JIT works best in companies that manufacture relatively standardized products that experience consistent demand. Such companies can confidently order materials from suppliers and assemble products in small, continuous batches. The result is a smooth, consistent flow of purchased materials and assembled products, with little inventory buildup.

However, JIT is not the best choice for every organization. Companies that manufacture nonstandardized products that experience sporadic or seasonal demand generally face more irregular purchases of raw materials from suppliers, more uneven production cycles, and greater accumulations of inventory.37

When successfully implemented, JIT enhances organizational performance in several important ways. First, it reduces the unnecessary labor expenses generated by manufacturing products that are not sold. Second, it minimizes the tying up of monetary resources in purchases of production-related materials that do not result in timely sales. Third, it helps management hold down inventory expenses, particularly storage and handling costs. Better inventory management and control of labor costs, in fact, are the two most commonly cited benefits of JIT.

Experience indicates that successful JIT programs have certain common characteristics:38

1. Closeness of suppliers—Manufacturers using JIT find it beneficial to use raw materials suppliers who are based only a short distance from them. When a company is ordering smaller quantities of raw materials at a time, suppliers must sometimes be asked to make one or more deliveries per day. Short distances make multiple deliveries per day feasible. Nonetheless, relying on one large supplier may present disadvantages as well. For example, an earthquake once caused one of Toyota’s piston suppliers to temporarily suspend its operations. Because the automaker practices JIT, the resulting shortage of pistons caused a delay in the delivery of about 55,000 vehicles.39

2. High quality of materials purchased from suppliers—Manufacturers using JIT find it especially difficult to overcome problems caused by defective materials. Because they keep their materials inventory small, defective materials purchased from a supplier may force them to discontinue the production process until another delivery from the supplier can be arranged. Such production slowdowns can be disadvantageous, causing late delivery to customers or lost sales.

3. Well-organized receiving and handling of materials purchased from suppliers—Companies using JIT must be able to receive and handle raw materials effectively and efficiently. Materials must be available for the production process where and when they are needed because if they are not, extra costs will be built into the production process.

4. Strong management commitment—Management must be strongly committed to the concept of JIT. The system takes time and effort to plan, install, and improve—and is therefore expensive to implement. Management must be willing to commit funds to initiate the JIT system and support it once it is functioning.

The general cost control process has four stages:

1. Establishing standard or planned cost amounts

2. Measuring actual costs incurred

3. Comparing planned costs to incurred costs

4. Making changes to reduce actual costs to planned costs when necessary

When following these stages for specific operations cost control, the operations manager must first establish planned costs or cost standards for operations activities such as labor, materials, and overhead. Next, the operations manager must actually measure or calculate the costs incurred for these activities. Third, the operations manager must compare actual operations costs to planned operations costs and, fourth, take steps to reduce actual operations costs to planned levels if necessary.

To maximize the benefits of using budgets, managers must avoid several potential pitfalls. Among these pitfalls are the following:

1. Placing too much emphasis on relatively insignificant organizational expenses—In preparing and implementing a budget, managers should allocate more time for dealing with significant organizational expenses and less time for dealing with relatively insignificant organizational expenses. For example, the amount of time managers spend on developing and implementing a budget for labor costs typically should be much greater than the amount of time they spend on developing and implementing a budget for office supplies.

2. Increasing budgeted expenses year after year without adequate information—It does not necessarily follow that items contained in last year’s budget should be increased this year. Perhaps the best-known method for overcoming this potential pitfall is zero-base budgeting.42 Zero-base budgeting is a planning and budgeting process that requires managers to justify their entire budget request in detail rather than simply refer to budget amounts established in previous years.

   Some management theorists believe that zero-base budgeting is a better management tool than traditional budgeting—which simply starts with the budget amount established in the prior year—because it emphasizes focused identification and control of each budget item. It is unlikely, however, that this tool will be implemented successfully unless management adequately explains what zero-base budgeting is and how it is to be used in the organization. One of the earliest and most commonly cited successes in implementing a zero-base budgeting program took place in the Department of Agriculture’s Office of Budget and Finance.

