Reaction Paper of:

Backflush costing: Cost accounting and cost management in a

JIT Environment
M. Gabril Asade & Maulina Fitriani

In a broad scope, JIT is focus on carrying out activities when needed. There are
at least four fundamental aspects of JIT that will ultimately lead to the creation of
sustainable competitive advantage in the long term, these four aspects are:

• All activities that do not add value to the product or service eliminated, this
includes activities and resources that constitute reduction or elimination
target.
• Commitment to high levels of quality, work things right first are important
when they aren't the time provided for rework.
• Strive for continuous improvement & in the efficiency of activities.
• Simplifying and increasing the visibility of all activities to help identify
activities (activities that do not add value).

JIT can be applied to various aspects, not just limited to production. In fact, JIT
can be applied to purchasing, distribution, retailing, and even administrative areas, but
in this reaction paper we are more focus on JIT in production activitiy. Based on our
group discussion, very few companies make this strategy work, a lot of companies try
and run it across a couple of their product lines but it is very hard to make it runs across
the company’s entire supply chain. JIT is very interesting, it requires minimal capital
expenditures, low inventory levels, low inventory counts, and quick-moving inventory
turnover. However, in practice is very difficult to make it works. So, we are going to
review why it works for some companies and why it doesn’t work for most companies.

There are some circumstances that must be matched with company’s business
operation in order to make JIT runs well. First, they have a fixed bill materials for
everything they manufactured, like automotive manufactures. Second, they have small
product line but they have huge volumes across those product lines. JIT doesn’t work
for a vast product offering with small volumes. Third, the company has to ramp up
production to volume. Fourth, a linear and constant demand for products. Fifth, the most
critical consideration is a vendor base, must be closed to the company and the company
is their number-one priority. Company can’t run JIT with vendors from overseas. If
those five circumstances are achieved, JIT can be the absolute best possible strategy in
reducing cost and eliminating waste. The problem is very few companies manufacture
from a fixed bill of materials because they have a large product line and can’t ramp up
production to volume. In fact, a linear and constant demand is difficult to be existed
because most of companies operate cyclical and seasonal market, it means that orders
are fluctuate from month to month. If JIT is not implementing well, then will result on
several disadvantages to the company, an example is delay. For instance, if the company
is not the vendor priority, materials transferred won’t be punctual that causes delay then
stock out. In the long-run will be lost in gross sales and loss customers for the worst
possibilities. So, we argue that JIT supposedly can’t work in today’s business world.