FHDSCM Module 6 – Production & Operations Management Chapter 7 - JIT & Supply Chain Management Chapter 7 “Just in Time” (JIT) & Supply Chain Management Objectives: Understand why Just-In-Time manufacturing is important and how it relates to Supply Chain Management. Define JIT and how JIT affects process flow design and its close proximity with total quality control. Table of Contents 1. Introduction to Just-In-Time (JIT) Manufacturing 2 2. Definition of Just-In-Time (JIT) 5 3. Objectives of a Just-In-Time system 5 4. JIT Requirements in Supply Chain Management 6 6. Critical Elements in JIT Manufacturing 9 7. JIT in Process Flow Design 11 8. JIT in Inventory and Vendor Management 16 9. Conclusion – Has JIT Outlived Its Usefulness? 19 10. Knowledge Assessment 20 ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 7 - JIT & Supply Chain Management 1. Introduction to Just-In-Time (JIT) Manufacturing Just in time manufacturing is a systems approach to developing and operating a manufacturing system. JIT is not a new concept, but rather has been part and parcel of the Japanese manufacturing industry. JIT originated in Japan. Its introduction as a recognised technique, philosophy, or way of working, is generally associated with the Toyota motor company. JIT was initially known as the “Toyota Production System”. Within Toyota, Taiichi Ohno is most commonly credited as the originator of “JIT” concepts. The beginning of this production system is rooted in the historical situation that Toyota faced. After the Second World War, the president of Toyota said: “Catch up with America in three years, otherwise the automobile industry of Japan will not survive”. At that time, one American worker produced approximately nine times as much as a Japanese worker. Taiichi Ohno examined the American industry and found that American manufacturers made significant use of economic order quantities – the traditional idea that it is best to make a “lot” or a “batch” of a certain item, before switching to a new item. They also made use of economic order quantities in terms of ordering and stocking the many parts needed to assemble a car. Ohno felt that such methods would not work in Japan – total domestic demand was low, and the domestic marketplace demanded production of small quantities of many different models. Accordingly, Ohno devised a new system of production based on the elimination of waste. In his system, waste was eliminated by: Just-in-time – items only move through the production system as and when they are needed, and Automation – automating the production system to include inspection. Human attention only being needed when a defect is automatically detected, whereupon the system will stop, and not proceed, until the problem has been solved. In this system, inventory (stock) is regarded as unnecessary waste. Ohno regarded waste as a general term including time, resources, and materials. He identified a number of sources of waste which should be eliminated: Overproduction – waste from producing more than is needed. Time spent waiting – waste associated with a worker being idle whilst waiting for another worker to pass him an item he needs. Transportation or movement of goods – waste associated with transporting or moving items around the factory. Processing time – waste associated with spending more time than is necessary processing an item or machine. Inventory – waste associated with keeping stock. ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 7 - JIT & Supply Chain Management Defects – waste associated with defective items. At the time car prices in the USA where typically set using a selling price which was cost plus profit mark-up. However, in Japan, low demand meant that manufacturers faced price resistance, so if the selling price is fixed, how can the company increase the profit mark-up? Obviously, by reducing costs and hence a large focus of the system that Toyota implemented, related to cost reduction. To aid in cost reduction Toyota instituted production levelling – eliminating unevenness in the flow of items. If a component which required assembly had an associated requirement of 100 during a 25-day working month, then 4 were assembled per day, one every two hours in an eight-hour working day. Levelling was also applied to the flow of finished goods out of the factory and to the flow of raw materials into the factory. Toyota also changed their factory layout. Previously all machines of the same type, e.g., presses, were together in the same area of the factory. This meant that items had to be transported back and forth as they needed processing on different machines. To eliminate this transportation, different machines were clustered together so items could move smoothly from one machine to another as they were processed. This meant that workers had to become skilled on more than one machine – previously workers were skilled at operating just one type of machine. Although this initially met resistance from the workers, it was eventually overcome. To help the workforce to adapt to what was a vastly different production environment, Ohno introduced the analogy of teamwork as a “baton relay race”. Within the newly rearranged factory floor, workers were encouraged to think of themselves as members of a team – passing the baton (processed items) between themselves, with the goal of reaching the finishing line appropriately. If one worker had an off day, then the other workers could help him, perhaps setting up a machine for him so that the team output was unaffected. To achieve a method of controlling production (the flow of items) in this new environment, Toyota introduced the KanBan ( 看 板 ). The KanBan is essentially information regarding what has to be done. Within Toyota the most common form of KanBan is a rectangular piece of paper within a transparent vinyl envelope. The information listed on the paper tells a worker what to do, which items to collect, or which items to produce. Two types of KanBan are distinguished in Toyota for controlling the flow of items: A withdrawal KanBan – which details the items which should be withdrawn from the preceding step in the process, and A production ordering KanBan – which details the items to be produced. ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 7 - JIT & Supply Chain Management Figure 7-1: KanBan System All movements throughout the factory are controlled by these KanBans. Since the KanBans specify item quantities precisely, no defects can be tolerated e.g., if a defective component is found when processing a production ordering KanBan, then the quantity specified on the KanBan cannot be produced. Hence the importance of automation – the system must detect and highlight the defective items so that the problem that caused the defect to occur can be resolved. Another aspect of the Toyota Production System is the reduction of setup time. Machines and processes had to be re-engineered, to reduce the setup time required, before the processing of a new item can commence. Ohno has written that Toyota was only able to institute KanBans on a company wide basis in 1962, ten years after they first embarked on the introduction of this new production system. Although, as the originators of the approach, Toyota still had much to learn, and no doubt made mistakes, which illustrates the time that can be required to successfully implement a JIT system in a large company. Moreover, one can reflect on the management time, effort, and costs that were consumed during the development and implementation of their JIT system. It is therefore necessary to understand that just-in-time systems focus on the concept of waste elimination. It encourages the organisation to plan that the basic resources of equipment, raw materials, and labour, are made available, only at the moment it is required. JIT is commonly associated with producing only the required units, in the required quantities, at the required time, by aligning manufacturing capacities with the demands of the market. In other words, JIT simply means to produce what the market wants, when the market wants the products. ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 7 - JIT & Supply Chain Management JIT has been found to be effective in increasing an organisation’s productivity, revenue performance, and product quality, whilst at the same time, saving costs. 2. Definition of Just-In-Time (JIT) Just-in-time is a philosophy embodying various definitive concepts that result in a different way of conducting business for most organisations. The basic tenets of these philosophical concepts include: All waste, anything that does not add value to the product or service, should be eliminated. Value is anything that increases the usefulness of the product or service to the customer, or reduces the cost, to the customer. JIT is a never-ending journey, but with rewarding steps and milestones. Inventory is a waste; it covers up problems that should be solved rather than concealed. Waste can gradually be eliminated by removing small quantities of inventory from the system, correcting the problems that ensue, and then removing more inventory. The customer’s definition of quality and the criteria for evaluating the product, should drive product design and the manufacturing system. This implies a trend toward increasingly customised products. Manufacturing flexibility, including quick response time to delivery requests, design changes, and quantity changes, is essential to maintain high quality and low cost with an increasingly differentiated product line. Mutual respect and support, based on openness and trust, should exist among all in an organisation, its employees, its suppliers, and its customers. A team effort is required to achieve these world-class manufacturing capabilities. Management and staff must participate. This implies increasing the flexibility, responsibility, and authority provided to the hourly worker. The employee who performs a task often is the best source of suggested improvements in the operation. It is important to employ the workers’ brains, not merely their hands. JIT is therefore a philosophy of continuous and forced problem-solving supporting lean production. Lean production supplies the customer with exactly what the customer wants, when the customer wants it, without waste, through continuous improvement. Lean production is driven by the ‘pull’ of the customers’ orders. JIT is a key ingredient of lean production. When implemented as a comprehensive manufacturing strategy, JIT and lean production sustain competitive advantage and result in greater overall returns. 3. Objectives of a Just-In-Time system With JIT, supplies and components are ‘pulled’ through a system to arrive where they are needed when they are needed. When units do not arrive just as needed, a ‘problem’ has been identified. ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 7 - JIT & Supply Chain Management This makes JIT an excellent tool to help organisations add value by driving out waste and unwanted variability. Because there is no excess inventory or excess time in a JIT system, costs associated with unneeded inventory are eliminated and throughput improved. Figure 7-2: Pull System Consequently, the benefits of JIT are particularly helpful in supporting strategies of rapid response and low cost. Thus, a general set of objectives with implementing just-in-time concepts are: Reduce operating costs, Eliminate waste, Greater performance and throughput, Higher quality, Improved delivery, and Increased flexibility and innovativeness. 4. JIT Requirements in Supply Chain Management As each organisation is uniquely positioned and constructed to produce their core products, the implementation of a just-in-time system requires modifications within individual supply chain processes in order to be successful. There are distinct differences in each manufacturing process, such as product specifications, customers’ requirements, business goals, etc., but it is highly dependent on the individual organisation to determine the level of appropriateness and the application of just-in-time methodologies. We will begin by looking the planning stage for a JIT installation within a supply chain management process. ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 7 - JIT & Supply Chain Management 5. Planning for Just-In-Time To plan the process for a JIT manufacturing system, it is necessary to understand the objectives of JIT together with the goals of the system itself. Once the manufacturing objectives have been established, the process of planning becomes the road to determine the requirements to meet those objectives. The goal of a JIT application is to ensure that the system allows the organisation to plan the materials, equipment, and labour on hand, required to do the job. To attain this goal, the organisation requires the following objectives: To integrate and optimise the manufacturing process, Produce quality product, Reduce manufacturing cost, Produce products on demand, Develop manufacturing flexibility, and Maintain commitments made between customers and suppliers. 5.1 Integrating and Optimising An organisation’s manufacturing system is a continual process of reducing the number of steps necessary to complete a process instead of having plateaus of steps. The removal of bottlenecks (or kinks) within the manufacturing process is critical towards integration. One such way is to plan to accomplish 100 percent defect free product quality. Integrating and optimising will involve the reducing need of unnecessary functions and systems such as inspection, rework, and inventory. 5.2 Produce Quality Product One of the basic fundamental goals of JIT in the supply chain process is “Total Quality Control” (TQC). TQC emphasises the quality of the product at every stage of manufacturing, and this includes the product design, manufacturing process and even the procurement of raw materials. Quality control is therefore conducted at every stage of the manufacturing process; from the source to the final step, rather than relying on a single processing stage which implements quality control on the final product. It is imperative that each individual function in the supply chain accepts responsibility for the quality level of its products. This concept introduces the correction of the problem before other defective units are completed and delivered. ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 7 - JIT & Supply Chain Management 5.3 Reduce Manufacturing Cost When the organisation designs products that facilitate and ease manufacturing processes, it helps to reduce the cost of manufacturing. One aspect in designing products for manufacturability is the need to establish a good employer and employee relationship. By doing so, it helps to cultivate and tap the resources of the production experts (e.g., production operators), and the line employees to develop cost saving solutions. 5.4 Produce Products on Demand Another basic fundamental principle of JIT is the goal of producing the product only as and when it is required. In other words, the product is not kept as inventory and manufacturing is only triggered by demand. By adopting the produce-on-demand concept, the organisation will ensure that only materials that are required will be utilised, and that labour will be expended only on products that will be shipped to the customer. At the end of the manufacturing cycle, excess inventory should not exist. 5.5 Develop Manufacturing Flexibility By having flexibility in manufacturing, it allows the organisation to commence new projects or improve the rate at which the production mix can be adjusted to meet customers’ demand. Planning for manufacturing flexibility requires the understanding of the elements in the manufacturing process and identifying elements in the process that restrict flexibility and to improve in these areas. One unique feature of JIT is the change from a PUSH to a PULL system. It has been recognised that work should not be pushed to the next worker until the worker is ready to accept it. This leads us to consider the following factors in supply chain management with regard to manufacturing flexibility: Supplier lead-time, The requirement to ensure a fast and reliable delivery of finished goods, Manufacturing process time, Process setup time, Kinks in the process need to be reduced and Resources need to be optimised. 5.6 Maintain Commitments Between Customers & Suppliers ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 7 - JIT & Supply Chain Management The organisation’s commitment to developing the internal structures as well as customer and supplier bases in order to support JIT manufacturing, is the primary requirement for developing the JIT system. Trust and commitment between the supplier and customer, is mandatory, because every JIT operation relies on it. Failure to keep the commitments is a serious form of breakdown in a JIT system and supply chain management. 