Introduction:
Importance of inventory management in business is evident. Since inventories make up a substantial part of total assets, reducing inventories to a minimum is desirable. Holding inventory is financially costly and there is more to it than just financial cost. In any kind of
business inventories also indicate to inefficiencies in the business process. There are several different reasons for carrying inventory. As Barlow cites from Coyle (Barlow 2002) these are:
• purchasing economies
• Transportation savings
• Safety/buffer stock
• Speculative purchases
• Seasonal supply
• Maintenance of supplier source
First three of these reasons it related to operational structure of the business. Rationale behind these is basically argues that bigger lot sizes will save the buyer in terms of financial costs and it is assumed that cost of carrying inventory is lower than these savings. Safety/buffer stock argument is about continuity of the production/business. Inventory in this context enables business process to run smoothly without any interruptions and again it is assumed that carrying cost of inventory is worth having this security against any interruptions.
This rationale of carrying inventory indicates inefficiencies of business process. Since inventory in this sense is a burden on the business efficient way is to do away with it. Although it is not possible all the time, reducing inventory to a minimum level is only possible by increasing the efficiency of the business. For example it is more efficient when purchasing at the lowest possible price and transporting at a low cost with small lot sizes. Buffer stock also indicates inefficiency in the business process. If an organization is able to produce when needed without needing a buffer stock it is evidently more efficient.
Inventory management is important and effective business processes run with lower inventories. There are different approaches and tools to manage inventory. Some sees inventory as a necessity and aims to manage it and some aims to completely remove the inventory. JIT is an approach which aims to reduce inventory to zero. Even though it is a bit of a chicken and egg dilemma, JIT reduces inventory but it is not the primary aim of JIT approach.
What is Just in Time?
Just-in-time (JIT) is an inventory strategy that strives to improve a business's return on investment by reducing in-process inventory and associated carrying costs. To meet JIT objectives, the process relies on signals or Kanban between different points in the process, which tell production when to make the next part. Kanban are usually 'tickets' but can be simple visual signals, such as the presence or absence of a part on a shelf. Implemented correctly, JIT can improve a manufacturing organization's return on investment, quality, and efficiency.
Quick notice that stock depletion requires personnel to order new stock is critical to the inventory reduction at the center of JIT. This saves warehouse space and costs. However, the complete mechanism for making this work is often misunderstood.
For instance, its effective application cannot be independent of other key components of a lean manufacturing system or it can "...end up with the opposite of the desired result." In recent years manufacturers have continued to try to hone forecasting methods (such as applying a trailing 13 week average as a better predictor for JIT planning), however some research demonstrates that basing JIT on the presumption of stability is inherently flawed.
According to Waters-Fuller (1995) JIT activities to achieve the result of waste elimination and inventory reduction are:
• Small lot sizes delivered in exact quantities
• Few suppliers, ideally one per component
• Supplier selection based on quality and delivery performance
• Long term contracts
• standardized packaging
• reduced paperwork
• Delivery synchronization to production
• Geographically close suppliers
• improved data exchange
These practices eliminate the reasons for holding inventory. Single sourcing, long term contracts etc. enables the business use its supplier as a warehouse and requires closer inter organizational relationships. Billesbach and Schniederjans (1989) identify some JIT techniques as: (i) re-layout and merger of operations, (ii) standardization of activities, (iii) multifunctional workers, (iv) cellular organization. These techniques are aim to change internal processes to comply with JIT philosophy.
History of Just in Time
Just-In-Time is a Japanese manufacturing management method developed in 1970s. It was first adopted by Toyota manufacturing plants by Taiichi Ohno. The main concern at that time was to meet consumer demands. Because of the success of JIT management, Taiichi Ohno was named the Father of JIT.
After the first introduction of JIT by Toyota, many companies followed up and around mid 1970s', it gained extended support and widely used by many companies.
One motivated reason for developing JIT and some other better production techniques was that after World War II, Japanese people had a very strong incentive to develop good manufacturing techniques to help them rebuilding the economy. They also had a strong working ethnic which was concentrated on work rather than leisure, seeker continuous improvement, life commitment to work, group conscious rather than individualism and achieved common goal. This kind of motivation had driven Japanese economy to succeed.
