Characteristics of Good Quality Information (ACCURATE).

Characteristics of good quality information can be defined as an acronym ACCURATE. These characteristics are interrelated; focus on one automatically leads to focus on other.

Accurate

Information should be fair and free from bias. It should not have any arithmetical and grammatical errors. Information comes directly or in written form likely to be more reliable than it comes from indirectly (from hands to hands) or verbally which can be later retracted.

Complete

Accuracy of information is just not enough. It should also be complete which means facts and figures should not be missing or concealed. Telling the truth but not wholly is of no use.

Cost-beneficial

Information should be analysed for its benefits against the cost of obtaining it. It business context, it is not worthwhile to spend money on information that even cannot recover its costs leading to loss each time that information is obtained. In other contexts, such as hospitals it would be useful to get information even it has no financial benefits due to the nature of the business and expectations of society from it.

User-targeted

Information should be communicated in the style, format, detail and complexity which address the needs of users of the information. Example senior managers need brief reports which enable them to understand the position and performance of the business at a glance, while operational managers need detailed information which enable them to make day to day decisions.

Relevant

Information should be communicated to the right person. It means person which has some control over decisions expected to come out from obtaining the information.

Authoritative

Information should come from reliable source. It depends on qualifications and experience and past performance of the person communicating the information.

Timely

Information should be communicated in time so that receiver of the information has enough time to decide appropriate actions based on the information received. Information which communicates details of the past events earlier in time is of less importance than recently issued information like newspapers. What is timely information depends on situation to situation. Selection of appropriate channel of communication is key skill to achieve.

Easy to Use

Information should be understandable to the users. Style, sentence structure and jargons should be used keeping the receiver in mind. If report is targeted to new-comer in the field, then it should explain technical jargons used in the report.

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Types of Market Research Methodologies for Businesses.

There are two popular types of market research business can carryout to evaluate opportunities and threats, entering new markets, building new products, before planning changes in the business processes and setting prices of the products.


1. Primary Market Research.
   Primary market research is a quantitative market research. Research can be done just sitting in the office it is also known as desk research.  It gathers data from existing publications from various sources. It includes news papers, monetary and fiscal policies, statistics on population, employment rate and wages, relevant legislations affecting the business and so on.
   
   
   These are readily available cheap source of information. Integrity of information depends on source from which it is extracted. It can be used initial market research tool and use as screening device. Proposals which are found attractive can be further analyzed for qualitative information.
   
   
2. Secondary Market Research.
   Secondary market research is qualitative market research. Research is performed by doing outdoor surveys, interviewing public, contacting customers through e-mail and visiting customers place. Data is gathered from wide range of sources are often subjective based on individual opinion and in narrative form making comparing and differentiating difficult. Market research tool need to be employed to convert qualitative data into qualitative data, such as ranking scales, rating systems, MCQs and smileys can be provide to capture the emotions etc.
   
   
   This method of market research is relatively costly and time consuming. Its provides fresh information, fills information gap not obtainable from quantitative source and direct from the source for whom market research is carried out.
   
   
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ACCA APM (P5) Exam Techniques and Tips

Exam format:

Section A	1Q = 35-40 marks, 2Q = 25-20 marks.
Section B	2 Questions out of 3 = 20 marks each



Reading time: 15 minutes (you may mark the Question paper only, during this time).
Total time: 3 hours and 15 minutes.


Read the exam rules at the back of exam attendance paper.
Listen to the invigilators instruction carefully lack of obedience may disqualify a candidate for exams.
Have your script checked by the invigilator for completeness of details.
Feel free to ask invigilators for any information necessary to comply with exam standards.


