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Just-in-time (business)

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Template:Corporate Finance 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 Template:Nihongo 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 dramatically 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" system or it can, as its academic founder noted, "...end up with the opposite of the desired result."[1]. 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)[2], however research of today's leading corporations demonstrates that basing JIT on the presumption of stability is inherently flawed.[3]

Contents

[edit] History

The technique was first used by the Ford Motor Company, as Henry Ford described it in his, My Life and Work (1922): "We have found in buying materials that it is not worthwhile to buy for other than immediate needs. We buy only enough to fit into the plan of production, taking into consideration the state of transportation at the time. If transportation were perfect and an even flow of materials could be assured, it would not be necessary to carry any stock whatsoever. The carloads of raw materials would arrive on schedule and in the planned order and amounts, and go from the railway cars into production. That would save a great deal of money, for it would give a very rapid turnover and thus decrease the amount of money tied up in materials. With bad transportation one has to carry larger stocks."

This statement also describes the concept of "dock to factory floor," in which incoming materials are not even stored or warehoused before going into production. The concept requires an effective freight management system (FMS), which Ford describes in Today and Tomorrow.

Toyota Motor Corporation of Japan subsequently adopted and publicized JIT as part of its Toyota Production System (TPS). However, Toyota famously did not adopt the procedure from Ford, but from the Piggly Wiggly grocery store chain. Although Toyota visited Ford as part of its tour of American businesses, Ford had not fully adopted Just-In-Time, and Toyota executives were struck by the piles of inventory laying around and the uneven work schedule. At Piggly Wiggly, Toyota executives first observed a fully functioning and successful Just-In-Time system, and modeled TPS after it.

It is hard for Japanese corporations to warehouse finished products and parts, due to limited land availability. Before the 1950s, this forced the production lot size below the economic lot size. (An economic lot size is the number of identical products that must be produced to justify the cost of changing the production process over to another product.) This caused poor return on investment for factories.

The chief engineer at Toyota in the 1950s, Template:Nihongo, examined accounting assumptions and realized that another method was possible. The factory could implement JIT, which would make it more flexible and reduce retooling costs, thereby reducing the economic lot size to fit available warehouse space. JIT is now regarded by Ohno as one of the two 'pillars' of the Toyota Production System.

Over a period of several years, Toyota engineers redesigned car models for common tooling for such production processes as paint-spraying and welding. Toyota was one of the first to apply flexible robotic systems for these tasks. Some changes were as simple as standardizing hole sizes used to hang parts on hooks. They reduced the number and types of fasteners to standardize assembly steps and tools. In some cases, identical sub-assemblies fit several models.

Toyota engineers next determined that the remaining retooling bottleneck was the time required to change stamping dies used to make body parts. Workers adjusted these by hand with crowbars and wrenches. It could take several days to install a large, multi-ton die set and adjust it for acceptable quality. Further, these were usually installed one at a time by a team of experts, keeping the line down for several weeks.

Toyota responded with a strategy now called Single Minute Exchange of Die (SMED), developed with Template:Nihongo. They switched to very simple fixtures and substituted measurements adjustments. Almost immediately, die change times fell to hours instead of days. At the same time, quality of the stampings became controlled by a written recipe, reducing the skill level required for the change. Further analysis showed that a lot of the remaining time was used to search for hand tools and move dies. Procedural changes (such as moving the new die in place with the line in operation) and dedicated tool-racks reduced the die-change times to as little as 40 seconds. Today dies are changed in a ripple through the factory as a new product begins flowing.

After SMED, economic lot sizes fell to as little as one vehicle in some Toyota plants.

Carrying the process into parts-storage made it possible to store as little as one part in each assembly station. When a part disappeared, that was used as a signal (Kanban) to produce or order a replacement.

[edit] 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 an 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, 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.

[edit] Transaction cost approach

JIT reduces inventory in a firm. However, a firm may simply be outsourcing their input inventory to suppliers, 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.

[edit] 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:

  1. Time—wasted in traffic jams
  2. Inventory—specifically pipeline (in transport) inventory
  3. Scrap—fuel burned while not physically moving

[edit] 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.

[edit] Quality volatility

JIT implicitly assumes that input parts quality remains constant over time. If not, firms may benefit from hoarding high quality inputs.

[edit] 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 supplies coming in.

