step, the process is more efficient.

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Efficient Manufacturing Layout:

Companies must create a layout on the production floor to move materials through the process efficiently. Some companies must move workstations closer together to eliminate steps in the work process. This leads to a more efficient manufacturing layout that can significantly reduce lead time. Building products efficiently is a primary focus for a company implementing a lean manufacturing system.

Improve Customer Satisfaction:

Companies implement a Just-in-Time system or lean manufacturing to satisfy the demands of customers. The voice of the customer is always present in a Just-in-Time manufacturing environment. Reductions in lead time and costs can help a company deliver a product to the customer faster and for a lower price.

Advantage of just in time:

By using just-in-time concepts, there is a greatly reduced need for raw materials and work-in-process, while finished goods inventories should be close to non-existent. Just-in-time inventory has the following advantages:

There should be minimal amounts of inventory obsolescence, since the high rate of inventory turnover keeps any items from becoming old.

Since production runs are very short, it is easier to halt production of one product type and switch to a different product to meet changes in customer demand.

The very low inventory levels mean that inventory holding costs (such as warehouse space) are minimized.

The company is investing far less cash in its inventory, since less inventory is needed. Less inventory can be damaged within the company, since it is not held long enough for

storage-related accidents to arise. Production mistakes can be spotted more quickly and corrected, which results in fewer

products being produced that contain defects.

Disadvantage of just in time:

Despite the magnitude of the preceding advantages, there are also some disadvantages associated with just-in-time inventory, which are:

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A supplier that does not deliver goods to the company exactly on time and in the correct amounts could seriously impact the production process.

A natural disaster could interfere with the flow of goods to the company from suppliers, which could halt production almost at once.

An investment should be made in information technology to link the computer systems of the company and its suppliers, so that they can coordinate the delivery of parts and materials.

A company may not be able to immediately meet the requirements of a massive and unexpected order, since it has few or no stocks of finished goods.

Implication of just in time on accounting:

The changing of global competitive business environment has forced the organizations to transform themselves in order to become more competitive. Many companies adopted Just-in-Time system to process reengineering among the competitors. The adoption of JIT manufacturing system will implicate all the organization’s control system such as accounting information system. All the systems have to be updated to follow the innovation of changing manufacturing system. The implication of JIT manufacturing system in accounting area is very significant because the new system will affect all the accounting entries by the different type of accounting information measurement. Accounting for a JIT system is often simpler than other systems. Most accounting systems focus on determining product costs for inventory valuation. But JIT systems have minimal inventories, so there is less benefit from an elaborate inventory costing system. In true JIT systems, material, labor, and overhead costs can be directly to Cost of goods sold because inventories are small enough to be ignored. All costs of production are assumed to apply to products that have already been sold.

JIT in Manufacturing:

JIT in manufacturing is a system to operate and develop a system in factory. It is mainly based on the total decrease of waste by producing only the necessary units, in the necessary quantities, at the necessary time and brings production rates exactly in line with market demand. The main goal of JIT manufacturing is developing a system that allows a factory to have only the materials equipment and people by hand required doing the same plan. In order to achieve this goal, there are four key elements required to make sure the successful operation of a JIT manufacturing system. The four key elements include improving plant layout, reducing the setup time, striving for zero defect and developing a flexible workforce. By providing these four key elements, waste can be eliminated effectively. Factories have to improve

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the manufacturing flow lines in its plant in order to implement JIT properly. Plant layout approach used in JIT manufacturing is called “focused factory”. Using this approach, a “mini” factories are created, where all machines in a product flow line for separated product with manufacturing cells (one worker several machines) are tightly grouped together so that work in process are not shifted from place to place all over the factory. As a result, an improved plant layout can increase ‘throughput’ (total volume of production through a facility during a period) and reduce ‘throughput time’ or the cycle time. Setups involved activities such as moving materials that must be performed whenever production is switched over from making one type of item to another. Setups should be avoided because of the expense and the time involved in such setups. A technique used in JIT manufacturing is called ‘single-minute-exchange-of-dies’. This technique can only be applied if flow line is dedicated to a single product. Die must be changed when it wears out or when production is switched to a different product and this will be time-consuming. As the effect, batch sizes can be very small. Companies that are involved in JIT tend to become zealously committed to a goal of zero defects. If the complete goods contain even one defective unit, the manufacturer has to restart the whole production process just to make one unit. This can delay a shipping order and may generate a ripple effect that delays other orders. In JIT system, the suppliers are responsible for the quality of the incoming parts and materials. The company’s production workers are directly responsible for spotting the defective units rather than using inspections. Workers on JIT line must be multi skilled and flexible. Moreover, in JIT workers are expected to operate all of the equipment on the flow line and may perform minor repairs as well as do maintenance work when they would otherwise be idle. Therefore, factory should develop a flexible workforce.

