Traditional Investment Appraisal Techniques Essay

Traditional Investment Appraisal Techniques Essay.


“If you can’t measure it, you can’t manage it”. This basic principle of Peter Drucker is nowadays especially important when it comes to the valuation and management of strategic investments, which have the potential to bring sustainable change to the business processes of a company. When it comes to the process of assessing strategic investment proposals through investment appraisal techniques there might be doubts about the capability of traditional methods to recognize strategic intangible benefits which might be difficult to measure.

Mainly it has been argued that the overconfidence on financial appraisal methods may lead to a predisposition against strategic investment projects, thus acting as a hurdle for business innovation (Phelan 1997, as discussed in Alkaraan and Northcott 2006, p. 150). Therefore this review aims to discuss this matter by analysing the scientific perspective on traditional techniques and new approaches. Furthermore it will analyse the development of the investment appraisal practise through recent studies about manufacturing companies in the UK, Sweden and Italy.

Shortcomings of traditional approaches

Many new investments in the manufacturing industry improve the production processes leading to higher flexibility, efficiency as well as reliability and consistent quality of products, shorter lead times, simplification of design changes and solve environmental issues (Nasarwanji et al. 2009, p. 2, Jonsson 2000, p. 1466). Other strategic benefits might be creating competitive advantage, improve organizational learning or the responding to customer needs (Kaplan 1991, p. 215). While some of these strategic benefits can be quantified and therefore be measured others may be difficult to value or estimate in financial terms. Therefore it might be possible that such strategic benefits are not included in the calculations of traditional models like the payback method, return on assets or investment, internal or annual rate of return or the present value. This circumstance could make it difficult to justifying necessary new manufacturing technologies (Alkaraan and Northcott 2006, p. 152; Dempsey 2003; Covin et al. 2001; Lefley 2000, p. 29; Adler 2000, p. 16; Carter 1992, p. 59).

Another flaw is the inherent and biased short-term focus of the traditional methods because manufacturing investments often require long lead times to become fully operational and thus realizing their benefits. The short-term bias of the DCF-methods is intensified by the failure of adjusting the discount factors to the changing inherent risk in each different project phase (Alkaraan and Northcott 2006, p. 152; Adler 2000, p. 16; Carter 1992). Although the DCF-method is considered as the most effective technique for the evaluation of investment opportunities (Boston 2000, p. 35), it is argued that one can rarely predict longterm cash-flows accurately. Furthermore hurdle-rates are often inappropriate because of the usage of extremely high discount factors, thus leading to a minimization of the long-term benefits and the rejection of strategic investment projects (Alkaraan and Northcott 2006, p. 152; Adler 2000, p. 16; Carter 1992).

Critics also argue that the common assumptions underlying the status quo alternative against which the investment is being compared are wrong. The status quo or the current competitive position will not remain unchanged if the investment is rejected because the cost, quality flexibility and innovation level of the competitors are unlikely to remain at the same level (Adler 2000, p. 17; Carter 1992).

Additionally Adler is criticizing the inconsistency with regard to the treatment of the inflation in the calculations because there are no allowances made for the increased cash flows based on the future increased sales prices (Adler 2000, p. 17). In order to solve the inherent flaws of the traditional investment appraisal techniques and to include an additional evaluation of advantages in enhancing the competitive strategy, it is possible to distinguish two basic approaches in the scientific literature which will be discussed in detail during the following chapters.

Modification of traditional approaches

The first approach basically intends to modify the implementation of the existing traditional approaches. Proponents of this approach simply believe that the traditional appraisal techniques are still the best to use and argue that all the criticized flaws are just consequences of their incorrect usage (Adler 2000, p. 8; Kaplan 1986).

Next to the suggestion of scholars to include the inflationary factor properly in the calculations of the cash flows (Boston 2002, p. 35), they complain about the use of excessively high discount rates. Pointon suggested that this error is due to the use of the arithmetic mean for calculating the equity risk premium (ERP) because the arithmetic mean rate of return could even be positive if the overall rate of return for a period is zero. Instead one should use the geometric mean which calculates a more conservative ERP for UK between 3 to 5 per cent (Pointon 2002, 29). This statement was supported by publications during the financial crises, suggesting the same range (Inkinen et al. 2010). However it should be mentioned that the ERP for UK increased after the overcoming of the crisis ranging recently between 6 and 7 per cent (Miles 2013, p. 5).

Ramasesh and Jayakumar (1993) proposed to divide the calculation into four consecutive stages, where commonly made mistakes are being corrected, strategic benefits which are soft or uncertain are getting measured by trying to attribute them values and learning curve benefits are recognized. If the NPV is still negative at this point they suggest to undertake a residual strategic benefits qualitative analysis on the last stage (Adler 2000, p. 19). The risk by applying this method in the practise might be the undesirable interpretation of these stages as a merely search for additional value in order to justify the investment proposal even if it leads to unrealistic assumptions.

The methods or models of the other main approach are differing significantly from the described suggestions because they rely on strategic analytical frameworks which are especially aiming at evaluating strategic benefits in the long-term run of a business. Introduction of new analytical approaches

In 1997 Lefley introduced the so called Financial Appraisal Profile (FAP) model which consists of three investment evaluations which are done by an appraisal management team. The financial appraisal aims at providing a financial perspective on the project through calculating the NPV and other financial key performance indicators (Lefley 2000, p. 28). The project risks are identified by calculating the Risk Index where its degree is influenced by the likelihood of occurrence and the degree of impact. The last evaluation part calculates the Strategic Index by examining the key strategic benefits through the corporate management before applying a corporate ranking to take the different levels of importance into account (Lefley 2000, p. 29). This approach could be helpful for the corporate management to monitor their investment strategies by comparing the risk commitment to each project in connection with the expected financial and strategic benefits.

The multiattribute decision model (MADM) develops a general measure of utility based on the important financial and non-financial factors in evaluating an investment (Adler 2000, p. 9; Carter 1992). The ratings assigned to the factors are based on the expectation if the alternative will decrease, increase or has no impact on the factors. Additionally the different level of importance of the factors to the organization are considered by applying a weight (Adler 2000, p. 9). Furthermore it is possible to multiply the score with the expected probability of achievement (Adler 2000, p. 10).

The value analysis and analytical hierarchy model (AHM) are differing from the MADM in the way of how they collect the necessary input information. The value analysis uses the Delphi method which implements an iterative process of collecting single group members’ opinion providing it as group-level information to gain a group consensus (Adler 2000, p. 20). The AHM asks managers for a pairwise comparison between the factors’ utilities and builds up a matrix with the responds. Afterwards the comparisons are analysed by mathematical models such as vector analysis (Lloyd 2001, p. 364). The AHM also allows to check the coherence of the given scoring (Adler 2000, p. 21).

With the strategic cost management approach Shank (1996) attempts to broaden the horizon of conventional financial appraisal methods by adding the analysis of the implications of adopting an investment proposal on the value chain, competitive advantage and cost drivers of the firm (Adler 2000, p. 19). Hence this tool enhances the coherence between the execution of an investment and the formulated strategies of the firm, their implementation and development of strategic controls.

As one can see the scientific community developed a wide range of new analytical frameworks, thus enabling to include the strategic aspects of an investment decision into the conventional financial appraisal or departing from it significantly by using new strategic analysis frameworks. Nevertheless the important question here is if these new models are adopted by the management and therefore having an impact on the business practise of investment appraisal.

Recent state of business practise

Alkaraan and Northcott conducted a study of practise about the strategic capital investment decision-making among large UK manufacturing companies. They revealed that when it comes to the financial analysis of investment projects the NPV is the most used technique. Besides that the findings suggested that the usage of the method is independent of the nature of project which is being evaluated. This confirms the view of Abdel-Kader and Dugdale in an earlier observation (Abdel-Kader and Dugdale 1998, p. 273). Despite of its inferiority the usage of payback method is still widely spread among companies, where 98 per cent of the respondents stated that they use it even in the case of evaluating strategic investment proposals (Alkaraan and Northcott 2006, p. 160).

The still prevailing role of the payback method in all industries is also supported by an older study among Sweden’s largest groups of companies. Besides that companies within the manufacturing industry tend to use DCF-methods more often (Sandahl and Sjögren 2003, p. 51).

Alkaraan and Northcott found empirical evidence that the risk analysis methods are still remaining intuitive and simple, suggesting that risk evaluation is being perceived as a question of professional judgement rather than a detailed formal analysis (Alkaraan and Northcott 2006, p. 164). Despite of the academic endorsement of more sophisticated strategic investment appraisal techniques the findings suggest that they are still not widely applied in the practise of investment decision-making because it is likely that managers judge their practical and conceptual application as too difficult (Alkaraan and Northcott 2006, p. 164). The authors described this prevailing attitude with regard to appraisal of capital as ‘simple is best’ (Alkaraan and Northcott 2006, p. 170).

The philosophy of ‘simple is best’ is also supported by an study of Italian manufacturing companies which rejected the common assumption that firms with advanced manufacturing technologies (AMT) and hence a higher need of strategic investment decisions are using more sophisticated financial appraisal and risk analysis techniques than non-AMT firms (Cescon 2010, p. 24).


Despite of the critics developed from the scientific community about traditional financial investment techniques the empirical evidence does not show a high level of integration between strategic and financial analysis approaches in the business practise. Partly adjusted traditional investment appraisal techniques are still dominating the evaluation of investment projects, while risk analysis approaches remain relatively unsophisticated. The emergent strategic investment analysis tools developed by scholars have very little impact on practice because they are often viewed as too complex and theoretical. The underlying maxim of nowadays appraisal of investment projects seems to be ‘efficient and simple practicability’. Intuition and judgement also play an important role in the evaluation and analysis of the connections between the strategic dimensions of capital investments and their financial impacts on the business performance.

Abdel-Kader, M.G. and Dugdale, D. (2001), Evaluating investments in advanced manufacturing technology: a fuzzy set theory approach, British Accounting Review, Vol. 33, Issue 4, pp. 455–489.
Adler, R.W. (2000), Strategic Investment Decision Appraisal Techniques: The Old and The New, Business Horizons, November/December, pp.15–22.
Alkaraan, F. and Northcott, D. (2006), Strategic capital investment decision-making: A role for emergent analysis tools? A study of practice in large UK manufacturing companies. British Accounting Review, Vol. 38, Issue 2, pp. 149–173.

Boston, J. (2002), Purer Speculation, Financial Management (CIMA), March, pp. 34–35. Carter, W.K. (1992), To invest in new technology or not? New tools for making the decision, Journal of Accountancy, May, pp. 58–64.

Cescon, F. (2010), Investment in New Manufacturing Systems: An Italian-based empirical analysis, Economia Aziendale Online 2000 Web, Vol. 1 (2010), pp. 13–26. Covin, J.G., Slevin, D.P., Heeley, M.B. (2001), Strategic decision making in an intuitive vs. technocratic mode: structural and environmental considerations, Journal of Business Research, Vol. 52, Issue 1, pp. 51–67.

Dempsey, M.J. (2003), A multidisciplinary perspective on the evaluation of corporate investment decision making, Accounting, Accountability & Performance, Vol. 9, Issue 1, pp.1–33.
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Kaplan, R. S. (1986), ‘Must CIM be justified by faith alone?’, Harvard
Business Review, March-April, pp. 87–93.
Inkinen, M., Stringa, M. and Voutsinou, K. (2010), ‘Interpreting equity price movements since the start of the financial crisis’, Bank of England, Quarterly Bulletin, Vol. 50, No. 1, pp. 24–33.
Jonsson, P. (2000), An Empirical Taxonomy of Advanced Manufacturing Technology, International Journal of Operations & Production Management, Vol. 20, Issue 12, pp. 1446– 1474.
Lefley, F. (2000), The FAP Model of Investment Appraisal, Management Accounting UK, March, pp. 28–31.
Lloyd, A. (2001), “Technology, Innovation and Competitive Advantage: Making a Business Process Perspective Part of Investment Appraisal”, International Journal of Innovation Management, Vol. 5, Issue 3, pp. 351–376.

Miles, D. (2013), Central bank asset purchases and financial markets, Bank of England, Global Borrowers & Investors Forum, June 2013.
Nasarwanji, A., Pearce, D., Khoudian, P. and Worcester, R. (2009), “The Impact of Manufacturing Execution Systems on Labor Overheads”, Proceeding of the World Congress on Engineering 2009, Vol. 1, WCE 2009, London.

