Presentation (Inventory).ppt

Inventory
The term inventory is a designation for the goods that are held for sale, are in
production or are to be placed in production. Firms also maintain a fourth kind of
inventory, supplies or stores and spares. Supplies include office and plant cleaning
materials like soaps, brooms, oil, fuel, light bulbs etc. These materials do not directly
enter production, but are necessary for production process. Usually these supplies are
small part of the total inventory and do not involve significant investment. Therefore, a
sophisticated system of inventory control may not be maintained for them.
Importance of inventory control:
Inventory is an important item in any business. It constitutes a major portion of the
current assets. So, it is important to control the amount of inventory. A business firm
should control the different aspects of inventory such as its volume of purchase, time of
purchase, frequency of purchase, safety stock etc. The importance of inventory control
is described below:
1. Ensures prevention of excess inventory.
2. Ensures that stock will never be exhausted.
3. Prevents from purchasing goods at higher price for small purchases.
4. If there is no tight inventory control system then excess inventory may be stocked.
5. Stock will be at desirable amount so that production is not stopped.
6. Proper inventory control helps business firms to keep the inventory at the desired level.
7. Economy in purchase can be attained if inventory is controlled properly.
8. Order supply to buyers can be ensured.
9. Unforeseen contingencies can be handled.

10. Better services to customers can be provided .
11.Carrying and ordering costs can be kept at the minimum.
12. Investment in inventory can be controlled.
Why do we hold inventory?
1. Transaction motive: Emphasizes the need to maintain inventories to facilitate
smooth production and sales operation
2. Precautionary motive : This motive necessitates holding of inventories to guard
against the risk of unpredictable changes in demand and supply forces and other
factors. [ Risk and uncertainty of demand and supply]
3. Speculative motive : This motive influences the decision to increase or reduce
inventory levels to take advantage of price fluctuations. [Plague-Tettracyclin, Flood
- Rice.
Inventory Management Technique:
1. When to order
2. How much to order
Advantages of inventory control:
1.Buying Economy. Quantity discount., EOQ.
2. Centralized buying prevents duplication of purchase .
3. Interdepartmental transfer becomes easier.
4. Loss arising from return inward, wrong counting, physical loss , time of
claiming loss can be reduced.
5. Time lag between receipt of goods and completion of production reduces.

6. Helps cost accounting department by dividing the expenses between production
order and production department.
7. Provides data for preparation of financial statement.
8. Keeps the investment in inventory at minimum by stating the amount of safety stock.
, maximum stock, slow moving item and stopped items are also known from the
inventory control department .
9. Removes traditional inventory control system
10. Morale of employee improved . They get raw material inventory at the right time.
Thus they may desire to increase production.

Factors essential for the success of JIT
As has been mentioned earlier in this paper, there is no room for defective production in
a JIT system. The production process is designed in such a way that inputs to the nest
process are made available as soon as they are needed. This efficiency, however, is not
achieved easily. There is a crucial need for rigorous planning and careful consideration
of the factors that add to the success of JIT. The following factors among others merit
consideration.
A. Identification of Cost Accelerators
There are many costs that are added to the cost of the product. But all of these costs do
not increase the worth of the product. A product passes through several processes
before taking the shape of a final product. For example, a product requires processing,
inspection move time, queue time, and storage time. But only processing adds to the
value of the product. Other cost elements are only cost amplifiers. So, in a JIT system,
JUST-IN-TIME INVENTORY SYSTEM: PROBLEMS AND PROSPECTS FOR
MANUFACTURING FIRMS
What is JIT
Originating in Japan, JIT inventory system primarily aims at minimizing the stock of raw
materials , work-in-process and finished goods. Most Japanese manufacturing firms
believe that a build up of inventory is something wrong, arising due to inefficiency in
procuring ,production and marketing. In JIT approach, planning is done in a manner
such that raw materials , parts, sub-assemblies , both manufactured in-house, and
procured from outside arrive at the shop-floor, just at the time they are needed—no
sooner and not later. This implies that the lead time is minimal and in fact in JIT , the
ideal lead time is aimed at zero.

the costs that do not create value for the product are reduced to the minimum.
Companies like Hewlett Packard, Harley Davidson, Omark Industries and other
successful JIT users have undertaken studies to identify the causes that increase costs.
(3) This increase in costs results from the inefficiencies inherent in product design and
manufacturing process. So, these companies reduced engineering changes and part
numbers which consequently reduced financial problems relation to stock
obsolescence, storage and other costs associated with it. Number of vendors were
reduced and resulted in improved quality and delivery schedules (4).
B. Control over Production
Another factor that needs to be considered is control over the production process. In
case of traditional production processes with long production cycles, there are large in-
process inventories and the actual time spent on a product is often less then 5% of p
production cycle’s length. Inventories need to wait to be worked on (5). “With JIT, large
inventory queues don’t exist, so the production cycle can often be reduced by 90% or
more. The production schedules really mean something and expediting is no longer
possible (6). “
In a JIT system, strict accountability is observed. So, the materials department will
supply raw materials to the production department in time. They will devote more time
to purchasing so that materials arrive on time. The success of JIT depends on
shortening the actual production cycle. This strategy will reduce inventory, and improve
the flow of materials through the production system. The accurate matching between
material planning and production cycle enables the firm to reduce the inventory to a
minimum level.

