School of Business and Economics

University of San Carlos

P. Del Rosario St., Cebu City 6000
Cebu, Philippines







Just in Time Manufacturing System
A Special Topic in Cost Accounting 2







In partial fulfillment of the requirements for the course
AC 512: Cost Accounting, Part 2







Presented by


BURGAS, JHENNEL
CASINO, EMIRUFF OLEGARIO
NACUA, LORLEE
YAUNA, MICHAEL BENEDICT
MWF 7:30 8:30 p.m.




September 30, 2011
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JUST IN TIME MANUFACTURING SYSTEM

What is Just in Time Manufacturing or JIT?
A corporate system designed to produce output within the minimum lead time and at
the lowest total cost by continuously identifying and eliminating all forms of corporate
waste and variance.
It is a production and inventory control system in which materials are purchased and
units are produced only as needed to meet actual customer demand
A corporate strategy and a philosophy
The focus of JIT is to eliminate variance & waste

Objectives of JIT
Produce only the products the customer wants.
Produce products only at the rate that the customer wants them.
Produce with perfect quality
Produce with minimum lead time.
Produce products with only those features the customer wants.
Produce with no waste of labor, material or equipment -- every movement must have
a purpose so that there is zero idle inventory.
Produce with methods that allow for the development of people

Philosophy of JIT
JIT means getting the right quantity of goods at the right place and right time
All waste must be eliminated- non value items
Broad view: that entire organization must focus on serving customers
JIT is built on simplicity- the simpler the better
Focuses on improving every operation- Kaizen
Install simple visible control systems
Flexibility to produce different models/features

The main benefits of just in time manufacturing system are the following:
1. Funds that were tied up in inventories can be used elsewhere.
2. Areas previously used, to store inventories can be used for other more productive uses.
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3. Throughput time is reduced, resulting in greater potential output and quicker response to
customers.
4. Defect rates are reduced, resulting in less waste and greater customer satisfaction.

Disadvantages of using the just in time system:
1. Implementing thorough JIT procedures can involve a major overhaul of your business
systems- it may be difficult and expensive to introduce.
2. JIT manufacturing also opens businesses to a number of risks, notably those associated
with your supply chain. With no stocks to fall back on, a minor disruption in supplies to
your business from just one supplier could force production to cease at very short notice.


KANBAN SYSTEM

A Kanban system is a means to achieve just in time (JIT) production. It works on the basis that
each process on a production line pulls just the number and type of components the process
requires, at just the right time. The mechanism used is a Kanban card. This is usually a physical
card but other devices can be used Two types of such cards are usually used.

KANBANS simplify day to day flexibility, and changes to the production schedule need only to
be given to the final assembly process and will then automatically work their way back up the
line. Kanban systems can be tightened by removing cards or by reducing the number of parts
on pallet. The effect will be to speed the flow through the process and hence reduce lead time.
However it also makes the system more vulnerable to breakdowns and other causes of
dislocation. By identifying the areas within the line that are causing disruption, efforts can be
made to improve them. Thus the overall efficiency of the line is raised by tackling the key points.

Advantages of KANBAN:
Low costs associated with the transfer of information
Provides quick response to changes
Delegates responsibility to line workers
It is a simple technique not involving computers so its cost is low.
Lead times are reduced.

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Disadvantages of KANBAN:
It is less effective in shared-resource situations. Suppose the upstream station made
several parts. Then a request to make more of the part needed by the downstream
station will have to wait if other parts have to be made. A buffer is needed to ensure the
downstream station doesn't run out meanwhile. And, because each part needs a
separate signaling card, the system becomes more complex than if the resources were
dedicated.
Surges in mix or demand cause problems because KANBAN assumes stable repetitive
production plans. It is less suited to industries where mix and volumes fluctuate.
KANBAN in itself doesn't eliminate variability, so unpredictable and lengthy down times
could disrupt the system; poor quality in terms of scrap and rework also affect its good
functioning.
KANBAN systems are not suited for manufacturing environments with short production
runs, highly variable product demand, poor quality products, and a multitude of product
types.
A breakdown in the KANBAN system can result in the entire line shutting down.
The throughput of a KANBAN system is not managed but is instead a result of controlled
WIP and known cycle times.


