How can High Tech

OEMs Minimize
Inventory Liability?
A positive approach spanning entire supply chain
and applying principles of Toyota Production
System)

Submitted By

33140 Rupesh Sonawane

33181 Shivtej Shinde

33199 Gurudutt Deshpande

33272 Anup Sarda

33268 Ankur Rathi

Supply Chain management

Table of Contents
Introduction:.................................................................................................................2
Inventory Misconceptions.............................................................................................2
Waste of Overproduction:.............................................................................................3
Toyota Production System:..............................................................................................3
Just-in-Time...............................................................................................................3
Kanban System...........................................................................................................4
Why use a supermarket concept?..................................................................................4
Jidoka — Manufacturing high-quality products...................................................................5
Automation with a human touch....................................................................................5
Create Continuous Process Flow to Bring Problems to the Surface.....................................5
Benefits:.................................................................................................................6
Level Out the Workload (Heijunka)...................................................................................7
Benefits of Heijunka:...................................................................................................7
Conclusion:...................................................................................................................7
References....................................................................................................................7
Introduction:
Inventory is one of the most valuable assets a company has, yet benchmark results show that most companies
fail to manage it effectively. The majority of manufacturers and distributors rely on out-of-date, too
simplistic, or overly localized inventory policies. By doing so, companies tie up working capital, harm
customer retention, and hurt shareholder value-added.

In general, companies are finding they have been burdened with inventory misconceptions (including around
Lean principles), oversimplification, corporate discomfort with changing inventory strategies, and significant
underinvestment in breakthrough collaboration and optimization technology. Also as the nature of supply
chains changes, so must the policies used to manage inventory.

Inventory Misconceptions
1. Simplistic inventory policies work well. Companies that use ABCD inventory policies or simple
weeks-of supply rules frequently have 15-30% more inventory than they need and lower service
levels. They hold too little inventory for items with lumpy demand and too much for items with
steady demand.
2. Holding all items, at all levels in our finished goods network will give us the highest service levels.
Companies with multiple tiers of finished goods distribution frequently hold the wrong amount of
inventory in the wrong locations and suffer out of stocks despite high inventory investments. Many
of these companies should be holding some items just at their hub locations.
3. It is fine for each location or tier in the supply chain to set its own service level targets and
replenishment planning frequencies. The lack of synchronized inventory policies across
manufacturing stages and distribution tiers builds up unneeded inventory across the supply chain. In
addition, firms with high-volume, high-variability environments often have replenishment planning
frequencies that are too slow, creating unnecessary stock-outs and greater inventory costs.
4. Inventory minimization should be our goal. Companies with strong Lean philosophies often suffer
from longer-than-necessary order lead times, high total delivered costs, and service level issues
because they hold too little raw material and in-process buffer stock.
5. Using purchase orders or release notices for replenishment is efficient. A growing number of
companies that used to cut purchase orders or release notices for their suppliers are discovering it is
more effective to ask suppliers to take responsibility for maintaining inventory between min/max
levels.
Misconceptions around inventory affect both top line and bottom line revenue:

 Top Line Revenue:

 Revenue loss from stock-outs and late or incomplete orders that are cancelled
 customer retention issues because of service failures, long lead times, and flexibility challenges
 Bottom Line Revenue:
 Too much working capital tied up in inventory (also impacts the balance sheet)
 Lost manufacturing productivity and higher warehouse, labor, and transportation costs (e.g.,
expediting costs) caused by inventory delays or shortages
 Profit erosion and write-offs from obsolete or declining price inventory

Waste of Overproduction:
There are 2 types of over production:

 Quantitative: making more products than required

 Early: making products earlier than required

Toyota Production System:

The Toyota Production System (TPS) is an integrated socio-technical system, developed by Toyota, that
comprises its management philosophy and practices. The TPS organizes manufacturing and logistics for the
automobile manufacturer, including interaction with suppliers and customers. The Toyota Way is not about
managing inventory; it is about eliminating it.

The Toyota Production System (TPS) was established based on following concepts:

 The first is called "jidoka" (which can be loosely translated as "automation with a human touch")
which means that when a problem occurs, the equipment stops immediately, preventing defective
products from being produced
 The second is the concept of "Just-in-Time" - in which each process produces only what is needed
by the next process in a continuous flow.

