Academic journal article International Journal of Purchasing and Materials Management

JIT's Impact on a Firm's Financial Statements

Academic journal article International Journal of Purchasing and Materials Management

JIT's Impact on a Firm's Financial Statements

Article excerpt


A consequence of complex modern societies is that many areas of manufacturing face increasing supply and demand uncertainty and volatility. Dynamic environments are a realistic portrayal of contemporary business conditions - and changes can be swift and devastating to unprepared companies. Government policies, competitive pressures, and national and international shifts in supply and demand relationships compel corporations to engage in adaptive behavior for long-run survival. In seeking to identify efficiencies and strategies, one approach is to introduce a just-in-time (JIT) production system. This is likely to be motivated by potential productivity improvements, cost savings, and the release of resources for alternative reinvestment and utilization.

JIT has been extensively examined in the literature with regard to costs, purchasing, warehousing, waste, small businesses, and general management issues.[1] The purpose of this article is to extend the analysis of JIT by linking its implementation to financial statement consequences. The focus is on net income determination and the direction of change in selected balance sheet accounts.


The introduction of JIT may improve productivity through an overall streamlining of the assembly line, the reduction of setup times and costs, and by ensuring a consistent quality of production. The reduction of inventory at every work station, with reduced or eliminated reliance on buffer inventory, facilitates improved man-machine and machine-machine synchronization. The lack of buffering helps transform the separate stages in the manufacturing process into a single, unified production line with improved fluidity. Since all production ordered will immediately be used by the succeeding departments, work in process is restricted to small batches that are in operation. The overall consequence should be that either a given volume of output is produced in less time, or that a greater absolute level of output can be produced in a given time.


More effective plant utilization can be achieved from space released by the reduction of raw material storage needs and by physically relocating and reorganizing components of the assembly line. The first source of released space will arise from yard, warehouse, vat, bin, and shelving. This will open potential areas for building new facilities. Warehouse space made redundant can be sold or reallocated to productive activities. Other storage areas can be rationalized, and excess space sold or leased. The second source of space can result in either an increase in the size of the assembly line (for example, two simultaneous lines), an enrichment in the complexity of the assembly line, or the utilization of a new activity. The potential presents itself for the company to increase effective plant capacity. Ultimately this should increase output, and better utilize overheads such as utilities, supervision, and other fixed costs.


Expected cost savings in inventory investment, storage, personnel, wastage, and audit is a major motivator underlying the introduction of JIT. The extent to which JIT will decrease physical inventory levels and their value will drive at least some of the following:

1. Lower insurance premiums for fire, theft, and breakage

2. Reduced fixed interest changes on money borrowed to maintain base-level inventory

3. Less personnel to inspect, store, monitor, control, and issue inventory

4. Less clerical maintenance of a perpetual inventory system, and less time to conduct physical inventory checks

5. Reduced bidding activity and reduced manual repurchasing activity

6. Substantially reduced wastage during work in process through faster monitoring

7. Less write-off of obsolete and damaged inventory

8. Reduced audit time and costs commensurate with lower inventory audit

9. …

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