This paper seeks to analyse and discuss the concept and application of just in time (JIT) inventory system. The manner of McDonald and Toyota having benefited from the JIT system is discussed below What is JIT? Just in time (JIT) allows a company to provide goods or service to customers just in time as suggested by its name. It is a production process that tries to maximize value to customers while minimizing the cost associated.
Traditionally companies would provide for their inventories in anticipation of higher demand but JIT concept asserts that there is a better way option of doing it because of the high holding cost associated with keeping a higher than ideal amount The McDonalds’ Experience Dotmarketer (2005) cited that case of McDonald’s where the company’s crew doesn’t begin to cook its customer “orders until a customer has placed a specific order. ” Previous to JIT the company would make preliminary cooking for a group of hamburgers while being heated by lamps.
The practice was to keep these burgers until sold or discarded due to spoilage thus no fresh burger then if no special order McDonalds. Under JIT, a more refined technology of making a burger. McDonald’s can make available the goods fast enough upon order. In other words, no special order to have fresh burger under the JIT. The benefits there fore are obvious which includes better quality of customer service and lower cost due to lower inventory cost. With the claim of improved quality on customer’s service, customer would not be waiting long every time they make a special order for fresh products.
A requirement for company’s ability to actually produce faster must however be fulfilled. Failure to deliver the needed ability, the ordering costs of the company could be very high since associated with said cost is the benefits forgone due to customers loss who may get impatient ordering inexistent fast food. Lower costs (Meigs and Meigs, 1995; Plunkett and Attner, 1985) are associated with reduced holding cost of burger parts such as the beef, cheese, and buns which could be made higher because of spoilage costs (Dotmarketer, 2005).
Freezing the ground beef allows a short period of time. Neither cooking them could also bring higher spoilage cost. The option therefore was to sell the burger needs to be sold within number of minutes but not days (Dotmarketer, 2005). It was therefore based on company’s experience that holding inventories long are not the companies advantage although its business its fast food which should be requiring them be high inventories to make its food available fast. It found that unsold food after a short period of time was also put to waste which essentially form part of holding costs.
High McDonald’s storage cost means high price and less competitiveness of its product in the market (Dotmarketer, 2005). JIT and its background JIT has its basis under the economic order quantity concept where there is a need to find that combination to attain reduction of the total cost of ordering and holding inventory (Droms 990; Helfert, 1994). Dotmarketer (2005) claimed that the food industries have their characteristic of High holding costs; hence JIT system could be taken advantage in exploiting the savings in exchange for keeping less amount of inventory.
JIT has the ability to lessen ordering costs seems to be there secret for its success. While it was difficult for McDonald to lower holding costs, it was easier for the company to make ordering costs lower (Dotmarketer, 2005). Brigham and Houston (2002) cited that the JIT is inventory control developed by Japanese firms but became useful throughout the world. Hence JIT could have a very wide application across industries. Safety Stock, how reduced? Another feature of JIT is capacity to reduce safety stock.
Dotmarketer (2005) explained that the two reasons for safety stocks’ existence. One is variability in demand and the other is variability in lead times from suppliers. Conceptually, JIT would bring down this variability lessens safety stock, hence lower holding cost. The safety stock has two types of inventory. The first inventory is needed to account for fluctuations in demand during the lead time, such that if said lead time is shorter, JIT must suggest smaller safety stock is smaller (Dotmarketer, 2005).
McDonald’s got over this by creating a system for faster burger production. The second inventory is the one needed fill demand due variance in lead time, such that such that absence of variance would be helped by a reduced safety. McDonald’s made this happen by standardizing production (Dotmarketer, 2005). The experience of Toyota and other US car manufacturers Brigham and Houston (2002) cited Toyota to have used the just-in-time system, when eight of the Toyota’s ten factories, along with the most of Toyota’s suppliers, were placed at the countryside around Toyota City.
This enabled the delivery of components that would tie to the speed of the assembly line as the parts needed are generally delivered no more than a few hours before they are used. This allowed Toyota to reduce carrying large inventories, but it required a great deal of coordination between the manufacturers and its suppliers, both in the timing of deliveries and the quality of the parts (Brigham and Houston, 2002). The same system needed that component parts must be perfect; otherwise a few bad parts could stop the entire production line.
Hence the Japanese was timely in having JIT inventory management developed hand in hand with its concept and practice of the total quality management (TQM) (Brigham and Houston, 2002). Brigham and Houston (2002) cited too the cases of US automobile manufacturers that patterned their moves with Japanese JIT in having their domestic firms to move toward just-in-time systems. Ford did restructure its production systems with the purpose of increasing its inventory turnover from 20 times a year to 30 to 40 times.
But the same risks associated with McDonald was also felt in the case of US car manufacturers as JIT systems had caused considerable pressure on suppliers. The experience of GM which had required a 10-day supply of seats and other parts thereby putting its supplier in pressure which may not be sustained all the time (Brigham and Houston, 2002). Is JIT a perfect inventory system? The answer of course is in negative as Dotmarketer (2005) explains that JIT many advantages may be lost with some significant risks with inventory management not mitigated.
” To illustrate the company using JIT may be dependent upon on particular or limited number suppliers. There are also cases where internal issues of these suppliers might affect the company such is the case of sudden strike from labour unions that could put the company into ransom situation for pending orders thus the undue loss of opportunities (Dotmarketer, 2005). Conclusion: This paper was able to prove that Just-In-Time inventory systems have the capacity to provide an attractive, cost-cutting production system as long as risks are weighed and mitigated.
Preventative measures are need in approaching the risks with JIT. The cases of McDonald, Toyota and other US car manufacturers are examples of companies who have applied the concepts but any other company could apply the same particularly those with high ordering costs and high holding or storage costs. JIT could be a way of attaining competitive advantage (Porter, 1998).
References:
Brigham and Houston (2002) Fundamentals of Financial Management, Thomson South-Western, US Dotmarketer (2005) McDonald’s, a guide to the benefits of JIT, {www document} URL, http://www.inventorymanagementreview. org/justintime/index. html, Accessed December 13, 2007 Droms (1990) Finance and Accounting for Non Financial Managers, Addison-Wesley Publishing Company, England Helfert, Erich (1994), Techniques for Financial Analysis, IRWIN, Syndey, Australia Meigs and Meigs (1995) Financial Accounting, McGraw-Hill, London, UK Plunkett and Attner (1985) Introduction to Management, PWS-Kent Publishing Company, Boston, Massachusetts. USA Porter (1998) Competitive Advantage, Free Press-Up