JUST_IN_TIME_Malawi_College_of_Accountancy_Short_notes.pptx

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1. JUST IN TIME MALAWI COLLEGE OF ACCOUNTANCY (MCA) MGA313

2. JUST-IN-TIME (JIT) Some manufacturing companies have sought to reduce their inventories of raw materials and components to as low a level as possible. Just-in-time procurement is a term which describes a policy of obtaining goods from suppliers at the latest possible time ( ie when they are needed) and so avoiding the need to carry any materials or components inventory.

3. Just-in-time production describes manufacturing to order. As orders are received, manufacturing is triggered to fulfil those orders. This enables better product customisation , less/no risk of obsolescence and few holding costs. It does, however, imply a flexible manufacturing process (in terms of what and how much is made) with follow-on considerations for employment terms. In addition, idle time may need to be tolerated (although managed to a practical minimum.

4. Potential benefits of JIT (by ACCA) Reduction in inventory holding costs Reduced manufacturing lead times Improved labour productivity Reduced scrap/rework/warranty costs Reduced inventory levels mean that a lower level of investment in working capital will be required.

5. Advantages of JIT inventory (by accounting fellow): Working capital. JIT inventory is designed to be exceedingly low, so the investment in working capital is minimized. Obsolete inventory. Since inventory levels are so low, there is little risk of having much obsolete inventory. Defects. With so little inventory on hand, defective inventory items are easier to identify and correct, resulting in lower scrap costs.

6. Advantages of JIT inventory (by accounting fellow): Process time. A thoroughly implemented JIT system should shorten the amount of time required to manufacture products, which may decrease the quoted lead times given to customers placing orders. Engineering change orders. It is much easier to implement engineering change orders to existing products, because there are few existing stocks of raw materials to draw down before you can implement changes to a product.

7. Drawbacks of JIT Shortages . Low JIT inventory levels make it more likely that any problem in the supplier pipeline will lead to a shortage that will stop production. This risk can be mitigated through the use of expensive overnight delivery services when shortages occur. In just-in-time inventory systems, companies order the bare minimum amount of inventory to get through until the next delivery date.

8. Difficulty With Surprise Extra Business. One of the biggest just-in-time business disadvantages is a lack of flexibility when it comes to good fortune. In most businesses, a customer coming in and wanting to order a massive amount of products is a good thing. For a T-shirt company with a new school account, it can mean making the new client wait longer than he wants to just to get a complete order. Small businesses can't afford to turn down windfalls, but it can be next to impossible to find enough raw materials on short notice to take care of those profitable new customers.   This can be resolved in one of two ways. In the first case, the new customers can get their desired order, but they'll have to wait much longer to get it due to lack of inventory. Depending on the particular type of shirt they want, it can take weeks to find a large enough supply to satisfy the new clients. On the other hand, if the T-shirt shop owner manages to find a ready supply of basic shirts that will satisfy the customer, it's likely that they'll cost more money than the shop's normal supplier will charge. The windfall customer can actually end up costing the company money by lowering the profit margin to next to nothing.

9. More Planning and Training Required Many small businesses do inventory and materials ordering by hand using paper and pencil, at least in the beginning. Even those large enough to need or want a computer inventory program do so with simple apps. In most cases, it's enough to take inventory a couple of times a month, just to keep track of what you'll be needing. In these cases, inventory is a simple process and can be easily taught to any employee in a short amount of time. With a JIT inventory system, the entire inventory process is more complex. Employees must be trained to take highly detailed inventory on a very frequent basis. Accuracy is crucial because the entire ordering system for the company is based on those numbers. Employees will need to learn to use elaborate computer systems, which can be challenging for those who aren't familiar with the computers installed in the office. In order to train and keep employees who can handle these inventory duties, you may have to increase labor costs. In addition, you'll need to find suppliers who are willing to work with you by delivering supplies multiple times each week without adding exorbitant delivery charges to each order. It's also a smart practice to create relationships with lesser suppliers for emergency supplies in case of a break in the inventory/delivery process.

