Page 209 - Cambridge IGCSE Business Studies

15: Production of goods and services

All of these sources of waste increase a business’s costs which, in turn, will reduce
its competitiveness and profi tability. Therefore, the introduction of lean production

techniques such as just-in-time inventory management and Kaizen (continuous
improvement) will bring the following benefi ts:

■ New products can be brought to the market more quickly.
■ Quality is improved.
■ Wastage of time and other resources is reduced or eliminated.
■ The costs of holding inventories is eliminated.
■ Unit costs are reduced, which will increase the profit made on each unit sold or
enable a business to reduce its prices and be more competitive. This will increase
sales, revenue and profits.

Just-in-time (JIT) inventory control

The just-in-time (JIT) inventory control system means that no inventories are
held by the business. Raw materials and components arrive from suppliers just

as they are needed by the production process. As soon as finished goods leave
the production process, they are delivered to the customer. JIT inventory control
reduces business costs by removing the costs of holding inventories.
However, for JIT to be successful it must also remove the costs of not holding
inventories which we looked at earlier. To achieve this, businesses need to have an
excellent relationship and good communication with suppliers. The raw materials

and components have to be delivered on time and be of the required quality and
quantity. In addition, both the workers and the machinery used in production
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must be flexible, that is they must be able to switch from one product to another at
short notice.

ACTIVITY 15.3

The new Operations Director of Practical Plastic Products (PPP) wants to introduce JIT inventory control. He believes that it
will bring important benefits to the company. At a recent board meeting, he said, ‘The introduction of JIT inventory control
will save $40,000 per year in warehousing costs and there will be other cost savings too.’
The Marketing Director was worried about the risk to the company’s reputation if it failed to meet customer deliveries.
The Finance Director was concerned about the extra costs of new technologies required to improve communications with

suppliers. The Human Resources Director wondered how the introduction of JIT could affect some workers.
1 What other costs savings do you think the introduction of JIT inventory control could bring to PPP?
2 Do you think the Marketing Director is right to be worried about the risk to PPP’s reputation if JIT is introduced?
3 What are the ‘new technologies’ mentioned by the Finance Director, and why are they needed to improve
communications with suppliers?
4 How do you think the introduction of JIT could aff ect some of PPP’s workers?

Kaizen
Kaizen is a Japanese term meaning ‘continuous improvement’. Th e Kaizen
approach gives all workers the opportunity to make suggestions about how to
improve quality or productivity. Workers are doing the tasks every day and so
they may know better than managers how to change the production process
to make it more effi cient. The changes suggested by individual workers may be

very small, but all of these small improvements can lead to big improvements
in effi ciency.