3. Ignoring the fact that budgets must be changed periodically—Managers should recognize that such factors as costs of materials, newly developed technology, and product demand change constantly and that budgets must be reviewed and modified periodically in response to those changes.

   Ignoring the fact that budgets must be changed periodically—Managers should recognize that such factors as costs of materials, newly developed technology, and product demand change constantly and that budgets must be reviewed and modified periodically in response to those changes.

A special type of budget called a variable budget is sometimes used to determine automatically when such changes in budgets are needed. A variable budget, also known as a flexible budget, outlines the levels of resources to be allocated for each organizational activity according to the level of production within the organization. It follows, then, that a variable budget automatically indicates an increase in the amount of resources allocated for various organizational activities when production levels go up and a decrease when production goes down.

Many managers believe that although budgets are valuable planning and control tools, they can result in major human relations problems in an organization. A classic article by Chris Argyris, for example, shows how budgets can create pressures that unite workers against management, cause harmful conflict between management and factory workers, and create tensions that result in worker inefficiency and worker aggression against management.43 If such problems are severe enough, a budget may result in more harm than good to an organization.44

Several strategies have been suggested to minimize the human relations problems caused by budgets. The most-often-recommended strategy is to design and implement appropriate human relations training programs for finance personnel, accounting personnel, production supervisors, and all other key people involved in the formulation and use of budgets. These training programs should emphasize both the advantages and the disadvantages of applying pressure on people through budgets and the possible results of using budgets to imply that an organization member is a success or a failure at his or her job.

Managers should use ratio analysis in three ways to control an organization:46

• Managers should evaluate all ratios simultaneously. This strategy ensures that managers will develop and implement a control strategy that is appropriate for the organization as a whole rather than a control strategy that suits only one phase or segment of the organization.

• Managers should compare computed values for ratios in a specific organization with the values of industry averages for those ratios. (The values of industry averages for the ratios can be obtained from Dunn & Bradstreet; Robert Morris Associates, a national association of bank loan officers; the Federal Trade Commission; and the Securities and Exchange Commission.) Managers increase the probability that they will formulate and implement appropriate control strategies when they compare their financial situations to those of competitors.

• Managers’ use of ratios should incorporate trend analysis. Managers must remember that any set of ratio values is actually only a determination of the relationships that existed in a specified time period (often a year). To employ ratio analysis to maximum advantage, they need to accumulate ratio values for several successive time periods in order to uncover specific organizational trends. Once these trends are revealed, managers can formulate and implement appropriate strategies for dealing with those trends.

More than 50 percent of the expenditures of a typical manufacturing company are for the procurement of materials, including raw materials, parts, subassemblies, and supplies. This procurement is the responsibility of the purchasing department. Actually, purchases of production materials are largely automated and linked to a resources requirement planning system. Purchases of all other materials, however, are based on requisitions from users. The purchasing department’s job does not end with the placement of an order; order follow-up is just as crucial.

Receiving activities include unloading, identifying, inspecting, reporting, and storing inbound shipments. Shipping and distribution activities are similar and may include preparing documents, packaging, labeling, loading, and directing outbound shipments to customers and to distribution centers. Shipping and receiving are sometimes organized as one unit.

A traffic manager’s main responsibilities are selecting the transportation mode, coordinating the arrival and departure of shipments, and auditing freight bills.

Inventory control activities ensure the continuous availability of purchased materials. Work-in-process and finished-goods inventories are inventory control subsystems. Inventory control specifies what, when, and how much to buy. Held inventories buffer the organization against a variety of uncertainties that can disrupt supply, but because holding inventory is costly, an optimal inventory control policy provides a predetermined level of certainty of supply at the lowest possible cost.

Shop-floor control activities include input/output control, scheduling, sequencing, routing, dispatching, and expediting.

Although many materials management activities can be programmed, the human factor is key to a competitive performance. Skilled and motivated employees are therefore crucial to successful materials control.