6. Critical Elements in JIT Manufacturing For an organisation to implement Just-In-Time manufacturing, key critical elements are required that would assist in achieving success stories. These elements are: Partnerships, Commitments, Contracts supporting partnerships, Developing JIT suppliers, Partnerships – a mutually beneficial system, and Customer-supplier proximity. 6.1 Partnerships In the past, organisations were able to remain independent and competitive when they had the capability and resources required to produce a product. This is no longer true in today’s time. As technology advancement increases in complexity, organisations have to overcome capital limitations and labour-intensive requirements by becoming dependent on suppliers to provide services. Numerous services and Original Equipment Manufacturing (OEM) suppliers have evolved as a result. Organisations are now more appreciative of the fact that long term success relies on the quality of the customer-supplier relationships established. Thus, successful partnerships require the development of mutually beneficial programmes. 6.2 Commitments In order to allow the suppliers to work with customers in a confident manner, the level of commitment provided by the manufacturers must support them. Without a partnership between the customer and supplier, there will always be hesitation instead of trust. The goals of trust and commitment in JIT within a supply chain are to build partnerships to reduce the needs for materials-production control, receiving inspection or maintaining inventory buffers. Contracts used by JIT manufacturing companies to record the details of an agreement usually stress the level of commitment needed. ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 7 - JIT & Supply Chain Management 6.3 Contracts Supporting Partnerships By ensuring fair and equitable contracts, many of the problems in developing customer-supplier relationships are overcome by JIT manufacturers. The goal of JIT is to develop long term contracts with suppliers. A long-term contract gives the supplier job security for as long as the supplier remains competitive and committed. Long term contracts usually extend for one or more years and can consist of one, or more part requirements. 6.4 Developing JIT Suppliers In today’s context of manufacturing, it is important to develop a link between organisations, to ensure long-term business relationship. In turn, it will provide both organisations with the stability required to optimise their profit potential. There are four factors that affect the supplier’s ability to deliver namely trust, communication, linearity of production and time and visibility to make changes. One of the most basic needs of suppliers is to be able to trust that the customer will provide its organisation with the business stability if the supplier meets requirements. This will allow the two organisations to work much more closely than they would, based just on a contract. To have successful communication links between customers and suppliers, organisations should implement a supplier contacts function, which helps to overcome the complexity of the communication problems. Some organisations assign a buyer-quality-engineering team to be the contact for each supplier. This is an advantage as it provides a formal communication channel for the supplier and minimises the potential for miscommunication. Other organisations tend to install supplier programmes, which keep the suppliers informed on issues of mutual interest as well as expose the suppliers to information that will have an effect on the suppliers’ production. Such programmes strengthen supplier relationships by creating communications and providing an understanding of each other’s needs. Linear production schedules contribute towards improving the performance of manufacturing. In a JIT system, the need for the supplier to track the customers’ requirements closely is necessary and important. For this to happen, the supplier must reduce their lead-time to the minimum. This will encompass isolating bottlenecks in the process, balancing the production system and reducing setup time. For most suppliers, the ability to respond to changes within customer demand challenging. However, they must have sufficient time to make the necessary changes. Some changes deemed relevant are purchasing materials, increase ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 7 - JIT & Supply Chain Management equipment, establish work shifts and recruiting and training labour. With better schedule visibility, suppliers could react more quickly to changes in production requirements. 