Chapter 6 Just-in-time and lean thinking

Content

Just-in-time

Lean thinking

Vendor-managed inventory (VMI)

Quick response

Just-in-time
Key issues
1
What are the implications of Just-in-time for logistics?

How can just-in-time principles be applied to other forms of material control such as reorder point and material requirements planning?

Just-in-time
Just-in-time: A definition
Uses a systems approach to develop and operate a manufacturing system Organizes the production process so that parts are available when they are needed A method for optimizing processes that involves continual reduction of waste

Just-in-time
Little JIT
the application of JIT to logistics

Central themes surrounding Just-in-time

Simplicity Quality Elimination of waste

Just-in-time
Pull scheduling
A system of controlling materials whereby the use signals to the maker or provider that more material is needed.
buyer
Pull: Just-in-time

Push scheduling

A system of controlling Push: traditional way materials whereby makers and providers make or send material in response to a pre-set schedule, supplier regardless of whether the next process needs them at the time.

Just-in-time
Activity
Pull
Demand uncertainty Computer

Push/Pull
Book/CD

Grocery

Scale economics

Push

Just-in-time
Just-in-time system
JIT Pyramid of key factors
Level 1 Just-in-time 1

Level 2

Level 3

Minimum 2 Minimum 6 inventory delay 3 4 Minimum Minimum 5 Simplicity defects downtime and visibility

Just-in-time
Just-in-time system
Factor 1
The top of the pyramid is full capability for JIT supply supported by Level 2 and Level 3 operation.

Factor 2
Delay and inventory interact positively with each other The concept of Kanban

Factor 3
Defect delay inventory

Just-in-time system
Factor 3
Defect delay inventory

Inventory

hides problems
Machine downtime Bad design Unreliable supplier Poor quality Inefficient layout

Just-in-time
Just-in-time system
Factor 4
Preventive maintenance Breakdowns Planned maintenance Changeover Flexible production Machine downtime Safety stocks

Just-in-time
Just-in-time system
Factor 5
Simply and visible process help to reduce inventory and could be better maintained.

Factor 6
Its more difficult to see the flow of a process with increased inventory.

Just-in-time
The supply chain game plan
Demand management Forecasts Orders

Material Requirements Planning

Independent demand

Logistics planning Dependent demand

Master schedule Material plan Purchase orders

Source

Bill of materials

Logistics execution

Work orders
Make Deliver

Just-in-time
The supply chain game plan
Independent demand
Demand for a product that is ordered directly by customers. items are those items that we sell to customers

Dependent demand
Demand for parts or subassemblies that make up independent demand products. items are those items whose demand is determined by other items

Just-in-time
Case: Automobile

Case: Cake

Just-in-time
Demand characteristics and planning approaches
Economic order quantities (EOQ)
Stock Recorder quantity Usage rate

Reorder point

Buffer stock Lead time Time

Just-in-time
Assumptions in Economic Order Quantity Model
Demand is deterministic. There is no uncertainty about the quantity or timing of demand. Demand is constant over time. In fact, it can be represented as a straight line, so that if annual demand is 365 units this translates into a daily demand of one unit. A production run incurs a constant setup cost. Regardless of the size of the lot or the status of the factory, the setup cost is the same. Products can be analyzed singly. There is only a single product.

Notation
D = Demand rate (in units per year). c = Unit production cost, not counting setup or inventory costs (in dollars per unit). A = Constant setup (ordering) cost to produce (purchase) a lot (in dollars). h = Holding cost (in dollars per unit per year)

Q = Lot size (in units); this is the decision variable

Just-in-time
EOQ model
Q Average inventory level 2Q
The holding cost per unit 2
A The setup cost per unit Q

hQ 2D

The production cost per unit

Just-in-time
EOQ model
hQ A Y (Q) c ( total cos t per unit ) 2D Q dY (Q) h A 2 0 dQ 2D Q 2 AD Q (economic order quantity) h
*

Just-in-time
Practice
Pam runs a mail-order business for gym equipment. Annual demand for the TricoFlexers is 16,000. The annual holding cost per unit is $2.50 and the cost to place an order is $50. What is the economic order quantity?

Q
*

2 16000 50 800 units per order 2.5

Just-in-time
Demand characteristics and planning approaches
Periodic order quantity (POQ) and target stock levels
How much to order? Economic order quantity

When to order?

Periodic order quantity

Just-in-time
Economic order quantity with uncertain demand
Week No. 1 2 3 4 5 Demand 100 100 200 400 800 Order quantity 1,000 0 0 0 1,000 Inventory end 900 800 600 200 400 Inventory start 1,000 900 800 600 200 Inventory holding 950 850 700 400 300

6
7 8 9 10 Sum Average

1,000
800 400 100 200 4,100 410

1,000
1,000 0 0 1,000 5,000 500

400
600 200 100 900 5,100 510

400
400 600 200 100 5,200 520

400
500 400 150 500 5,150 515

Just-in-time
Periodic order quantity (POQ) with uncertain demand
Week No. 1 2 3 4 5 Demand 100 100 200 400 800 Order quantity 200 0 600 0 1,800 Inventory end 100 0 400 0 1,000 Inventory start 200 100 600 400 1,800 Inventory holding 150 50 500 200 1,400

6
7 8 9 10 Sum Average

1,000
800 400 100 200 4,100 410

0
1,200 0 300 0 4,100 410

0
400 0 200 0 2,100 210

1,000
1,200 400 300 200 6,200 620

500
800 200 250 100 4,150 415

Just-in-time
Target stock level (TSL)
constant

Periodic order quantity = Target stock level Stock on hand Stock on order TSL = cycle stock + safety stock

Just-in-time
supplier

Distribution center

retailer

Just-in-time
JIT and material requirements planning (MRP)
Material requirements planning (MRP) - A methodology for defining the raw material requirements for a specific item, component, or sub-assembly ordered by a customer, or required by a business process. MRP systems will usually define what is needed, when it is needed, and by having access to current inventories and pre-existing commitment of that inventory to other orders to other customers, will indicate what additional items need to be ordered to fulfill this order.