Because of the natural constraints and the economy constraints after World War II, Japanese Manufacturers looked for a way to gain the most efficient use of limited resources. They worked on "optimal cost/quality relationship".
Before the introduction of JIT, there were a lot of manufacturing defects for the existing system at that time. According to Hirano, this included inventory problem, product defects, risen cost, and large lot production and delivery delays. The inventory problems included the unused accumulated inventory that was not only unproductive, but also required a lot of effort in storing and managing them. Other implied problems such as parts storage, equipment breakdowns, and uneven production levels.
For the product defects, manufacturers knew that only one single product defects can destroy the producer's creditability. They must create a "defect-free" process.
Instead of large lot production - producing one type of products, they aware that they should produce more diversified goods. There was also a problem of rising cost, the existing system could not reduce cost any further but remember improvement always leads to cost reduction.
Lastly, the existing system did not manage well for fast delivery request, so, there was a need to have a faster and reliable delivery system in order to handle customers' needs.
Thus, JIT manufacturing management was developed based on these problems.
Philosophy
The philosophy of JIT is simple: inventory is waste. JIT inventory systems expose hidden causes of inventory keeping, and are therefore not a simple solution for a company to adopt. The company must follow an array of new methods to manage the consequences of the change. The ideas in this way of working come from many different disciplines including statistics, industrial engineering, production management, and behavioral science. The JIT inventory philosophy defines how inventory is viewed and how it relates to management.
Inventory is seen as incurring costs, or waste, instead of adding and storing value, contrary to traditional accounting. This does not mean to say JIT is implemented without awareness that removing inventory exposes pre-existing manufacturing issues. This way of working encourages businesses to eliminate inventory that does not compensate for manufacturing process issues, and to constantly improve those processes to require less inventory. Secondly, allowing any stock habituates management to stock keeping. Management may be tempted to keep stock to hide production problems. These problems include backups at work centers, machine reliability, and process variability, lack of flexibility of employees and equipment, and inadequate capacity.
In short, the just-in-time inventory system focus is having "the right material, at the right time, at the right place, and in the exact amount", without the safety net of inventory. The JIT system has broad implications for implementers.
Transaction cost approach
JIT reduces inventory in a firm. However, a firm may simply be outsourcing their input inventory to suppliers, even if those suppliers don't use JIT (Naj 1993). Newman (1993) investigated this effect and found that suppliers in Japan charged JIT customers, on average, a 5% price premium.
Environmental concerns
During the birth of JIT, multiple daily deliveries were often made by bicycle. Increased scale has required a move to vans and lorries (trucks). Cusumano (1994) highlighted the potential and actual problems this causes with regard to gridlock and burning of fossil fuels. This violates three JIT waste guidelines:
Time-wasted in traffic jams
Inventory-specifically pipeline (in transport) inventory
Scrap-fuel burned while not physically moving
Price volatility
JIT implicitly assumes a level of input price stability that obviates the need to buy parts in advance of price rises. Where input prices are expected to rise, storing inventory may be desirable.
Quality volatility
JIT implicitly assumes that input parts quality remains constant over time. If not, firms may hoard high quality inputs. As with price volatility, a solution is to work with selected suppliers to help them improve their processes to reduce variation and costs. Longer term price agreements can then be negotiated and agreed-upon quality standards made the responsibility of the supplier. Fixing up of standards for volatility of quality according to the quality circle
Demand stability
Karmarker (1989) highlights the importance of relatively stable demand, which helps ensure efficient capital utilization rates. Karmarker argues that without significantly stable demand, JIT becomes untenable in high capital cost production. In the U.S., the 1992 railway strikes caused General Motors to idle a 75,000-worker plant because they had no supply.
Classic JIT diagram
The classic JIT diagram is as below. There the company (the boat) floats on a sea of inventory, lurking beneath the sea are the rocks, the problems that are hidden by the sea of inventory.
|
--|--
|
---------------
\ /
========\ Company /============ Sea of inventory
\---------/
x
xxx xxxx
xxxxx xxxxxx Rocks - the problems hidden
xxxxxxxxxxxxxxxx by the sea of inventory
If we reduce the inventory level then the rocks become exposed, as below.
|
--|--
|
--------------- x
\ / xxx xxxx
========\ Company /====xxxxx===xxxxxx========
\---------/ xxxxxxxxxxxxxxxx
Now the company can see the rocks (problems) and hopefully solve them before it runs aground.
