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Strategic Cost and Managerial Accounting in UAE Case Study

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Updated: May 21st, 2020

Just In Time (JIT)

Just in time is a strategy that is usually used by companies with the aim of increasing efficiency. Under this strategy, the company only receives goods when they are needed. The strategy has a number of benefits to the company. The major objective of the ‘just in time’ strategy is to reduce costs that are related to holding inventory. These are costs such as holding cost, opportunity cost for the inventory held and carrying cost. The company does not have to keep a lot of stock in its premises. As a result, the company is not required to incur costs related to acquiring a store for goods. The carrying cost is also reduced since the company does not have to transport goods in bulk. In addition, stock out cost is also avoided when a company adopts the JIT strategy. These are costs of lost sales as a result of stock out and loss of goodwill when customers do not get what they want and when they want, among other costs (Lu& Nihon, 2009).

The just in time strategy is highly effective in a production firm. Its functionality depends on signals from different points. A production unit is signaled by another unit on when to manufacture a certain part and how many units to manufacture. The signal is sent when the signaling party realizes that the part required at that production point is not present in the shelves or is reducing. This ensures that the production process runs smoothly and efficiently. For JIT to be effective, it has to be dependent on lean manufacturing. Lean manufacturing is the kind of manufacturing that seeks to consider usage of resources and ensure that value is preserved with less work. One of the companies that are known to use these methods of inventory management and production is Toyota in its ‘Toyota Production System’ (Neelankavil & Rai, 2009).

The term just in time was first introduced and described in the year 1923 by Henry Ford in his book known as ‘My Life and Work’. Ford wrote that their production unit at Ford Motor Company had found out that there was no need for buying materials and storing them when they are not needed. He wrote that they were planning to be buying only enough materials that were to fit their production needs. Ford realized that this was going to save the company a lot of money and reduce the amount of money that is tied up in materials at any one time. It would, thereby, increase the company’s productivity (Lu & Nihon, 1989).

Fundamental techniques used in JIT

JIT is a strategy whereby materials in a production company are delivered when required. Therefore, the technique used in JIT is that the company will make an order for raw materials just before the level of raw materials in stock depletes. Therefore, the company sets a certain level at which it will be ordering more raw materials. The level that the company sets is referred to as the re-order level. There should be a time that is set between which the materials are ordered and delivered. This period of time is referred to as lead time (Neelankavil & Rai, 2009). Therefore, the company should have supportive suppliers who will be able to deliver quality materials on time. The suppliers should be able to make deliveries direct to the work areas.

The workplace where JIT is applied should be highly organized. The workers should be highly experienced to reduce wastage of materials or eliminate it completely if possible. The parts delivered are highly specialized and, therefore, perfection should be highly maintained. This helps in increasing the quality of products. People who work in an organization that applies JIT strategy should be able to stay on their schedules strictly. This is because any delay in the production process might cause the whole process to fail. Quality production is the bottom line for JIT. Therefore, all production activities should be directed towards quality. The supplies should be of quality, statistical process control should be of quality, and there should be quality in all sections within the firm. Employee commitment and management support should also be embraced (Lu & Nihon, 1989).

Is JIT a success in Japan?

Just in time was first implemented in Japan by the Toyota Motor Corporation. Just in time was to be part of the company’s production system referred to as the ‘Toyota Production System’. Despite the fact that Henry Ford was the first person to describe this term, the Ford Motors Corporation did not fully implement the strategy immediately. Therefore, Toyota did not copy the strategy from Ford. One of the reasons why this strategy was first implemented in Japan is that there are no enough lands in the country for companies to build warehouses where they can store finished products, as well as parts at the same time. Reduced ‘economic lot size’ due to scarcity of land made Japanese companies think of innovative ways of dealing with the issue during the 1950s. The ‘economic lot size’ was leading to poor production and ROI recorded by the Japanese firms was low. The factories, therefore, had to find a way of turning this around (Singh, 2011).

It was in the 1950s that the then chief engineer of Toyota realized that a different method could be adapted to solve this problem, and he came up with the just in time system. The chief engineer was able to see that reducing costs incurred in having a warehouse would increase flexibility in the company. The program became a success for Toyota Motors Corporation. The company was able to produce cars at a relatively lower cost and was still able to meet the market demand. The return on investment for Toyota increased.