Exam technique and Tips for ACCA paper APM (P5) (also useful for PM-F5).
1. Read the question requirements of all questions. This will give you an idea of what questions and its parts you answer with confidence and discarding the question you do not answer properly.
2. Read the scenario slowly and thoroughly, at the same time marking any key dates, figures, stakeholders and problems faced by the business. It may not be possible for you to read all the questions within fifteen minutes. I advice you to read the question last, which you have planned to answer first, so you do not have to re-read the question and this will save your time.
3. Avoid use of punctuations, articles, adverbs, adjective and conjunctions excessively and unnecessarily. This will not earn you marks but it will take time.
4. Devote as much time as necessary to read scenarios and requirements. If necessary read questions again until you thoroughly understand the meanings behind each sentences. Each sentence is written for a reason and will help you to earn marks. You will get nothing if you spend lot of time answering the question but not answered what is asked.
5. Allocate your time with respect to marks available for each parts of the question. Allocate 1.5 minutes per mark, it leaving 30 minutes panic and checking time. You should focus on gaining 1mark in 1.5 minutes, no matter from where it comes. This 1.5 minutes including reading and writing time both. If you have spent more time on reading you to balance this increasing your writing speed. Use this flexibly some questions may take more than allocated time and some will take lesser time. You should aim to earn marks rather than completing the paper.
6. Do not hesitate writing what you think might be writing, there is no negative marking. So remember there is no one right answer. Marker are instructed to reward every logical answer to the question set.
7. Break the complex requirements into bits of separate requirements. Assume equal marks if requirement  is allocated separate marks. Look for the magical word "and". Example. Explain and evaluate the appropriateness of key critical success factors used the business XYZ.
8. Look at the requirements again while writing answer if you have doubt on what is asked? Frequently looking at the requirements help you write answers relevant to the requirement.
9. Do not try to produce perfect answers last marks are difficult and time consuming to achieve. Try to write good answers and points you are confident for its relevance to the question. You can come back to the question, if you have spare time left at the end.
10. Look for professional marks where available, you gain this by simply presenting your answer in the format asked by examiner, look for the person to whom your communication is addressed. Use technical jargons and details and style of presentation by considering the position, knowledge and experience of the person involved. In P5 this person will be the internal manager of any level in the organization.
11. Present your answer in the context of the organization. While some questions may ask for knowledge.
12. Look for verbs like explain, analysis, discuss etc, industry, past experience, culture and objective of business, external factors (PESTEL), SWOT, nature of material, labor, machinery, problems facing and proposed strategies, analysis financial information to use in your answers like trends, other information that would be useful but not given in the scenario. All these information will form the basis of your marks earning points.

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What is mission, goals, Objectives, Strategy and Budgets purposes?

Business Documents	details	Duration	Nature	Examples	Origin
Mission or vision statement	Sets purpose, stakeholders, culture and ethical values. Frame work for other documents.	Unlimited	Narrative	Mission of ACCA is to promote Accountancy profession and safe guard its members interest and society at large. The way exams are taken reflects culture and ethics like invigilator uniforms and enforce security in the premises.	Top level like board of directors.
Goal	Sets direction. Motivating.	Unlimited	Narrative	Goal is the dream comes in the mind of the entrepreneur like "I want to be the best accountant in the world"	Dream of organizational leader such as CEO.
Objective	Sets future position & Practicable based on business position in the macro environment: PESTEL	Long term normally 1 to 5 yrs.	Specific Measureable Attainable Relevant Timely	Objectives are rational decisions like "I have to pass two per session". This is set after taking account for various factors like time available, energy limitations, IQ levels, money to pay fees etc.	Top level managers aware of external influence affecting the business.
Strategy	Way to achieve future position. Strategy is the thoroughly considered option among various alternatives based on  SWOT analysis	Initially equal to objectives. Subsequently revised to due to changing conditions.	Narrative.	There are following options available. Option 1. distance learning. Option 2. Go to tuition provider. Option 3. Study with other students. Strategy I chose is distance learning (option 1) based on my SWOT analysis.	Top level may be same as those involved in objectives setting.
Budget	Breaks strategy into small bits of targets. It identifies and allocates resources and challenges to implement the strategy.	Normally 1 yr May be made quarterly.	Quantitative financial data.	Amount of fees I need to pay and its time. Exam dates of papers chosen. Cost of learning material to buy. Time needed to read the material. Setbacks likely to take time due to illness, traditional occasions.	Top level by imposing the budget. Participation of operational managers. Negotiating with low-level managers.