[edit] 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/relayout for flow 
      - L Reduce lot sizes 
      - O Link operations
      - W Balance workstation capacity
      - M Preventative 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

[edit] Effects

Some of the initial results at Toyota were horrible but even so, a huge amount of cash seemed to appear from nowhere as in-process inventory was built and sold. This generated tremendous enthusiasm in upper management.

Another surprising effect was that factory response time fell to about a day. This improved customer satisfaction by providing vehicles within a day or two of the minimum economic shipping delay.

Also, the factory began building many vehicles to order, eliminating the risk they would not be sold. This dramatically improved the company's return on equity by eliminating a major risk source.

Since assemblers no longer had a choice of which part to use, every part had to fit perfectly. This caused a quality assurance crisis, which led to a dramatic improvement in product quality. Eventually, Toyota redesigned every part of its vehicles to widen tolerances, while simultaneously implementing careful statistical controls for quality control. Toyota had to test and train parts suppliers to assure quality and delivery. In some cases, the company eliminated multiple suppliers.

When a process or parts quality problem surfaced on the production line, the entire production line had to be slowed or even stopped. No inventory meant a line could not operate from in-process inventory while a production problem was fixed. Many people in Toyota confidently predicted that the initiative would be abandoned for this reason. In the first week, line stops occurred almost hourly. But by the end of the first month, the rate had fallen to a few line stops per day. After six months, line stops had so little economic effect that Toyota installed an overhead pull-line, similar to a bus bell-pull, that let any worker on the line order a line stop for a process or quality problem. Even with this, line stops fell to a few per week.

The result was a factory that eventually became the envy of the industrialized world. It has been widely emulated, but not always with the expected results, as many firms fail to adopt the full system[4].

The just-in-time philosophy was also applied to other segments of the supply chain in several types of industries. In the commercial sector, it meant eliminating one or all of the warehouses in the link between a factory and a retail establishment. Examples in sales, marketing, and customer service involve applying information systems and mobile hardware to deliver customer information as needed, and reducing waste by video conferencing to cut travel time[5].

[edit] Benefits

Main benefits of JIT include:

  • Set up times are significantly reduced in the factory. Cutting set up time allows the company to improve their bottom line, be more efficient, and focus on other areas that may need improvement. This allows the company to reduce or eliminate inventory for "changeover" time. The tool used here is SMED.
  • The flow of goods from warehouse to shelves improves. Having employees focus on specific areas allows them to process goods faster and not become fatigued from doing too many jobs at once. Small or individual piece lot sizes reduce lot delay inventories, which simplifies inventory flow and its management.
  • Employees who possess multiple skills are used more efficiently. Having employees trained to work on different parts of the inventory cycle allows companies to move workers where they are needed.
  • JIT provides better scheduling and work hour consistency. If there is no demand for a product at the time, workers don’t have to work. This saves the company money, either by not having to pay workers or by having them focus on other work.
  • There is an increased emphasis on supplier relationships. A company without inventory does not want an inventory system brake that creates a supply shortage. This makes supplier relationships extremely important.
  • Supplies come in around the clock, which keeps workers productive and businesses focused on turnover. Focusing management on deadlines makes employees work hard to meet company goals, in pursuit of job satisfaction, promotion, or even higher pay.

[edit] Problems

[edit] Within a JIT system

Just-in-time operation leaves suppliers and downstream consumers open to supply shocks and large supply or demand changes. For internal reasons, Ohno saw this as a feature rather than a bug. He used an analogy of lowering the water level in a river to expose the rocks to explain how removing inventory showed where production flow was interrupted. Once barriers were exposed, they could be removed. Since one of the main barriers was rework, lowering inventory forced each shop to improve its own quality or cause a holdup downstream. A key tool to manage this weakness is production levelling to remove these variations. Just-in-time is a means to improving performance of the system, not an end.

Very low stock levels means shipments of the same part can come in several times per day. This means Toyota is especially susceptible to flow interruption. For that reason, Toyota uses two suppliers for most assemblies. As noted in Liker (2003), there was an exception to this rule that put the entire company at risk because of the 1997 Aisin fire. However, since Toyota also makes a point of maintaining high quality relations with its entire supplier network, several other suppliers immediately took up production of the Aisin-built parts by using existing capability and documentation. Thus, a strong, long-term relationship with a few suppliers is better than short-term, price-based relationships with many competing suppliers. Toyota uses this long-term relationship to send Toyota staff to help suppliers improve their processes. These interventions have been going on for twenty years and have created a more reliable supply chain, improved margins for Toyota and suppliers, and lowered prices for customers. Toyota encourages their suppliers to use JIT with their own suppliers.

