Features of JIT Production Systems

Learning Objective 6 Identify the features and benefits of a just-in-time production system

• for example, organizing work in manufacturing cells, improving quality, and reducing manufacturing lead time to reduce costs and earn higher margins

A JIT production system has these features:

• Production is organized in manufacturing cells, which are work areas with different types of equipment grouped together to make related products. Materials move from one machine to another, and various operations are performed in sequence, minimizing materials-handling costs.
• Workers are hired and trained to be multiskilled and capable of performing a variety of operations and tasks, including minor repairs and routine equipment maintenance.
• Defects are aggressively eliminated. Because of the tight links between workstations and the minimal inventories at each workstation, defects arising at one workstation quickly affect other workstations in the line. JIT creates an urgency for solving problems immediately and eliminating the root causes of defects as quickly as possible. Low levels of inventories allow workers to trace problems to and solve problems at earlier workstations in the production process, where the problems likely originated.
• The setup time, the time required to get equipment, tools, and materials ready to start the production of a component or product, and the manufacturing cycle time, the time from when an order is received by manufacturing until it becomes a finished good, are reduced. Setup costs correspond to the ordering costs P in the EOQ model. Reducing the setup time and its costs makes production in smaller batches economical, which in turn reduces inventory levels. Reducing the manufacturing cycle time enables a company to respond faster to changes in customer demand (see also Concepts in Action: Just-in-Time Live Concert Recordings).

• Suppliers are selected on the basis of their ability to deliver quality materials in a timely manner. Most companies implementing JIT production also implement JIT purchasing. JIT plants expect JIT suppliers to make timely deliveries of high-quality goods directly to the production floor.

We next present a relevant-cost analysis for deciding whether to implement a JIT production system.

Costs and Benefits of JIT Production

As we have seen, JIT production clearly lowers a company’s carrying costs of inventory. But there are other benefits of lower inventories: heightened emphasis on improving quality by eliminating the specific causes of rework, scrap, and waste, and lower manufacturing cycle times. It is important, therefore, when computing the relevant benefits and costs of reducing inventories in JIT production systems for managers to take into account all benefits and all costs.

Consider Hudson Corporation, a manufacturer of brass fittings. Hudson is considering implementing a JIT production system. To do so, Hudson must incur $100,000 in annual tooling costs to reduce setup times. Hudson expects that JIT production will reduce its average inventory by $500,000 and that the relevant costs of insurance, storage, materials handling, and setups will decline by $30,000 per year. The company’s required rate of return on its inventory investments is 10% per year. Should Hudson implement a JIT production system? On the basis of the information provided, we would be tempted to say “no” because the annual relevant total cost savings amount to $\mathrm{\$}\text{80,000}\mathrm{\hspace{0.17em}}\left[\right(10\%\hspace{0.17em}\mathrm{of}\hspace{0.17em}\mathrm{\$}\text{500,000})+\mathrm{\$}\text{30,000})]\mathrm{,}$ which is less than the additional annual tooling costs of $100,000.

Our analysis, however, is incomplete. We have not considered the other benefits of lower inventories associated with JIT production. Hudson estimates that implementing JIT will improve quality and reduce rework on 500 units each year, resulting in savings of $50 per unit. Also, better quality and faster delivery will allow Hudson to charge $2 more per unit on the 20,000 units that it sells each year.

The annual relevant benefits and costs from implementing JIT equal the following:

Therefore, Hudson should implement a JIT production system.