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Outsourcing- Benefits and Limitations in Business Management.

Benefits of Outsourcing in Business Management.

 

1. Economies of Scale.

   Outsourcing organization carries out activities on full time basis and at possibly at much larger scale than their clients. They may have economies of scales and have specialist able to bargain discounts and work efficiently better than their client. Some extent of these benefits they may passed to their clients to gain business.

    

2. Planning and Budgeting.
   Cost can be known in advance reduces uncertainties in planning and budgeting. Future cash flow requirements can be better anticipated.

    

3. Realization of Surplus Assets.
   Outsourcing can make some asset idle which can be used deployed elsewhere or can be sold to realize cash flow which contribute towards the improvement of liquidity position.

    

4. Elimination of Limiting Resources.
   Outsourcing organization may have larger capacity which can be used in line with other activities of the business.

    

5. Reduced Overhead Costs.
   Outsourcing organization may be ready to provide services  based on variable charges hourly or per unit basis.

    

6. Experience and Expertise.
   It is possible that outsourcing organization has specialist knowledge; skills and equipment enable them to provide better quality services.

    

7. Focus on Core Activities.
   It will reduce managerial workload allowing them to focus on core competencies and delegate areas on which they lack competencies and resources to some competent  outsourcing organization.

    

   Limitations of Outsourcing in Business Management.

    

8. Loss of Control.

   Outsourcing organization may be remote from business current location, frequent visits are not possible and communication through reporting are not sufficient to exercise control. Core activities should not be outsourced unless impracticable to do in-house. Any incompetency identified by market can be threatening to the reputation of the business.

    

9. Lack of Independence.
   Business may became dependent on outsourcing organization, because of loss of competency and resources in the business due to employees being redundant or deployed elsewhere and assets are sold which now require more investment to buy again. In case of breach, it will be difficult to setup activities immediately. Delays to setup activities again can damage reputation and cash flows.

    

10. Employee Morale.
    Employee may lost their skills overtime and resentment can happen if outsourcing leads to forced redundancy. It can seriously impact productivity because their will be little motivation regarding promotion and growth. In extreme cases it may end up with strikes.

     

11. Cost May Exceed Benefits.
    There may be cost associated with employee redundancy payments, early termination penalties of existing contracts and disposal cost of property, plant and equipments. Benefits determined from outsourcing are future expectations which may not come true. Like savings in step fixed costs of energy and supervisory costs due to reduced activity level.

     

12. Reaction of Stakeholders.

    Stakeholders may react positively or negatively depends how they perceive the impact of outsourcing on their interest in the business. Some stakeholders may become happy while some may become sad.  

    These include shareholders who may sell their shares can affect the share price, financers who may demand repayment of the capital, customer who may take their business elsewhere and supplier who may change their business terms depending upon their perception of business future risk.

     

13. Legislation.

    Legislation may limit dealing in foreign countries to protect its currency value or dealing with rival countries. It may protect some stakeholder rights by enforcing legislation e.g. imposing high import duty to protect home industries or by imposing licensing requirements to business operating in  particular industry requiring some activities or standards which are pre-requisite to get a license.

     

     

    Related posts:

    Process/Strategy Matrix for Outsourcing Decisions in Business Management.

     

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What are Types of “Product Pricing Strategies” in Management Accounting?

Pricing strategies adopted should be consistent with business objectives. Price strategies are used to control market share, stakeholders (customer and government). Organization may have cultural and ethical viewpoints; pricing strategies should be adjusted for such things. These strategies do not consider these values and beliefs on their own. Some Pricing Strategies are:

No-frills Pricing

This type of pricing is associated with product having only basis features. It targets price sensitive customers requiring no luxuries. Profit margins are not reduced; perhaps costs and quality are reduced.

It is adapted by small to medium sized business having fewer resources to compete with large businesses.

