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This report discussed the implications of just-in-time on Sony laptop manufacturing facility. Just-in time is a method widely used in management accounting which emphasises on inventory control with the prime goal of achieving zero inventory, not just confined to a single organisation but to the entire supply chain (D. Hutchins, 1999). By reducing inventory the company aims to reduce any carrying costs. This concept is combined with a product costing approach of backflush accounting in which final costing of the product is delayed until the goods are finished hence making the company more cost efficient. This approach reduces the risk associated with the fluctuation in raw material prices.
JIT's philosophy strives towards the total elimination of waste as it incorporates Lean manufacturing as well. This waste can be categorised in different ways (A. Harrison, 1992):
Overproduction can be described as the greatest source in which more is produced than needed. In other words ignoring the principles of demand and supply. To overcome this, a product is produced only when the customer needs it.
Waiting time can be described as idle time incurred in manufacturing due not fully utilising machine or labour hours. This does not add value and hence a waste.
It is important to use efficient transport means as it may add to increased storage space and the whole concept of minimising inventory may not help in cutting costs after all.
Processes can add a lot of waste. This may include waste in design and maintenance and moreover waste which can be generated by processes which are too big, too fast or too variable.
The core waste which the JIT emphasises to get rid off. An average company can be distinguished from an excellent company by just looking at the amount of inventory they posses. As large sums of inventories point towards the possible problems of equipment breakdown, poor coordination between processes or lengthy setup times.
The workforce might be in motion but not doing their respective jobs. Simplification of work by improved jigs and fixtures is a rich source of reduction in the waste of motion.
Cost of defective goods can be huge if they get out into the field and cause customers not to buy that product again. The recent case of defected goods which includes Toyota, a pioneer in JIT is a perfect example. The internal or the tangible cost of those defects can be calculated but the damage to the brand caused by such a defect can be huge and will be difficult to calculate.
Backflush accounting goes hand in hand with JIT. Backflush as explained earlier is a method of pricing applied only to the finished products. In this way Backflush tries to reflect the real prices in the market. The procedure in which this method is applied is not as straight forward as it sounds. The cost of completed work is deducted from the combined work in progress account and debited to the cost of sales. The work at the end of the period is than valued based on the estimates at the end of the same period of raw material or conversion cost components. A physical count is done to prepare these valuations (M.L. Inman, 1997).
2.0 Strategic Decisions
Existing practices in Sony are far from efficient. Their existing inventory management method uses demand information creation system which collects data about the sales of products. This data is then used to predict future sales for about 33 weeks in advance. Cross checks are then performed within the system to make sure if the product is available in the inventory for that period or not (fujitsu.com). This method of accumulating inventory reduces the working capital in a company. The decrease in working capital means that the cashflow of a company is disturbed and ultimately financing of new projects might be delayed.
Moreover this also creates a problem of product costing. Raw materials used to make products if bought cheaper might become expensive in near future but the company might not be able to transfer the extra cost to the customer as the price of the product is set in the market and people will be reluctant to pay premium on a product which is might be nearing its lifecycle.
Implementing just-in-time and backflush accounting techniques may well prove to be useful especially in this scenario. It can be applied in a step by step process (nzqa.gov.nz):
Demand Indicator: There should be an indicator to show the demand of a product in order for the company to decide whether to produce the product or not and most importantly how much to produce. This system should be efficient to the outmost so that inventory should be controlled.
Flow authorisation: A system which informs the worker to make a product without any other authority interfering in the system. This system of flow should be maintained from the very start which will include efficient transport, efficient workforce and above all a robust company hierarchy which is capable of making strategic decisions in a short space of time.
Kanban: It is a system to trigger action. This system traditionally uses cards to signal the need for an item. After fully implementing kanban, all manufacturing and procurement are ultimately driven by the requirements of final assembly.
Pull System: This system is demand driven and hence products are produced on demand rather than on a push system in which production is based on sales forecast.
Procedures: JIT cannot be achieved without the smooth following of procedures. Simple instructions and a trained workforce are essential for the smooth flow.
