Just-in-Time Inventory Management

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Just-in-Time is an inventory management philosophy that aims to reduce inventories by implementing systems and processes to supply a product or service exactly when it is needed, and how it is needed in the production process. The concept of JIT is widely accepted today by many American manufacturing companies, and it is a means of controlling costs through striving to maintain lean inventories—in fact, the concept of JIT was introduced in the early 1980’s to the U.S. as a concept know as “zero inventories”. This inventory control concept involves close relationships with vendors or suppliers, who are able to provide components of the product direct to the work-in-process area, in a “pull” type fashion, whereby the components are delivered immediately before they are required. Since the introduction of the JIT concept, it has evolved to become a management philosophy that requires a corporate-wide commitment to do a process right the first time, and to reduce non-value added activities in the manufacturing process. Because the concept largely centers on this element of focusing on the elimination of waste in the manufacturing process, the JIT concept emphasizes the need for the supplier and the receiver of goods to never have to wait on the other. Ideally, the concept is beneficial to both supplier and manufacturer in this way, because it allows both companies to reduce their Work In Process (WIP) and finished goods inventory, while reducing inefficiencies and bottlenecks in the system—thus cutting costs and improving profitability.

The first article pertaining to JIT discusses practical application of JIT methods in the health care industry, titled “Applying Just-In-Time Systems in Health Care”, from the magazine, IIE Solutions. The article describes the opportunities that exist in health care organizations in general, to implement JIT type practices to help improve profitability and work flow. In general, the opportunities that exist for a service organization to implement a JIT strategy involve an approach that breaks down specific services into “manufacturing like” processes. There are many opportunities in service organizations to apply JIT concepts, but the health care organizations that are best suited for JIT management or those companies that have operations that are repetitive and reasonably high volume dealing in tangible assets. According to the article, examples of JIT opportunities in health care include: central supply warehouses, materials management and pharmacies, and nursing staff scheduling. The most obvious candidate of these for opportunities to apply JIT management to is the area of materials management and pharmacy, because it clearly involves the flow of material and tangible goods. In order to help maintain low inventories of medical supplies and pharmaceuticals, hospitals use JIT philosophy to reduce their overall number of suppliers, pick suppliers that are consistent and reliable, and close in proximity to the facility. In addition, many hospitals receive material goods six days a week, and develop a “community” strategy whereby hospitals are networked together to share pharmaceuticals with one another, as well as local pharmacies to ensure that they can deliver life saving drugs to their patients, without stocking high inventory levels. Accounting implications of using a JIT system in the health care industry are similar to those in a manufacturing organization. According to this article, manufacturing organizations often use process costing, where unit costs are calculated by dividing production costs of a period by the output of that period. In a process costing system, it is important to have homogenous processes, and while certain business activities in a health care system are similar, the clinical aspect of health care are more unique and therefore a challenge to group into a process costing system. The article concludes with a cautionary perspective on implementing...
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