Price Penetration

Price penetration is about charging very low prices to build market share and discourage competition. It reduced profit margins to attract customers while costs and quality remains intact. Price penetration is long term strategy may be influenced by factors like selling of winter goods at begin of the winter at highly reduced prices to discourage imported goods suppliers. Profitability is achieved through economies of scale and internal efficiencies. This strategy may be adopted by risk averse businesses.

Discounted-pricing

Discounted pricing seems similar to price penetration but the extent to prices is decreased in discounted- pricing is lesser than price penetration. Price discounting is a short term strategy may be influenced by seasonal factors like selling of winter goods at low prices to empty the stock before season is off.

Price Skimming

Price Skimming is opposite to price penetration. Price skimming is about charging extra ordinary high prices to customer. This types of strategy is associated with innovative and luxury goods having short product life cycle, so that development expenditure can quickly recovered by obtaining cash flows from those segment of society able to very high prices to maintain their status. This types of strategy is suitable for business having cash flow problems. This strategy is also adopted by risk taker businesses.

Premium Pricing

Premium pricing seems similar to price skimming. Premium pricing charges only quiet high prices. It is adopted because product is different in term of features and higher in quality than products offered by competitors. Premium reflects the difference in product quality. Like blackberry mobile phones are relative expensive because of its features and quality,

Captive Product Pricing

Captive product pricing is about is selling of main products at low margins even at loss, with intention of earning by selling its closely related (like spare parts) Products at high margins. Ex. Selling cars at lower prices while gear boxes at higher prices. Once the customer has brought the main product, they have no option except to replace the original product.

Optional Product Pricing

Optional product pricing seems like captive product pricing. In optional product pricing products are not closely related to main product. In it customers are not forced to buy the subsequent products from the same supplier. Ex. Selling computers to customers at low price with a hope, they will buy peripherals such as monitor, keyword and mouse also from them.

Price Segmentation 

Price Segmentation is about charging different prices to different market segments. Business may classify the market segments by geo-location, age, sex, time. Like Bpp and Kaplan charges low prices for its learning materials in developing countries. Some restaurants sell foods at reduced prices after 12 am.

Bundle Product Pricing

Various complementary goods or service like blender and juicer , audit and tax are offered as a package. This strategy is relevant to business selling range of products to obtain cross-selling benefits. Combined cost of audit and tax will be lower due to not having to do tax calculations from begin; work done on audit job can be utilized to perform tax job. Similarly, combined cost of blender of juicer will be lower as component of blender can be used for juicer too.

Full Cost Plus Pricing

Full cost plus pricing is the traditional form of pricing by adding mark-up to the full cost (direct and indirect costs). This is long term product price by ensuring all costs will be recovered. This is relevant to product where there is no existing market or price of the product is to be recovered from one or few units combined. Ex, biding for the tender of building construction, Generally no market exist for building construction as each building is different from others.

Marginal Cost Plus Pricing

Marginal or variable Cost Plus Pricing is used for short term decision making. Like customer has made an offer to buy some units at reduced prices. It is not suitable for long term pricing as recovery of fixed cost may not be possible.

Competitive Pricing

Use the price of the competitors to price products. This is applicable where products are similar in nature in terms of quality, size and weight like peanut cookies and coconut cookies 50g pack.

Product Line Pricing

This Pricing strategy takes account of whole product range before prices are set. Retailer selling pen recognizes that customer may buy refills too, so he/she might attempt to increase the combine revenue from these products.

Psychological Pricing

Psychological Pricing attempts to take advantage of the human psychology. In the absence of other information about product quality, people tend to judge the quality with price. In case of highly innovative products customer are less able to judge the product quality, so business may try to make an impression by packaging and price. Ex, cosmetics have more packaging cost than the cost of contents. Similarly, Educational institutes might charge high prices to give an impression of quality.

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What is Total Quality Management(TQM) in Business Management?

What is Total Quality Management (TQM)?