[edit] Within a raw material stream

Template:Peacock As noted by Liker (2003) and Womack and Jones (2003), it ultimately would be desirable to introduce synchronised flow and link JIT through the entire supply stream. However, none followed this in detail all the way back through the processes to the raw materials. With present technology, for example, an ear of corn cannot be grown and delivered to order. The same is true of most raw materials, which must be discovered and/or grown through natural processes that require time and must account for natural variability in weather and discovery. The part of this currently viewed as impossible is the synchronised part of flow and the linked part of JIT. It is for the reasons stated raw materials companies decouple their supply chain from their clients' demand by carrying large 'finished goods' stocks. Both flow and JIT can be implemented in isolated process islands within the raw materials stream. The challenge becomes to achieve that isolation by some means other than carrying huge stocks, as most do today.

Because of this, almost all value chains are split into a part made-to-forecast and a part that could, by using JIT, become make-to-order. Historically, the make-to-order part has often been within the retailer portion of the value chain. Toyota took Piggly Wiggly's supermarket replenishment system and drove it at least half way through their automobile factories. Their challenge today is to drive it all the way back to their goods-inwards dock. Of course, the mining of iron and making of steel is still not connected to an order for a particular car. Recognising JIT could be driven back up the supply chain has reaped Toyota huge benefits and a dominant position in the auto industry.

Note that the advent of the mini mill steelmaking facility is starting to challenge how far back JIT can be implemented, as the electric arc furnaces at the heart of many mini-mills can be started and stopped quickly, and steel grades changed rapidly.

[edit] Oil

It has been frequently charged that the oil industry has been influenced by JIT.[6][7][8]

The argument is presented as follows:

The number of refineries in the United States has fallen from 279 in 1975 to 205 in 1990 and further to 149 in 2004. As a result, the industry is susceptible to supply shocks, which cause spikes in prices and subsequently reduction in domestic manufacturing output. The effects of hurricanes Katrina and Rita are given as an example: in 2005, Katrina caused the shutdown of 9 refineries in Louisiana and 6 more in Mississippi, and a large number of oil production and transfer facilities, resulting in the loss of 20% of the US domestic refinery output. Rita subsequently shut down refineries in Texas, further reducing output. The GDP figures for the third and fourth quarters showed a slowdown from 3.5% to 1.2% growth. Similar arguments were made in earlier crises.

Beside the obvious point that prices went up because of the reduction in supply and not for anything to do with the practice of JIT, JIT students and even oil & gas industry analysts question whether JIT as it has been developed by Ohno, Goldratt, and others is used by the petroleum industry. Companies routinely shut down facilities for reasons other than the application of JIT. One of those reasons may be economic rationalization: when the benefits of operating no longer outweigh the costs, including opportunity costs, the plant may be economically inefficient. JIT has never subscribed to such considerations directly; following Waddel and Bodek (2005), this ROI-based thinking conforms more to Brown-style accounting and Sloan management. Further, and more significantly, JIT calls for a reduction in inventory capacity, not production capacity. From 1975 to 1990 to 2005, the annual average stocks of gasoline have fallen by only 8.5% from 228,331 to 222,903 bbls to 208,986 (Energy Information Administration data). Stocks fluctuate seasonally by as much as 20,000 bbls. During the 2005 hurricane season, stocks never fell below 194,000 thousand bbls, while the low for the period 1990 to 2006 was 187,017 thousand bbls in 1997. This shows that while industry storage capacity has decreased in the last 30 years, it hasn't been drastically reduced as JIT practitioners would prefer.

Finally, as shown in a pair of articles in the Oil & Gas Journal, JIT does not seem to have been a goal of the industry. In Waguespack and Cantor (1996), the authors point out that JIT would require a significant change in the supplier/refiner relationship, but the changes in inventories in the oil industry exhibit none of those tendencies. Specifically, the relationships remain cost-driven among many competing suppliers rather than quality-based among a select few long-term relationships. They find that a large part of the shift came about because of the availability of short-haul crudes from Latin America. In the follow-up editorial, the Oil & Gas Journal claimed that "casually adopting popular business terminology that doesn't apply" had provided a "rhetorical bogey" to industry critics. Confessing that they had been as guilty as other media sources, they confirmed that "It also happens not to be accurate."