6.5 Partnerships – A Mutually Beneficial System A successful JIT system allows the suppliers and customers to work in cooperation and ensure smooth transactions within the supply chain. Such a mutually beneficial system would enable both organisations to achieve greater heights than they would have on an individual basis. There are three sub-systems involved in this mutually beneficial system: Early supplier involvement, Just-in-time materials shipment and Invoicing systems. Involving the supplier early in the design phase of a new product will allow the supplier to perform at its utmost. Suppliers will often make suggestions that can improve the design of the product and the feedback generated provides avenues for improvement in cost, quality, and scheduling. It is a known fact that deliveries can often cause traffic woes. Moreover, there are problems of unloading material, unpacking, and transportation to the production lines. It is important to develop systems to improve the efficiency of deliveries to the customers. A JIT system requires frequent deliveries. In the market, there are already solutions developed to handle an increased invoice load. Electronic invoicing will work where compatible equipment transmits customers’ accounts directly. Another solution is to pay suppliers based on purchasing records that have completed the assembly process. A third possibility is to batch invoices and submit them on a bi-monthly or monthly schedule. A company can also invoice the monthly deliveries on one invoice, hence decreasing the amount of paperwork. 6.6 Customer-Supplier Proximity Customer-supplier partnerships can be forged irrespective of the physical location and distance between two companies. However, close proximity offers three advantages: Early supplier involvement, Manufacturing line issues can be resolved early, and Easier communication. The criteria for determining supplier selection are based on suppliers’ ability, location, and finally pricing. ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 7 - JIT & Supply Chain Management 7. JIT in Process Flow Design In today’s context of supply chain management, the objectives of process flow design can be expressed as optimising the linking balance between effectiveness and efficiency. Both markets and technology are constantly developing and what is optimal at any one point in time may not remain so. An important subsidiary objective is therefore to retain an appropriate degree of flexibility to cope with both market changes and the development of technology. 7.1 Operations Linkage Operations management is often seen as being more concerned with efficiency. However, efficiency without effectiveness is at best a waste of resources, and at worst, positively damaging. Effectiveness can be defined as “doing the right thing” and efficiency as “doing things right”. Given this, operations management is about “doing the right things right, first time”. Effectiveness is simply achieving the desired outcome. In an overall context of the organisation, this is usually expressed in terms of customer satisfaction. A product or service that meets customer needs will sell; one that does not meet those needs, will not sell well, unless it is a monopoly. A product or service that meets customer needs better than the competition will capture market share. In manufacturing, operations are usually dependent upon design and marketing to specify customer needs, so an effective manufacturing operation will be delivering the right quantity at the right time to the right specifications. This is fundamental to a just-in-time system. In services, where customers interact directly with the operation, the situation is much more fluid. The operation may be able to adjust to particular customer needs, but overall, there are still constraints arising from the design of the service. Efficiency is a much simpler concept than effectiveness. It is closely related to the concept of productivity but can be simply defined as achieving the required output at the lowest overall cost. Cost as we all know involves labour, materials, equipment, support services and time. Within a “just-in-time” system, efficiency must be present in all possible process elements. The real danger with seeking to improve efficiency in isolation is that the real purpose may be lost. The result is suboptimal performance, or even, in the extreme case, dysfunctional performance. 7.2 Balance Workstation Capacities ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 7 - JIT & Supply Chain Management The concept of just-in-time manufacturing stresses the balance of workstations within a production process. When processes are balanced, the product flows continuously and customer demands are easily met. Cellular manufacturing (commonly known as a U-shaped system) will enable an organisation to apply its JIT concept on the manufacturing floor. Cellular manufacturing will link the manual and machine operations into an efficient combination of resources to maximise valueadded content while minimising waste. The most efficient combination implies the concept of process balancing, i.e., to balance workstation capacities. Only in a balanced process will the product continually flow. As a result, parts movement is minimised, waiting time between operations is reduced, inventory is reduced and productivity increases. The benefits of implementing cellular manufacturing to balance the workstation capacities are: Maximised value added by each operator, Minimised part movement and inventory, Reduced lead times, cycle times, and waiting times, Increased productivity and quality performance, Freed up floor space, Improved efficiency of cross training workers, Increased communication, and Increased flexibility. 