JUST IN TIME

Objectives
1. Compare and contrast just-in-time (JIT)
manufacturingAfterpractices
studying this
with traditional
chapter,
manufacturing you should
practices.
be able
2. Apply just-in-time to:
manufacturing
practices to a traditional manufacturing
illustration.
3. Describe the implications of a just-in-
time manufacturing philosophy on cost
accounting and performance
measurement systems.
 Objectives
4. Apply just-in-time practices to a
nonmanufacturing setting.
5. Describe and illustrate activity analysis
for improving operations.
 What is Just-in-Time?
JIT is a business philosophy that
focuses on reducing time and cost
and eliminating poor quality within
manufacturing and non-
manufacturing processes.
Sometimes called short-cycle or
lean manufacturing.
 Just-in-Time Principles
Just-in-Time Manufacturing
Reduces inventory.
Reduces lead time.
Reduces setup time.
Emphasizes product-
oriented layout
Emphasizes team-oriented
employee involvement.
Traditional Manufacturing
Increases inventory to protect
against process problems.
Increases lead time as a buffer
against uncertainty.
Disregards setup time as an
improvement priority.
Emphasizes process-oriented
layout.
Emphasizes work of
individuals following manager
instructions.

Continued
 Just-in-Time Principles
Just-in-Time Manufacturing Traditional Manufacturing
Emphasizes pull Emphasizes push
manufacturing. manufacturing.
Emphasizes zero defects. Tolerates defects.
Emphasizes supplier Treats suppliers as “arm’s-
partners. length,” independent entities.
 8

Reducing Inventory
Assume the
river is
inventory.

As long as the river (the inventory)

covers the rocks, the (production)
problems are hidden.
 9

Reducing Inventory

If the river (inventory) is reduced,

the problems are exposed.

Machine
breakdowns
Poor Unreliable Untrained
quality employees
suppliers
Reducing Lead Time

Lead time, sometimes called

throughput time, is a measure of the
time that elapses between starting a
unit of product…
Reducing Lead Time

…into the beginning of a

process and completing
the unit of product.
Reducing Lead Time
Value-added lead time is
the time required to
actually manufacture a
unit of a product.
Reducing Lead Time
Nonvalue-added lead time is the
time that a unit of product sits in
inventories or moves
unnecessarily.
 Components of
Lead Time

Start of production End of production

for a single item for a single item

Conversion Time Wait Time Move Time Down Time

Value-added Nonvalue-added

Total Lead Time

Reducing Setup Time

A setup is the effort

required to prepare
an operation for a
new production run.
 Relationship Between Setup
Times and Lead Times

Long Large Large

Setup Batch Inventor
Times Sizes y

Longer Lead Times

 Automotive Components Inc.
manufactures a batch of 40 engine
starters through three processing.
Each unit in the batch requires the
following processing time:

Machining 6 minutes
Assembly 10
Testing 8
Total 24 minutes
After machining, it takes 10 minutes
to move the machined batch to
assembly. It then takes 15 minutes to
move the assembled batch to testing.
Approximately 97.5 percent of the
lead time is consumed by nonvalue-
added waiting and moving.
 How can we
improve our lead
time performance?
 Solutions
1. Reduce setups so that the batch size
could be reduced to one piece (one-
piece flow).
2. Move the processes closer to each
other so that the move time is
eliminated.
Emphasizing Product-
Oriented Layout

Organizing work around the

products is called a
product-oriented layout (or
product cells), while
organizing around
processes is called process-
oriented layout.
 Emphasizing Employee
Involvement
Employee involvement uses
teams organized in product
cells, rather than just
Suchefforts
employee teams
of isolated individuals.
can be cross-trained to
perform any operation
within the product cell.
 Emphasizing Pull
Manufacturing
Producing items only as they are
needed by the customer is called
pull manufacturing. The system
that accomplishes pull
manufacturing is often called
kanban (Japanese for “cards”).
Emphasizing Zero Defects
Poor quality results in
increased need for
inspection, more
production interruptions,
an increased need for
rework, a higher cost from
scrap, and additional
warranty costs.

MAKE IT RIGHT THE FIRST TIME!