Total quality management is modern concept in management accounting. It aims to eliminate defects (zero defects), so there is no allowances are available for wastages and idle time. It attempts to manufacture goods of required quality in first attempt. There is no need to rework products which increases cost and time to deliver products. Total quality management is the need of just in time (JIT) to reduce delivery time.
In TQM production and inspection takes place at the same time. Quality is checked at each stage of production process so defects can be identified and corrected where it has occurred before it proceeds to the next stage. It is consistent with the old maxim 'prevention is better than cure'
TQM recognizes the need for inter-departmental communication, so that workers know their work falls in the overall process. Ex, delivery department can know how to handle the goods by communicating with packaging department. Workers need to be trained enough undertake the maintenance work and fix the machinery on their own to prevent idle time due to machine breakdowns.
In TQM focus is on quality from the eyes of the customer. It recognizes the need for decentralization as customers can be entertained according to the requirements of the customers regarding product quality and specification in different locations.

What is Benefits of Total Quality Management (TQM)?

• TQM saves money by eliminating reworking of finished goods that uses more resources and time.
• Training provided to workers increases their motivation because of increase in employability.
• Workers are aware of the end result of their jobs helps them perform their job more effectively by keeping the required result in mind.
• TQM help business products to be certified for quality from the organizations like ISO (international standardized organization) which increase marketability of products.
• Reduces cost of after sales services and warranty claims. Warranty claims expenses pickup, rework and again delivery of goods.
• Non-value added (Do increases value to the customer) activities like finished goods inspection are eliminated as goods are inspected for quality at each production stage.

What is Limitations of Total Quality Management (TQM)?

• TQM has unrealistic policy of 'doing things right' which is not possible as human being is not perfect.
• Quality checks at each stage may increase the length of production process resulting in more cost.
• TQM needs cultural changes like line of communication, production process and so on. Employs do not accept these changes as they were get familiar with existing work processes and may not like to learn new way of doing things.
• Training can result in costs and idle time. The time in which workers can produce products, will now be spent of attending classes and money paid on behalf of workers to teachers can be substantial which can used elsewhere to gain competitive advantage.
• TQM can increase many fixed costs recruitment of full-time skilled labour on salaried basis in place of part-time semi-skilled labour on hourly wages and more money will be spent on machine maintenance to avoid machine breakdowns which can exceed the cost of breakdowns.
• Production processes may need to be automated to get consistency in product quality. It needs substantial investment in plant and machinery.

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What is Standard Costing System,Purpose & Process

What is standard cost?

Standard costs are used for planning and control. Standard costs are the vital part of budgeting process and variance analysis. Standard costs like Material, labour and overheads (administration, selling & distribution) costs are identified in advance. Material costs may be determined from the contract to buy material or existing figures adjusted for inflation. Labour costs are determined from employment legislation minimum wage requirements and negotiation with labour union. Overheads are determined from previous experience adjusted for inflation or anticipated costs due to changes in operations.

When standard costing is first time implemented actual data of the past years or competitors actual performance may form the basis of Standard costs.

Purpose of Standard Costing Systems or Method?

Standard costing system provides standard cost for budgeting purpose to plan future performance. Standards are established to communicate employees about economy and efficiency is required to achieve business objectives.

It can be used to motivate employee to achieve desired level of performance (ideal standards). It provides some allowances for wastage and idle time (attainable standards), it recognizes the fact the labour are likely to waste some material and will become absent for various reasons like sickness.

Standard costing provides standard costs for variance analysis to control business performance. Standards are compared with actual outcomes to find deviations and reasons for these deviations, so that corrective action can be taken. It helps in managing human resources by giving them signal that their performances are being measured, compared and analysed.

Rewards can be given and Disciplinary action can be taken based on pre-defined criteria communicated to them, so that decisions regarding whatever action taken can be justified to avoid resentment among workforce.

Standard Costing Process or Procedure

Standard costing is used for recording of material, labour, overhead. Data presented in the financial statements are recorded at actual cost. Some business chooses to directly record Direct costs (material and labour) at actual costs and indirect cost (overheads)at standard or budgeted cost as per normal costing systems, while other businesses choose to record all Direct and indirect costs firstly at standard cost. At the end of the reporting period, when company performs variance analysis, these variances (differences) are adjusted to standard costs to arrive to actual cost. Whatever the approach may be chosen, it gives the same results.