One plan to expose the problems is simply to:
make a large amount of finished goods stock to keep the customers supplied
try running the production system with less inventory to expose problems
revert to the original levels of inventory until you have had time to fix the problems you exposed
repeat the above - hence continuous improvement
Advantages of using JIT in Industries
The benefits of JIT are:
better quality products
quality the responsibility of every worker, not just quality control inspectors
reduced scrap and rework
reduced cycle times
lower setup times
smoother production flow
less inventory, of raw materials, work-in-progress and finished goods
cost savings
higher productivity
higher worker participation
more skilled workforce, able and willing to switch roles
reduced space requirements
improved relationships with suppliers
JIT Implementation Design
Based on a diagram modeled after the one used by Hewlett-Packard's Boise plant to accomplish its JIT program.
1) F Design Flow Process
- F Redesign/relay out for flow
- L Reduce lot sizes
- O Link operations
- W Balance workstation capacity
- M Preventive maintenance
- S Reduce Setup Times
2) Q Total quality control
- C worker compliance
- I Automatic inspection
- M quality measures
- M fail-safe methods
- W Worker participation
3) S Stabilize Schedule
- S Level Schedule
- W establish freeze windows
- UC Underutilize Capacity
4) K Kanban Pull System
- D Demand pull
- B Backflush
- L Reduce lot sizes
5) V Work with vendors
- L Reduce lead time
- D Frequent deliveries
- U Project usage requirements
- Q Quality Expectations
6) I further reduce inventory in other areas
-S Stores
- T Transit
- C Implement Carroussel to reduce motion waste
- C Implement Conveyor belts to reduce motion waste
7) P Improve Product Design
- P Standard Production Configuration
- P Standardize and reduce the number of parts
- P Process design with product design
- Q Quality Expectations
An example of the use of JIT in General Motors is given below:
General Motors (GM) in the USA has (approximately) 1700 suppliers who ship to 31 assembly plants scattered throughout the continental USA. These shipments total about 30 million metric tons per day and GM spends about 1,000 million dollars a year in transport costs on these shipments (1990 figures).
JIT implies frequent, small, shipments. When GM moved to JIT there were simply too many (lightly loaded) trucks attempting to deliver to each assembly plant. GM's solution to this problem was to introduce consolidation centers at which full truckloads were consolidated from supplier deliveries.
This obviously involved deciding how many consolidation centers to have, where they should be, their size (capacity) and which suppliers should ship to which consolidation centers (suppliers can also still ship direct to assembly plants).
As of 1990 some 20% by weight of shipments go through consolidation centers and about 98% of suppliers ship at least one item through a consolidation centre.
All this has been achieved without sacrificing the benefits of JIT.
Business models following similar approach
Vendor-managed inventory
Vendor-managed inventory (VMI) employs the same principles as those of JIT inventory, however, the responsibilities of managing inventory is placed with the vendor in a vendor/customer relationship. Whether it's a manufacturer managing inventory for a distributor, or a distributor managing inventory for their customers, the management role goes to the vendor.
An advantage of this business model is that the vendor may have industry experience and expertise that lets them better anticipates demand and inventory needs. The inventory planning and controlling is facilitated by applications that allow vendors access to their customer's inventory data.
Another advantage to the customer is that inventory cost usually remains on the vendor's books until used by the customer, even if parts or materials are on the customer's site.
Customer-managed inventory
With customer-managed inventory (CMI), the customer, as opposed to the vendor in a VMI model, has responsibility for all inventory decisions. This is similar to JIT inventory concepts. With a clear picture of their inventory and that of their supplier's, the customer can anticipate fluctuations in demand and make inventory replenishment decisions accordingly.
CONCLUSIONS
The following conclusions were drawn from this study:
1. Most important elements for service industries are total productive maintenance, process flexibility, JIT purchasing, smooth flow of materials, housekeeping, process flexibility, set up time reduction, administrative efficiency.
2. The difficult elements for service industries are total productive maintenance, quality function deployment, standardization, standard containers, and quality circles.
3. It is recommended that the service industries should implement most important and less difficult elements at the initial stage.