JIT in Purchasing:

Management accounting are familiar with the use of Just-in –Time (JIT) in purchasing with the aim to reduce the finished goods inventory that a company has to keep and to overcome or avoid the delay of raw material at ordering, receiving and incoming inspection. This means that JIT purchasing enable the materials to be delivered in time once it is needed for production. JIT purchasing works well to reduce wastes in many forms such as waste in raw materials, times, transaction process, etc. There are several goals of JIT purchasing: Firstly, to remove or eliminate inessential activities or process in the production. Secondly, to eliminate the carrying of stock inventory. Thirdly, to eliminate of transit inventory and finally to improve the quality and reliability of the suppliers. However, to implement JIT program effectively, a series of changes needs to be made on to the production process. If these changes are not made, production will increase the level of work-in-process (WIP) inventory, which will result in higher cost of production. JIT also requires the plant to be balanced so that each task has

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the same output level to create transfer batches of equal size. JIT required fewer inventories, which led to reduction in manufacturing costs, better responsiveness to customer requirements, and the opportunity for better product quality. JIT results in lowering WIP inventories, which leads to lower investment in manufacturing costs. The most challenging area for most manufacturers in achieving JIT system can only be operated successfully when the material being fed into it are of sufficient quality and delivered on time. Therefore, unless the quality and delivery of purchased material does not create production issues, the purchasing function should begin to establish a JIT supplier base. Organizations are now giving increasing attention to reducing stock level to a minimum by implementing JIT purchasing techniques. By arranging with suppliers for more frequent deliveries of smaller quantities of materials, so that each delivery is just sufficient to meet immediate production requirement, stock can be cut to a minimum. Just-in-time (JIT) purchasing reduces the wastage that is present at receiving and incoming inspection. It also reduces excess inventory, the delay of sending the materials to the manufacturer. It also increased the cycle times thus produce a good quality of products. In contrast, this will reduce the stocks in warehouses, transaction processing, and account payable function and save money. JIT requires a close and trusting relationship between the purchasing company and the supplier. A potential supplier will provide the manufacturer special price, delivery charges, technical services and advice, quality materials, and so on. Companies that have implemented JIT purchasing techniques have substantially reduced their investment in raw material and work in progress stocks. Other advantages includes a substantial savings in factory space, large quantity discounts and a reduction in paperwork arising from issuing blanket long-term orders to fewer suppliers instead of purchase orders. It also closely matches the receipt of material used in order to reduce stock carrying.

Just-In-Time System and Variance Analysis:

JIT approach can reduce or eliminate many unfavorable cost variances. For instance, long-term pricing agreements with select group of suppliers can virtually eliminate material price variances. Material uses variances caused by defective materials also may be minimized. Should a batch of inferior material be encountered, the production process is halted and the supplier is contacted to resolve the problem immediately.

Thus, rather than discovering quality control problems after the fact, a JIT system makes it possible to detect and correct quality problems as they occur. Workers in a JIT system must be able to shift production quickly from one product to another. Adherence to carefully planned production schedules reduces idle time and eliminates non-value-added activities. As a

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consequence, labor efficiency variances often are improved under JIT approach. Well-trained employees, working smarter with more efficiency, can minimize the need for overtime hours. Thus, JIT system may reduce or eliminate favorable labor rate variances. Finally, by cutting overheadCosts associated with non-value-added activities, JIT system also help management avoid unfavorable overhead spending variances.

Conclusion:

Thus, from the above discussion it has brought out that the Just-in-time can make products become more efficient, reliable and with a higher quality with its implementation. In accounting area, the JIT manufacturing system minimizes the amount of holding inventory in the warehouse. But when JIT manufacturing systems come across to accounting, the inventory costing system can be eliminated by the minimal inventory level at an optimal point in the JIT system. The firm can reduce the inventory costing system costs by improving the inventory control system. Furthermore, the change in the accounting system also influences the financial statement of the firms. After adopting the JIT manufacturing system, the inventory costing costs are eliminated and result in a low inventory holding costs. All these factors increase the profit of the firm, result in more attractive financial statement to the end users.

Reference:

http://en.wikipedia.org/wiki/Just-in-time_%28business%29

http://smallbusiness.chron.com/justintime-method-31185.html

http://leanman.hubpages.com/hub/JustInTime

http://smallbusiness.chron.com/purpose-justintime-inventory-systems-20342.html

http://personal.ashland.edu/~rjacobs/m503jit.html

http://tejc.tripod.com/jit.htm

http://smallbusiness.chron.com/uses-jit-accounting-system-15432.html

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http://www.delhibusinessreview.org/v_3n2/dbrv3n2m.pdf

http://www.accountingtools.com/questions-and-answers/the-advantages-and-disadvantages-of-just-in-time-inventory.html