Other companies in Japan started following the same strategy as Toyota, and their returns on investment started to increase as well (Neelankavil & Rai, 2009). Some of the changes that the system brought to Japanese production companies include a significant increase in the amount of income. The time taken by companies to respond to an order was also reduced significantly. A customer would make an order and the final product could be delivered within a very short time. This was important in that it increased customers’ satisfaction and their loyalty to Japanese companies.

In addition, people working in assembly companies such as Toyota had to use the available parts efficiently. This is because they had little choices in the parts to use and, therefore, they had to use the available parts perfectly. They had to make the parts fit perfectly as well. As a result, this improved quality assurance. Total quality management was implemented to ensure quality and less wastage. Generally, the process has been highly successful in Japan. It has led to high quality production in Japan. In addition, Japanese products are sold at low prices due to their low production costs; hence more customers prefer the products since they get high value for their money. This has increased the sales turn over for the Japanese companies (Singh, 2011).

Is JIT applicable in the UAE?

The United Arab Emirates is a region that is emerging as a strong economy. The major product from the region is oil. UAE supplies oil to most parts of the world. The region is in the process of increasing its 2.9 million barrels production per day to 5 million barrels per day. The demand for oil has been on the increase as a result of increasing industrialization. There have been production companies established in the UAE as a result of the region’s oil reserves. Some of the factories in the UAE are the chemical and plastics factories, as well as other companies that have a close connection with the oil supplies in the region. UAE needs to improve its oil production efficiency to meet the demand in the market at the moment. The Just in time strategy will be significant in improving the efficiency (Ramos, 2010).

Another reason why ‘just in time’ should be applied in the UAE is the high risk that is associated with storage of oil. Oil is a highly flammable product and its storage should be done in a highly cautious manner. This means that the cost of storing oil will be high since special storage equipment is required. Oil companies need to improve their income, and they would welcome any strategy that would help them save on costs. Just in time system would be the optimum option for them; the oil companies can be delivering oil to production companies on demand rather than storing it as they await orders. In addition to the increasing number of factories being established in the United Arab Emirates, the application of JIT is possible since it is going to increase efficiency and return on investments for both the oil industries and other factories that are being established.

Dubai Aluminum (DUBAL)

Dubai Aluminum is a company that deals with aluminum production and is one of the largest companies currently in the UAE. The company is also ranked among the top five companies in a similar industry worldwide. All the smelting for Dubai Aluminium is done at one single site. Raw materials used by the company include alumina, petroleum coke and coal tar pitch. Storage of these raw materials is expensive as they require a large warehouse space. In addition, storage of finished metal products is also very expensive. It is actually not economical for the company to store large amounts of raw materials or finished goods. As a result, just in time strategy will be highly suitable and effective. JIT is has the capability of increasing the income for the company through savings on inventory. If the just in time strategy is applied in this company, the amount of space used for warehouse can be used for further production to increase efficiency and speed of production. The ability of the company to meet demand will be high since it will have more production plants (Ramos, 2010).

On the other hand, it might not be easy to implement the JIT strategy in Dubai Aluminium for some reasons. Dubai Aluminium is not similar to an assembly company like Toyota where parts are ordered when required. The demand for metals is from outside companies, which are not in the same production line with Dubai Aluminium. Therefore, it is difficult for Dubai Aluminium to know when metal will be ordered. As a result of this difficulty in demand prediction, implementation of the JIT strategy may be difficult. The company needs to have ready products to supply them on order.

Demand for aluminum may be urgent, giving the workers less time to produce the required aluminum. It is important to note that there is no known assembly industry in Dubai and, therefore, a large percentage of aluminum produced is exported. The foreign companies that purchase the metal may need it urgently. Due to the amount of time required to manufacture the metals, Dubai Aluminium may lose sales for lack of ready aluminum. In case the company loses such sales, a lot of money will be lost in the process. Loss of sales might be costly than the cost of storing metals in a warehouse. This makes it difficult for JIT to be implemented in the company.

Reference List

Lu, DJ & Nihon NK 1989 Kanban just-in-time at Toyota: Management begins at the workplace, Productivity Press, Cambridge, MA.

Neelankavil, JP, & Rai, A 2009 Basics of international business, M.E. Sharpe, Armonk, NY.

Ramos, SJ 2010 Dubai amplified: The engineering of a port geography, Ashgate Publishers, Farnham.

Singh, S 2011 ‘JIT system: A cultural difference between Japan and Indian Implementation’, International Journal of Research in Mechanical Engineering and Technology, vol. 1, no. 1, pp. 52-56.

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