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Just-In-Time: Revisiting a popular management technique.

Once almost revered as "the answer" to minimizing inventory costs and risks, this important technique and its limitations have been subjected to 30 years of practical use and academic research.

Just-in-time (JIT) is a Japanese technique/philosophy of work intended to reduce overall quantity and cost of inventory. It is best known for significant reductions in on-the-floor inventories that support each step of production. J. E. Beasley (Imperial College UK) identified T. Ohno of the Toyota Motor Car Company (formerly the Toyota Production System) as the person who led the origination of this technique around 1970. Much of the following discussion is based on Beasley's writings.

JIT is defined commonly as an integrated approach to manufacturing, which results in the production of goods very shortly before actual time of use. JIT implies predictable and controllable production, coupled with quick feedback to suppliers on changes in supply usage. Well-known U.S. users of JIT processing include the Fred Myers grocery chain (for stocking retail stores), General Motors (for manufacturing), and the National Institutes of Health (for grant application processing).

The Heart of JIT

JIT is a "lean" production system--production with minimum inventories. The JIT process of minimizing inventories requires frequent, timely deliveries of supplies in small quantities and with high quality. Closely associated with establishing a reliable delivery schedule is the need to reduce the number of suppliers--perhaps to just one--for each type of good required and for ensuring that information on quantity and time of delivery is sent quickly between the supplier and the user. Although production-oriented, the JIT philosophy is not just to reduce inventory but also to identify and improve practices and steps through the entire processing line. For example, JIT assumes that incoming products are packaged so they can be put into immediate production. It also assumes that production takes place in the same location as product receipt to avoid goods-in-transit at the production site (i.e., building large local inventories at the using site).

Objectives

The JIT technique/philosophy can achieve large savings in production cost by careful management, allowing operation with smaller inventories. Smaller inventories benefit the customer by reducing:

* costs of inventory investment,

* obsolescence of stock,

* opportunity for theft,

* costs of warehousing,

* costs of handling between warehouse and production line, and

* exposure to weather hazards.

The supplier can benefit by:

(1) gaining a preferred status as a source,

(2) planning production work to fit user needs rather than building stockpiles to meet uncertain quantity needs,

(3) reducing costs and storing large inventories of finished goods, and

(4) avoiding inventory shrinkage and obsolescence with small stocks of finished goods.

However, the supplier may be forced to make many small shipments at a higher total cost than fewer large shipments.

JIT and Similar Systems

JIT is focused on the actual product quantity used and needs a constant flow of usage information between the supplier and the customer. This information flow becomes a critical item in the process.

Material requirements planning (MRP) systems relate orders for supplies to orders received for end products and provide the necessary production schedule. MRP systems originally were designed to forecast usage of the supplies based on end products required. They typically were limited to the production process and therefore were somewhat similar to JIT. This resemblance becomes very close if the forecasted production quantity is updated quickly to actual production and the shipment quantity is adjusted immediately to reflect this. MRP records typically identify overloads in a production function and highlight delays in receiving supplies. MRP systems commonly provide improved cost reports for each stage of the manufacturing process and the latest versions of MRP systems often extend overall operational control to other functions of the manufacturer organization such as customer order entry, capacity planning, purchasing, and financial analysis.

Most current MRP systems require considerable information on every organization aspect that is managed. The information must be timely, and the reports generally must be tailored for that organization. In turn, these needs demand sophisticated computer applications software and hardware, staff resources, and substantial supplier capabilities--all of which take considerable time to put into practice. JIT commonly requires fewer resources and less time to implement.

JIT also is similar to an economic ordering quantity (EOQ) process. However, JIT assumes that the costs of procurements and total costs can be reduced on a continuing basis. EOQ processes have been in use for years. In the January 2001 issue of Solutions, Piasecki notes that EOQ was described in a 1931 textbook used by the Alexander Hamilton Institute in New York--almost 40 years before JIT. EOQ typically uses a simple accounting formula to relate usage quantity, costs for issuing an order, and annual carrying costs to determine the level of inventory that will give the lowest cost. An EOQ is simple to calculate, but its accuracy depends on having actual costs for preparing a purchase order and justifiable estimates of carrying costs. Apparently, reasonable cost figures may have inherent shortcomings that give misleading results for an EOQ calculation. For example, some cost figures may rely on arbitrary distribution of overhead charges. Of course, the calculated quantity figure is often adjusted in practice to

(1) allow for underlying imprecise costs figures;

(2) provide a margin (sometimes purely arbitrary) to cope with possible changes in demand;

(3) meet standard shipping quantities, containerized freight, for example; and

(4) meet minimum standard sales quantities, such as products sold in dozens, cases, carloads, or truckloads.