10. A Tight Supply Chain Means Less Control Most small business owners are proud of their ability to pivot and to change things up quickly when the economic forces around them call for it. With just-in-time inventory systems, it's much more difficult to do this. A neighborhood bakery will generally know when the local celebrations will happen and will order accordingly. But if the baker finds out that a new wedding planner is looking for an emergency supply of fancy cupcakes, she has little chance of stepping up and reaching out for the job.   Even if she manages to get the cupcake order, if the baker's supplier of silver cake decorations is out of stock, she has fewer options to offer the potential new customer. Any sort of disruption in the supply chain anywhere in the system will ultimately impact the bottom line of the small business using this system. With fewer options to offer customers and fewer opportunities to change business plans on short notice, just-in-time inventory can curtail opportunities that might otherwise grow a small business.

11. Problems With Natural Disasters Tornados , hurricanes, floods and other natural disasters can have a huge impact on any business, as can civil unrest or police actions. The difference with just-in-time inventory systems is that the effect can be felt much more harshly. The danger isn't only what happens when emergencies arise near the business, but also when they happen in other areas where a business's supplier happens to be.   A local coffee shop utilizing JIT ordering will generally keep enough beans on hand for three or four days' worth of average sales. They may stock an additional day's worth of supplies but not more than that. If their roaster, located in the next state, is hit with a tornado or a fire, the coffee shop owner will have little time to scramble and find a new commercial bean supplier. If his customers are used to a certain mix of proprietary blends, he may not be able to keep his doors open for more than a few days before running out of inventory.  

12. The Need for Higher IT Investments Just-in-time inventory systems are so complex that they're virtually impossible to utilize without a computer and dedicated programs. Companies will need inventory tracking, order creating, sales predicting and a host of other programs to make this system work properly. This means a large investment in both hardware and software plus training time for management and employees. There will be extra labor costs, extra supervisory duties and more time needed for inputting data.  Once all these systems are installed and the people have been trained, the entire company now relies on the computer system to work flawlessly. In most cases, they do, but problems do arise. That's the reason IT departments exist. Any business with a JIT system needs to have a relationship with an IT professional who is familiar with the hardware it has installed, as well as a familiarity with the professionals working for the JIT company. No company can afford to have their inventory system offline for days, whether it's because of a bug in the software or a glitch in the computer. Emergency repair can be expensive and might not even be available on nights or holidays. Smart business owners create a backup plan for emergencies, but they're temporary stopgaps at best.

13. Necessary Reliance on One Supplier Setting up a JIT system requires creating relationships with major suppliers who will deliver the weekly raw materials a business needs. While these business ties can be a benefit to any company, there are downsides to this arrangement as well.   A pizza restaurant owner who relies on one restaurant supply company has the advantage of knowing how much she will pay for pepperoni and flour each week, making it easier to control food costs. On the other hand, she's limited in her ability to look around at her supplier's competitors to see what prices they offer for the same products. If a supplier across town is offering pepperoni for half price that week, she can't simply place a single order before going back to her steady supplier. She can change suppliers, but there's no way to simply shop around to find the best prices each week.   The same problem happens if the supplier decides to raise prices. The pizza shop owner is stuck paying the higher prices until she can find a similar supplier that offers better prices and who is willing to work with her on her ordering schedule. Either way, JIT inventory severely cuts a business owner's ability to find the best cost for raw materials on a timely basis.

14. Problems With Customer Satisfaction When just-in-time inventory systems work, they work well. However, when these systems break down, businesses can suffer on multiple fronts. Lack of inventory means loss of business, but that's only the immediate effect. Dissatisfied customers who can't get what they want or who have to wait longer than usual to have their orders fulfilled are a real problem in today's business environment. The internet has a huge influence on almost every small business, and unhappy customers hold a larger amount of power to hurt businesses than ever before. Review sites like Yelp and Facebook, Twitter and other social media sites give customers a voice that they've never had before. One bad review, if written in an amusing or shocking style, can be enough to severely hurt any small business today. Viral business reviews are the stuff of internet legend, and some have been repeated for years. In an age where every customer has the power to shut a business down if he's motivated enough, business owners are going above and beyond to keep them happy. Keeping enough inventory in stock to keep customers satisfied can be a large part of this strategy.

15. JIT will not be appropriate in some cases. For example, a restaurant might find it preferable to use the traditional economic order quantity approach for staple non-perishable food inventories but adopt JIT for perishable and 'exotic' items. In a hospital, a stock-out could quite literally be fatal and so JIT would be quite unsuitable.