7.3 Re-layout for Production Flow The basic layout of an operation is usually determined by the choice of process. Job and project operations usually adopt a fixed product layout, since it is the nature of the object being worked upon which dictates the disposition of the labour and facility. In a batch organisation, layout is based upon process type, with processes requiring similar equipment and skills being grouped together. In flow or mass production, each product, or product type, has its own dedicated production resources. When an organisation plans to install a JIT system, detail considerations must be given to the layout of the facility. This is necessary as the manufacturing layout has an impact on the process time, manufacturing capacity; storage for work-in-process goods, holding area for finished assembled products and ultimately the organisation’s manufacturing efficiency. The re-layout term used within the JIT concept focuses on the following objectives: Maximise utilisation of space, as space is an expensive resource, Minimise unnecessary movement as it may affect the product quality, Maintain appropriate flexibility to meet product change demands by customers, ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 7 - JIT & Supply Chain Management Allow sufficient free access for process and maintenance operatives and To conform to relevant safety legislation. It is not to state that for every JIT system introduction, a total re-layout of the production facility is imperative. Rather, the organisation’s management needs to analyse the cost and benefits of conducting a re-layout of the process, which will affect both equipment and labour location, as well as the anticipated service output to meet customers’ demand generated from such changes. 7.4 Preventive Maintenance Emphasis Most manufacturing organisations would stress the importance and need for preventive maintenance. Commonly known as Total Preventive Maintenance or TPM, it includes both preventive maintenance emphasis and the continual analysis of and improvements to equipment, tooling, and the workplace organisation. TPM increases flexibility, reduces material handling, and improves flow. When equipment fails, work-in-process increases at upstream work centres as queues increase, and downstream work centres are idle due to lack of incoming parts. In addition, deliveries are delayed, and scrap is often produced before the operation is stopped. One advantage of preventive maintenance over repair maintenance is that PM can be scheduled when the machine is not needed while repair cannot. Thus, it is necessary to use machine and worker idle time to maintain equipment and prevent breakdowns. Furthermore, if PM is performed properly, there is less total maintenance effort required than when each component failure is repaired in isolation. 7.5 Setup & Changeover Time Reduction To manufacture what is needed at the right time requires a key component within the supply chain, i.e., flexibility. Individual work centres need to be able to change from one product to another as and when the demand changes. These changes are commonly known as setups or changeover time. The time of setup or changeover is measured from the moment the last product of the existing run is manufactured to the time when normal production of the next product is completed. Lengthy setup procedures are a constraint on flexibility, and they are therefore seen as an important source of waste that must be reduced to the absolute minimum. The classic approach to reducing setups is to study the current methods of working ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 7 - JIT & Supply Chain Management and to seek improved ways of doing the tasks involved. There are three main avenues to consider: The activities, which occur whilst the manufacturing is stopped, should be reviewed with a position to transfer as many of such activities as possible to activities which can be completed whilst the manufacturing unit is still running, the activities, which require the operation to stop, should have all their related equipment modified. That supports the rapid exchange of technology during setup, and efforts should be focused on eliminating adjustments made after the setup is completed and manufacturing is resumed. The above rigorous approach allows Japanese companies to reduce their setup times tremendously, often reducing procedures requiring hours of downtime to methods of working involving only minutes of downtime. To reduce or eliminate setup times, some organisations therefore aim for single digit setup times, less than 10 minutes, or “one-touch” setup. This is possible through better planning, process redesign, and product redesign. 7.6 Lot Size Reduction The trend in today’s manufacturing is to move towards a Just-in-Time manufacturing environment. Successful implementation of JIT manufacturing principles may lead to reduced inventory costs, improved quality, and increased equipment utilisation. A necessary requirement for successful implementation of JIT is the ability to run small lot sizes, as small lot sizes can reduce work-in-progress (WIP) inventory and manufacturing lead time, if the setup times are not much larger than the unit run times. Intuition leads many to believe we should manufacture products in large lots in order to save on setup time and save on production costs. However, one should not forget there are COSTS associated with lot size, be it big or small. The key costs are: Setup costs – costs to prepare to make a batch or order a batch, Order costs – cost of placing and receiving an order from a supplier, and Holding costs – cost of holding a unit in inventory for a given time period. With JIT concepts, all activities associated with setup, ordering, and handling of materials are viewed as non-value-added activities. One of the key focus areas of JIT is to reduce setup time to ‘zero’. As setup time and costs go down, so should the lot size. Typical lot size classifications are as follows: Production or process batch – the quantity of material manufactured as the result of one setup, Transfer batch – the quantity moved from one operation or workstation to the next and Delivery quantity – lot quantity shipped between customer and supplier. ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 7 - JIT & Supply Chain Management Many organisations use the Economic Order Quantity (EOQ) to determine the optimum lot size for manufacturing. A reduction in the lead time allows the manufacturer to respond quicker to new customer orders or any changes in demand and increases the likelihood of meeting the demand on time. Small lot sizes tend to reduce WIP because a lot spends less time at a machining centre, causing new arriving lots to wait less for the machines to become available. However, reducing the lot size too much can sometimes have the opposite effect by increasing WIP because machine utilisation may increase significantly due to an increase in the setup times. The selection of an appropriate lot size therefore needs to take the setup time into consideration. It is important to note that reducing setup times allows economical production of smaller lots, but close cooperation with suppliers is necessary to achieve reductions in order lot sizes for purchased items, since this will require more frequent deliveries. 8. JIT in Inventory and Vendor Management Just-in-time is a term usually thought of as describing inventory arriving or being produced just in time for the shipment or next process. JIT is a system for optimising manufacturing processes by eliminating all process waste including wasted steps, wasted material and excess inventory. Just-in-Time inventory systems depend upon logistics that include, transportation, warehousing and several strategies for handling the potential supply chain uncertainties. The challenge for organisations in today’s competitive market is: Reduce Cost Reduce Lead Time Improve Quality “Cheaper” “Faster” “Better” Figure 7-3: Consequence of Market Demand 8.1 Reduction of Lead Times Manufacturing lead times can be reduced by moving work centres closer together, applying group technology and cellular manufacturing concepts, reduce setup times, reducing queue length (the number of jobs waiting to be processed at a given machine), and improving the coordination and cooperation between successive processes. Often lot sizes are large in most organisations because of the following: Long setup times, Unreliable processes, ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 7 - JIT & Supply Chain Management Unreliable equipment, Travel distance, Equipment bottlenecks, Defective materials, and Part design. Smaller lot sizes can be produced by addressing some of the above, in particular setup reduction. Focusing on the setup procedures by systematically standardising them and eliminating steps that do not contribute to the actual process time can reduce setup times. These could be reducing the walking distance by rearranging the areas. A key factor in setup reduction is the classification of internal, carried out when machine has to be shut down for setup, and external, when work can be carried out while machine is running operations. Reducing the internal steps and converting them to external steps reduces actual machine downtime (setup). Delivery lead times can be reduced through close cooperation with suppliers, possibly by inducing suppliers to locate closer to the factory. Thus, JIT means we get what we need, where and when we need it and no sooner. By reducing the overall flow time of products, we can reduce many of the associated costs of production, such as inventory holding costs and improve overall quality. 8.2 Delivery Frequency To maintain optimum inventory and prevent “over-stocking”, the organisation needs to work closely with all its vendors. The relationship with vendors falls mainly in the category of purchasing materials and its deliveries. On time delivery and the frequency of delivery are major aspects relevant to inventory and vendor management in a just-in-time system. On time delivery simply means that the workstations receive the material just before it is required. A supplier’s ability to deliver on time is a combination of factors namely transportation, raw materials availability, price, plant shutdown, etc. If a factor arises that could affect the delivery schedule, the organisation should be able to increase production schedules and establish sufficient inventory to enable the production to continue past the expected disruption. Frequent delivery is required if dependency on inventory is to be minimised. The supplier’s ability to make frequent deliveries depends on the supplier’s ability to produce products at the rate the customer requires delivery. Local suppliers usually have an advantage in being able to deliver daily. Frequent delivery means that a loss of one small shipment will have less significance than the loss of a large shipment. Another major concern with delivery frequency is the process of coordinating the manufacturing need for materials. The process is complicated by periodic changes in product mix and volume requirement and the continual introduction of new products. Organisations solve the problem of how much material to order and when ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 7 - JIT & Supply Chain Management to order by placing contracts based on order requirements supplied by material control. Material control makes a decision based on the master schedule less current inventory. In a JIT system, the supplier picks up information on the next production requirements every time a delivery is made. 8.3 Quality Expectations Quality is an integral part of a JIT system in the management of supply chains. Quality control concentrates on quality at every stage of manufacturing including the purchase of raw materials or components from vendors. Vendor quality, engineering, and receiving inspection, are therefore important and necessary to increase the vendor quality. 