Phelan, S.E. (1997), Exposing the illusion of confidence in financial analysis, Management Decision, Vol. 35, Issue 2, pp. 163–168.
Pointon, J. (2002), Justifying the Means, Financial Management, December, pp. 33–34. Ramasesh, R. and Jayakumar, M. (1993), “Economic Justification of Advanced Manufacturing Technology”, Omega International Journal of Management Science, June 1993, pp. 289–306.

Sandahl, G. and Sjögren, S. (2003), Capital budgeting methods among Sweden’s largest groups of companies. The state of the art and a comparison with earlier studies, International Journal of Production Economics, Vol. 84 (2003), pp. 51–69. Shank, J. (1996), “Analysing Technology Investments–From NPV to Strategic Cost Management”, Management Accounting Research, June 1996, pp. 185–197. 7

Traditional Investment Appraisal Techniques Essay

Hershey’s Homework Essay

Hershey’s Homework Essay.

1. Does Hershey use process manufacturing or the assembly process? Is the production of Hershey’s chocolate an intermittent or continuous productions process? Justify your answers.

Hershey uses both process manufacturing and the assembly process to produce and manufacture their products. Process manufacturing is used during the chocolate creation phase by combining various ingredients together, such as cocoa beans, milk and sugar, that cannot be disassembled back into their original components. The assembly process is used when different components are combined together, such as chocolate and almonds to make a Hershey’s candy bar with almonds, or chocolate and peanut butter to make Reese’s Peanut Butter Cups, which is then followed by the automated packaging process.

In the production of Hershey’s chocolate a continuous process is used because different processes are performed using multiple machines with long production runs to turn out the finished product over time. For example, the cleaning of the imported cocoa beans takes place on one machine while the sorting, roasting and blending of the beans take place on different machines and when all of those processes and components (addition of milk, sugar etc.

) are complete the chocolate must be refined and go through the conching process for up to 72 hours.

The ingredients being processed in order to make the chocolate are continuously in motion, undergoing chemical reactions (chocolate liquor) that require heat to properly formulate. Shutting down and starting up Hershey’s continuous chocolate making process would more than likely result in a poor quality product that would need to be reprocessed or disposed of, therefore, the factory operates 24 hours per day, seven days per week with infrequent maintenance shutdowns (

Hershey’s Homework Essay

Sudsy Soap Essay

Sudsy Soap Essay.

Question 1: Assume that you are Frank Johnson’s assistant, and he asks you to look into various scheduling problems that might occur. List and discuss them.

Scheduling Problems:

– Lead time: First of all; Starting date of this partnership wasn’t mentioned; however; assume we are in month of June; According to the proposal the promotion will start by October 5th so prior to this date they should be ready with Soap and dishes taking into consideration that delivery time of Soap varies between 6 to 43 days.

But if we were in September for example; they won’t be able to meet this lead time. In addition to; the delivery time of dishes this was not mentioned. -Picking and Packing: they need to take into consideration the packing time to make these packages specially that Dishes are fragile so they will need a special packing.

First, extra time will be needed to put the dishes in the packages. How will this affect production schedules? How must production and delivery be altered to ensure that all geographic markets, including Hawaii (if it is to be included in the TV campaign), receive the same dish items in the same week? In addition, will packages have special printings that tell what type of dish they contain? If so, there will be problems coordinating the same dishes with the same packages.

Question 2: What packaging problems, if any, might there be? Packaging problems:

Dishes will need a special packing because they are fragile; so they might need special upgraded material for packing to avoid having broken dishes. Labeling: they will need special labels marked with “Fragile Products”. More time will be needed due to this special packing.

Will one package hold all five dishes, or will some require a unique package size (which will rule out the proposal)? What external changes in printing on the package will be needed? Will the packages safely transport the dishes? Will the changed weight of packages have an impact on handling, or on transportation costs? Question 3: Many firms selling consumer goods are concerned with problems of product liability. Does the dish offer present any such problems? If so, what are they? Can they be accommodated? First, breakage. Who reimburses the customer, who pays for soap, and who discovers broken glassware inside? If there are delivery snags or supply problems, what responsibility is there to provide consumers with dishes they could not obtain during the promotion? Does the firm’s product liability insurance cover problems that may occur from the dinnerware promotion?

Question 4: Should the exterior of the Sudsy Soap package be altered to show what dish it contains? If so, who should pay for the extra costs? The package should be altered externally to remind the customer of the promotion and indicate that there is a free item inside. Because the dish-maker gets free advertising from the soap packages, they should pay part of the costs. The splitting of these costs is subject to negotiation and would depend upon the overall agreement between the two firms.

Question 5: Assume that you are another one of Johnson’s assistants and your principal responsibility is managing the inventories of all the firm’s inputs, finished products, and outbound inventories. What additional work will the dish proposal cause for you? There might be a rise in sales, an increased need for all inputs into production, as well as need for higher capacity and inventories. There would need to be an estimate of the possible sales increase, demands imposed by new delivery requirements, and the change in package size and weight. In addition, incoming dishes would need to be monitored, as would specially-printed packages and outgoing packaged soap (classified by the type of dish inside). After the promotion, by how much, and for how long, will soap sales decline?

Question 6: You are Mr. Beever. Your staff has given many objections to the dish tie-in proposal, but you believe that much of the problem is your staff’s reluctance to try anything innovative. Draft a letter to the company that—although not accepting their proposal—attempts to clarify points that may be subject to misinterpretation and also takes into account some of your staff’s legitimate concerns. Some of the points the letter would cover include:

a) If we cannot fulfill delivery on schedule to all markets, to have the dishes in the right place when your TV campaign breaks, are we liable to you? To the customer? b) What if the dishes break in route from you to us? c) What quality assurance of your dinnerware product can you provide? d) If, for some reason, a customer cannot find pieces for an entire place setting, will you supply them missing pieces? At what cost? We don’t want any backlash against our company and soap product. e) Who pays the freight and insurance charges to get the dishes to our factory? f) Who pays for our increased packaging and handling costs? g) Who pays for the increased costs caused by complications added to our scheduling of outbound shipments? h) What is the content of the TV campaign? What shows will it appear on? How much mention will be made of our product? How, if at all, will our soap packages be shown on TV? i) Who will pay for the redesign of our packages? j) Will there be import duties on the dinnerware? Will we be reimbursed for paying them? k) Will you assume any liability in case we are sued because of something resulting from this promotion?


Several instructors use this case early in the course, and then as part of the final examination.

1-Scheduling Problems.
A-Lead time:
First of all; Starting date of this partnership wasn’t mentioned; however; assume we are in month of June; According to the proposal the promotion will start by October 5th so prior to this date they should be ready with Soap and dishes taking into consideration that delivery time of Soap varies between 6 to 43 days. But if we were in September for example; they won’t be able to meet this lead time. In addition to; the delivery time of dishes this was not mentioned.

B- Picking and Packing: they need to take into account the packing time to make these packages specially that Dishes are fragile so they will need a special packing.

2-packaging problems:
▪ Dishes will need a special packing because they are fragile; so they might need special upgraded material for packing to avoid having broken dishes.
▪ Labeling : they will need special labels marked with “Fragile Products”.
▪ More time will be needed due to this special packing.

3- Product liability is: “the area of law in which manufacturers, distributors, suppliers, retailers, and others who make products available to the public are held responsible for the injuries those products cause”; in addition to this; product liability is the defect that might occur for any product. I believe that dish offer present such problem; because it could be broken easily as dishes are Classified as fragile products but this can be accommodated through the good safety packing same as for DG. Meaning extra cost will exist.

4-I believe that yes; exterior of the sudsy soap should be alerted to what is inside the package. Because in that sense he will be more interested and more précised regarding either buying or not buying the set and this will be according to his needs. For the extra cost accompanying this option ; I believe it depends which partner will gain more benefit ; and in this case I think the dish partner…

Sudsy Soap Essay

Beta-Galactosidase and Western Blot Essay

Beta-Galactosidase and Western Blot Essay.

1. EMG 9 and EMG 26 contain strain _lac-_(I- Z+ Y+) and strain _lac -_ (I+ Z- Y-)respectively.Three genes huddled together on the chromosome are required for two strains of _E.coli_ to utilize lactose.Consisting of three genes, namely, _lacZ_, _lacY_ and _lacA_, the _lac_ operon orderly handles these genes to code specific enzymes necessary for the metabolism of lactose. The genes _lacZ_, _lacY_ and _lacI_ would code for beta-galactosidase, galactosidase permease and _lac_ repressor respectively. Regulation of _lac_ operon is also tight and the operon’s negative control is made possible by _lac_ repressor (Hill, 1996).

With the presence of _lac_ repressor, _lac_ operon will be deactivated and will remain on this state unless acted upon by lactose. Consequently, transcribing the genes inside _lac_ operon will be prevented. _Lac_ operon only operates with the presence of lactose and absence of glucose. However, when both lactose and glucose are available, the latter is primarily preferred over metabolism. Lactose will only be cleaved into glucose and galactose with the aid of beta- galactosidase and its transportation inside the cells will be facilitated by galactoside permease (Hayes et al.

, 2010).

Inside EMG26, mutation can be noted on _lacZ_ gene. Production of beta-galactosidase will also not occur regardless of the current state of _lac_ operon, whether it is activated or not; or whether lactose is present or absent (Snyder, et al., 2007). Moreover, binding of _lac_ repressor to its operator is also apparent which in turn prevents the transcription of _lac_ genes through the inhibition of RNA polymerase. However, this inhibition may be counteracted with the presence of allolactase, an alternative lactose formation generated from rearrangements of beta-galactosidase.

When allolactase binds, alteration in the conformation of repressor will occur in such way that it favors its dissociation with the operator (Hames, et al., 2000). Consequently, it stimulates the _lac_ operon, which results to the production of (_lac_ Y+) or galactosidase permease only. Galactoside permease is only produced since its genes do not undergo mutation. On the other hand, beta galactosidase is not produced when mutation of _lac_ Z gene occurs.

When it comes to EMG 9, the production of _lac_ repressor is not apparent due to _lacI_ gene mutation (_LacI-)_. Constant activation of _lac_ operon will happen regardless of lactose availability. In addition, transcription of _lac_ genes by RNA polymerase will occur. Therefore, it can be stated that galactosidase permease and beta-galactosidase will always be present since _lac_ operon remains activated and no mutation occurs with their genes (Pierce, 2007). Upon inspecting the gel used in this study, there were notable cellular variations between the protein pattern and the content of two _E. coli_ strains, EMG 26 and EMG 9.

The identified difference between the two strains is primarily on the ability to manufacture beta-galactosidase protein, and this is apparent on the EMG 9 strain. Since EMG 9 can produce beta-galactosidase proteins, it is possible that bands are present on the eighth and ninth lane. As presented in Figure 2, two bands are identified to have high distinction and intensity on the topmost surface of the gel. In the sixth and seventh lane, where EMG 26 strain of _E. coli_ is cultured, no bands are discovered. This can be explained by the inability of this strain to produce beta-galactosidase proteins secondary to alteration of _lacZ_ gene.

Although Figure 2 reflects that two bands are present on the eighth and ninth lane, these types of bands do not correspond with beta-galactosidase protein. Rather, these two bands are similar to those bands present in lane 10. In this lane, numerous amounts of molecular markers which consist of seven proteins are laden. One of these proteins is beta-galactosidase, and this was regarded as the first band in the gel. Moreover, this type of protein made up the 116 kDa weight as shown in Figure 3. This identified weight is attributed to the characteristic of beta-galactosidase to be denatured by sodium dodecyl sulfate (SDS).

In its original state, beta-galactosidase has a molecular weight of 464 kDa. Considering that this protein consists of four complex subunits, its exposure to the denaturing activity of sodium dodecyl sulfate can equally divide beta-galactosidase into four parts, each of which has a molecular weight of 116 kDa. Moreover, exposure to polycramide gel electrophoresis will result to alignment of subunits. The subunit possessing a molecular weight of 116 kDa will be regarded as the first molecular marker in the band (Zhang et al., 2005).

