Management And Accounting Web

Crusoe, J., G. Schmelzle, T. Buttross. 1999. Auditing JIT Implementations. Journal of Cost Management (December): 23-26.

Summary by Chris Kelso
Master of Accountancy Program
University of South Florida, Fall 2001

Internal Auditing Main Page | JIT Main Page

The purpose of this article is to discuss hidden costs associated with just-in-time systems. The article was written to help internal auditors locate these hidden costs. The authors begin by briefly discussing the components of a successful JIT system.

Seven items that should be included in a JIT system to insure its success:

pull scheduling,
purchasing and supplier relations,
plant layout,
computer integrated manufacturing (CIM),
setup reduction,
total quality control (TQC), and
a flexible workforce.

First, pull scheduling is the method of production in which demand dictates the amount produced. The scheduling uses an IS system that tells each worker how much product to manufacture. Contrast this to the traditional push method in which a fixed amount is produced and “pushed” onto the market.

Second, to insure the success of the JIT systems a firm needs to establish a relationship with a high-quality, dependable supplier.

Third, the plant layout must be efficient. For example, reduce the distances that work-in-progress must travel.

Fourth, to maintain an efficient JIT system it would benefit a firm to implement computer integrated manufacturing (CIM). A CIM is comprised of four components: computer aided design (CAD), computer aided manufacturing (CAM), computer aided engineering (CAE), and flexible manufacturing systems (FMS). These applications assist with the implementation and maintenance of the system.

Fifth, setup time is important for JIT. To increase speed of customer orders, a firm must decrease the manufacturing set up time.

Sixth, JIT systems must use Total Quality Control (TQC) to reduce defects.

Finally, a successful JIT system needs a flexible workforce.This means the workers must be trained to work on different machinery, can perform their own quality control inspections, and do their own maintenance work.

Hidden Costs of JIT

When the authors refer to hidden costs they are discussing the problems associated with a JIT system. These hidden costs include labor union leverage, problems with flexible manufacturing systems (FMS), problems developing a flexible workforce, difficulties with supplying commodities using JIT, increased expenses for suppliers, and increased space needed for JIT machinery.

A JIT system gives labor unions an advantage. JIT is used to minimize the finished inventory on hand. Due to the low finished inventory, if the workers decided to strike it would result in a substantial loss of revenue. Union activity outside the company is also a problem. One example involves a trucker strike in Indiana. The strike completely shutdown a Saturn Assembly plant because it could not receive its JIT inventory.

Flexible Manufacturing Systems are machines and manufacturing tools that are able to do multiple jobs. They are meant to help the JIT system by reducing changeover time. One of the drawbacks of FMS machinery is it is often not durable enough to handle large manufacturing jobs such as engine assembly. Another problem is the upfront and hidden costs. Implementing a FMS system would cost double the amount when compared to the traditional push systems. In some cases, FMS does not reduce any changeover time. Even if one machine can make numerous products, the FMS machines will still require time to be altered to accommodate a new product. The changeover time is still long and costly.

Another problem of FMS is the expense incurred for developing a flexible workforce. The extra training needed for the employees will be costly. Unions have also complained about workers having to perform their own maintenance.

JIT systems are difficult to implement when dealing with commodities. Commodity suppliers buy their inventory when the prices are low. Due to this the inventory on hand varies. A supplier’s methods of attaining material are not in sync with those of the JIT company.

JIT systems cause suppliers to incur greater expenses in two ways: through satellite warehouses and increased frequency of shipments. Satellite Warehouses are storage facilities suppliers build close to their customers to provide faster service. Suppliers involved with JIT companies often have the added expense of these buildings. JIT forces the suppliers to increase the number of shipments, hence higher shipping costs. To recuperate these costs they have to increase the price of their products that are then passed on to the JIT companies.

A myth of JIT systems is that they will reduce space requirements due to less inventory storage. However, to implement a JIT system the machinery needs to be arranged in ways that increases the amount of space used.

Conclusion

Crusoe, Shcmelzle, and Buttross wrote this article to assist internal auditors in evaluating their company's JIT system. They provide examples of a few items that should be considered during an evaluation or before the installation of a JIT system.

___________________________________________

Related summaries:

Baggaley, B. and B. Maskell. 2003. Value stream management for lean companies, Part I. Journal of Cost Management (March/April): 23-27. (Summary).

