MODULE 7 - FULL

Just-in-Time (JIT) Systems Overview

• JIT systems aim for zero inventory and perfect quality, responding directly to customer demand.
• Key components include JIT purchasing and JIT production, promoting lower investment, space savings, and increased flexibility.

Traditional Inventory Management Systems

• Traditional systems rely on estimated production quantities to meet anticipated sales demand.
• Management typically ensures sufficient inventory of raw materials and finished goods to avoid shortages.
• Efficient management focuses on minimizing production costs through longer production runs and economic order quantities for bulk purchasing.

Introduction to JIT

• JIT is a pull system where production is driven by actual demand, as opposed to a push system that relies on stock buffers.
• A JIT purchasing system synchronizes material delivery with usage to reduce costs associated with holding inventory.
• Non-value-adding activities are minimized, aiming to eliminate waste and improve overall production efficiency.

Essential Elements of JIT

• Close supplier relationships are vital for quality and timely delivery.
• Uniform loading and reduction of setup times promote seamless production processes.
• Preventative maintenance is essential for ensuring operational reliability.
• Employee involvement and training contribute to a more flexible workforce capable of performing multiple roles.

Value-Added Activities in JIT

• Value is only added during active processing of products; activities like storage, inspection, and transport do not add value.
• Non-value-added activities should be eliminated to enhance efficiency and reduce costs.

Problems Associated with JIT

• Predicting demand patterns can be challenging, potentially leading to stockouts.
• JIT increases vulnerability to supply chain disruptions, demonstrated by events like the Kobe earthquake and the 2011 Japanese tsunami.
• JIT may not be suitable for all industries, particularly those with complex supply chains or critical inventory needs, such as healthcare.

Inventory Control Levels

• Inventory costs include purchase, holding, ordering, and stockout costs; effective management is critical.
• Holding inventory serves multiple purposes, including meeting demand, providing process buffers, and exploiting bulk discounts.

Critical Inventory Control Levels

• Reorder Level: Trigger point for new orders, calculated as maximum usage multiplied by maximum lead time.
• Minimum Level: Warns of potential stockouts, calculated as reorder level minus average usage during average lead time.
• Maximum Level: Indicates potentially excessive inventory; calculated using reorder level, reorder quantity, and minimum usage during minimum lead time.

Economic Order Quantity (EOQ)

• EOQ minimizes total inventory costs by determining the optimal order quantity.
• A well-managed EOQ leads to a balance between ordering costs and holding costs, optimizing inventory levels.

Summary of Inventory Management Techniques

• Effective inventory management is essential for maintaining a balance between costs, quality, and customer satisfaction.
• Techniques such as monitoring demand patterns, supplier relationships, and employing modern inventory systems (like JIT) can dramatically affect a company's efficiency and responsiveness to market trends.### Economic Order Quantity (EOQ)
• EOQ helps determine the optimal order size to minimize total inventory costs.
• Average inventory is typically half of the reorder quantity unless buffer or safety inventory is maintained.
• Holding costs rise with inventory levels; smaller orders can reduce these costs.
• Ordering costs, influenced by order frequency, include various administrative expenses and increase with smaller order quantities.
• EOQ can be visually represented in tables, graphs, or calculated using a formula.

EOQ Calculation Examples

• Type 1: EOQ Table Method

  • Example: Raw material cost is 16perunitwithanannualdemandof25,000units,holdingcostof16 per unit with an annual demand of 25,000 units, holding cost of 16perunitwithanannualdemandof25,000units,holdingcostof6.40, and order cost of $32.
  • EOQ determined as 500 units where total annual relevant costs are minimized.

• Type 2: EOQ Graph Method

  • Holding costs increase with order quantity, while ordering costs decrease; EOQ is found where both intersect, also at 500 units.

• Type 3: EOQ Formula

  • Formula: ( EOQ = \sqrt{\frac{2C_0D}{C_H}} ) where:
    • ( C_H ) = holding cost per unit,
    • ( C_0 ) = ordering cost per order,
    • ( D ) = annual demand.

Other Inventory Control Systems

• Order Cycling Method

  • Reviews inventory quantities periodically; for low-cost items, may order based on a 90-60-30 day cycle.

• Two-Bin System

  • Utilizes two storage bins; when one is empty, an order for replenishment is triggered. It is straightforward but may lead to inefficient inventory levels.

• Classification of Materials (ABC Method)

  • Classifies items as A (expensive), B (medium cost), and C (inexpensive) for tailored inventory control based on cost sensitivity.

• Pareto Distribution

  • Emphasizes that 80% of value is derived from 20% of items; critical items should be closely monitored.