TRADITIONAL COSTING SYSTEM vs. JIT COSTING SYSTEM

Concept Traditional Costing
JIT
(Lean Enterprise)
Original purpose
Inventory valuation and matching
& overall profit
Reduce waste & increase
efficiency
Expanded purpose
Management control - variance
analysis
System philosophy of Continuous
improvement
Short or long run
orientation
Short run emphasis with long run
implications
Long run improvement
Main focus or concept
Production and value added by
production departments
The whole system:
interdependence, cooperation &
synergy
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Production control or
emphasis
Push system with emphasis on
labor efficiency & production
volume
Pull system using kanban
authorizations to produce
Overhead cost
allocation emphasis &
drivers
Allocate using production volume
based drivers
Assign costs based on cycle time
in the cells
Product costs
accuracy
Not accurate - distorted Fairly accurate
Inventory levels High Minimum to zero
Waste Price and quantity variances Emphasis on eliminating
Capacity focus
Labor & machine utilization,
production volume variances
Measured by cycle time.
Emphasis on balancing capacity &
the flow of work
Quality of conformance Inspect to find spoilage Quality at the source, Jidoka
Effect producing
excess inventory has
on profit
Increases profit
Using throughput costing it
decreases profit
Performance
Measurements
Mainly financial measurements,
i.e., variances, Net income and
return on investment
Non-financial measurements such
as cycle time, on time delivery,
quality (% defects) inventory turns
as well as unit costs


VALUE ADDED & NON-VALUE ADDED ACTIVITITIES

Only when you have identified your non-value added activities in your process can you reduce
or eliminate them. During this cycle time analysis one identifies and eliminates bottlenecks,
decreases wait or queue time, increase process frequency, simplifies the process, allows more
time for conducting value added work.

Value adding activity
Providing worth or merit to an activity as defined by the customer. Activities must be performed
to meet customers CTQs. Actions are value added if the customer cares, if something is
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physically changing for the best and you do the step right the first time. Value added activities
essentially change the product or service and the customer is willing to pay for them.

An activity is considered value adding if it satisfies all three of these requirements: (1) the
customer is willing to pay for the process or activity, (2) the process or activity physically
changes or transforms the process or activity, and (3) the process or activity is performed
correctly the first time its undertaken. These activities generate a positive return on investment
and resources and cannot be eliminated without impairing the production process.

Non-value adding activity
Actions or activities in a process, procedure, or service that do not add value or conformance to
the external customer, (customer requirements), or company and do not meet all criteria
for value-adding which includes rework, inspection, control, and the like. These are usually not
profitable activities, for example scrap. One major goal of any six sigma endeavor is to reduce
any activity that does not add value.

Some non-value adding activities are necessary and cannot be avoided. One needs to look at
these activities to see if they could be included in value adding activities or eliminated which
should aid to reduce the cost and get a better return on investment.

Non-value added activities typically comprise 90% of total product cycle time. These should be
eliminated, reduced and simplified.

Some examples of non-value added activities:
Bottle necks on production lines
Cant find things or lost or misplaced material or equipment. For utensils and
equipment use shadow boards (place of everything and everything in its place)
Mistakes like using expired material
Too much sampling and testing
Unorganized work areas and lack of housekeeping
Unavailability of information
Too much travel distance/time due to poor lay out on shop floor
Reworks and sorting defect material
Not doing things right the first time
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Unnecessary equipment stoppages or manufacturing downtime
Lack of materials or manpower hindering operation f low
Unlabelled or unidentifiable material
Running out of consumables (order in advance)
Too long or insufficient set up times
Continuous state of performing emergency fixes to problems
Ineffective or lack of planning
Generating too much waste and scrap material
Human non-value added activities are mistakes, forgetfulness, poor communication,
indecisiveness, no authority to take action
Untapped personnel or not using peoples expertise
Over processing
Over production and holding too much inventory Unscheduled machine maintenance
or repairs
Transportation problems
Incorrect storage conditions where FIFO (First in First Out). Point of Use storage
might eliminate warehousing and non-value added handling or waiting time
Using ineffective equipment e.g. equipment not intended for use
Unskilled and untrained personnel
Queue or waiting
Unreliable suppliers
Unnecessary machine change over
No safety stock
Producing incorrect yields
TIMWOOD seven wastes: Transportation, Inventory, Movement, Waiting, Over
processing, Overproduction, Defects.

4 MEASURES OF JUST IN TIME SYSTEM PROCESS PERFORMANCE

I. Manufacturing Cycle Efficiency

Manufacturing Cycle Efficiency is value added time as a percentage of throughput time or value
add (VA) time divided by non-value add(NVA) time. That is, in the entirety of a process flow or
value stream flow, the total of value added time divided by the total of non-value added time.
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Basically this breaks down to the time spent actually working on the product divided by the time
spent working on the product, time spent on inspecting the product, time spent on moving the
product and time a product spend waiting to be worked on.