[edit] Business models following similar approach

[edit] 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.

The primary advantage of this business model is that the vendor has industry experience and expertise that lets them better anticipate demand and inventory needs. The inventory planning and controlling is facilitated by applications that allow vendors access to their customer's inventory data.

Third-party applications offer vendors a quick implementation time. Further, such companies hold valuable inventory management knowledge and expertise that helps organizations.

[edit] 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.

[edit] See also

[edit] References

Template:No footnotes

  1. A study of the Toyota Production System, Shigeo Shingo, Productivity Press, 1989, p 187
  2. Gilliland, Michael. "Is Forecasting a Waste of Time?", Supply Chain Management Review, July/August 2002.
  3. Ruffa, Stephen A., (2008). Going Lean: How the Best Companies Apply Lean Manufacturing Principles to Shatter Uncertainty, Drive Innovation, and Maximize Profits, AMACOM (American Management Association)
  4. Alan Pilkington, “Manufacturing Strategy Regained: Evidence for the Demise of Best-Practice”, California Management Review, (1998) Vol. 41, No.1, pp.31-42.
  5. Paul H. Selden (1997). Sales Process Engineering: A Personal Workshop. Milwaukee, WI: ASQ Quality Press. pp. 113-117. 
  6. Bongiorni, Sara. "All in the timing", The Greater Baton Rouge Business Report, 19 July 2004.
  7. "Online NewsHour: Rising gas prices -- April 30, 1996". http://www.pbs.org/newshour/bb/economy/gas_hike_4-30.html. Retrieved 2007-09-24. 
  8. "Story taken from Time magazine May 13, 1996 Volume 147, No. 20". http://www.econ.ucsb.edu/%7Etedb/eep/news/gas.html. Retrieved 2007-09-24. 

[edit] Further reading

  • Schonberger, Richard J. (1982), Japanese Manufacturing Techniques: Nine Hidden Lessons in Simplicity, Free Press, ISBN 0029291003
  • Editorial, "The Inventory Land Mine", Oil & Gas Journal, Vol 94, Number 29, 15 July 1996.
  • Flinchbaugh, Jamie and Carlino, Andy (2006), The Hitchhiker's Guide to Lean: Lessons from the Road, SME, ISBN 0-87263-831-6
  • Goldratt, Eliyahu M. and Fox, Robert E. (1986), The Race, North River Press, ISBN 0-88427-062-9
  • Hirano, Hiroyuki and Makota, Furuya (2006), "JIT Is Flow: Practice and Principles of Lean Manufacturing", PCS Press, Inc., ISBN 0-9712436-1-1
  • Liker, Jeffrey (2003), The Toyota Way: 14 Management Principles from the World's Greatest Manufacturer, First edition, McGraw-Hill, ISBN 0-07-139231-9.
  • Management Coaching and Training Services, (2006). The Just-In-Time (JIT) Approach. Retrieved June 19 2006 from the World Wide Web: [1]
  • Ohno, Taiichi (1988), Toyota Production System: Beyond Large-Scale Production, Productivity Press, ISBN 0-915299-14-3
  • Ohno, Taiichi (1988), Just-In-Time for Today and Tomorrow, Productivity Press, ISBN 0-915299-20-8
  • Wadell, William, and Bodek, Norman (2005), The Rebirth of American Industry, PCS Press, ISBN 0-9712436-3-8
  • Waguespack, Kevin, and Cantor, Bryan (1996), "Oil inventories should be based on margins, supply reliability", Oil & Gas Journal, Vol 94, Number 28, 8 July 1996.
  • Womack, James P. and Jones, Daniel T. (2003), Lean Thinking: Banish Waste and Create Wealth in Your Corporation, Revised and Updated, HarperBusiness, ISBN 0-7432-4927-5.
  • Womack, James P., Jones, Daniel T., and Roos, Daniel (1991), The Machine That Changed the World: The Story of Lean Production, HarperBusiness, 2003, ISBN 0-06-097417-6.