Pricing Approaches

• Cost-Based Approaches

  • Many companies utilize a cost-plus pricing strategy to determine prices, primarily influenced by full costs.

• Full Cost-Plus Pricing

  • Sets selling price by adding a profit margin to the total cost of the product; considers production, administration, and selling expenses.

• Drawbacks of Full Cost Approach

  • Fails to factor in demand-driven pricing, potentially leading to misalignment with market conditions.

• Marginal Cost-Plus Pricing

  • Pricing based on variable costs plus a profit margin; encourages attention to contribution margins and flexibility in response to sales volume changes.

Market-Based Pricing Strategies

• Product Life Cycle Stages

  • Introduction, Growth, Maturity, Saturation/Decline; informs pricing policies through each phase of product life.

• Market Competition Types

  • Perfect Competition: Many sellers and buyers, no influence on prices.
  • Monopoly: One seller dominates pricing.
  • Oligopoly: Few companies influence market prices through competitive reactions.

• Price Leadership

  • Major firms may establish prices that others follow, promoting stability in oligopolistic markets.

• Market Penetration Pricing

  • Launches products at low prices to gain market share quickly.

• Market Skimming Pricing

  • High initial prices to maximize early profits, then gradually reducing prices as the product matures.

• Differential Pricing

  • A strategy where the same product can be sold at different prices to various customer segments.### Pricing Strategies

• Prices can be set based on various factors including market segment, product version, geographical location, and time of service.

• Airlines may charge different fares in different countries, such as Australia and New Zealand.

• Services like cinemas and hairdressers often provide discounts for seniors and juveniles.

• Car models frequently offer 'add-on' extras, allowing brands to cater to diverse customer preferences despite higher overall prices.

• Theatre ticket prices vary by seat location, demonstrating a common form of price discrimination.

• Railway companies employ price discrimination, charging more during peak times when demand remains high.

Price Elasticity of Demand

• Price elasticity of demand (PED) quantifies the change in quantity demanded due to price changes.
• The formula for PED is the percentage change in sales demand divided by the percentage change in sales price.
• Demand is elastic when a small price change leads to a significant change in demand (PED > 1).
• Demand is inelastic when price changes have a minimal effect on demand (PED < 1).
• Special cases include perfectly inelastic (PED = 0) where demand remains constant regardless of price, and perfectly elastic (PED = ∞) where any price increase drops demand to zero.
• Understanding elasticity aids management in pricing decisions; inelastic demand suggests prices can be raised without losing revenue, while elastic demand requires careful price adjustments.

Demand-Based Pricing

• Price theory links price, quantity demanded, and total revenue, suggesting a profit-maximizing pricing strategy can be derived.
• Accurate demand estimates across different price levels are crucial for effective pricing strategies.
• A monopolistic position allows businesses to set prices flexibly rather than following market rates, impacting demand based on price adjustments.

Target Costing

• Target costing shifts the traditional cost-price-profit paradigm, focusing on customer willingness to pay rather than production costs.
• The Japanese automotive industry pioneered this method, emphasizing cost control throughout the product life cycle.
• A target cost is determined by subtracting the desired profit margin from the price customers are willing to pay. If the expected production cost exceeds this, modifications are required.
• It emphasizes continuous cost reduction throughout the product’s life to remain competitive.

Transfer Pricing

• Transfer prices determine the cost of goods or services transferred between different units within the same company.
• Setting transfer prices balances divisional autonomy with overall corporate profitability.
• Transfer pricing must be recorded for effective planning and control, impacting both cost and revenue.
• Prices can be based on market rates, production costs, or negotiated terms, impacting profit distribution among profit centers.

Profit Centres and Pricing Disputes

• Profit centers within organizations must generate profits from their activities, with performance measured by profitability.
• Managers may face conflicts when setting transfer prices between profit centers; higher prices can improve one center’s profits at a cost to another.
• Profitability incentives can lead to pricing strategies that may ultimately harm overall corporate profit, as seen in inter-divisional transactions.

Key Pricing Concepts

• Just-In-Time (JIT) aims for minimal inventory while maintaining high quality, reducing costs, and enhancing flexibility.
• Total inventory costs encompass purchase, holding, ordering, and stock-out costs.
• Economic Order Quantity (EOQ) minimizes total inventory costs and can be calculated using various methods.
• Cost-plus pricing incorporates all costs of production plus a profit margin, while target costing focuses on consumer demand and price acceptance.
• Effective transfer pricing encourages divisional performance without harming corporate profit maximization.

This quiz covers the principles and practices of Just-in-Time (JIT) systems, including their impact on inventory management and production processes. Discover how JIT aims for zero inventory, enhances quality, and increases customer satisfaction while reducing investment requirements. Test your understanding of key concepts and practices associated with JIT systems.