In JIT environment, the right item is produced at the right time and in the right quantity.
To achieve this goal, accurate information regarding the quantity of materials needed
and time when they will be needed is necessary.
Manoocheri (7) echoed the came kind of sentiment stating that smoothening of
production is a necessary condition for the implementation of JIT system. He asserts
that production at the final assembly line has to be smoothed in order to prevent
unexpected variance in production.
Another problem of the production process that needs attention is the long set-up time
that is quite uneconomical for producing products in small lots. The set-up time must be
reduced substantially to achieve the benefits of JIT. The Japanese have been able to
reduce the set-up time by using techniques like calibrated toll setting and they rely on
offline tool set-ups. Innovative manufacturing engineers are essential for the
accomplishment of this task (8).
C. Worker Participation and Group Technology
Another essential condition for the implementation of JIT is the introduction of group
technology in grouping different machines so that larger tasks can be performed by the
group or work center without moving large lots of work-in-process components (9).
Since the norm is to produce in small lots, work flows quickly on a common routing
through a set of machines. The workers must also be able to work at work centers
rather than on machines. These processes helps reduce defects which are identified tin
their early stage. The workers are multifunctional. They do not become bored because
they perform different tasks rather than performing a repetitive single task. Monden has
noted a case of machine set-up in a Japanese auto company in which a

single worker interfaces with 16 simple machines which perform different operations
(10). Another blessing of group technology is the reduction in set-up time and
improvement of production efficiency. The Japanese view “group technology as an
important step towards achieving JIT production” (11).
Group technology is opposed to functional technology whereby each worker finishes a
part. As a result, greater lead time is required. Worker’s participation is also a must for
the implementation of JIT since they will have to accomplish the task.
The JIT system can be viewed as a source of motivation for workers. Under this
system, workers have increased authority and responsibility. A worker can stop a
product line if he falls behind of discovers a defect in the product or sub-assembly.
Employees can get help from other people in times of need.
“In studying the secrets of the success of Japanese companies, one factor very
frequently referred to is the high quality of the workers, their loyalty, dedication,
motivation, high performance, and cooperative attitude (12). Although culture is a
contributing factor, the role of management should not be lost sight of for the creation of
a productive JIT assumes a cooperative workforce. Since there is no inventory, safety
stock and small lot-size, the management has to rely on worker’s high performance,
dedication, overtime production
hours and multifunction skills. Thus the JIT system is designed to enhance workers
capabilities, motivation and involvement, and rely on their contribution. (13)
So, workers participation and group technology are essential prerequisites of JIT
system

D. Preventive Maintenance
In a JIT environment, the output of one machine is the input of the next machine. If a
machine breaks down, then the whole system fails. So, the preventive maintenance of
machines must be emphasized. Since the early recovery from the breakdown is the
desired goal, regularly scheduled preventive maintenance must be in operation. When
the machine breams down, then the whole production line stops and all the workers pay
their attention to the stopped equipment and the person responsible for the breakdown
of the equipment is identified. Consequently, the worker will try to keep his machine in
top operating condition. So, a sense of responsibility to other co-workers must be
injected into the workers for the success of the JIT.
E. High Quality Products
If a company can not produce quality products then it will lose its market to the
competitors who offer quality goods to the market. Quality was not a matter of much
concern in earlier days. There, was a prevailing view that higher quality would increase
cost. But if the quality is not improved for fear or increase in cost, then there is another
cost that is taxing which is the cost of product failure. One of the goals of JIT system is
the zero defects of products. Defective work may disrupt the production process. Since
there is no pile up of inventory to meet the demand, any defective units found in the
process are corre3cted immediately by a fast feedback. In this case management has
to tell the workers that quality is important not the quantity. So, the quality of products
must be ensured for the successful operation of JIT.