Standard costs may need to be revised during the periods if circumstances changes which initially used in the determination of standard costs like inflation rate. Then this new standard cost will be used from the point circumstances are changed.

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Benefits and Limitations of Standard Costing System.

What is the Benefits of Standard Costing Systems or Method?

It is traditionally used system, it requires lesser resources and easy to implement.

It saves the bookkeeping cost by not requiring to record actual cost each time when transaction occurs, In standard costing all the standard cost recording are done when actual activity level (sales volume) are known to determine the total standard cost for the period.

It helps to identify the relationship between different variables like price and usage. Ex, usage of poor quality raw material to reduce price may lead to increased usage of raw material due to increase in wastage.

Actions can be taken on basis of materiality (benefit exceeds cost). It directs managerial attention towards the area which really needs improvements. Like adverse labour efficiency variance suggests the need of training.

What is the Limitations of Standard Costing Systems or Method?

When the variance is reported nothing can be done to prevent the loss. It is based on historical data by the time variances are reported may be too late from the period to which it relates, and can be considered out of date by manager being reported.

Manager may not understand the purpose of standard costing and perceive it as a limitation on their authority to take decisions. To control cost Manager may be feel forced to take decision against their beliefs, like Quality is important for business success or it is unethical to use poor quality materials.

A person responsible for variances is difficult to identify for reward or penalizing. Ex. Favourable usage variance might because of the good quality material than standard lead to reduced wastages.

It does not give any motivation to improve their performance beyond the standards. Ex, sales person has already achieved his/her target to be entitled for bonus than he/she may not do further effort to increase sales.

It directs resources towards past while business objective is achieved by looking into future.

Other limitations are:

It does not consider impact on customer, how product prices are justified and product quality.

It does not consider liquidity and long term impact (goods may be sold on credit) of the standards set to achieve short term results.

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What are the Costing Systems or Methods & Types?

What are Costing Systems or Methods?

Some cost are direct while others are indirect, direct costs can be identified to a specific products but indirect costs which are not identifiable to specific products, need to be allocated on some objective and rational basis for product costing & pricing which can be justifiable to customers. Costing systems are the systematic allocation of cost to products. It can be used for planning, decision making and control purpose as well. Budgeted figures are used for costing of products as actual prices are not known at time when prices are decided.

What are the Types of Costing Systems or Methods?

Absorption Costing System

Absorption costing system is the method of allocating overheads (Fixed and variable) to products based on pre-determined absorption rate. To find the pre-determined rate total Budgeted overhead cost is divided by activity level. The basis on which costs are allocated are subjective and difficult to justify. Absorption costing system gives full cost of the product. It can be used for long term product pricing. It is traditionally used system easiest to apply. This costing system is permitted by international accounting standards for financial reporting purpose

Marginal Costing System

Marginal costing system identifies variable and fixed overhead costs separately. It identifies different behaviour of fixed and variable costs. It workouts cost for short term decision making. It can be used to evaluate ad-hoc (unplanned) opportunities and proposals. It declares fixed overhead are irrelevant in the short term and cannot aid in day to day decision making. It recognizes term 'contribution' it means contribution towards recovery of fixed cost. It is the term which should be considered instead of profits.

All cost are variable in the long term. All cost have to be recovered in the long term if business has to operate successfully. It is merely useful for short term management decision making like make or buy, contribution per scarce resource and finding optimal production plan, like through linear programming.

Activity Based Costing System

Activity based costing does the job of traditional activity based costing system in rational and objective way. It identifies activities, like machine running costs and invoicing customers, across whole business instead of departments and uses cost drivers (variable or item which incurs cost), like machine hours (volume based), number of invoices (transaction based). All the overhead costs across whole business are allocated to activities, technical term cost pools. These cost pools are divided by cost drivers to obtain an ABC rate. This rate is used to allocate cost to the products on the basis of each product increasing cost diver quantity. This costing system gives useful information for planning and control.