8.4 Minimizing Inventory Many organisations utilise a JIT system as a tool to minimise inventory investment. The ideology is that the materials arrive at the time they are required for production and the company minimises inventory investments by having only work-in-process (WIP) inventory. Inventory turnover can be increased which will result in a higher profit margin. This eliminates the need for safety stocks and reduces inventory on hand. However, there must be extensive coordination between the company, suppliers, and transportation to meet schedules for the production shop floor. If a supplier or transporter cannot meet the schedule, the production will halt, as is the case with quality problems. To minimise inventory, proper inventory control methods must apply. Some of these techniques are the ABC system and EOQ model. EOQ still has to be considered in a JIT system. EOQ is the order quantity that will minimize total annual cost or the total of its order costs (OC) and carrying costs. Carrying costs or Handling costs (C) is Variable. In a JIT system, it is the goal to reduce costs. ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 7 - JIT & Supply Chain Management In order to reconcile JIT and EOQ, one does not need to see the fixed costs as that, rather seek to continually reduce them, which in turn reduces the total annual cost. Figure 7-3: Cost Minimisation The diagram above illustrates how these two components (annual holding cost and annual order cost) change as Q, the quantity ordered, changes. As Q increases, holding cost increases but order cost decreases. Hence the total annual cost curve is as shown above. Somewhere on that curve lies a value of Q that corresponds to the minimum total cost. In any inventory model, the basic objective is that inventory needs to be replenished. However, valuable lessons have been learnt from the Japanese methods where ©GMLS Page 4 v 2021 Cost Total Cost Order Cost Holding Cost Order Quantity
FHDSCM Module 6 – Production & Operations Management Chapter 7 - JIT & Supply Chain Management substantial efficiencies are gained from frequent deliveries of small quantities to meet immediate demands. 9. Conclusion – Has JIT Outlived Its Usefulness? JIT is vulnerable to plant shutdowns, demand surges and other uncertainty because of the zero-inventory element. Small and frequent lot deliveries can cause highway congestion and can mean more delays and higher cost in transportation. Increase in security can result in interruptions for manufacturers as shipments can be delayed at border crossings. While there are proponents who will continue to maintain the longevity of JIT, there are those who may counterattack the relevance of JIT in a new world. When he set-up Toyota’s famous JIT system, Ohno never factored in 7.2 on the Richter scale. Toyota does not have a plant in the Kansai region, yet it was still crippled by the quake. Two suppliers of Toyota – makers of car radios and brake callipers – do have plants near Kobe, and both suffered severe enough to halt production. JIT, however, means what it says: parts are to be delivered precisely when the customers need them. So critical is this system to Toyota’s operations that the loss of those tow two suppliers forced the company to shut down all twelve of its Japanese assembly plants last week, and by Friday, a company spokesperson conceded that management was still unsure when production would resume. Newsweek, 30th January 1995 p.24-29. Production at Toyota’s plants in Japan – which build 16,200 vehicles a day – has virtually ground to a halt after a fire at a parts maker’s factory cut off supply of three small brake and clutch parts. Many of Japan’s No 1 auto maker’s lines may not reopen for up to a week as the company scrambles to find alternative parts suppliers, Toyota said. Toyota’s trouble shows the continuing vulnerability of Japan’s much heralded JIT system. Wall Street Journal Europe, 4th February 1997 JIT and supply disruptions, greater security and the attendant delays are not likely to disappear in the six months or even a year or two. Business operations have become less predictable in the future. Over the long term, then, manufacturers, retailers and suppliers will have to adapt for new contingencies. Since the 1980s, many Japanese companies have reduced inventory levels and will continue to do so. These companies include Sony and Sanyo. But when the Kobe earthquake struck in 1995, there was a re-think of inventory levels. Did companies manage to learn the lesson? If yes, then the impact of the September 11th attack would have minor impact on JIT global operations? Research some similar examples of JIT articles for your own benefit. ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 7 - JIT & Supply Chain Management 10. Knowledge Assessment JIT has many advantages, but it is not perfect. Discuss the considerations needed to be made by organisations before implementing JIT that would minimize potential disadvantages caused by the following factors: Changes in global security measures in the shipping world causing delays in transit and ultimately in lead times. Natural disasters such as earthquakes, tsunamis, and ash clouds, as well as Technological changes. END OF MODULE ©GMLS Page 4 v 2021