As mentioned previously, the two identified bands in the eighth and ninth lane, where EMG 9 is cultured, have high intensity and distinction. This can be explicated by the mutated _lacI_ gene found within this strain of _E.coli_. When this gene mutates, synthesis of _lac_ repressor will not transpire and activation of _lac_ operon will take place. Consequently, the non-mutated _lacZ_ gene within the EMG 9 strain will be transcribed and translated. Beta-galactosidase will become abundant resulting to increased intensity of bands. Therefore, it can be stated that there is direct relationship between protein abundance and intensity of the bands. Protein abundance will result to high band intensity (Hill, 1996).

The EMG 26 strain cultured on the sixth and seventh lane is a competent producer of _lacI_ gene. This gene produces _lac_ repressor proteins and such ability is absent on EMG 9. Therefore, the bands identified on the sixth and seventh lane are attributed to _lac_ repressor proteins. Conversely, these bands are absent on the eighth and ninth lane where EMG 9 is cultured. Just like beta-galactosidase, _lac_ repressor protein is a tetramer and its molecular weight at this state is 150 kDa.

It can also be denatured by sodium dodecyl sulfate and such process would divide this protein into four equal subunits, each of which has a molecular weight of 37.5 kDa (Zhang et al., 2005). It can therefore be stated that these divided bands should be apparent between the third and fourth molecular markers as found in Figure 2. However, establishing the identity of its composition, whether it is made up of _lac_ repressor proteins or not, is difficult. This is the difference between the two _E.coli_ strains and such distinction can be visualized better with the enhancement of gel resolution.

Despite the differences identified, the other bands present on both cultures of EMG 26 and EMG 9 correspond to all cellular proteins. In addition, the positioning, amount, and type of these proteins are quite the same since they are both cultures of _E.coli_.

2. One of the most widely used methods for measuring and identifying proteins dissociated by PAGE or polyacramide gel electrophoresis is coomassie blue staining. This method marks all the proteins present in the gel by binding to the hydrophobic structures found in protein backbone. However, an acidic medium must be used in coomasssie blue staining to enhance the attraction of electrostatic and Van der Waals forces. These forces generate protein-dye complexes by binding together the building blocks of protein and the molecules of stain. Coomassie blue staining also has protein-dye ratio which contributes to its ability to dye proteins intensely. For every milligram of protein, commasie blue can bind around 1.2 to 1.4 milligrams of dye. The intensity of staining is also affected by the amount of certain amino acids found in the proteins since commassie blue can bind these proteins hydrophobically or ionically. These proteins would include arginine, histidine and lysine. Therefore, the abundance of these amino acids (histidine, arginine and lysine) on a protein would result to greater intensity on the stain produced by coomassie blue (Roe, 2001).

However, the downfall of using this kind of staining is insensitivity. As compared with fluorescence and silver staining, coomassie blue staining has low protein detection rate which is 30 to 100 nanograms only. In addition, this staining method cannot measure the amount of protein precisely. Difficulties with protein counting are attributed to the staining and destaining process utilized in this method. Previously dyed proteins by commassie blue staining need to be destained which consequently reduces the amount of dye attached to them (Roe, 2001).

3. Previously, it has been established that the abundance of protein is directly proportional to its intensity and thickness. When there are high amounts of protein, there are also notable increase in thickness and intensity of bands. Nevertheless, band thickness and intensity are affected by several factors. In the study conducted, the factor that affects the intensity and thickness of the bands is the amount of _E.coli_ strain used. Varying amounts of EMG 26 and EMG 9 strain are placed on each tube. The first and sixth tubes contain 10 microliters of EMG 26 and the same amount of EMG 9 strain is placed on the third and eighth tubes. On the other hand, 20 microliters of EMG 26 strain is used on the second and seventh tubes, tubes four and nine also have 20 microliters but of different strain, which is EMG 9. Although they have the same amount of commassie blue stain, differences in the thickness and intensity of bands are expected.

It is therefore expected that abundant proteins would result to bands will greater thickness and intensities. On the other hand, the presence of amino acids such as histidine, arginine and lysine on proteins would result to greater intensity on the staining of coomassie blue.

4. In this experiment, the cultures of _E.coli_ strain, EMG 26 and EMG 9, undergo protein extraction. The extracted proteins are subjected to polyacylamide gel electrophoresis and sodium docecyl sulfate (SDS). The SDS is a denaturing detergent, which divides proteins into smaller units in such a way that they cannot bind again. This is also used to identify the polypeptide composition of each protein complexes. Aside from identification, the SDS also coats each polypeptide with negative charges which allow movement of these particles towards the anode. It also coats the inherent charges of each subunit causing molecular-weight-based rather than charge-based electrophoresis. This results to rapid migration of polypeptides with low molecular weights as compared to those polypeptides with larger molecular weights (Nolden et al., 2007).

The gel is also exposed to coomassie blue staining and nitrocellulose paper. Coomassie blue is used on one side of the gel to provide better visualization of polypeptides under the Gel Imaging System. The other side utilized nitrocellulose paper by blotting it on the gel to identify specific antibodies on beta-galactosidase. Antibody detection is done using monoclonal antibody of anti-beta-galactosidase, an agent distilled from the ascitic fluid of a mouse with hybidroma (Bazin, 1990). Since this monoclonal antibody can detect beta-galactosidase proteins of E.coli, it will attach itself with a high specifity to portions of previously blotted nitrocellulose paper where beta-galactosidase is present.

Visualization of beta-galactosidase protein in nitrocellulose paper necessitates another form of antibody which is called the anti-mouse immunoglobulin-G alkaline phosphate conjugate. It can detect immunoglobulin-G mouse antibodies that have formed complexes with beta-galactosidase proteins and covalent linkages with enzymes of alkaline phosphatase. This is regarded as indirect method of beta-galactosidase protein detection since its amount is determined by the reaction of alkaline phosphatase to the added 5-bromo-4-chloro-3-indolylphosphate (BCIP) substrate. Therefore, complexes of alkaline phosphatases and protein antibodies exist whenever beta-galactosidase is present (Jowett, 2009).

The presence of the BCIP is also necessary for color detection especially with the supplementation of nitro blue tetrazolium (NBT). Phosphorylated compounds, which are products of BCIP substrate, become illuminiscent if they are stripped off of their phosphate group. Such stripping is possible with the cleaving action of alkaline phosphatase. Adding NBT will allow detection of illuminiscented products of BCIP substrate which appears as purple-gray in the nitrocellulose paper (Eisenthal et al., 2002). The enzyme will then augment the signal which detects the presence of beta-galactosidase. As beta-galactosidase increases in number, so does the intensity of the enzymatic activity. Thus, the intensity of band color is directly proportional to the quantity of beta- proteins present (Eisenthal et al., 2002).

5. Within the immune system are proteins that activate in response to the presence of foreign material. These are the antibodies. However, their responses are mediated with an antigen, which contributes to the ability of antibodies to react only with a certain substance and not with other substances (Orazi et al., 2007).Because of their ability to differentiate one molecular structure to the other, antibodies are utilized to quantify, purify and evaluate biological molecules and to treat medical conditions. Interestingly, the reaction with these antigens is necessary in the production of several types of antibodies. One of them is the monoclonal antibody. (Orazi et al., 2007)

As the name suggests, this antibody consists only of a single antibody which reacts to a specific antigen. It has a single isotope of immunoglobulin and affinity and is utilized to extract antibodies from proteins that cannot be sequenced or purified. They are also used on proteins that are low in quantity (Orazi et al., 2007). Since monoclonal antibodies are monoepitopic, detecting locations for the functioning of proteins are feasible. Nevertheless, becoming monoepitopic makes them prone to protein alterations such as fixation with aldehydes, denaturation with the SDS, and modifications after its transition (Orazi et al., 2007).

Polyclonal antibody is another type of antibody produced with reaction to an antigen. It contains various molecules of antibodies which act on a single antigen and respond regardless of the antigen present. If monoclonal antibody has monoepitopic specificity, polyclonal antibody has polyepitopic specificity (Buchwalow et al., 2007).This distinctive feature of polyclonal antibody facilitates the recognition of epitopes even if they are fixated by aldehydes or denaturated by the SDS since not all of epitopes are obliterated after these processes(Buchwalow et al., 2007).

As compared to the single affinity exhibited by monoclonal antibodies, affinities of polyclonal antibodies for a single antigen are varied. The minor disparities found on the amino acids of these antibodies allow them to act variedly on the same antigens. Polyclonal antibodies are also favored over monoclonal antibodies since they provide an easy, quick and economical method of antibody production. It is very different when one produces monoclonal antibodies since they are costly, protracted, and necessitate extensive skills and equipment to culture cells (Buchwalow et al., 2007).

6. The purple-gray color found on the nitrocellulose paper with anti-beta-galactosidase monoclonal antibody signifies the presence of beta-galactosidase proteins. The color is produced after the BCIP substrate and the NBT reacts with complexes formed between protein antibody and alkaline phosphatase. Therefore, it is anticipated that the purple-gray color will be evident on the third and fourth lanes which contain 10 microliters and 20 microliters of cultured EMG 9 E.coli strain, respectively. This is possible since the EMG9 strain consists of strain _lac -_ (I- Z+ Y+).

Since this strain has a mutated _lacI_ gene, it is impossible to synthesize _lac_ repressors. Therefore, _lac_ operon will be activated regardless of the presence of allolactose. Constant translation and transcription of _lac_ genes will occur, which results to continuous production of galactosidase permease and beta-galactosidase. Figure 2 shows the presence of beta-galactosidase proteins (molecular weight of 116 kDa) on the first bands of third and fourth lanes as color purple-gray. This is possible since the molecular marker is made up of beta-galactosidase proteins. It is also expected that the fifth lane will have proteins of beta-galactosidase since this lane contains beta-galactosidase proteins.

On the other hand, the color identified is not expected on the first and second lanes since they contain 10 and 20 microliters of EMG 26 E.coli strain, respectively. This can be explained by the mutated _lacZ_ gene found on strain _lac -_ (I+ Z- Y-). The mutation of _lacZ_ gene will prevent the formation of beta-galactosidase proteins regardless of lactose availability. Since no mutation occurs on _lacI_ gene, production of _lac_ repressor will not occur. With absence of _lac_ repressor, _lac_ operator will be deactivated. On the other hand, the presence of lactose will result to activation of the _lac_ operator. _Lac_ operon will also be turned on if an inducer called allolactose is present. If ever operon is turned on, production of galactosidase permease will occur since _lacI_ gene is not mutated. Beta-galactosidase protein, on the other hand, will not be present because _lacZ_ gene is mutated.

Upon inspecting the third, fourth and fifth lanes, it is noted that beta-galactosidase proteins, with a molecular weight of 116 kDa, is at the topmost part of the gel. On the lanes where beta-lactoside is available, purple-color is present due to the formation of complexes, which result to the reaction between protein-antibody and anti-body alkaline phosphatase. On those lanes where beta-lactoside is unavailable, no purple-gray color can be noted. Nevertheless, false positive results may occur. This means that purple-gray color is present despite beta-lactoside unavailability.

7. Figure 2 illustrates the bands detected on the third and fourth lanes of nitrocellulose paper blotted with protein content of EMG 9 _E.coli_ positive strain. This strain is a competent producer of beta-galactosidase and such ability is attributed to the _lac -_ (I- Z+ Y+). Within this strain, mutated _lacI_ gene and non-mutated _lacZ_ gene can be found. Such orientation results to the absence of _lac_ repressor which in turn closes the _lac_ operon.

Further examination of the nitrocellulose paper presented in Figure 2 reveals the presence of multiple bands and the absence of single bands. Normally, single bands become evident if the antibody successfully reacts with beta-galactosidase protein resulting to the formation of complexes (Pierce, 2007). Consequently, the color purple-gray will appear on the topmost part of the gel in line with the first bands to signify beta-galactosidase proteins. If single bands are absent, there must be factors that affect these reactions. Elucidating the western blot process will allow clarification of the identified phenomenon. Augmenting the sensitivity of western blot requires treatment of nitrocellulose paper with TBST + 1% BSA. This is done to prevent fixation of antibodies on locations where nonspecific protein binding can take place.