Formula:
MCE = Value-added time / Throughput time

If the MCE is less than 1, then non-value added time is present in the production process. An
MCE of 0.5, for example, would mean that half of the total production time consisted of
inspection, moving, and similar non-value-added activities. In many manufacturing companies, it
is less than 0.1 (10%), which means that 90% of the time a unit is in process is spent on
activities that do not add value to the product. By monitoring the MCE, companies are able to
reduce non-value-added activities and thus get products into the hands of customers more
quickly and at a lower cost.

Example
Calculation of Manufacturing Cycle Efficiency:
Novex Company keeps careful track of the time relating to orders and their production. During
the most recent quarter, the following average times were recorded for each unit or order:
Wait time 17.0
Inspection time 0.4
Process time 2.0
Move time 0.6
Queue time 5.0
Goods are shipped as soon as production is completed.

MCE = Value-added time / Throughput time
MCE = 2.0 days* / 8.0 days**
= 0.25

*Only process time (2.0 days) represents value-added time
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**Throughput time = Process time + Inspection time + move time + Queue time
= 2.0 days + 0.4 days + 0.6 days + 5.0 days
= 8.0 days


II. Delivery Cycle Time

The amount of time from when an order is received from a customer to when the completed
order is shipped is called delivery cycle time. This time is clearly a key concern to many
customers, who would like the delivery cycle time to be as short as possible. Cutting the delivery
cycle time may give a company a key competitive advantage - and may be necessary for
survival. Consequently, many companies would include this performance measure on their
balanced scorecard.

Delivery Cycle Time and Throughput (Manufacturing Cycle) Time












Formula:
Delivery Cycle Time = Wait time + Throughput time


Calculation of Delivery Cycle Time:
Novex Company keeps careful track of the time relating to orders and their production. During
the most recent quarter, the following average times were recorded for each unit or order:
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Wait time 17.0
Inspection time 0.4
Process time 2.0
Move time 0.6
Queue time 5.0
Goods are shipped as soon as production is completed.

Delivery Cycle Efficiency = Wait time + Throughput time
= 17.0 days + 8.0 days*
= 25.0 days

*Throughput time = Process time + Inspection time + move time + Queue time
= 2.0 days + 0.4 days + 0.6 days + 5.0 days
= 8.0 days


III. Throughput (Manufacturing Cycle) Time

The amount of time required to turn raw materials into completed product is called throughput
time, or Manufacturing cycle time.

The throughput time or manufacturing cycle time is made up of process time, inspection time,
move time, and queue time. Process time is the amount of time work is actually done on the
product. Inspection time is the amount of time spent ensuring that the product is not defective.
Move time is the time required to move materials or partially completed products from
workstation to workstation. Queue time is the amount of time a product spends waiting to be
worked on, to be moved, to be inspected or to be shipped.
Only one of these four activities adds value to the product - process time. The other three
activities - inspecting, moving, and queuing - add no value to the product and should be
eliminated as much as possible.

Formula:
Throughput time = Process time + Inspection time + move time + Queue time
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Calculation of Throughput Time or Manufacturing Cycle Time:
Novex Company keeps careful track of the time relating to orders and their production. During
the most recent quarter, the following average times were recorded for each unit or order:
Wait time 17.0
Inspection time 0.4
Process time 2.0
Move time 0.6
Queue time 5.0
Goods are shipped as soon as production is completed.

Throughput time = Process time + Inspection time + move time + Queue time
= 2.0 days + 0.4 days + 0.6 days + 5.0 days
= 8.0 days


IV. Velocity

There is an important and direct relationship between the size of WIP and the speed of
production. If the rate of output is maintained while the number of units in process is cut in half,
then the speed of the system has been doubled. As long as the rate of output is held constant,
reducing the number of units in process and increasing the speed of the system are one and the
same. The speed which units or tasks are processed in a system is called the velocity and is
inversely related to the throughput time.

A strategic benefit of increased velocity is the reduced time needed to fill production orders.
Velocity improvement can be extended forward to finished goods inventory and shipping. The
result is a shorter total lead time for responding to any change in customer tastes or opportunity
for a new product or product variation. Reducing cycle time or increasing velocity means
reducing cost and increasing competitiveness.

An increase in velocity results in the reduction of throughput time or the manufacturing cycle
time that entails reducing duration and costs of set-up. Suppose the annual carrying cost is 25%
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variable production cost and the variable cost of average WEP is $200,000. With JIT, the
company would be able to double the velocity by cutting average batch size in half. Average
WIP will be reduced by half, producing savings of $25,000 (25% x $200,000) in annual carrying
cost.


PROCESS PRODUCTIVITY AND QUALITY YIELD

Process productivity refers to the total units started during the period divided by the value
added processing time while process quantity yield is the proportion of goods units resulting
from activities.