 Anderson Metal Fabricators
(AMF) makes two types of metal
covers, large and small. Metal
covers are made by stamping a
pattern of the cover from sheet
steel. The stamped patterns are
then sent through a hole
punching operation, then a
forming operation.
Traditional Operations—Anderson Metal Fabricators

Administrative Offices: Technical Offices:

Accounting Maintenance Design
Sales and Tooling Scheduling
Customer Service Manufacturing

Receiving and Stamping

Raw Materials
Inventory WIP

Shipping Finished Forming Punching

Department Goods
Inventory WIP WIP

Work in Process Areas

 Just-in-Time Operations—AMF

Administrative Offices: Technical Offices:

Accounting Design
Sales Scheduling
Customer Service Manufacturing

Stamping

Small covers Maintenance and Tooling

Receiving

Shipping
Stamping

Medium covers Maintenance and Tooling

Stamping

Large covers Maintenance and Tooling

= Work in Process Areas = Pull Kanban Signal

 Just-in-Time Operations—AMF

Administrative Offices: Technical Offices:

Accounting Design
Sales Scheduling
Customer Service Manufacturing

Stamping Punching Forming

Small covers Maintenance and Tooling

Receiving

Shipping
Stamping Punching Forming

Medium covers Maintenance and Tooling

Stamping Punching Forming

Large covers Maintenance and Tooling

= Work in Process Areas = Pull Kanban Signal

Accounting for Just-in-Time Operations
In a just-in-time operating environment, the accounting
system will have the following characteristics:
 Fewer transactions. The accounting system is
simpler because there are fewer transactions to
record.
 Combined accounts. All in-process work is
combined with raw materials to form a new account,
Raw and In Process (RIP) Inventory.
 Nonfinancial Performance Measures. There is a
greater emphasis on nonfinancial measures.
 Direct Tracing of Overhead. Indirect labor is
directly assigned to product production cells.
 The transfer of costs as
products move through the
production process is
termed backflush
accounting.
 Combined
Transactions
The annual budgeted conversion cost for
AMF’s medium-cover product cell is
Php2,400,000. These costs will support
1,920 planned hours of production.

Budgeted cell
2,400,000
conversion =
cost rate 1,920

= 1,250 per hour

 The medium-cover product cell is
expected to require 0.02 hours of
manufacturing time per unit.

Conversion
cost per unit = 0.02 x 1,250
= 25 conversion cost per unit
 Steel coil is purchased for producing
8,000 medium covers. The purchase
cost was 120,000, or 15 per unit.
Raw and In Process Inventory 120,000
Accounts Payable 120,000

A separate
materials account
is not used.
 Conversion costs are applied to 8,000
medium covers at a rate of 25 per cover.

Raw and In Process Inventory 200,000

Conversion Costs 200,000

The Raw and In Process

Inventory account is used
to accumulate the applied
conversion costs.
All 8,000 medium covers were completed
in the cell. The cost is 40 per unit
(materials, 15; conversion costs, 25).
Finished Goods Inventory 320,000
Raw and In Process Inventory 320,000

This is a backflush
transaction.
Of the 8,000 units completed, 7,800 were sold
and shipped to customers at 70 per unit.

Accounts Receivable 546,000

Sales 546,000
Cost of Goods Sold 312,000
Finished Goods 7,800 x 70312,000

7,800 x 40
 Nonfinancial Performance
Measurement
Just-in-time principle addressed by
performance measures (% of respondents):
 Inventory turnover 82%
 On-time delivery rates 41
 Production lead time 35
 Quality yield 32
 Throughput 32
 Time required for setups 26
 Space utilized 12
 Extent of cross-training or new skills obtained 8
 Typical Hospital Process Flow

Patient
Admitted

Admitting Clerks
Collect Patient
Information
 Typical Hospital Process Flow
Patient transported to Radiology
X ray made
Patient transported back to Nursing Unit

Patient Tests
Admitted Conducted
 Typical Hospital Process Flow
Specimen transported to Lab
Tests performed
Results reported to Nursing Unit

Patient Tests
Admitted Conducted
 Typical Hospital Process Flow
Drugs ordered
Order filled
Drugs sent back to Nursing Unit