This is also the aim of the experiment. When the nitrocellulose paper is not properly treated with the TBST + 1% BSA, there will be insufficient blocking which results in multiple bands. Moreover, excessive protein binding sites will be present allowing other antibodies to bind. Thus, if anti-beta-galactosidase monoclonal ntibody, the primary antibody, binds to nonspecific protein binding sites, the secondary antibody which is the anti-mouse-immunoglobulin-G alkaline phosphatase conjugate will also bind. This causes the formation of protein complexes, which can produce purple-gray color upon reacting with the added NBT and BCIP substrate. False positive results will occur since beta-galactosidases proteins are not involved in the whole process.

False positive results can also occur if monoclonal antibodies cross-react with non-target proteins and non-specific proteins. Epitopes have various forms and they can be conformational or linear in nature. Epitopes become conformational if residues of amino acid fold in such a way that it is far from the protein sequence. Imitation of linear epitopes is also possible with the aid of simple sequences of peptides. Such imitation can also happen with conformational epitopes which generate the so-called mimotopes (Westwood et al., 2007).

Although nitrocellulose paper is properly blocked and the beta-galactosidase proteins have successfully attached to specific protein binding sites, cross-reaction can still occur. If parts of epitope sequences are present on the mimotopes and linear epitopes that have cross-reacted, there is a great tendency that these proteins can be identified by antibodies found on the nitrocellulose paper. Reaction and binding can take place on the primary antibody which in turn allows binding with the secondary antibody. Consequently, it forms complexes and reaction with the NBT, and the BCIP will result to purple-gray color.

False positive results also happen if the proteolytic enzymes found on the cultures of _E.coli_ have degraded beta-galactosidase proteins. Even though beta-galactosidase proteins are degraded, epitopes are still present and they still contain the target epitope (Balsubramanian et al., 2004). Therefore, recognition of the primary and secondary antibodies is still possible. They can also form complexes that produce small-fragmented purple-gray color upon reacting with the added NBT and BCIP. Since the fragmented epitopes from degraded beta-galactosidase have less friction, they can move further towards the anode. This process explains why multiple bands are present on the lower ends of the third and fourth lanes of nitrocellulose paper (see Figure 2).


1. The emergence of band on the gel stained with coomassie blue denoted that proteins are present. These proteins were acquired from the extraction process performed on both cultures of _E.coli_ strains, EMG26 and EMG 9, which were later subjected to sodium docecyl sulfate polyacrylamide gel electrophoresis (SDS-PAGE). Moreover, inspection of the topmost band on the eighth and the ninth lane revealed the presence of beta-galactosidase, the only protein that can be detected in the gel stained by coomassie blue.

2. Inspection of the nitrocellulose paper revealed the presence of multiple bands and this can be explained by several reasons. First, the appearance of multiple bands may have something to do with nitrocellulose paper’s blocking process. Insufficient blocking of nonspecific proteins will allow antibodies to bind on these sites and this will generate a false positive result.

The proteolytic activity of enzymes present in the cultures of E.coli may also explain why multiple bands are present on the nitrocellulose paper. Isolation of proteins on E.coli cultures allowed enzymes to degrade beta-galactosidase into smaller fragments. Although they are degraded, the resulting fragments still contain an epitote that can be still be detected by antibodies. Once detected, antibodies will bind to them and this would result to another false positive result.

Monoclonal antibodies are capable of cross-reaction and this process can explain the presence of multiple bands. These antibodies are capable of binding with non specific proteins as long as they contain partial sequence of the epitote protein they really target. Once binding occurs, there will be false positive results.

Multiple bands can be detected on the third, fourth and fifth lane. This became possible since the third and the fourth lane contains the culture of EMG 9 _E.coli_ strain. On the other hand, the fifth lane contains beta-galactosidase, one of the seven proteins found on its molecular marker. Furthermore, beta-galactosidase with a molecular weight of 116kDa represents the topmost bands on these three lanes.

Nevertheless, multiple bands are not present on the first and second lane since they both contain cultures of EMG26. In this type of strain, the _lacZ_ gene on its _lac_ operon is mutated. This results to absence on the production of beta-galactosidase. With the absence of beta-galactosidase, no antibody-binding will occur.


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Beta-Galactosidase and Western Blot Essay

Importance of JIT in Modern Organisation Essay

Importance of JIT in Modern Organisation Essay.

The philosophy of just-in-time (JIT) originated in Japan 50 years ago at Toyota Motor Co. The goal is to create a production environment driven by demand that holds only a small amount of inventory and products at any given time. Organizations in the manufacturing, service and public sectors are implementing a wide variety of innovative managerial tools and JIT philosophy to help them deal with the highly competitive, customer-driven environments in which they must operate. External relationships, for example with vendors and transportation carriers, become critical for effective support of JIT systems.

Co-ordinate such relationships and interactions introduces additional complexity into the system.

Many companies now operate in a global environment that offers both threats and opportunities to their very survival. This global environment changes at an ever increasing rate and manufacturing organisations need to be able to adapt to those changes very quickly or they will succumb to their competitors. This paper clarifies the basic features of JIT and their benefits to organizations.

The paper illustrates some advantages of using JIT system in order to emphasis the importance of adopt this system. Therefore, the purpose of this article is to advocate the JIT systems through analyse the current problems in most organizations.


JIT manufacturing has the capacity, when properly adapted to the organisation, to strengthen the organisation’s competitiveness in the marketplace substantially by reducing wastes and improving product quality and efficiency of production.

“JIT manufacturing is a philosophy by which an organization seeks continually to improve its products and processes by eliminating waste” (Ptak, 1997). It is a systems approach to reduce stock and eliminate waste, thus to produces only necessary items in necessary quantities at necessary times. It has been widely implemented in manufacturing industries as a survival strategy against global market competition. JIT offers various benefits, such as greater throughput, higher productivity and better quality. In this paper, the author will start from the basic elements of JIT, and batch size discussion will be followed in section 2. Section 3 will clarify two basic methods of JIT which can be used to overcome the “local versus company-wide” dilemma. The relationship of ERP and JIT will be mentioned in Section 4. Section 5 will illustrate outcomes of JIT to a supply chain of company.


JIT composes of ten basic elements which are:

Flexible resources

Cellular layouts

Pull production system

Kanban production control

Small-lot production

Quick setups

Uniform production levels

Quality at the source

Total productive maintenance

Supplier network

The author will illustrate each of these elements and their outcomes for JIT system.

_Flexible Resources_

It is recognized as a key element of JIT which requires workers with the ability to perform more than one job and general-purpose machines with the ability to perform several basic functions. With single workers operating multiple machines, the machines themselves also required some adjustments. Extra tools and fixtures were purchased and placed at their point of use so that operators did not have to leave their stations to retrieve them when needed. The company uses of JIT system can reduce the waste of movement to other machines, setting up other machines and waiting at other machines can also be eliminated.

_Cellular layouts_

It creates manufacturing cells that comprise of dissimilar machines brought together to manufacture a family of parts. The layout of machines within the cell resembles a small assembly line and is usually U-shaped. Work is moved within the cell which in normally in one direction and experiences little waiting. In a one-person cell, the cycle time of the cell is determined by the time it takes for the worker to complete his or her path through the cell. It means even different items produced may take different time to complete; the time between successive items leaving the cell remains virtually the same because the worker’s path remains the same.

_Pull system_

It emphasizes the supermarket approach and relies on customer requests to pull products/components through the system. Workers take only those parts or materials they need and can process immediately. The system avoids overproduction and; only necessary quantities are produced.

_Kanban Production Control System_

“Kanban is a ‘pull’ system which is driven by the demand at the lowest point in the chain.”(Christopher, p186, 1998) A kanban contains such information as part number, description, type of container, unit load, preceding station, and subsequent station. In a Kanban system the aim would be to produce only that quantity needed for immediate demand. It provides a simple and understandable process, quick and precise information with lower cost, avoid overproduction and delegate the responsibilities to line workers.

_Small-lot production_

It requires less space and capital investment. Incorporate the production of small amounts at a time can allow processes to be moved closer together and transportation between stations can be simplified. The quality problems are easier to detect in small-lot production. Lower inventory levels make processes more dependent on each other. In short, small-lot production will help people to discover the errors and solve the problems quickly.

_Quick Setups_

It incorporates a system called SMED (single minute exchange of dies) that focuses on the principles for quick set-ups. The system differentiates between internal and external set-up, where internal set-up can be performed only when the machine is stopped, and external set-up can be performed while the machine is operating. It convert internal set-up to external set-up.

_Uniform Production Levels_

It is achieved by smoothing the production requirements on the final assembly line. It aims to reduce variability through more accurate forecasts, smoothing of demand and incorporating mixed-model assembly steadying component production.

_Quality at the Source_

One of the most important issues of just-in-time is quality. Just-in-time companies should follow the concept of quality at the source, or doing it right the first time throughout all areas of the organization. Just-in-time can only be successful in a company that is already producing quality goods. A quality at the source (jidoka) program must be implemented to give workers the personal responsibility for the quality of the work they do, and the authority to stop production when something goes wrong.

_Total Productive Maintenance_

It refers to the practice of preventive maintenance with the concepts of total quality – employee involvement, decisions based on data, zero defects, and a strategic focus. The goal of TPM is zero breakdowns.

_Supplier Networks_

A network of reliable suppliers is also essential to JIT. An organization will reap many benefits in terms of costs and time savings by reducing the number of suppliers and improving relationships with these valued partners in the JIT manufacturing process. The company and the supplier both benefit from just in time systems. The company benefits because of reduced cost. The supplier benefits by long-term business relationships with companies as long as they continue to supply quality products on time.


Large batch size can reduce set-up cost per unit, however, the carrying cost of it must be higher due to the higher inventory. Large batch inventory may hide many quality problems and only become visible when downstream customers try to use and it does not fit. A large batch size will tend to create long waiting time delays as large jobs wait in queue behind large jobs being processed. Thus, a longer average job queuing time will result from either batch size that are too small (an excessive amount of machine time is consumed by setups), or batch size that are too large (large jobs waiting in queue behind other large jobs).

It means large batch can result of a number of difficulties, including: lengthy setups, long queues at work centers, material waiting to be moved to the next operation, long distances between work centers, uneven loads from one period to the next, equipment and workers with limited flexibility, unexpected equipment failure, and large safety stocks to cover possible scrap. Let’s consider how the JIT approach can solve some of these difficulties.

“JIT philosophy the requirement is for small shipments to be made more frequently and to meet the precise time requirements of the customer.” (Christopher, p188, 1998) Smaller batch sizes are desirable because they lead to such benefits as shorter lead times, less work in process, fewer space requirements, and less scrap and rework. With all the machines located close together in the cell, material handling is greatly reduced.

Moreover, control of parts flows and scheduling within the cell are simplified, as is tracking the status of jobs. Also, small batch size leads to lower inventory, which will make it easier to discover the problems. Lower inventory makes reliable continuous flow delivery. Although small batch size usually needs more money on set-up cost per unit, the carrying cost of it must be lower due to the small-lot production.


JIT focuses on total employee involvement, not on the local or departmental resources, This principle can be found through analyzing the two basic elements of JIT-Kaizen and Group Technology.

Kaizen is the Japanese term for continuous improvement. It is both a rigorous, scientific method using statistical quality control (SQC) and an adaptive framework of organizational values and beliefs that keep workers and management alike focused on zero defects. It is a philosophy of never being satisfied with what was accomplished last week or last year. It is the team responsibility to improve current systems and procedures. Management, staff, and labor must participate.

It need total employee involvement, that is, participation of every employee at every level. To be able to establish a JIT manufacturing system, every department should have some commitment to align with a common goal. The company’s top management must also support this goal in order to have resources and time allocated to developing the necessary systems and procedures.

The Kaizen cycle has four steps:

Establish a plan to change whatever needs to be improved.

Carrying out changes on a small scale.

Observe the results,

Evaluate both the results and the process and determine what has been learned.

Group technology seeks to improve productivity by grouping parts and products with similar characteristics into families and forming production cells with a group of dissimilar machines and processes.” The aim of group technology is to makes it possible for a firm to achieve higher levels of flexibility without increasing production costs or sacrificing product quality, thus leading to an improved competitive position for the firm. GT is the concept of exploiting similarities to achieve manufacturing and design efficiencies. For instance, the cells group dissimilar machines together to process a family of parts with similar shapes, the worked paths are given at the same time. The cycle time is also prescribed by the workers paths. The flexibility of this layout must be very much efficient. It is the group technology which makes the works independent to a department.