Target Costing System

This is a modern methodology towards costing. It attempts to find market price of the similar products in advance. Required rate of return is deducted to arrive at target cost. This cost is different from the actual cost. The difference between Target and actual cost is called gap. This gap should be reduced overtime by achieving efficiencies (learning effect), economies of scale and product specification changes by eliminating non-value added activities. Once the target cost is achieved, it should be further reduced as it aims for continuous improvement. Advantage of using this costing system is that financial viability (whether to continue or not) of the product is known at development stage of the product life cycle.

Backflush Costing System

Backflush costing system is different way of allocating costs to products. It does not use traditional inventory bookkeeping which tracks inventory movements from raw material to work in process (WIP)to finished goods. It directly recognizes the cost to finished goods account, all previous bookkeeping is flushed. Costs are recorded when goods are finished or delivered. It saves time and cost of tracking and maintaining separate account for each stage of production process. This costing system is applicable when just in time (JIT) inventory management is in place. It does not gives accurate product costs as there may be some work-in-process remaining at year end. Material cost is the same as standard cost because of JIT. Labour and overheads are recorded at actual cost.

Throughput Costing System

In modern, business environment majority of the costs like labour and overhead are fixed due to employment legislations, automation and long term contracts for energy and others. This leaves only material cost as variable which can be controlled in the short term. Throughput costing system aims to maximize throughput (Total Sales minus Material cost) per factory cost/hour (Total labour plus overhead costs divided by total factory hours). Factory hours are time for which factory operating it excludes unavoidable idle time. It gives information for decision making and control purpose in that product generating low throughputs can be identified, improved, prioritizes for production, evaluating one-off opportunities or proposals and discontinued loss making products.

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What is Just In Time (JIT)? Its Benefits & Limitations.

What is Just in Time (JIT)?

Just in time inventory (JIT) system is the approach to inventory management; it suggests inventory should be only purchased for production of Products to satisfy customer demands. Otherwise, no inventory should be purchased for storage. In Just in time system ideal inventory is Zero. Buffer stock is only need for inventory anticipated to become short in supply.

How Just in Time (JIT) affects the business?

Just In Time is beyond than just in inventory system it changes the way business is structured, its culture and its management philosophy, like focus shifts from production to customer. Effects of Just In time Inventory System on Business are.

It requires many changes in the way business operates.

Consideration of factors like availability of raw material or use of alternative material. (Limitation)

Machinery maintenance has to be carried out more frequently to avoid machine break downs resulting in idle time, which ultimately delay the deliveries to customers.

It affects the selection of markets to sell products. Markets situated at remote places make it difficult for the business to deliver goods on time. (Limitation)

It takes managerial time and costs (limitation) to implement JIT. Direct cost as well as opportunity cost of using the time elsewhere to gain competitive advantage.

Production process has to be changed to avoid bottleneck (constraints), so that no work-in-process (WIP) arises. There is no need of separate sub-department because goods do not change hands from start to finish.

Retraining (limitation) may be necessary, JIT involves the use of multi-skilled workers so that time taken in moving the goods from one department to another is eliminated.

Change management may be necessary to implement JIT. Existing culture may not be appropriate for JIT implementation; employees may resist change (limitation) from the fear of learning new thing.

Information technology plays a vital role implementing JIT. It provides the efficiency needed for time ordering of inventory, so that inventory can be quickly purchased. Ex, POS (Point of sale) systems are required through which purchase orders are automatically dispatched when inventory falls below a certain level.

It requires the use total quality management (TQM) in place of traditional standard costing which provides allowance for wastage and idle time. Wastages and idle time can delay delivery to customers.

It also need horizontal value chain to be reconsidered for activities like material handling and finished goods inspection which takes time but does not add value to the product no longer needed due to the use of TQM. In TQM production and inspection are done at the same time. In JIT inventory goes straight to production department where it is needed.

