Notes

We have discussed the economic benefits of finding ways to increase TP by decreasing TC. Another method of doing this is called Just-In-Time (JIT). Entire chapters in textbooks are written about JIT, so we’ll keep the description brief. JIT is a management philosophy in which costs are reduced by eliminating waste in any process. Waste is considered any activity that does not add value to the customer. In many companies, inventory is considered a waste because it is just sitting in a warehouse waiting for a customer to order it. While the inventory is idle, it is waste. To reduce waste, we must reduce our inventory—but how? The longer it takes a shipment to get to us, the more inventory we must carry to prevent a stockout . So the reasonable thing to do is reduce transportation time to enable us to reduce our inventory. We could reduce transit time by using air freight instead of water, rail, or road. To do this costs more, so the cost reduction associated with the elimination of inventory (waste) must outweigh the increased cost of transportation.

Movement is also considered a waste in JIT philosophy; therefore, it can be said that transportation itself is a waste and should be reduced or eliminated. A way to reduce transportation significantly is to either operate near your suppliers or insist that your suppliers have a facility near you. For example, suppose you manufacture stereos in Charlotte, North Carolina, and the speaker supplier is in Los Angeles; the average transit time to get speakers from Los Angeles to North Carolina is two days, and you pay for this. However, if you work a deal to have the supplier inventory speakers in a warehouse two blocks away from your manufacturing facility, you may now receive a pallet of speakers in 30 minutes, as opposed to an entire truckload in two days. You may pay more for the speakers, but reduce TC due to a reduction in transportation costs.