ERP is an account-oriented information system for identifying and planning the enterprise wide resources needed to take, make, ship, and account for customers’ orders. “The use of the system has the potential to convert supply chains into demand chains in the sense that the system can now respond to known demand rather than having to anticipate that demand through a forecast.” (Christopher, p199, 1998) For many users, an ERP is a “do it all” system that performs everything from entry of sales orders to customer service The system integrated operations and reporting to initiate, monitor, and track critical activities such as order fulfilment and replenishment processing. It is a method for the effective planning and control of all resources needed to take, make, ship and account for customers orders in a manufacturing, distribution, or service company. It attempts to integrate all departments and functions across a company onto a single computer system that can serve all those different departments’ particular needs.

JIT (just in time) is a philosophy based on the elimination of waste, an important component of JIT is kanbans which is a technique based on replacing material that has been used but has no forward visibility. ERP systems improve efficiency of organizations and allow for more accurate information for decision makers to utilize. In connection with JIT process, ERP systems help to flatten an organization across the entire global enterprise by identifying business areas that are not adding value. Within the pull system, the production of a certain product starts on the demand or at the request of the buyer.

It has been determined that the computer is the best source for determining when an order should be placed. Companies use ERP information system can link the replenishment of product in the market place with their upstream operations and those of their suppliers through the use of shared information. The system monitors and measures all aspects of production as the order proceeds through the various steps of the production cycle. The work order provides a complete “audit trail” which will come in handy later down the road.

Presently, ERP is considered the price of entry for running a business and for being connected to other enterprises in a network economy. As the business scale becomes global, and technology such as the Internet allows speedy and inexpensive communication, the use of ERP systems will be critical to an organization’s success. e-commerce and supply chain management techniques, along with JIT, will be a push toward better information systems to better manage the organization and support customers and suppliers along the supply chain. In this growing global economy, the business that provides better product with better customer service will be the business that survives the increased competitiveness. Businesses can better provide for their customers by integrating the online shopping experience with automated ERP systems.


_Quick Response_

QR has been defined as a philosophical business umbrella, by which retailers decrease inventory levels while gaining greater customer delivery, through innovative use of technology and business partnerships. There are many tools are used to create QR environment, which include bar code, POS and EDI. Manufacturers have turned to just-in-time (JIT) as their answer to the problem of managing inventories. They look to JIT to reduce lead time, eliminate waste, produce to customer demand, and develop long-term relationships with suppliers. In turn this will help manufacturers to satisfy the customers’ requirements with minimum levels of inventory and increase productivity. Retailers, struggling for survival, also must find ways to substantially reduce their cost while improving customer service.

One major coat incurred by retailers is the cost associated with carrying and handling inventory, which serves to satisfy customer demand. The volume of inventory the retailer carries is proportional to the sizes, styles, prices, models, colors, and so forth of the products and their total lead time. If lead time were zero, the inventory would be zero. Even though this is not practical, the shorter the lead time, the smaller total the inventory. Retailers are now adopting the philosophy that is referred to as Quick Response (QR). Quick response can be considered as a process that uses real-time or near-real-time signals to trigger replenishment responses in the supply chain for manufacturers or retailers. This will improve inventory turns, product allocation and replenishment times and helps retailers avoid running out of important stock.

“The basic idea behind quick response (QR) is that in order to reap the advantages of time-based competition it is necessary to develop systems that are responsive and fast. Hence QR is the umbrella term for the information systems and the JIT systems that combine to provide ‘the right product in the right place at the right time.” (Christopher, p192, 1998) In short, QR is the retailer sends a replenishment order to the supplier or manufacturer via electronic data interchange (EDI).

_Vendor relationship_

Companies with just in time production systems depend on suppliers to deliver quality goods on time. An organization will reap many benefits in terms of costs and time savings by reducing the number of suppliers and improving relationships with these valued partners in the JIT manufacturing process. Suppliers must deliver goods as frequently as required. Suppliers must make numerous deliveries each day in the exact quantity specified. Because of frequent deliveries, central receiving areas and warehouses are not needed. Several suppliers may combine their loads on one truck that will tour the supplier plants to pick up itmes for delivery to the customer. Meanwhile, the small warehouses could be used for frequently delivered items, and the consolidation warehouses could become load-switching points when geographic distances between supplier and customer prohibit daily deliveries.

Generally materials are delivered straight to the area of the production process. The JIT approach presents a very different perspective on the relationship. The JIT purchaser-supplier relationship is one of a partnership-in-profit creation. The cooperative relationship, on the supplier’s side, insulates them from the full force of competition in the supply segment of the market chain. This is particularly noticeable when the supplier is committed to only one, or at most, a few purchasers. The buyer, on the other hand, can benefit from the non-investment and low risks of this “vertical integration”. Companies must build relationships with suppliers. The company and the supplier both benefit from just in time systems. The company benefits because of reduced cost. The supplier benefits by long-term business relationships with companies as long as they continue to supply quality products on time.


Hence we can see that to have a Total JIT manufacturing system, a company-wide commitment, proper materials, quality, people and equipments must always be made available when needed. In addition; the policies and procedures developed for an internal JIT structure should also be extended into the company’s supplier and customer base to establish the identification of duplication of effort and performance feedback review to
continuously reduced wastage and improve quality.


Christopher, M., (1998), Logistics and supply chain management – strategies for reducing cost and improving service (2nd Edition). Prentice Hall.

Ptak, C., 1987, MRP and Beyond: A Toolbox for Integrating People and Systems, Irwin, Chicago, IL.

Importance of JIT in Modern Organisation Essay

Murphy Case Analysis Essay

Murphy Case Analysis Essay.

Just-In-Time Concept.

Just-In-time manufacturing, or JIT, is a management philosophy aimed at eliminating manufacturing wastes by producing only the right amount and combination of parts at the right place at the right time. This is based on the fact that wastes result from any activity that adds cost without adding value to the product.

The goal of JIT, is to minimize the presence of non-value-adding operations and non-moving inventories in the production line. This will result in shorter throughput times, better on-time delivery performance, higher equipment utilization, lesser space requirement, lower costs, and greater profits.

The key behind a successful implementation of JIT is the reduction of inventory levels at the various stations of the production line to the absolute minimum.

This necessitates good coordination between stations such that every station produces only the exact volume that the next station needs. On the other hand, a station pulls in only the exact volume that it needs from the preceding station. In this case, Murphy’s management started the implementation of JIT without wholly understanding the concept; the poor performance was caused by lack of knowledge about JIT and lack of communication/coordination between the departments.

Problems at Murphy:

The CEO of Murphy Manufacturing liked the idea of JIT (reducing inventory holding cost while improving production efficiency) based on a few books he read, thus he wanted to implement this concept in his company even though the present MRP system had been working very well for a long time. On the other hand, Joe Vollbrach, Vice President of Operations for Murphy Manufacturing, initiated the implementation process based on the way it was working in the book examples he read without doing any feasibility study a or having a complete understanding about how to implement JIT concept in a small manufacturing environment like which Murphy is in.

The result is disastrous, purchasing department are constantly ordering materials at very high cost; the shipping/receiving department are harassed by endless loading/unloading task; production efficiency was down due to lack of production materials and no clear production schedule; sales people has to deal with angry customers because most the order aren’t shipped/delivered on time.

General JIT Implementation Guidelines:

Since JIT encompasses a number of functional areas of the company, top management support are a must. Full acceptance by top management is required to empower middle management to overcome the inevitable roadblocks in implementation. In this case, John should take the initiative to be the champion of JIT concept and provide the full support for implementation.

Second, training and education as a fundamental requirement for JIT implementation in order to promote a significant change in attitude of the workforce that will create an environment conducive to completing the implementation. Training courses should be made available for employees to fully understand JIT concept and harness it.

Third, it is important that JIT is seen as a philosophy rather than a set of add-on techniques to current practices. The company must question why and how it uses JIT and be able to figure out the results of undertaking JIT and incorporate them into its marketplace strategy. By adhering to these guidelines on implementation and instill the knowledge of JIT concept to entire employees at Murphy’s, the transition process to JIT will go smoothly and best JIT implementation techniques will be utilized.

The pros/cons of implementing JIT in Small Manufacturing Enterprises:

Most publications discussing JIT implementation focus on large manufacturing firms, the environment in which the concepts arose. Because of the limitations that small manufacturing enterprises face, which include limited staffing and material resources and reduced bargaining power with customers’ suppliers and financial institutions, it is not clear that all JIT components are applicable to every environment. Thus choosing the right JIT implementation strategy is crucial for Murphy’s future successes.

Most Small Manufacturing Enterprises depend heavily on a few major customers, thus normally suffer fluctuating demand from these key customers. In regard to vendor relationships, their purchase volume is not large enough to give them leverage over their suppliers to purchase in a small batch size with a good quality at a definite time. Compared to large firms, Small Manufacturing Enterprises normally have limited free cash to fund investment in new production concepts or technologies. They also lack bargaining power with their creditors and debtors, and have difficulties in getting loans from financial institution. Hence, forward planning is constrained by cash flow maintenance. Consequently, if Small Manufacturing Enterprises get involved in innovative projects at all, they will focus on projects with short term returns and overlook initiatives promoting long-term results.

Small Manufacturing Enterprises also have limited non-cash resources (machinery or people). They do not normally have specific departments such as a training department or an engineering department. With limited management staff there is a small pool for potential champions of new techniques. Also, small firms may be so small that a change in production cannot be implemented without affecting the entire plant. This is another barrier for Small Manufacturing Enterprises to improve their operations as they have to risk the whole factory in order to know whether a certain technique is appropriate or not to the company. Which is very true in this situation, slight modification in any one of the major operation departments, will affect the entire company. Thus, every step has to be carefully analyzed and backup techniques needs to be developed.

However, there are also several advantages for small manufacturers compared to big ones. Small firms normally do not have union contracts and usually have fewer problems with resistance to change compared to large companies. A flatter organization is typical in small firms and it fosters more frequent open communication. Therefore, the decision making process is simpler and the result is conveyed faster throughout the employees. Compared to large firms, small firms are used to working in smaller batches and are more accustomed to a flexible response to demand changes.

Problems in Implementing JIT Components:

First, Cross training is common for small manufacturers because of the need to cover absent employees from a small labor pool and is also easier to implement than in large companies. The only problem is that extensive training is costly. Small manufacturers may train key employees individually and ask them to impart their knowledge to other worker. In this case, all the middle management can learn about JIT concept then passing it to production employees.

Second, most small companies are very dependent on a few major customers. They lack bargaining power with their key customers and will not be able to compel these customers to order on a stable demand rate. The most desirable situation would be the cooperation of their customers in sharing their forecast demand and production schedule. Achieving this may be limited by bargaining power and therefore the result may be production based on inaccurate forecasts resulting in using finished goods inventory as a buffer. Production leveling can be a great barrier for small businesses to fully adopt JIT.

Third, JIT Purchasing is normally implemented as the last component, especially for small manufacturers, due toe lack of bargaining power with their suppliers. Small manufacturers normally do not give enough sales to their vendors and are forced to order in large batches and store a large amount of raw material or they will suffer a higher cost to get the materials just-in-time. All these potential problems need to be studied, when implementing the JIT concept at Murphy.

Murphy Case Analysis Essay

A Difficult Task Force: Organizational Behavior Essay

A Difficult Task Force: Organizational Behavior Essay.

The concept of groups, teams and teamwork is a very important factor for good performance of the whole company. I read the case about the group of professionals who had to control and serve the new joint venture between companies from Japan, United States, and South America. This new company had to make, sell, and service pet caskets for the burial of beloved pets, mostly dogs and cats. During the first month of work, each company had assigned personnel to the task force.

The members from every company were chosen to participate in the joint venture. As chair of the task force, Jose initiated a meeting of all the members of the new company. He gave historical information, and then he reviewed the market for the innovations of their prospective product. The task force was to develop the initial design parameters for the new product to meet increasing demand around the world. Next part of the meeting was opened to comments and suggestions.