Patient Tests Procedure

Admitted Conducted Performed
 Typical Hospital Process Flow

Patient Tests Procedure Patient

Admitted Conducted Performed Discharged
Just-in-Time Hospital Unit Layout

Chemistry
Patient Rooms Lab

Cross-trained Caregivers

Patient Rooms X ray Admitting

Office
 Costs of Quality Using
Activity Analysis
Prevention costs are the costs of activities that
prevent defects from occurring during the design and
delivery of products or services.
Appraisal costs are the costs of activities that detect,
measure, evaluate, and audit products and processes
to ensure that they conform to customer
requirements and performance standards.
 Costs of Quality Using
Activity Analysis
Internal failure costs are the costs
associated with defects discovered by a
business before the product or service is
delivered to the consumer.
External failure costs are the costs
incurred after defective units or services
have been delivered to consumers.
Although difficult to measure, it may be the
largest cost in the quality equation.
 Quality Control Activity Analysis—Gifford Co.
Quality Cost
Quality Control Activities Activity Cost Classification
Design engineering P 55,000 Prevention
Disposal of rejected materials 160,000 Internal Failure
Finished goods inspection 140,000 Appraisal
Materials inspection 70,000 Appraisal
Preventive maintenance 80,000 Prevention
Processing returned materials 150,000 External Failure
Disposing of scrap 195,000 Internal Failure
Assessing vendor quality 45,000 Prevention
Rework 380,000 Internal Failure
Warranty work 225,000 External Failure
Total activity cost P1,500,000
 Pareto Chart of Quality Costs
Costs
$400,000 Quality Control Activities
Rework
350,000
Warranty work
300,000 Disposing of scrap
250,000 Disposal of rejected materials
Processing returned materials
200,000
Finished goods inspection
150,000 Preventive maintenance
100,000 Materials inspection
50,000 Design engineering
Assessing vendor quality
0
Activity Categories
 Cost of Quality Report
Cost Summary
Quality Cost Percent of Total Percent of Total
Classification Quality Cost Quality Cost Sales
Prevention 180,000 12.00% 3.6%
Appraisal 210,000 14.00% 4.2%
Internal failure 735,000 49.00% 14.7%
External failure 375,000 25.00% 7.5%
Total 1,500,000 100.00% 30.0%
 Indicate whether the item is value-
added or nonvalue-added.
Quality Control Activities Activity Cost Classification
Design engineering 55,000 Value-added
Disposal of rejected materials 160,000 Nonvalue-added
Finished goods inspection 140,000 Value-added
Materials inspection 70,000 Value-added
Preventive maintenance 80,000 Value-added
Processing returned materials 150,000 Nonvalue-added
Disposing of scrap 195,000 Nonvalue-added
Assessing vendor quality 45,000 Value-added
Rework 380,000 Nonvalue-added
Warranty work 225,000 Nonvalue-added
Total activity cost 1,500,000
 What percentage is value-added and
what percentage is nonvalue-added?
Quality Cost
Quality Control Activities Activity Cost Classification
Design engineering 55,000 Value-added
Disposal of rejected materials 160,000 Nonvalue-added
Finished goods inspection 140,000 Value-added
Materials inspection 70,000 Value-added
Preventive maintenance 80,000 Value-added
Processing returned materials 150,000 Nonvalue-added
Disposing of scrap 195,000 Nonvalue-added
Assessing vendor quality 45,000 Value-added
Rework 380,000 Nonvalue-added
Warranty work 225,000 Nonvalue-added
Total activity cost 1,500,000
390,000 ÷ 1,500,000 = 26%
 What percentage is value-added and
what percentage is nonvalue-added?
Quality Cost
Quality Control Activities Activity Cost Classification
Design engineering 55,000 Value-added
Disposal of rejected materials 160,000 Nonvalue-added
Finished goods inspection 140,000 Value-added
Materials inspection 70,000 Value-added
Preventive maintenance 80,000 Value-added
Processing returned materials 150,000 Nonvalue-added
Disposing of scrap 195,000 Nonvalue-added
Assessing vendor quality 45,000 Value-added
Rework 380,000 Nonvalue-added
Warranty work 225,000 Nonvalue-added
Total activity cost 1,500,000
1,110,000 ÷ 1,500,000 = 74%
 Activity Analysis for Processes

Sales Order
Order Customer Entered
Submitted Credit into a
by Check Computer
Customer System
Activity Analysis for Processes

Order Product
Picked Order Received
from Shipped by
Warehouse Customer
 Activity Analysis for Processes
Management determines that not all
customer orders need to go through credit
check, but only orders from new
customers require this effort. If this
change is made, only 2,500 of the 10,000
sales orders will require credit checks.
Management introduced a more efficient
warehouse product layout. This layout
reduces the cost of picking orders by 35%.
 Activity Analysis Activity Cost Activity Cost
Prior to After
for Processes Improvement Improvement
Customer credit check 14,400 3,600
Order entering 9,600 9,600
Order picking 36,000 23,400
Order shipping 20,000 20,000
Total sales order fulfillment 80,000 56,600x
$36,000
65%
Cost per shipped order 8.00 5.66

Savings = 23,400
The End