Jit and Toc

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JIT benefits, as framed by Garrison and Noreen (2000), include the bolster of working capital by reducing capital in inventories; the optimization of space for more productive works; the increase of productivity; and the reduction of defect rates. Similarly, Younies, Barhem, and Hsu (2007) found that:

The implementation of JIT can provide many advantages to a company. The usage of JIT techniques can improve a company's problem solving capabilities by exposing problems in the production process as they occur. JIT reduces lead times and increases equipment utilization because of smaller lot sizes and delivery order sizes. Product quality is increased because quality is centered on the individual workers, and the workers are considered part of the team. Input from workers is encouraged. Adoption of JIT usually reduces paper work, and requires only simple planning systems. A reduction in inventory is always achieved as the JIT philosophy aims to eliminate non-value-added time or wasted time. (p. 43) Though JIT system has many advantages, it is vulnerable to unexpected disruptions in supply. A production line can quickly come to a halt if essential parts are unavailable (Garrison and Noreen, 2000). The authors used Toyota case as an example: “One Saturday, a fire at Aisin Seiki Company’s plant in Aichi Prefecture stopped the delivery of all brake parts to Toyota. By Tuesday, Toyota has to close down all of its Japanese assembly lines. By the time the supply of brake parts had been restored, Toyota had lost an estimated $15 billion in Sales.” (p. 17) Younies, Barhem, and Hsu (2007) also pointed out some disadvantages associated with the implementation of JIT: “It may be difficult for JIT to be effective in certain types of environments. JIT requires an atmosphere of close cooperation and mutual trust between the workforce and management. It is usually not as effective when labor is unionized. The use of JIT production or purchasing requires a large number of production setups and frequent shipments of purchased items from suppliers. Therefore, suppliers become very important and crucial to the company's operations. The process is not well-suited for irregularly used parts or specially ordered products because it does not respond quickly to changes in schedules when there is little excess inventory available.” (p. 43-44) With the above advantages and disadvantages, JIT is a critical factor in making managerial decision on inventories. In order to implement JIY effectively, the management should consider the capability and infrastructure level of the company. In addition, the restructuring costs to implement JIT versus the benefits from JIT should be taken into consideration. Another factor should be considered is the nature of the business since some materials/products are seasonal products which need to be built up to meet the production and market demands. The Importance of TOC in making managerial decision on activity based accounting The Theory of Constraints (TOC) is a system’s management philosophy developed by Eliyahu M. Goldratt. In his book, called The Goal: A Process of Ongoing Improvement, Goldratt (1992) states that a firm’s goal is to make money now and in the future. A company will not exist if it is not making money. Any activity that does not help make money is a waste of time and resources. TOC emphasizes the importance of managing the organization’s constraints. Since the constraint is whatever is holding back the organization, improvement efforts usually must be focused on the constraint in order to be really effective. TOC is implemented through three measures: throughput, operating expenses, and inventory. Throughput is the rate at which the system generates money through sales and as defined by Goldratt, throughput is revenue less direct materials. In order to increase the throughput, all bottlenecks of the system should be identified and the management should focus on improving the efficiency of the...
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