Supply chain both up side and down side has to be changed. Supplier chose should be able to make deliveries on time. Distribution of goods should be done in-house or outsource to some reliable logistics firm (firm which handle business operations on clients behalf).

Traditional inventory cost allocation systems like perpetual inventory systems using FIFO or LIFO in which needs inventory needs to be tracked from raw materials to WIP to finished goods. Just In time employ Backflush costing system in which raw material to directly transferred to finished goods when manufacturing is completed or goods are dispatched.

What are the Benefits of Just In Time (JIT) System?

There are many benefits of Just In Time (JIT) inventory system.

• It reduces the requirement for working capital as in practice minimal level of inventory has been kept.
• It reduces the risk of inventory obsolesce, fire, flood and theft.
• It improves liquidity position of the company as cash or bank will increase instead of inventory which is a less liquid form of asset.
• Excess capital can be invested elsewhere to grab the adhoc (unplanned) opportunities or invested for short term to receive interest.
• It reduces record keeping costs as inventory is not tracked as backflush costing system is used.
• It reduces material handling and finished goods inspection cost.
• Goods are Manufactured what is demanded by the customer. It reduces the risk of manufacturing product which has no sufficient demand.
• It reduces the inventory holding cost, while inventory ordering cost is control by the use of information technology.
• It facilitates long term planning by fixing the material prices in advance.

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What is Fitzgerald and Moon Building Block Model?

Fitzgerald and Moon proposed a Building  block model which suggests the solution of performance measurement  problems in service industries. But it can be applied to other manufacturing and retail businesses to evaluate business performance. It identifies three areas for performance measurement, these are

· Standards.
What kinds of properties good standards or targets should possess.
o    Equity.
Performance measures should be equally challenging for all parts of business. Relaxation given to one part of the business leads to perception of unfair treatment which hinders productivity.
o    Ownership.
Performance measure should be acceptable to everyone. Employees should be got involved in the identification of measures rather than being imposed on them. Ownership means here is responsibility for the results.
o    Achievable.
Performance measure should be realistic. Ex, Using actual results for the competitors to set as target. Employee will not be motivated to achieve targets if consider them impossible.
· Rewards.
What kind of properties reward schemes should possess.
o    Motivation.
Rewards scheme should be set in manner which motivates employees to achieve the business goals. If sales growth is desired than bonus can be linked to performance measures, like increase in number of units sold than previous year.
o    Clear.
Rewards scheme should be clearly communicated to employees in advance. What kind to performance will be rewarded and how their performance will be measured.
o    Controllability.
Employees should only be reward or penalized of the result over which they some control or influence. Aspects of business like financing and investment should not be considered by eliminating related expenses like interest and depreciation, when evaluating their performance.
· Dimensions.
They are the areas of business performance which need to be monitored and controlled if business goals have to be achieved. For overall assessment of the business performance, performance needs to be measure from various perspectives. They are further divided into two sub-categories.
o    Determinants.
These are performance areas which influence the results. These are.
·Quality.
It is the ability to deliver goods and service with consistency. Quality should be judged from eyes of the customers. Quality is the level of benefits customers expects from the product. Quality should be enough for a product price paid.
·Flexibility.
It is the responsiveness to change in the factor influencing the business performance. Ex, ability to cope with sudden increase in sales demand.
·Innovation.
Ability of the business to devise new products and new ways of doing things. Like packaging of products with environment friendly (recyclable) material.
·Resource Utilization.
It is the ability to use resources to achieve business objectives. Business assets should be used for the proper purpose and in most efficient way. Ex, using delivery vans to its maximum capacity only by carrying authorized goods.
o    Results.
It reflects the success or failure of determinants identified above.
·Financial Performance. Financial performance gives an indication of overall business at a glance in monetary terms. These can be used to identify areas of strengths and weaknesses. It may also highlight other areas previous identified which may be critical to business success.
·Competitive Performance.
How they stand in comparison to its competitors? How are the different from their competitors? Ex, offering of products of higher quality than competitors and products having distinct features than rival products.



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