Companies embark on \"Just-in-Time\" and \"Lean\" and similar programs for which

Question

Companies embark on "Just-in-Time" and "Lean" and similar programs for which revenue enhancement is not the primary goal. They center on internal issues like inventory reduction, shorter lead times to service customers, and reduced production costs. Changes to product/service prices and quantity sold are not the primary justifying factor. How can such programs be justified financially if revenue does not increase? (you do not need to have knowledge of "Just-In-Time" or Lean" programs to answer this.) Answer below, or attach a Word Document   Limit your answer to 500 words or less. Companies embark on "Just-in-Time" and "Lean" and similar programs for which revenue enhancement is not the primary goal. They center on internal issues like inventory reduction, shorter lead times to service customers, and reduced production costs. Changes to product/service prices and quantity sold are not the primary justifying factor. How can such programs be justified financially if revenue does not increase? (you do not need to have knowledge of "Just-In-Time" or Lean" programs to answer this.) Answer below, or attach a Word Document   Limit your answer to 500 words or less.

Explanation / Answer

The objectives of programs like Just-in-time or LEAN are

1. To be more responsive to customers

2. To have better communication among departments and suppliers

3. To be more flexible

4. To achieve better quality

5. To reduce product cost

Out of the above, objectives 4 and 5 are derived benefits from implementation of these programs.

It is true that programs like Just-in-time or Lean does not address the primary goal of a corporate which is wealth maximisation of stake holders. There are several ways a manufacturing concern might be overspending like excess stocking of inventory or finished product. Similarly, there may be wastages of money and time due to waiting for material, movement, defective production, redundancies in the process.

For example, if the plant layout is poorly planned, there may be excess movement of labour and material from one place to another in the plant itself which may result in excess labour working hours, cost of movement. Similarly the process itself might have some built in redundancies which even if removed does not affect the production in any way while continuing with them is costing the corporate money on excess labour, material, time etc.

By concentrating on reducing these wasteful expenditure, reduction of defective products, wastage of labour hours etc., a corporate can achieve the objectives 4 & 5 mentioned above viz., improve the quality and reduce product cost.

These measures in turn though did not result in increase of sales revenue will increase the profitability through reduction of costs. In the long run these programs will result release of managers’ time to concentration on introduction of new products and improvement of sales revenue.

Hence introduction of programs like Just-in-time and Lean will benefit the corporate in attaining its primary goal in the long run.

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