EOQ is a suitable technique when demand is steady, for example, determining staple food inventories needed to support a consistent demand such as in an established retirement community or remote military unit. EOQ is performed by the customer and may have little input from a supplier especially when the product is a common commodity item such as nonperishable food, long-shelf life over-the-counter drug, or commercial copy paper. JIT has a broader focus toward improvements in all aspects of the production process including minimizing inventories. JIT also requires frequent customer-supplier information exchange.

System Management

JIT can be managed by the supplier or the user. In its early incarnation, as with the Toyota Production System in Japan, it made sense for Toyota to specify the time and quantity of deliveries from its many small suppliers, since few had the staff or the overall information to do so. As many of these suppliers were local, transportation delays tended to be small and delivery delays were minor. In the United States, major customers (users) often advocate the JIT approach to their suppliers as an obvious way to reduce customer inventories. However, the physical size of the United States often results in significant geographic separation between customer (user) and supplier. So, despite cutting inventories, production may become very dependent on highly reliable shipping.

In some cases, the supplier has viewed JIT as a way of securing more business from a major customer. In other instances, there is a pressure on the supplier to retain and perhaps "lock-in" a large and valued customer. These considerations, among others, often help shift JIT responsibility to the supplier. As a practical matter, JIT is hard for small supplier companies to support until their staff has gained some expertise.

When suppliers manage the JIT process, they need continuous updates on actual user consumption and data on trends in consumption. The supplier also must be able to determine actual product delivery times, monitor their own operations (for example, raw material lead times, inventory on-hand, and availability and cost of transportation), forecast production, determine pricing strategy, appraise product perishability and obsolescence, and plan special packaging to minimize customer handling. An in-house manufacturing facility may be operated in a JIT fashion, especially if the outside suppliers take the brunt of peaks and valleys in the demand for that product. In this case, the in-house manufacturing facility with a known fixed demand may find it easier to use.

Limitations

A 1995 University of Georgia study (Polito) pointed out many limitations and problems with JIT. If there is more than a 10 percent change in the flow of products, JIT is difficult to support. JIT assumes that inventory always is available for quick delivery and at the same price. JIT is very vulnerable to logistical problems, such as rail/truck strikes and extreme weather. The costs of shipping per unit of inventory may rise when shipped quantities fall below full truckload/railcar capacity so that a lesser quantity may cost almost as much as a full load. On-time delivery must be made regardless of weather, and the product must be of high quality. This down side may be more than just inconvenience. Snow in the Washington, D.C., area could easily delay the daily shipment of perishables needed for a large restaurant, forcing the establishment to close. Weather may prevent timely delivery of radioactive isotopes for medical diagnosis: Isotopes that lose their power are worthless the next day. Any calamity that d isrupts shipping patterns becomes a problem. Problems also arise if wide fluctuations--either large increases or decreases--occur in end-user demand.

Unrecognized Risks of JIT

Despite highly hyped discussions about cheap reliable data communications, there are often numerous operational difficulties and delays in communications between the supplier and the customer that must be resolved. On the plus side, there is

(1) universal availability of the Internet for domestic and international communications;

(2) widespread adoption of EDI (electronic document interchange) (1) with improved standards and alternate methods in the wings;

(3) easy use of computer applications and "standard" solutions offered by banks, financial institutions, and large specialized vendors such as GE information systems; and

(4) some assurance that using PKI (public key encryption) (2) security tokens and encrypted data transmission will ensure that messages are legitimate and unaltered.

