Just In Time

Best practices are like benchmarks. They are very personal and contextual. Applied incorrectly, best practices can become handcuffs. People say let's apply best practices to help improve the processes. We always look at what has worked for others and try to repurpose it for our requirements. Does that make it "best practices," though?

Best practice like Just In Time (JIT) inventory system is not just an attempt to maintain minimum or zero inventory. The JIT process involves fine tuning production and supplier scheduling systems, where inventories are supplied when needed in production and monitoring the entire value chain closely to reduce wastage and minimize inventory buffers.

An US company had known about JIT used by its Japanese counterparts with assembling cost below 20 % of its own. In an attempt to replicate the success, US Company too then implemented JIT. Although it was successful in reducing its assembly cost noticeably, it experienced dramatic problems with its major suppliers at the same time. They begun to demand price increase that more than offset the assembly plant cost saving. The company blamed its suppliers for not using JIT concept for their own operations. However, the problem was different and not realized by the US Company initially.

While the US Company reduced its need for buffer stocks, it placed major strains on the manufacturing responsiveness of its suppliers. The reason was very simple. The assembly plant of the US Company was experiencing huge and uncertain variability in their production schedules which made the manufacturing for its suppliers a nightmare. Management had ignored the idea that JIT involves partnering with suppliers down the value chain. It did not realize that the key in the success of JIT for Japanese assembly plants was schedule stability for its supplier firms.

A knowledgeable risk consultant can play important role in implementing and maintaining innovative management accounting systems like JIT, ABC & Six Sigma. The risk involved is of making incorrect planning decisions and control decisions.

Nowadays activity-based costing (ABC) is being adopted as an alternative cost accounting system that supposedly overcomes the deficiencies of the traditional cost accounting system. However, ABC has been abused by its users. It is now clear that one should understand it from Activity Based Management and strategic perspective and should not use it as an accounting system by bringing it in the general ledger system.

Proper Risk Consulting may contribute to the success of new management accounting concepts through several types of involvement: (1) audit of cost drivers, (2) audit of non-financial performance metrics, (3) Value Chain Analysis, and (4) audit of value added by ABC.

This is the future area where maximum value addition can be achieved and requires different approach in risk consulting.

Risk exists if you are not aware and not implementing a new management tool and technique when your competition is. Risk exists if you are implementing it incorrectly and your benchmarking analysis is flawed and not showing you the key factors causing the performance difference between you and your competitor.