Mariana Preus, representative from Argentina, the head of product design, said that the current designs that they had in production in Argentina plant were just fine, and he didn’t see any reasons to innovate the design of their product. All other members of the meeting agreed not to make any changes in the design of the product. Jose reminded to all of the participants of the meeting that their task force’s purpose is to redesign the product and its manufacturing systems. Finally, Jose had to agree with members of the meeting and to write a memo to the council of presidents with the recommendation to use existing designs and to begin immediately to design the plant and the manufacturing system. The meeting adjourned,d and Jose returned to his computer and started to write the memo that, he knew, would anger the presidents. He wondered what had he done wrong and what he could have done to prevent such result of the meeting.

I think that in this case study we see an example of the formal group that is formed by a manager to help the organization to accomplish its goals. The group development process wasn’t finished and ended on the second stage–storming. Analyzing the group member roles, in our situation Jose is the initiator of the meeting, information giver, opinion seeker, and orienter. Mariana Preus has a role of initiator and information giver, because he insisted on the not redesigning of the product. The other members seem to serve just as a passive audience–followers, because they all agreed to the Mariana’s suggestion, and didn’t give any other opinions. Also, there was no group cohesiveness; a “we feeling” binding group members together to accomplish their goal.

The diverse nature of the group affected the committee’s action by not understanding and participating of all members in the meeting. If I was in Jose’s position, I would try to keep the group headed toward the stated goal better, and not to agree with the suggestion of one member, but to count the opinions of every member of the group. Also, it wasn’t right to adjourn the meeting before getting the result that would approach to the goal of the whole meeting.

A Difficult Task Force: Organizational Behavior Essay

Supply chain drivers on example of Toyota Company Essay

Supply chain drivers on example of Toyota Company Essay.

1. Introduction.

In order to understand how Toyota Company have improved its supply chain performance in terms of responsiveness and efficiency, we should examine four supply chain drivers: inventory, transportation, facilities and information. Above-mentioned drivers not only determine the supply chain’s performance in terms of responsiveness and efficiency, they also determine whether strategic fit is achieved across the supply chain.

Consider this framework for Toyota Company as the objective of my analysis. Toyota’s competitive strategy is to be reliable manufacturer of different models of quality cars.

This strategy dictates that ideal supply chain for Toyota will concentrate in responsiveness but also should be efficient. Its supply chain consists of decentralized, but interlinked units that engage in local experimentation and actively pursue learning and resource transfer across units. Toyota effectively uses four supply chain drivers to show best performance. Later while analyzing each driver you will be able to see it.


One of the key goals of Toyota is to reduce inventory at the line side of the plant and throughout the supply chain. It does it with the help of crossdocking (which support all of Toyota’s plants) in order to increase delivery frequency and reduce inventory.

Toyota reduces in-process inventory through Just in Time set of techniques. The process is driven by a series of signals, or Kanban that tell production processes to make the next part. Kanban are usually simple visual signals such as the presence or absence of a part on a shelf. JIT causes dramatic improvements in a manufacturing organization’s return on investment, quality, and efficiency.

For example involves picking up from one supplier and delivering to the cross dock, such as delivering kits to a plant. Toyota may divide four pallets into 12 to 14 smaller orders in order to minimize inventory at the plant, which can absorb some fluctuation in demand. This means more frequent pick-ups of small lot levels done hour by hour. Toyota’s management initiatives involve increasing delivery frequency, reducing inventory, and accommodating the five-day car (from order to delivery). It is also being more proactive in order to absorb changes or uncertainty on a daily basis. At the same time, reducing costs.

The above listed companies are the major suppliers of inventory for Toyota Company.

Toyota group and suppliers organizations: Toyota Industries Corporation (Manufacture and sales of spinning and weaving machines, industrial vehicles and automobiles), Aichi Steel Corporation (Manufacture and sales of specialty steel and forged steel products), Toyoda Machine Works, Ltd. (Manufacture and sales of machine tools and auto parts), Toyota Auto Body Co., Ltd. (Manufacture of auto and special vehicle bodies and parts), Toyota Tsusho Corporation (Import, export and trading of raw materials and products), Aisin Seiki Co., Ltd. (Manufacture and sales of auto parts, household appliances and die-cast parts), Denso Corporation (Manufacture and sales of electric auto components and household appliances), Toyoda Boshoku Corporation (Manufacture and sales of cotton thread, cotton cloth, auto parts and household appliances).

Role of inventory in Toyota’s supply chain is considerable, because company tries to keep low stock using above-stated techniques (JIT, crossdocking). Not thinking globally, at this stage (inventory) company is efficient-cost reduction. Moreover, the major inventory (end product) of Toyota are-cars, and for them, not like for some bestseller or blockbuster, demand cannot suddenly exceed expectation. Stable demand creates appropriate trade-off: relatively predicted inventory, hence more efficient; its availability- responsiveness.


Toyota had avoided many of long-distance transportation problems, simply by creating different manufacturing divisions in every major market (for example for North America, France, etc, it builds plants producing cars according local demand, and placing it closely to high-developed infrastructure and suppliers). In Japan, it uses rail and truck modes of transportation. Because of the fact that country is not very big, it does not take much time (and is not too costly) to transfer products between different stages, and at the same time speed of product transportation is relatively high. Outsource transportation for end products by third-parties (dealers) somehow decrease transportation function. Local infrastructure is extremely developed and it is easy to create route along which product can be delivered. Due to these peculiarities, company uses middle balance between efficiency and responsiveness.


Here we discuss the role of Toyota’s facilities play in the supply chain and critical facility-related decisions that Toyota’s managers made.

Toyota’s domestic manufacturing and marketing organizations:

· A total of 12 Toyota plants are located in and around Toyota City and other areas of Aichi Prefecture. Toyota has established three other domestic manufacturing companies outside of Aichi – in Kyushu, in Hokkaido and in Tohoku. (See exhibit #1).

· There are 308 Toyota dealers in Japan, consisting of 5 channels: “Toyota ” dealers, “Toyopet ” dealers, “Toyota Corolla ” dealers, “Netz Toyota ” dealers and “Toyota Vista ” dealers.

· In addition, DUO sales outlets, which sell Volkswagen vehicles, have been operating since April 1992.

There are also virtual locations (web-sites), such as, etc.

Other Toyota facilities include: Higashi-Fuji Technical Center (Research & advanced development), Shibetsu Proving Ground (Testing and evaluation of automobiles), Nagoya Wharf Center (Shipping), Tobishima Center (Shipment of parts for overseas production), Haruhi Parts Center (Warehousing and service of large-size spare parts), Oguchi Parts Center (Warehousing and service of small and medium spare parts), Kamigo Logistics Center (Warehousing and service of interior and exterior spare parts), Tobishima Logistics Center (Warehousing and service of parts for overseas production and spare parts).

Each Toyota facility working towards ISO 14001 certification, or already certified, continues to set measurable environmental targets to be achieved. (ISO 14001 is a process of continual improvement that does not stop at initial certification. The facilities’ targets typically involve setting time goals for prevention of pollution).

The reasons on the choices of facilities` location made by Toyota were mainly the well-established infrastructure along with the quality of auto-parts manufacturers established in the region, the geographic situation, the proximity to other Toyota facilities, and the easy access to most markets for the every new car to be produced at the plant.

For manufacturing facilities company had implemented Toyota Production System (TPS)-the framework and the interaction of these facilities with the suppliers and customers. The main goal of the TPS is to eliminate waste. There are 4 kinds of waste found in the TPS:

· Excessive Production Resources (excessive facilities and workforce).

· Overproduction.

· Excessive Inventory.

· Unnecessary capital investments.

Toyota was able to greatly reduce cost and inventory using the TPS, enabling it to become one of the three largest companies in the world. Due to this stellar success of the production philosophy many of these methods have been copied by other manufacturing companies.

Commonly used terminology in TPS:

· Just in time (JIT).

· Kanban (Sign, Index Card).

· Muda (Waste).

· Heijunka (Production Smoothing).

· Andon (Signboard).

· Pokayoke (Fool proofing).

· Jidoka (Automation).

· Kaizen (Continuous Improvement).

Considering Japanese manufacturing facilities Toyota is more efficient than responsive, by using its famous TPS. But you can see that for other facilities company is more responsive and moreover it develops loyalty to current customers, hence extent awareness to potential ones.

For example, the majority of Toyota service centers and stores facilities have a number of features including but not limited to:

· Waiting Area.

· Refreshments.

· Newspapers and Magazines.

· Toilets.

· Courtesy Car Service.

· Service Bays.

Aside from, in Japan these facilities are presented as very effective and spreaded network.

Globally, Toyota makes facilities decisions to be more responsive to their customers. Company has an end goal of opening manufacturing facilities in every major market that it enters. Although there are other benefits to opening local facilities, such as protection from currency fluctuation and trade barriers, the increase in responsiveness plays a large role in Toyota’s decision to locate in their local markets. Web sites, counting as virtual facilities, through which customers can locate the closest dealer, compare prices and models of cars, receive technical advice and support, and even make an order, add value to responsiveness, and at the same time help company to increase facilities` capacity, because of involving more audience and take off overload on its physical location (reduce costs).


Toyota uses the following IT infrastructure:

· Unix-based client server environment

· SAP R/3 modules FI, CO, SD, MM, and PS and solution for the automobile sector.

· Lotus Notes.

· Intranet, which can be accessed through worldwide networks, such as Sprint, UUNet, Tymnet, CompuServe.

Toyota is trying to get its products and operations as Internet-enabled as possible. Toyota is one of the first automakers to use the Internet aggressively to connect with its divisions, dealerships and through whole supply chain. Toyota is also the first company to pursue an online replacement-parts aftermarket exchange. Nowadays Toyota has wide-ranging web initiatives. They stretch from providing automobiles with wireless access to live traffic and safety reports to connecting Toyota dealers in a virtually paperless communications network.

Toyota is working closely with i2 Company to launch what the automaker is calling the Monarch Project, which is aimed at improving operations in Toyota’s $1 billion parts-replenishment business. A major part of the initiative will be Dealer Daily, a web-based portal that will connect Toyota’s 1,300 dealers with its factories around the clock, improving parts ordering, sales and vehicle repair operations. For example, dealers will be able to download sales and other company information directly from the Web using a virtual private network and leased lines. This will prevent Toyota from having to send two pounds of paper-based updates to dealers each week, slashing about $3 million in annual printing and distribution costs.

In the long term, Toyota wants to have complete visibility in its supply chain. Suppliers will be able to look at Toyota’s parts inventories and automatically replenish them, instead of waiting for Toyota to make a request (pull information system, data is quickly transmitted through all stages to accurately react on demand).

The new i2 system will also allow dealers to instantly locate the exact car model a customer has ordered – whether it’s in a warehouse, on a truck or in a factory – and deliver it as soon as possible. Though it’s not quite the build-to-order model Dell Computer uses to sell its PCs, Toyota’s approach should greatly reduce the cycle time for customers to get their cars

Toyota relies on visual controls in place of using TMS or WMS for decision support. It uses a Kanban card, which is a visual cue for the need to replenish small lot sizes. But it is developing in-house systems that support enhancing Kanban to Web-based E-Kanban.

Automaker has tide connections between all stages of supply chain with the help of own intranet (EDI, which helps to exchange information with suppliers, staff very effectively); web-sites, which are localized for every specific market (for example for North America, for Japan, etc) and allow to customers to be not physically presented at facility, but to reach information, or even choose car model he/she likes; and ERP systems (SAP and i2 software) which allow interaction between all stages and make information visible to everyone who has enough rights to use it. This determines the role of information in company`s supply chain. At that stage Toyota is much more responsive to customer than efficient.

Obstacles to achieving strategic fit.

There are several obstacles, which can make difficult to create ideal balance between efficiency and responsiveness for Toyota Company:

Increasing Variety of Products: customers may demand custom-made product (in our case- cars): sport/casual car, different colors, various options (ABC, conditioner, audio/video, signaling), diesel/benzene (or even hybrid: hydrogen-benzene car). All these can increase uncertainty, hence cost for company and low down of responsiveness.

Decreasing Product Life Cycles: environmental restrictions for octane number of benzene, right-side cars can involve prohibiting usage of cars, which possess these features, and hence decrease opportunity window for automaker.

Globalization: difficulties with coordination of business units, competition from GM, Ford, and Honda.

Difficulty Executing New Strategies: current strategy is perfect, but then after influence of different factors company will face with the need of change, it should not only understand, but know how to execute something especially new.

Increasingly Demanding Customers: matching customer’s expectations and perceptions, providing better quality for same price.

