Just-in-Time (JIT) Processing

Traditionally, continuous process manufacturing has been based on a just-in-case philosophy: Inventories of raw materials are maintained just in case some items are of poor quality or a key supplier is shut down by a strike.

Similarly, subassembly parts are manufactured and stored just in case they are needed later in the manufacturing process.

Finished goods are completed and stored just in case unexpected and rush customer orders are received. This philosophy often results in a push approach, in which raw materials and subassembly parts are pushed through each process. Traditional processing often results in the buildup of extensive manufacturing inventories.

Primarily in response to foreign competition, many U. S. firms have switched to just-in-time (JIT) processing. JIT manufacturing is dedicated to having the right amount of materials, parts, or products just as they are needed.

JIT first hit the United States in the early 1980s when automobile companies adopted it to compete with foreign automakers. Many companies, including Dell Opens in new window, Caterpillar Opens in new window, and Harley-Davidson Opens in new window, now successfully use JIT.

Under JIT processing, companies receive raw materials just in time for use in production, they complete subassembly parts just in time for use in finished goods, and they complete finished goods just in time to be sold. Illustration 17A-1 shows the sequence of activities in just-in-time processing.

Objective of JIT Processing

A primary objective of JIT is to eliminate all manufacturing inventories. Inventories have an adverse effect on net income because they tie up funds and storage that could be put to more productive uses.

JIT strives to eliminate inventories by using a pull approach in manufacturing. This approach begins with the customer placing an order with the company, which starts the process of pulling the product through the manufacturing process.

A computer at the final work station sends a signal to the preceding work station. This signal indicates the exact materials (parts and subassemblies) needed to complete the production of a specified product for a specified time period, such as an eight hour shift.

The next-preceding process, in turn, sends its signal to other processes back up the line. The goal is a smooth continuous flow in the manufacturing process, with no buildup of inventories at any point.

Elements of JIT Processing

There are three important elements of JIT processing:

1. Dependable suppliers

Suppliers must be willing to deliver on short notice exact quantities of raw materials according to precise quality specifications (even including multiple deliveries within the same day).

Suppliers must also be willing to deliver the raw materials at specified work stations rather than at a central receiving department. This type of purchasing requires constant and direct communication. Such communication is facilitated by an online computer linkage between the company and its suppliers.

2. A multi-skilled work force

Under JIT, machines are often strategically grouped into work cells or work stations. Much of the work is automated. As a result, one worker may operate and maintain several different types of machines.

3. A total quality control system

The company must establish total quality control throughout the manufacturing operations. Total quality control means no defects. Since the pull approach signals only required quantities, any defects at any work station will shut down operations at subsequent work stations. Total quality control requires continuous monitoring by both line employees and supervisors at each work station.

Benefits of JIT Processing

The major benefits of implementing JIT processing are:

1. Significant reduction or elimination of manufacturing inventories.
2. Enhanced product quality.
3. Reduction or elimination of rework costs and inventory storage costs.
4. Production cost savings from the improved flow of goods through the processes.

The effects in many cases have been dramatic. For example, after using JIT for two years, a major division of Hewlett-Packard found that work in progress inventories (in dollars) were down 82%, scrap/rework costs were down 30%, space utilization improved by 40% and labor efficiency improved 50%. As indicated, JIT not only reduces inventory but also enables a manufacturer to produce a better product faster and with less waste.

One of the major accounting benefits of JIT is the elimination of separate raw materials and work in progress inventory accounts. These accounts are replaced by one account, Raw and In-Process Inventory. All materials and conversion costs are charged to this account. The reduction (or elimination) of in-process inventories results in a simpler computation of equivalent units of production.