A microeconomic analysis of investment in just-in-time manufacturing

Abstract

This paper presents a fundamental microeconomic analysis of a firm which has made an investment into just-in-time (JIT) manufacturing principles. The firm is assumed to possess some monopsony power in the purchasing of its raw materials and sells its output in a competitive market. The firm's investment process can take place over one or more time periods and it is assumed that, properly implemented, JIT brings about a unit production cost reduction. The model developed is used to comment on the implications of both the unit production cost reductions and the size and duration of the investment made in JIT. This work highlights, in simple economic terms, the potential benefits of JIT implementation to the firm. In particular, the effects of reducing the supplier base are examined, as this is one of the major thrusts of the JIT philosophy. The importance of taking a long term view in the development of JIT suppliers is also shown through the model.