On the down side, current serious problems include:

(1) incompatible communications systems that take time to meld;

(2) volume and timing of the JIT data communications traffic's interference with other communications users at either the supplier or vendor company;

(3) worms and viruses in messages, which disrupt local computers and company file servers so that messages do not transmit on a timely basis; and

(4) unpredictable electronic attacks on the common carrier and Internet provider telecommunications equipment (router and switches), as well as on user and supplier file servers.

Possible delays in communications may result in out-of-stock conditions, which stop production lines and result in unfulfilled and/or untimely orders. Unforeseen and substantial costs and time, weeks or months, may be required to correct these communications problems. The data communications function may be a critical and potentially risky part of existing MT management and future JIT implementation.

Application

The JIT philosophy can be applied to any situation where inventories of goods are involved. It also appears that JIT can and actually is being applied when "information"--rather than physical commodities or products--is the raw material. However, the use of JIT for information-oriented industries (i.e., banking, brokerage, and insurance) raises special concerns beyond the scope of this brief review. The information "shipping" and "receiving" platforms in these industries may be a combination of one or more computer servers, the Internet, dial-up or dedicated telephone circuits, or perhaps wireless communications. The information inventory would be stored in file servers generally in specially designed databases and perhaps protected by storing duplicate files at a backup site. Each mode and combination of information transmission, storage, and production has unique advantages and limitations and deserves careful analysis before JIT implementation.

In Summary--Use with Caution

JIT is not a panacea for inventory problems. It is a good fit for some products but may be inappropriate in certain types of production. It may be a poor approach for seasonal items and may not fit when logistics are a concern.

* JIT with the wrong products does not solve the production problem. For example, it may not be appropriate for a supplier or a user manufacturing in small custom lots. It also may not be appropriate for a supplier who uses a continuous production process with inventories to cushion fluctuation in demand.

* There may other problems in the entire production process which create the appearance of an overly large inventory and prevent JIT from being useful. For example, certain inventories build up during the year to meet typical sales requirements, such as the increase of snow blowers in the fall to meet the upcoming winter demand.

* JIT may not be a good fit for products that face logistics problems. For example, unavailability of air express service for time-sensitive biological materials from the producer may court disaster for the user unless these problems can be resolved before JIT is adopted.

* JIT must be applied through a mutual agreement between the supplier and the end-user. Too often, the small supplier does not have the current technology nor the know-how to be able to cooperate in the JIT process without hands-on training from the large customer.

* The information transfer process and the supplier's manufacturing plans may both be out of step with the end user's needs and expectations. If problems occur, the end-user's loss may outweigh the cost savings of helping the supplier onboard. Mutual discussion is needed in advance to resolve such issues.

* High speed communications between supplier and user must be available, compatible, reliable, and timely. This important capability must be evaluated before JIT is adopted, since this capability might otherwise come only with higher than expected service costs and unforeseen delays.

Endnotes

(1.) EDI (electronic document interchange) is a process using standard agreed-upon formats and entries to conduct normal business via data communications over telephone lines. EDI processes are often specific to a type of business or product. Within that business community, standard electronic forms are sent among suppliers, customers, banks, and shipping companies to order goods, arrange payments, or route goods without the delay of mailing paperwork. Often, the electronic data from the sender may be entered directly into the recipient's data processing system without the costs of clerical transcribing, avoiding further error or delay.

(2.) PKI (public key encryption) is a methodology that allows computer messages to be coded by the sender, sent over public telephone wires, and uncoded by the receiver in a fashion that guarantees that the message was actually sent by that sender and that the message was not tampered with by any other party. Security tokens, such as SecurlD, provide continually changing passwords, which control a telephone caller's access to a distant computer system. PKI can be used to ensure that only approved supplier's messages are sent directly to the customer's in-house inventory system. Encryption prevents outsiders from reading messages so that customer business plans and actions are not disclosed.

About the Author

DR. HENRY PETERSOHN, CPCM, is a technical program manager. He has written three textbooks and a number of technical articles in the data processing and telecommunications management field. He has a certificate in data processing from DPMA and expertise in the technical preparation, placement, and management of contracts for data processing and telecommunications. Send comments on this article to cm@ncmahq.org.
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Title Annotation:inventory control
Author:Petersohn, Henry
Publication:Contract Management
Geographic Code:1USA
Date:Mar 1, 2002
Words:2500
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