F. Good Relation with Supplier
In a JIT system no inventory of raw materials is maintained by the firm. The raw
materials arrive at the right time in the right quantity at the production floor. So, a good
relationship with the supplier is a crucial need for the success of the JIT.
In order to ensure on-time delivery with shorter lead time, a guarantee of a low rejection
rate of the incoming raw materials is a must. In this case, the supplier must perform the
inspection at source. If suppliers make more frequent deliveries, then the manufacturing
firm may be sure of uninterrupted delivery and the need to keep inventory is then
reduced to the absolute possible minimum. Inspection of raw materials at source has a
lot of advantages. If quality of material is ensured by the supplier then the buyer firm
can save a lot of money which is generally spent to arrange to inspect the goods and
other clerical work involved in returning the goods to the vendor. In return for the
improved service, the vendor gets guaranteed business from the buyer’s firm. The JIT
manufacturer looks for a dingle vendor who assures high quality raw materials with
reliable deliveries rather than lower price (14). Thus a high degree of trust and mutual
respect is to be developed between the vendor and buyer firm. This development in
relationship is essential to the success of JIT and beneficial to both buyer and vendor.
G. Management Commitment
Another essential prerequisite for the installation and success of JIT is the commitment
of top management. Commitment is needed for any kind of organizational change but
management must be committed to JIT because of two reasons: First, JIT will expose
manufacturing problems and the management must willingly allocate resources to
solving the problems. An organization with a quality control department is essential for
the JIT system. Second, JIT changes the production process fundamentally. When a

defect is found in the production process, the cause of the defect is identified and
continuous improvement in the production process is focused. Workers think of doing
their jobs better rather than just doing it (15).
H. Early Waning System and Stop Lights
Early warning system is an essential prerequisite for the success of JIT system. JIT
system is based on zero defectives and higher quality. So, immediate reporting must be
made to correct the defectives. There must be a system of stop light to stop the
production line by the workers.
“For example, one of the Hewlett-Packard plants uses red lights and sirens as an early
warning system to achieve total quality control under the JIT system. As soon as a
worker spots a defective part being produced by the assembly line, he pushes a button
to activate the lights and sirens, and to stop the line, an action which draws the
immediate attention of the management. Workflow remains stopped until the problem is
corrected” (16). This problem helps eliminate reworks on defectives which save cost and
staff times to record the costing of defectives. The percentage of good units produced
from the input also increases because of elimination of defective parts.
I. Software Development
In order to switch from batch oriented production to JIT, a manufacturing firm must first
understand the JIT system, its design, feature and operation. This understanding is a
must because JIT is different from batch-push operation. The main idea is that the
manufacturer’s basic philosophy regarding the flow of goods and production has to be
changed. The next step is to synchronize a batch oriented system to JIT production
through manual clerical effort.
Once the operation is stabilized and the company attains a full understanding of the
material requirement, than the company will customize a software system tailored to its
own system.

J. Load of Machines in a JIT System
The machines should be scheduled in such ways that are not overloaded. This
procedure reduces the machine breakdowns and wear and tear of machinery parts.
The under loading of machines in conjunction with preventive maintenance inverses the
lives of the machines. It also helps improve quality control. Error prevention rate is
increased.
FACTORS THAT HELPED JAPAN TO UTILIZE JIT EFFICIENTLY
The Kanban or JIT system has first been by Japanese manufacturing firms successfully.
We can say that circumstances had compelled them to be innovative. They have a
small land mass. So, lack of space compelled them to devise means of solving
problems and utilize the available space efficiently.
Another problem for Japan is that their export market is far away from them. So, they
had to be cost control. Factors responsible for the success of JIT system in Japan will
be presented in the rest of this section competitive and in order to be competitive in the
market place they put greater emphasis on quality.
A. Orderly Workplace
Japanese factories are orderly, quiet and clean irrespective of the industry, the age of
the company of its location. It is the result of their attitude, system and practices. The
plant managers have been applying the system in the workplace for a long period of
time. The workers are assigned the task of keeping the machines and the workplace in
good order. The workers are also trained so that they can correct minor problems that
arise in the course of day-to-day operations. The simple goal of this responsibility and
training is to avoid breakdown of machinery during working hours (17).

B. Fixed Vendor
Japanes factories buy goods from a vendor. They do not use bid process to buy goods.
They emphasize assured on-time delivery of products and so not emphasize low
purchase price. They get the vendor involved in the design of the product. The vendor is
held responsible for delivering quality products and on-time delivery so that no
disruption occurs in the production process of the manufacturer.
C. Workers’ Participation
Japanese workers are committed to the organization. They do not lack job security like
U.S. workers. The mobility of labor in Japan is less than that of U.S.A. The labor
management relation is also close. The authoritarian attitude is absent. The workers
have the fight to stop an assembly line if it is necessary to correct a defective work.
Japanese companies that have used JIT system for five years of more have reported
that their productivity has increased by about 30% (18).
D. Group Technology
Another factor that led to the successful use of JIT is the group technology. The
Japanese think that group technology is an essential step towards achieving JIT
production. Japanese group technology, however, utilizes overlapped pf concurrent
operations. In most cases the overlapped operations utilize “mechanical fingers” that
grasp a single part and convey it to the subsequent operations where the machine
properly positions it for further work. (19) Thus, a high degree of automation is achieved
through the use of overlapped production process winch eliminates the need for human
intervention.