Baggaley, B. and B. Maskell. 2003. Value stream management for lean companies, Part II. Journal of Cost Management (May/June): 24-30. (Summary).

Borthick, A. F., P. L. Bowen, and M. C. Sullivan. 1998. Controlling JIT II: Making the system monitor itself. Journal of Cost Management (July/August): 33-41. (Summary).

Carr, L. P. and C. D. Ittner. 1992. Measuring the cost of ownership. Journal of Cost Management (Fall): 42-51. (Summary).

Carr, L. P., W. C. Lawler and J. K. Shank. 2002. Reconfiguring the value chain: Levi's personal pair. Journal of Cost Management (November/December): 9-17. (Summary).

Castellano, J. F. and R. Burrows. 2011. Relevance lost: The practice/classroom gap. Management Accounting Quarterly (Winter): 41-48. (Summary).

Clinton, B. D., and H. Ko-Cheng. 1997. JIT and the balanced scorecard: Linking manufacturing control to management control. Management Accounting (September): 18-24. (Summary).

Davenport, T. H. and J. Glaser. 2002. Just-in-time delivery comes to knowledge management. Harvard Business Review (July): 107-111. (Summary).

Deluzio, M. C. 1993. Management accounting in a just-in-time environment. Journal of Cost Management (Winter): 6-15. (Summary).

Deluzio, M. C. 1993. The tools of just-in-time. Journal of Cost Management (Summer): 13-20. (Summary).

Foster, G. and C. T. Horngren. 1987. Cost accounting and cost management in a JIT environment. Management Accounting (June): 19-25. (Summary).

Fullerton, R. R. 2003. Performance measurement and reward systems in JIT and non-JIT firms. Cost Management (November/December): 40-47. (Summary).

Fullerton, R. R. and C. S. McWatters. 2002. The role of performance measures and incentive systems in relation to the degree of JIT implementation. Accounting, Organizations and Society 27(8): 711-735. (Summary).

Goodson, R. E. 2002. Read a plant - fast. Harvard Business Review (May): 105-113. (How the rapid plant assessment (RPA) process can tell you if a factory is truly lean in as little as 30 minutes. The process includes two tools: The RPA rating sheet includes 11 categories for assessing leanness, and the RPA questionnaire includes 20 yes or no questions). (Summary).

Kalagnanam, S. S. and R. M. Lindsay. 1998. The use of organic models of control in JIT firms: Generalising Woodward's findings to modern manufacturing practices. Accounting, Organizations and Society 24(1): 1-30. (Summary).

Lee, J. Y. and J. K. Winch. 1998. From push to pull: Management's control system modification for manufacturing change. Advances in Management Accounting (6): 75-92. (Summary).

Lessner, J. 1989. Performance measurement in a just-in-time environment: Can traditional performance measurements still be used? Journal of Cost Management (Fall): 23-28. (Summary).

Martin, J. R. Not dated. Lean concepts and terms. Management And Accounting Web. LeanConceptsandTermsSummary.htm

Martin, J. R. Not dated. Profit Beyond Measure graphics and notes. Management And Accounting Web JohnsonBromsGraphicsNotes.htm

Martin, J. R. Not dated. What is lean accounting? Management And Accounting Web. LeanAccounting.htm

McIlhattan, R. D. 1987. How cost management systems can support the JIT philosophy. Management Accounting (September): 20-26. (Summary).

O'Brien, J. and K. Sivaramakrishnan. 1994. Accounting for JIT: A cycle time-based approach. Journal of Cost Management (Fall): 63-70. (Summary).

Patell, J. M. 1987. Adapting a Cost accounting system to just-in-time manufacturing: The Hewlett-Packard Personal Office Computer Division. Accounting & Management Field Study Perspectives, edited by William J. Bruns, Jr. and R. S. Kaplan. Harvard Business School Press: 229-267. (Summary).

Swenson, D. W. and J. Cassidy. 1993. The effect of JIT on management accounting. Journal of Cost Management (Spring): 39-47. (Summary).

Toyota Public Affairs Division and Operations Management Consulting Division. 1998. The Toyota Production System: Leaner Manufacturing for a Greener Planet. The Toyota Motor Corporation. (Summary).

Vollmann, T. 1990. Changing manufacturing performance measurements. Proceedings of the Third Annual Management Accounting Symposium. Sarasota: American Accounting Association: 53-62. (Summary).