Just-in-Time
"Just-in-Time" means making "only what is needed, when it is needed, and in the amount needed." For
example: To efficiently produce a large number of automobiles, which can consist of around 30,000 parts, it
is necessary to create a detailed production plan that includes parts procurement. Supplying "what is needed,
when it is needed, and in the amount needed" according to this production plan can eliminate waste,
inconsistencies, and unreasonable requirements, resulting in improved productivity.
Kanban System
In the TPS (Toyota Production System), a unique production control method called the "kanban system"
plays an integral role. The kanban system has also been called the "Supermarket method" because the idea
behind it was borrowed from supermarkets. Such mass merchandizing stores use product control cards upon
which product-related information, such as a product's name, code and storage location, are entered. Because
Toyota employed kanban signs for use in their production processes, the method came to be called the
"kanban system." At Toyota, when a process refers to a preceding process to retrieve parts, it uses a kanban
to communicate which parts have been used.

Why use a supermarket concept?

A supermarket stocks the items needed by its customers when they are needed in the quantity needed, and
has all of these items available for sale at any given time.

Taiichi Ohno (a former Toyota vice president), who promoted the idea of Just-in-Time, applied this concept,
equating the supermarket and the customer with the preceding process and the next process, respectively. By
having the next process (the customer) go to the preceding process (the supermarket) to retrieve the
necessary parts when they are needed and in the amount needed, it was possible to improve upon the existing
inefficient production system. No longer were the preceding processes making excess parts and delivering
them to the next process.

Two kinds of kanban (the production instruction kanban and the parts retrieval kanban) are used for
managing parts.
Jidoka — Manufacturing high-quality products
Automation with a human touch
The term jidoka used in the TPS (Toyota Production System) can be defined as "automation with a human
touch." The word jidoka traces its roots to the invention of the automatic loom by Sakichi Toyoda, Founder
of the Toyota Group. The automatic loom is a machine that spins thread for cloth and weaves textiles
automatically.

Before automated devices were commonplace, back-strap looms, ground looms, and high-warp looms were
used to manually weave cloth. In 1896, Sakichi Toyoda invented Japan's first self-powered loom called the
"Toyoda Power Loom." Subsequently, he incorporated numerous revolutionary inventions into his looms,
including the weft-breakage automatic stopping device (which automatically stopped the loom when a thread
breakage was detected), the warp supply device and the automatic shuttle changer. Then, in 1924, Sakichi
invented the world's first automatic loom, called the "Type-G Toyoda Automatic Loom (with non-stop
shuttle-change motion)" which could change shuttles without stopping operation.

The Toyota term "jido" is applied to a machine with a built-in device for making judgments, whereas the
regular Japanese term "jido" (automation) is simply applied to a machine that moves on its own. Jidoka
refers to "automation with a human touch," as opposed to a machine that simply moves under the monitoring
and supervision of an operator.

Since the loom stopped when a problem arose, no defective products were produced. This meant that a single
operator could be put in charge of numerous looms, resulting in a tremendous improvement in productivity.

Create Continuous Process Flow to Bring Problems to the Surface

A good place for any company to begin the journey to lean is to create continuous flow wherever applicable
in its core manufacturing and service processes. Flow is at the heart of the lean message that shortening the
elapsed time from raw materials to finished goods (or services) will lead to the best quality, lowest cost, and
shortest delivery time. Flow also tends to force the implementation of a lot of the other lean tools and
philosophies such as preventative maintenance and built-in quality (jidoka).

Eight non-value-adding wastes that an OEM should continually seek to remove from its processes:

 overproduction
 waiting
 unnecessary transport
 overprocessing
  excess inventory
 unnecessary movement
 defects
 unused employee creativity

When you try to attain one-piece flow, you are also setting in motion numerous activities to
eliminate all muda (wastes).

Benefits
1. Reduces Cost of Inventory. You free up capital to invest elsewhere when it’s not invested in
inventory sitting on the floor. And companies do not have to pay the carrying costs of the
capital they free up. Also your inventory obsolescence goes down.