Supply chain drivers on example of Toyota Company Essay

Barilla SpA Case Study Essay

Barilla SpA Case Study Essay.

Barilla SpA, the world’s biggest pasta manufacturer, has continuously experienced problems with increased costs and inefficiencies in their operation. The fluctuations in demand have caused Barilla SpA’s manufacturing costs, inventory costs, and distribution costs to go up. Issues that influenced the demand fluctuations are the discounts Barilla SpA offers on both price and transportation, the compensations for sales representatives that is based on the volume of goods they sell to the distributors, and long lead times between time of order and time of delivery – just to name a few.

The idea of JITD is to allow sales and inventory data to be shared along the supply chain. By doing so, Barilla SpA can use that data from its distributors to better understand the demand of its products and perform better forecasting. The results would be lower transportation costs due to better shipment planning, increase manufacturing efficiency, reduce inventory costs, and less stock outs for its distributors. This will benefit both Barilla SpA and its distributors, but resistance from the distributors and Barilla SpA’s internal opposition makes it difficult to implement such strategy.

Barilla SpA’s sales representatives were afraid of losing their jobs because they felt with the JITD in place; they will no longer be needed. Also, it would essentially eliminate the current compensation system, meaning they would make less money. As for the distributors, the idea of providing sales data to others was unheard of at the time. The distributors did not trust Barilla SpA with their private information, and felt that they would lose control of their own operations if they had agreed with Barilla SpA.

Despite of all the internal and external resistances and doubts, I still think JITD is feasible for Barilla SpA, and they should continue to try and implement it due to the large savings and increased efficiency that JITD will bring to both Barilla SpA and its distributors. In order to succeed, Barilla SpA must convince its distributors that the JITD strategy will work, and that it is also beneficial to everyone.

Before trying to convince the distributors, I believe Barilla SpA must convince its sales representatives first because they are the ones the distributors talk to the most, and can have an influence in a distributor’s decision. An example of that is the Macaroni GD in the case, where its sales representative had some influence on Macaroni’s decision. Barilla SpA must communicate to its sale representatives that even with JITD in place, they will still be needed. Their responsibilities will be changed from trying to sell high volumes to selling the JITD idea and to maintain a good relationship with the distributors. The sales representatives will be the first ones to help solve any problems that the distributors has, and they will be involved in other logistic responsibilities that the JITD will require. Also, convince them that the more money the company saves, the more the company will profit; therefore a higher bonus can be given to employees. This may change Barilla SpA’s sales representatives’ perception to Pro-JITD.

As for the distributors, there are a few ways that will help Barilla SpA convince them that JITD will be beneficial for everyone. Instead of trying to convince the distributors just by talking to them and telling them about JITD, Barilla SpA should develop some kind of an analysis that they can show the distributors just how it can benefit them. Show them the high costs and cons of the current strategy, and compare it to the costs savings that JITD will bring across the supply chain.

Next, Barilla should implement JITD in a number of the Barilla-owned regional warehouses first. Since they own the warehouses, they will be able to test JITD with them. After a period of time, Barilla can use the information gathered to show the distributors (only if it was successful), that the implementation of JITD is a good thing. Showing the distributors the improved efficiency and cost savings that resulted from it may help win them over.

One other thing that Barilla SpA can do to gain its distributors’ confidence to agree to the JITD program is signing some kind of a contract. It will be an agreement between Barilla SpA and its distributors that Barilla SpA will basically guarantee the positive results of the JITD program. If the JITD does not work, and in turn cause the distributors to lose money due to increased costs incurred by the distributors or increased stock outs (which leads to lost of sales), then Barilla SpA will be responsible to pay them that amount. This will show the distributors that Barilla SpA is confident that this JITD program will benefit the distributors, and will help convince the distributors to sign up for JITD.

The JITD strategy will result in less fluctuation in demand, and allow Barilla SpA to reduce costs and become more efficient. It will also benefit others in the supply chain as well and not just Barilla SpA. Barilla SpA must be able to convince both its internal sales representatives as well as the distributors. Once JITD is implemented, it will improve communication, cooperation, and relationship between Barilla SpA and its distributors. It will allow Barilla SpA to become more competitive and grow bigger than it already is, and its growth will benefit the distributors that trusted Barilla SpA and agreed to the JITD.

Barilla SpA Case Study Essay

Economic Order Quantity model (EOQ) and the Just-In-Time model (JIT) Essay

Economic Order Quantity model (EOQ) and the Just-In-Time model (JIT) Essay.


It is very important that successful enterprises need efficient stock control management, especially in manufacturing companies and retail distribution. In business practice, we usually use many stock control models such as the Economic Order Quantity model (EOQ) and Just-In-Time model (JIT). The purpose of this report is to indicate the rationale of EOQ and JIT models and detailed to explain the effectiveness in practice of the two models. Moreover, I decided to take the McDonald company as an example, which illustrate JIT model is being applied by McDonald company.

In this report, by serious study and literature review, combined with refer to relevant books, search useful information from internet and my personal idea. I have examined concepts of EOQ and JIT models. Followed by discuss the rationale of them, and illustrate effectiveness of the two models in practice that we may fully understand the importance of EOQ and JIT systems in company’s daily operation. Finally, use JIT system in McDonald Company is presented.


2.1 Definition

2.1.1 Economic Order Quantity model

The Economic Order Quantity stock control model also called the economic lot size or economic production quantity, it affirms that “the optimal quantity of an inventory item to order at any time is that quantity that minimizes total inventory costs over planning period” (Horne and Wachowicz 1995, p.271).

2.1.2 Just-In-Time model

The Just-In-Time stock control model “is an integrated set of activities designed to achieve high-volume production using minimal inventories of raw materials, work-in-process, and finished goods” (Aquilano et al. 2004, p.426).


In 1913, F. W. Harris developed an EOQ model which has been applied widely. This model is being used in planning the purchase raw materials, and suppliers, and in planning purchases for wholesalers and retailers who resell products.

3.1 Assumptions of EOQ Model

It is necessary to the inventory management that EOQ model is one of the most commonly approach. Use this model is relatively simple, however, according to Heizer and Render (2001, p.481), it must based on the following assumptions or conditions:

Rate of demand is constant, known and independent.

Lead time is certainty and constant, therefore, when the stock down to zero, the stock could be added at a precise time.

Quantity discounts are impossible.

The stock is immediate and complete.

If ordered goods are in appropriate time, shortages can be prevent.

Setup cost and holding or carrying cost are belong to variable costs.

3.2 The Objective of EOQ Model

“The objective of the EOQ model is to determine the optimal quantity of inventory to order and the best time to place the order” (Dyclcman et al. 1990, p.630). In fact, the EOQ is balancing two inventory management costs: carrying cost and ordering costs. Dyclcman et al. argue (1990): Carrying costs include out-of-pocket costs such as storage, insurance, taxes and so on. Opportunity costs is related to the cost of investing capital in inventory rather than in other income-producing assets. Ordering costs include out-pf-pocket expenditures incurred every time an order is placed, such as handling, shipping, and so on.

Dyclcman et al. (1990) make a further statement: Carrying costs and ordering costs demonstrate different cost behaviors relative to the level of inventory maintained. Carrying costs increase with the quantity of inventory maintained; ordering costs decrease with the quantity of inventory maintained. The more inventory kept on hand, the more storage, handling, and other such carrying costs are incurred. The larger the amount of inventory, the fewer number of orders needed to replenish the inventory and the smaller the amount of ordering costs.

3.3 Validity of the assumptions and model robustness

Although the assumption of EOQ model shows highly restrictive, one advantage of EOQ model is that it is quite robust. As mentioned onwards, there are some assumptions will be dropped, like no quantity discounts, no shortages, no uncertainty in demand and lead time. On the other hand, “such as a constant demand rate and a constant holding cost per unit, can be violated somewhat without substantially reducing the accuracy of the solution” (Martinich 1997, p. 671). When the demand face seasonal changes, model can be changed to adapt to this situation.

Martinich (1997) stated clearly: The important feature of EOQ model is that the function of total stocking cost is flat around the optimal order quantity. Estimating ordering cost per unit time and holding cost per unit time are very crucial, because they are not often very accurate. Therefore, the value computed for EOQ cannot equal

the true optimal value. “However, because of the flatness of the total stocking cost function, even if the computed EOQ is 20%-30% different from the true optimal, the cost penalty is relatively small”(Martinich 1997, p.671).

Robust is defined as “a model that gives satisfactory answers even with substantial variation in its parameters” (Heizer and Render 2001, p.486). As we mentioned above, it is difficult to decide accurate ordering costs and holding costs for inventory management. Thus, a robust model is very favorable and some errors do not cost us very much. This is because that the EOQ model is most convenient and it can accurately forecast demand, holding cost, and ordering cost is limited.

3.4 Fixed Order Point versus Fixed Order Interval Policy

EOQ model is an approach of the fixed order point policy. According to Ellram et al. (1998, p.128): Throughout the ordering process, as long as the EOQ model was identified, a fixed quantity will be ordered every time. “An order is placed when inventory on hand reaches a predetermined minimum level necessary to satisfy demand during the order cycle.” An order will be generated through the automated inventory management system.

Another reorder policy is the fixed order interval method. Use this method, we may set time interval, maybe every week. Under this method, many projects are bought by the same supplier. “A weekly order may be placed to reduce ordering costs and take advantages of purchase volume discounts and freight consolidation.”


As we all know, the most effective stock management approach is JIT production control system over the past 50 years. The system is currently being used by many industries.

4.1 JIT Logic

For the purpose of JIT system, it intend to use minimum inventories of raw materials, process of production, and finished goods to achieve high output. Need is based on the occurrence of product’s actual demand, otherwise nothing will be produced. Theoretically, if an item is sold, the market will pull a substitute in the system. “This triggers an order to the factory production line, where a worker then pulls another unit from an upstream station in the flow to replace the unit taken” (Aquilano et al. 2004, p.427). Then this upstream station pulls to further upstream and back to release of raw materials. To make this pull process more smoothly, JIT need high quality in every procedure, strong supplier relationships, and a very clearly demand for the final product.

4.2 Feature of JIT production system

In JIT production system, Black et al. (1996, p.842) argue that it include three key features:

1). Operation of production line is based on demand-pull, as a result, each workstation’s activity is subject to the approval of the demand of downstream workstations. There are many approaches to use demand-pull feature, but the most common method is Kanban system which is the Japanese term for a visual record or card.

Under Kanban system, use a kanban card to operate to authorized another operation to produce a given part of the special quantity. Black et al. (1996) provide an example: “suppose the assembly department of a muffler manufacture receives an order for 10 mufflers. The assembly department triggers productions of the 10 metal pipes it needs to make the 10 mufflers by sending a kanban card to the machining department, which then begins producing the pipes. When production is completed, the machining department attaches the kanban card to the box containing the mental pipes and ships the package downstream to the assembly department, which starts the cycle over again when it receives the next customer order.”

2). Each unit including the setup time and manufacturing lead time are minimized. When a product is prepare to begin in production line, then turned into finished products, the process of the elapse of the time is known as manufacturing lead time. Production of demand normally produced relatively small quantities, however, as long as setup times are small, it is cost-effective to produce product in small quantities.

3). If parts have defective and insufficient, the production line will cease operation. Each staff should attach great importance to reducing the occurrence of such problems like defective material parts. Conversely, under the traditional inventory management system, workers can ignore defective parts and continue to work because the inventory parts and work in process are huge.

Hirsch et al. (1989, p.746) take a similar view, they have also added an important argument that total quality control (TQC) is often combined with JIT system. All the staff have become quality control inspection personnel, meanwhile, if products and materials are found to be not meeting quality standard, the production line should suspend operation. As long as this situation happened, it must be resolved as soon as possible. It means that workers have not impetus to ignore the fault in the early of production process stage, they had to stop their work process.

4.3 JIT Costing

The fundamental difference between JIT method and other traditional methods is the treatment of the costs.

According to Hirsch et al. (1989, p.746), under the traditional approach of costing, raw materials or reserves firstly get into an asset account, when they are transported. After these amounts are transferred into a work-in process account, they will be put into operation as raw materials. “Then, as the materials move from process to process they pass through a series of work-in-process accounts for each operation.” Eventually, when the product
inventory through work-in-process account transfer to finished product inventory account.