3.0 Implementation and Case Study
JIT and backflush can be beneficial for our company in a number of ways (tutor2u.com):
Lower inventory means a reduction in storage costs
This automatically increases the working capital
Less stock decreases the possibility of inventory being obsolete or worn out
Coping with changing demand becomes easier to handle
It emphasises on doing right first time as items are produced after they are ordered which eliminates the chances of waste.
Changes in the prices of raw materials can be transferred to the consumer as product costing occurs after it is finished
It simplifies costing as it ignores both labour variances and work-in-progress(WIP)
JIT and backflush is being implemented by Dell Inc. And the results have been extraordinarily good. Dell follows a systematic procedure. It consists of a network strategically located across the globe. These include manufacturing centres for assembly of custom configured products. All of the Dell manufacturing centres use the same processes, enabled by the same systems and are measured the same way. This allows uniformity in all of Dell's manufacturing plants. After receiving the order it is transferred to the manufacturing facility which is closest to the shipping destination. At that point all the orders are sequenced into the production schedule every two hours. Moreover the built to order process generates requests for materials required for customers orders every two hours. Material is delivered to the factory and since there are no warehouses, inventories are low. Hardware fitting and software installation is done through a systematic process. After everything is done, the boxes are then sealed and either shipped straightaway or to an accumulation area. This built-to-order system keeps the inventory low (Dell.com).
This whole process is a testament to the JIT system which makes sure that the product is produced only after it is ordered according to the pull system and the materials are transported to the facilities when they are required.
4.0 Limitations of JIT
Although there are numerous benefits of JIT cited frequently, but there are some short comings which are shown as follows:
The primary limitation of the system is its dependence on historical demand. Change in demand can affect the process severely.
Industries are used to store huge inventories for backup for rough times in future don't find JIT system attractive. Safety stocks can act as a shock absorber for companies which overcome the problem of inaccurate demand.
Apart from the variation in demand, unexpected events like workforce strikes or natural disasters can put an additional strain on resources. This may lead to production facilities being on a stand still.
The benefits associated with JIT might be culturally bound and might not work in western economies.
5.0 Role of Management Accounting
Management accounting is concerned with the provisions and use of information to managers within the organization. It provides managers information which helps them in making business decisions and control. In just-in-time it is more concerned about how waste can be eliminated and how business processes can be streamlined through the use of management accounting. The job of a management accountant is therefore seen as value creators amongst the accountants. They are more focused on forward looking and taking decisions which will affect the future of the organization rather than historical record keeping.
The thing which connects management accounting with just-in-time and backflush is lean accounting. Simplification of existing systems and making it more cost efficient is the basic aim of this accounting. It advocates against the use of cost drivers. These cost drivers are neglected as it adds to nothing but makes the process more complex. Moreover it also makes sure that inventories are kept low (cimaglobal.com). This inventory strategy that strives to improve a business's return on investment by reducing in-process inventory and associated carrying costs. A second thing is to provide estimates of the cost of setting each production unit run at a plant, the cost of holding stock and downtime. The Cost of setting up machines is similar to economic order quantity. When the costs of downtime are high, there can be sizable benefits from maintaining continuous production.
The activities management accounting provides forecasting and planning, performing variance analysis, reviewing and monitoring costs inherent in the business are ones that have dual accountability to both finance and the business team.
Just-in-time and Backflush accounting techniques stress on making a business as simple as possible. Eliminating waste and streamlining business processes are the core principles of these techniques. Looking at the facts and figures of the two company's inventory in Appendix B it is evident that by applying these techniques company can get access to more working capital as the capital is not tied up in huge inventory. Even worrying is the risk of inventory losses due to change in demand or buying behaviour and this risk can be eliminated by applying pull factor rather than a push factor.
In a nutshell, company can increase its profits and become efficient. It can also be able to respond to changes in demand more quickly as compared to if existing practices are applied. Hence all in all it would be highly beneficial for our company to embark on this project of applying Just-In-Time and Backflush accounting.