E. Management Circle
The Japanese use the concept “quality circle” which is a part of the production circle.
The employees work jointly on a particular product. This creates fellow feeling for the
workers and when the workers face problems, they solve them jointly. This concept of
participative management contributes to the success of JIT because in a JIT this type of
cooperation is needed to correct the defects of to repair the breakdown or machinery.
F. Reduction in Set-up time
Japan has also been able to reduce its set-up time in production dramatically and
hence costs too. This has been possible due to on-time delivery by the vendor. “The
set-up time for a hood and fender stamping operation in a typical American automobile
plant is six hours. Set-up time is 4 hours in Sweden and West Germany. But Japanese
manufactures have reduced set-up time to as little as 12 minutes (20).”
G. Zero-Defect Targets
The Japanese have fixed a zero-defect target. They do not believe in defects. They are
not satisfied with less than perfection. The Japanese do not express their defect rate in
percentages. They express in parts per million. “It’s not just that we are idealistic”, one
Japanese manager stated, “but we realize that your willingness to stop at 95%, coupled
with our unwillingness to accept 95% is what makes us able competitors (21). Thus,
zero-defect target contributes significantly to quality products and hence the target for
zero inventories is achieved since there is no inventory for defective parts.

PROBLEMS OF INSTALLING JIT ELSEWHERE AND REMEDIES
JIT system organizes the production of standard products, reduces inventory reduces
defects, improves quality and ultimately increases worker productivity. JIT has been
used with much success in Japanese firms and has been a cause of concern for the
U.S. firms are suffering from low productivity in relation to international standards and
are losing market share internationally. Any country, specially development countries,
which have to face international competition should seriously consider using JIT. By this
time some U.S. firms have already installed JIT system. But there are some problems
which are as follows:
1. Labor-management Relations
Labor-Management relations in the U.S. are not satisfactory in relation to that of other
advanced industrial nations. When there is any difficulty in the economy the workers are
set in the front line. The job of workers of the United States is also unsecured, they may
be fired at any time at the whims of management. This situation is also present in most
developing countries.
At the dawn of the industrialization, there was master-slave relationship. Between the
employer and the labor. The introduction of “Implied Employment Contract Doctrine”
established the workers with an “equal footing and with “open eyes by each party (22).
The loyal workforce is a must for the success of JIT because the company has to
depend on labor. Plenert has also concluded that the key to success in production
control is the treatment of people who do the work.

2. Proximity of Supplier’s Firm to the Manufacturing Plant
In order to ensure on-time delivery, the supplier’s factory should be located near the
manufacturing plant. U.S. manufacturing firms are negotiating with their vendors to
relocate their (vendor’s) firms near the manufacturer’s plant. But the vendors will not
agrese with this proposal unless they are given assurance of life-time business (25). Of
course some manufacturing firms like Johnson Controls, Chrysler, Ford, General
Motors, Harley Davidson have been able to get the suppliers to agree to relocate their
(supplier’s) firms near the manufacturers’ plant. (26)
3. Redesigning Production process.
U.S. firms are batch oriented. This production process is not suitable for JIT system. So,
the factory will need some drastic changes in respect of plant lay-out. With the use of
Kanban, factories will not be able to use more than 60% to 70% of their capacity. As a
result there will be some idle capacity. (27)
4. Poor Quality of Goods Supplied by the Vendor
Another problem that the U.S. firms are facing is the poor quality of goods supplied by
the vendor. For example the assembly division of General Motor is emphasizing
statistical quality control competence with every supplier. If it succeeds in doing that
then it will be able to eliminate inspection totally from its plants. (28)

SUGGESTIONS
1. In order to improve the labor-management relationship, and improved labor policy
that will be supported by the labor, government, general public and business should be
framed.
2. Participative management should be introduced that will democratize the workplace.
3. Close relationship with the suppliers must be developed to ensure on-time delivery
of quality products. The vendor should be given training about how JIT work.
4. The plant-layout of the factory should be redesigned and tailored to the JIT systems.
CONCLUSION
Finally, we can conclude that a combination of these steps will create a competitive
force that is very difficult to beat b the competitors. The firms will be able to reduce their
inventory significantly and consequently they will also be able to reduce much of their
non-value adding costs if they can install the JIT in their firms successfully.

Presentation (Inventory).ppt

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