“With JIT the incoming materials are entered at cost directly into a material and work-in-process inventory account.” There is no series of work-in-process accounts for each process because there is very little work-in-process to account for. The value of material is diverted to finished product inventory account because the product has been completed.

4.4 JIT Purchasing

In JIT purchasing, suppliers use the replacement principle of Kanban by using small, standard-size containers and make several shipments daily to each customer. JIT not only reduces in-process inventories by using Kanban, but also raw materials inventories are reduced by applying the same principles to suppliers as well.

According to Frazier and Gaither (2001): the elements of JIT purchasing are as following:

1). Supplier development and supplier relations undergo fundamental changes. The nature of the relationships between customers and suppliers shifts from being adversarial to being cooperative. The Japanese call these relationships subcontractor networks and refer to suppliers as co-producers.

2). Purchasing departments develop long-term relationships with suppliers. The result is long-term supply contracts with a few suppliers rather than short-term supply contracts with many suppliers.

3). Although price is very important, delivery schedules, product quality, and mutual trust and cooperation become the primary basis of supplier selection.

4). Suppliers are encouraged to extend JIT approach to their own suppliers.

5). Suppliers are ordinarily located near the buying firm’s factory, or if they are some distance from the factory, they are often clustered together. This causes lead times to be shorter and more reliable.

6). Shipments are delivered to the customer’s production line directly. Because suppliers are encouraged to produce and supply parts at a steady rate that matches the use rate of the buying firm, company-owned hauling equipment tends to be preferred.

7). Parts are delivered in small, standard-size containers with a minimum of paperwork and in exact quantities.

8). Delivered material is of near-perfect quality. Because suppliers have a long-term relationship with the buying firms and because parts are delivered in small lot sizes, the quality of purchased materials tends to be higher.


5.1 Examination of EOQ Assumptions

In the practice of business arena, although EOQ model enable to generate many good results, many limitations of EOQ model is combined with its own assumptions. Schroeder (1993, p.592) argued as following:

1). In practice, demand is assumed to be constant, but in many cases demand is shifty.

2). The unit cost is assumed constant, in practice, however, normally if the purchase of large quantities, it will gain quantities discounts. “This case needs a modification of the basic EOQ model and is treated in the chapter supplement.”

3). The material in the lot is assumed to arrive all at once, but in some cases material will be placed in inventory continuously as it is produced. This case is also treated in the supplement.

4). A single product is assumed, however, sometimes several projects were purchased through a single provider. Meanwhile they are being shipped at one time.

5). Suppose the setup cost is static, as a matter of fact, it is always decreased.

These assumptions have been pointed out to illustrate the limitation of the basic EOQ model, nevertheless it is useful approximation in practice. The formula at least “puts you in the ballpark”, provided the assumptions are reasonably accurate. In addition, the total-cost curve is rather flat in the region of the minimum. Therefore the EOQ can be adjusted somewhat to conform to reality without greatly affecting the costs.

The EOQ formula can also offer insight into economic behavior of inventories. For example, traditional turnover arguments suggest that inventory should increase directly with sales if a constant turnover ratio is desired. Since turnover is the ratio of sales to inventory, a doubling of sales will allow a doubling of inventory if the turnover rate is held constant. But the EOQ formula suggests that inventory should increase only with the square root of sales. This indicates that it is net economical to maintain a constant turnover ratio as sales increase; a higher turnover is indeed justified.

It is important for financial manager that fully understand limitations and assumptions of the EOQ model will offer a strong base of making stock management decision.

5.2 EOQ Model Extension

Obviously, through the above discussion, some assumptions of EOQ model are impractical. In order to make this model more useful, it is necessary to extension for EOQ model. Besley and Brigham (2005, pp.602-603) state clearly:

To begin with, if there is a delay between the time inventory is ordered and when it is received, the company have to reorder before it use up inventory. To avoid this, the firm can carry safety stock, which means “additional inventory carried to guard against unexpected changes in sales rates or production/shipping delays.”

The amount of safety stock a company holds generally increase with a) the uncertainty of demand forecasts, b) the costs (in term of lost sales and lost goodwill) that result from stockouts, and c) the chances that delay will occur in receiving shipments. The amounts of safety stock decreases as the cost of carrying this additional inventory increase. Moreover, a company should consider when determining appropriate inventory level is whether its supplier provides discounts to purchase large quantities.

It is unrealistic to suppose that the demand for the inventory is uniform in the year, the EOQ model should not be based on an annual to applying. More appropriate approach should divide the year into the seasons like the spring, the summer, the fall, and the winter which sales are relatively constant; then the EOQ model can be applied separately to each periods.


In practice, we have already found that JIT system have its potential benefits and its problems. It is important to use that fully comprehension the merits and the problems of JIT system.

6.1 Typical Benefits of JIT

Meredith and Shafer (2002, p.351) deem that JIT provide various advantage in real operation:

Cost savings. There are many approaches to save cost. Such as inventory reduction, reduced scrap, fewer defect, less space, fewer changes due to both customers and engineering, decreased labor hours, less rework, reduced rework, and other such effects. Total savings range in the neighborhood of 20 to 25 percent, with significantly higher savings on individual categories such as inventory and defects.

Revenue increases. Through high-quality product and satisfactory service to customers, revenue will be increased. Short lead time and rapidly reply to meet customer’s need lead to better margins and higher sales. The rapid research and development of new products and service will bring more revenues.

Investment savings. Investment is saved through three primary effects. First, less space is needed for the same capacity. Second, inventory is reduced to the point that turns run about 50 to 100 a year. Third, the volume of work produced in the same facility is significantly increased, frequently by as much as 100 percent.

Workforce improvement. JIT company’s employees are more satisfied with their work. They prefer the teamwork it demands, and they like the fact the fewer problems arise. They are also better trained for the flexibility and skills needed with JIT, and they enjoy the growth they experience in their jobs. “All this translates into better, more productive work.”

Uncovering problems. One of the unexpected benefits is the greater visibility to problems that JIT allows, if management is willing to capitalize on the chance to fix these problems. In trying to speed up a process, all types of difficulties are uncovered and most of them are various from of waste so not only is response time but also is usually zero.

6.2 Potential Problems in Implementing JIT

It is important that JIT system has some problems and limitations. According to Meredith and Shafer (2002, p.353), there are some difficulties and problems as following:

First of all, JIT system is do for repetitive production case, including relatively standard products. It does not applicable to custom, continuous flow, or project situation. JIT system is not long-term operations, because it is based on the identical mixed-model plans to operation in every day. Clearly, when setups need to spend a long time, JIT will not able to run continuously. JIT system often has setups, it also has frequent shipments and receipts. Therefore the company must be prepared for this too.

JIT need principle as well. Production will cease, once products are not arrive on schedule, or flaws happen. Moreover, we have no other means or time to make up for mistakes. Production system must be used correctly, workers must fulfill their work seriously, otherwise run of JIT system will fail.

Principle is usually linked with supply chain. The biggest problem to successful operation of JIT system is unrealistic deliveries from suppliers. For example: Suppose X company’s two important suppliers have already gone strike for several days, X company was forced to close 10 of its plants at a cost of almost $500 million in lost profits. When an important supplier their supply, JIT is very danger if there is no backup supplier.

In addition, equally serious problem is when a comprehensive delivery service goes on strike, like UPS and FEDEX strike that idled thousands of business and caused a major disruption in the economy. Although other delivery service can sometimes fill in, they often cannot bring sufficient capacity to the problem to keep JIT operating without disruption.

On the other hand, JIT is based on cooperation and trust among workers, managers, suppliers, customers, and so on. The current environment must be trust and competition is not exist, or else JIT will not run successfully. Trust and cooperation must also be extended to the external such as suppliers and customers. “With suppliers, this means moving to risky, single-source contracts and bringing an outsider into the project team, where there may be proprietary secrets.”

6.3 E-Commerce and JIT Purchasing

Nowadays, JIT system combined with e-commerce, making the JIT purchasing has become better to use in practice. E-commerce has already put up a advantage to JIT purchasing. There are some merits being showed: Reduce waste of time to deal with paper work and reduce the procurement lead time; labor costs are also reduced. “The bottom line is a more efficient and effective purchasing process” (Frazier and Gaither 2001, p.477).

E-commerce can drive the use of Kanban between manufacturer and suppliers. Under method of Internet-based system, a manufacturer can electronically send Kanban to suppliers. E-Kanban and paper Kanban have identical functions, however they can provided to suppliers rapidly.


·What are the benefits for McDonald?

The major benefits for McDonald are better food at a lower cost. McDonald Company has found something that allows them to improve quality and lower costs.

·Improved Quality

The less obvious benefit is the higher quality customer service that arises from the JIT burger assembly. When McDonald waits for you to order the burger, they do a few things to improve customer service. First of all, when you place a special order, it does not send McDonald’s into a panic that causes huge delays.

Now that McDonald company is in the practice of waiting until you order a burger until they make it, they don’t freak out when they have to make a special order fresh just for you. This higher quality customer service is subject to McDonald ability to produce faster. Without this ability, McDonald’s ordering costs would be sky-high because the costs associated with ordering would be the loss of customers tired of ordering fast food that really isn’t fast.

Second, JIT allows McDonald to adapt to demand a little bit better. Seemingly, lower inventory levels would cause McDonald’s bigger problems in a higher demand because they wouldn’t have their safety stock. However, because they can produce burgers in a record time, they don’t have to worry about their pre-made burger inventories running out in the middle of an exceptionally busy shift.

·Lower Costs In McDonald, the holding costs for burger parts (beef, cheese, whatever other garbage they put on their burgers) are fairly high because of their spoilage costs. Frozen ground beef that’s good today might not be so good in a few months. Once cooked, the same ground beef’s spoilage rate shoots through the roof. Instead of having a shelf life of months or weeks, the burger needs to be sold within 15 minutes or so. The holding costs go from roughly 20% per week to 100% per hour.

·Why use JIT?

According to argument of Inventory management review (2005):

·Economic Order Quantity Savings A large benefit of JIT is that it reduces the total cost of ordering and holding inventory. High holding costs is the nature of the fast food industry. JIT system allowed them to exploit the savings that were realized by holding less inventory.

High holding costs and low ordering costs are the factors that drive JIT. Generally, it’s the ability to lower ordering costs that make it a feasible solution. McDonald was slave to the high holding costs. It was just the nature of their industry. The solution for them was that while they couldn’t lower holding costs, they could lower ordering costs.

EOQ determines how much you should order and there are two factors that drive economic order quantities down: low ordering costs and high holding costs. Depending on the product and the industry, one or both of these qualities may exist in your operations. If they do, JIT may be right for you. Without the ability to make ordering costs low as a percentage of holding costs, then there is no need for JIT. In fact, the increased frequency in ordering will result in cost increases.

·Safety Stock Reductions

The other aspect of JIT is the drastic reduction in safety stock. Two reasons result in safety stock exist: variability in demand and variability in lead times from suppliers (for McDonald company, the supplier is the internal production process). If lead time is shorter, which JIT tries to accomplish, then this part of the safety stock is smaller, this lowering safety stock inventory. McDonald company is accomplished this by creating a system that allowed a faster burger production (McDonald’s lead times are internal).

On the other hand, If lead time has no variance or is reduced, then this term can be eliminated or at least reduced. Again, this is what JIT try to accomplish. McDonald company is accomplished by standardizing production.

McDonald Company fully understand that a considerable amount of work needs to be done with suppliers/internal operations in order to accomplish the tasks of shortening lead times and reducing their variances. McDonald company has the resource to implement JIT system successfully.

However, in competitive industries, JIT is not optimal for all the firms. JIT, like most management accounting techniques, is not a universal panacea, and some firms find it profitable like McDonald, Walmart, and so on; some are not.


It should be said that stock management is prominent aspect of working capital management. For the purpose of control stock level, most of companies use EOQ and JIT models in practice. Efficiency gains in inventory management can bring significant improvement to overall company financial performance. However, no model has been fully satisfactory. The two models have advantages and disadvantages respectively. In general, although each model will work well in certain environments, they may not work well in other environments. An inappropriate choice of system can be expensive mistake. Thus, it can be concluded that each company should choose own different stock control model with its own conditions and efficient inventory management can lead to better planning and business control.


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Economic Order Quantity model (EOQ) and the Just-In-Time model (JIT) Essay