Hidden Costs of JIT

The objective of this article is to discuss hidden costs associated with JIT systems. The article was written to help an internal auditor locate these hidden costs. The authors discussed briefly the components of a successful JIT system. These issues will also be summarized briefly. 

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

The authors lists these seven items needed for a successful JIT system:  

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 they will reduce space requirements due to less inventory storage. However, to emplement 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 the JIT system of his/her company’s system. They provide examples of a few items that should be considered during an evaluation or before the installation of a JIT system.  

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