2. Builds in Quality. It is much easier to build in quality in one-piece flow. Every operator is an
inspector and works to fix any problems in station before passing them on. But if defects do
get missed and passed on, they will be detected very quickly and the problem can be
immediately diagnosed and corrected.

3. Creates Real Flexibility. If we dedicate equipment to a product line, we have less flexibility
in scheduling it for other purposes. But if the lead time to make a product is very short, we
have more flexibility to respond and make what the customer really wants. Instead of
putting a new order into the system and waiting weeks to get that product out, if lead times
are a matter of mere hours we can fill a new order in a few hours. And changing over to a
different product mix to accommodate changes in customer demand can be almost
immediate.

4. Creates Higher Productivity. The reason it appears that productivity is highest when your
operations are organized by department is because, each department is measured by
equipment utilization and people utilization.

5. Frees up Floor Space. When equipment is organized by department, a lot of bits of space
between equipment is present that gets wasted by inventory—piles and piles of it. In a cell,
everything is pushed close together and there is very little space wasted by inventory. By
making greater use of the floor space you often eliminate the need to build more capacity.

6. Improves Safety. Wiremold Corporation, one of the early adopters of TPS in America, has
an exemplary safety record, winning a number of state safety awards. Yet when they worked
to transform their large-batch-process company to one-piece flow, they decided not to put in
place a special safety program. Smaller batches meant getting rid of forklift trucks, which
are a major cause of accidents. It meant lifting and moving smaller containers of material, so
accidents relating to lifting went away. Safety was getting better because of a focus on flow
—even without focusing on safety.

7. Improves Morale. In one-piece flow, people do much more value-added work and can
immediately see the results of that work, giving them both a sense of accomplishment and
job satisfaction.
Level Out the Workload (Heijunka)
Heijunka is the leveling of production by both volume and product mix. It does not build products according
to the actual flow of customer orders, which can swing up and down wildly, but takes the total volume of
orders in a period and levels them out so the same amount and mix are being made each day. The approach
of TPS from the beginning was to keep batch sizes small and build what the customer (external or internal)
wants.

Heijunka—the leveling of the workload—serves many purposes. First, it is a prerequisite to having

continuous flow and pull production. Second, at the supply chain level, it reduces artificial demand
fluctuations, or the bullwhip effect. Third, it provides visibility into systematic changes such as shift in
product mix or slowing of demand, and allows the planner to use rate-based planning techniques. It allows
the match of production and sales rates (using the concept of takt time). Thus, heijunka along with mix
planning are keys to maintaining a stable supply chain.

Benefits of Heijunka:
1. Flexibility to make what the customer wants when they want it. This reduced the plant’s inventory
and its associated problems.

2. Reduced risk of unsold goods. If the plant makes only what the customer orders, it doesn’t have to
worry about eating the costs of owning and storing inventory.

3. Balanced use of labor and machines. The plant can create standardized work and level out
production by taking into account that some engines will require less work and others will require
more work. As long as a big engine that takes extra work is not followed by another big engine, the
workers can handle it. Once the plant takes this into account and keeps the schedule level, it can
have a balanced and manageable workload over the day.

4. Smoothed demand on upstream processes and the plant’s suppliers. If the plant uses a just-in-time
system for upstream processes and the suppliers deliver multiple times in a day, the suppliers will get
a stable and level set of orders. This will allow them to reduce inventory and then pass some savings
on to the customer so that everyone gets the benefits of levelling.

Conclusion:
To stay competitive, companies need to buck conventional wisdom about how to manage inventory.
Companies need to redesign how they manage inventory across their supply chains to lower costs and
improve customer service levels. Toyota Production System provides a time tested and a successful
approach towards Inventory reduction. OEMs can use these points from TPS in their favour. But this
would require a lot of hard work and focus to reap the benefits.

References
1) The Toyota Way – By Jeffrey K Liker

2) Toyota Supply chain management – By Anant Iyer, Sridhar Seshadri

3) Lean manufacturing and TPS – by Jeffrey K Liker

4) How Toyota became No. 1 – David Magee