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School of Business and Economics

University of San Carlos

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

Just in Time Manufacturing SystemA Special Topic in Cost Accou nting 2

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

Presented by

BURGAS, JHENNEL

CASINO, EMIRUFF OLEGARIO

NACUA, LORLEE

YAUNA, MICHAEL BENEDICT

MWF 7:308:30 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 corporatewaste 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 achievejust 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 theline. 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 CostingJIT

(Lean Enterprise)

Original purposeInventory valuation and matching

& overall profit

Reduce waste & increase

efficiency

Expanded purposeManagement control - variance

analysis

System philosophy of Continuous

improvement

Short or long run

orientation

Short run emphasis with long run

implicationsLong run improvement

Main focus or conceptProduction 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

accuracyNot accurate - distorted Fairly accurate

Inventory levels High Minimum to zero

Waste Price and quantity variances Emphasis on eliminating

Capacity focusLabor & 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 profitUsing 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 eliminatedwithout impairing the production process.

Non-value adding activity

Actions or activities in aprocess,procedure, or service that do not add value or conformance to

the external customer,(customer requirements), or company and do not meet all criteria

forvalue-adding which includesrework,inspection, control, and the like. These are usually not

profitable activities, for examplescrap.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 beeliminated, 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 onactivities 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:


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


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:


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


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 opportunityfor 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.

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