Just-in-time
Feature of MRP
MRP is based on JIT Pull scheduling logic MRP is good at planning, but weak at control JIT is good at control, but weak at planning

TPS Vs. FPS

Just-in-time
Takt time: The maximum time allowed to produce a product in order to meet demand. Jidoka: Autonomation () Heijunka: A system of production smoothing designed to achieve a more even and consistent flow of work.() Kaizen: Improvement

Heijunka box

Content

Just-in-time

Lean thinking

Vendor-managed inventory (VMI)

Quick response

Lean thinking
Key issues
1
What are the principles of lean thinking?

How can the principles of lean thinking be applied to cutting waste out of supply chains?

Lean thinking
Taylorism: Frederick Taylor
1856-1915 The father of

scientific management Fordism: Henry Ford

1863-1947 The father of

mass production Toyota: Taiichi Ohno The father of Toyota Production System

Lean thinking
Lean thinking refers to the elimination of waste in all aspects of a business and thereby enriching value from the customer perspective.
1. Specify value muda 4. Let customer pull 5. Perfection muda 2. Identify value stream muda

muda 3. Create product flow

Muda means waste, specifically any human activity which absorbs resources but creates no value.

Lean thinking
Nine wastes
1. Watching a machine run 2. Waiting for parts 3. Counting parts 4. Overproduction 5. Moving parts over long distance 6. Storing inventory 7. Looking for tools 8. Machine breakdowns 9. Rework

Lean thinking

Inconsistent Process

Inconsistent Results

Traditional = People doing whatever they can to get results

Consistent Process

Desired Results

Lean = People using standard process to get results

Lean thinking
Role of lean practices
Small-batch production
Reduce total cost across a supply chain, such as removing the waste of overproduction.

Rapid changeover
Rely on developments in machinery and product design Provide the flexibility to make possible smallbatch production that responds to customer needs

Lean thinking
Design strategy
Lean product design
A reduction in the number of parts they contain and the materials from which they are made Features that aid assembly, such as asymmetrical parts that can be assembled in only one way Redundant features on common, core parts that allow variety to be achieved without complexity with the addition of peripheral parts Modular designs that allow parts to be upgraded over the product life

Lean facility design

Lean thinking
Design strategy
Lean product design Lean facility design
Modular design of equipment to allow prompt repair and maintenance Modular design of layout to allow teams to be brought together with all the facilities they need Small machines which can be moved to match the demand for them Open systems architectures that allow equipment to fit together and work when it is moved and connected to other items

Case study
Barriers to knowledge transfers within suppliers plants (Dyer and Hatch, 2006)
Network constraints
Customer policies or constraints imposed by customers Example: One supplier was required by GM to use large (45) reusable containers. When filled with components, these containers weighed 200~300 pounds. By comparison, Toyota had the supplier use small (23) reusable containers weighing 40 pounds when filled.

Case study

Case study
Barriers to knowledge transfers within suppliers plants (Dyer and Hatch, 2006)
Internal process rigidities
U.S. customers production process involved a high level of automation or large capital investment in heavy equipment. The large machines and equipment were bolted or cemented into the floor, hence increased the costs of change. These process rigidities resulted in plant managers waiting until the vehicle model change before implementing a new process. Toyotas production network is designed as a dynamic system, and the flexibility to modify the system is built into the processes and procedures.

Content

Just-in-time

Lean thinking

Vendor-managed inventory (VMI)

Quick response

Vendor-managed inventory
Key issue

How can suppliers help to reduce waste in the customers process?

Vendor-managed inventory
Conventional Inventory Management
Customer
monitors inventory levels

places orders

Vendor
manufactures/purchases product assembles order loads vehicles routes vehicles

makes deliveries

You call We haul

Vendor-managed inventory
Problems with Conventional Inventory Management
Large variation in demands on production and transportation facilities workload balancing utilization of resources

unnecessary transportation costs

urgent Vs. non-urgent orders setting priorities

Vendor-managed inventory
Vendor-managed inventory
Customer
trusts the vendor to manage the inventory

Vendor
monitors customers inventory customers call/fax/e-mail remote telemetry units set levels to trigger call-in controls inventory replenishment & decides when to deliver how much to deliver You rely We how to deliver

supply

Vendor-managed inventory
VMI
An approach to inventory and order fulfillment in the way that supplier, not the customer, is responsible for managing and replenishing inventory.

Vendor-managed inventory
Number of items as ordered Number of items in back-order

buyer

Acknowledgement

seller
Number of items in stock Consumption of previous period Any other specific customer- or item-related parameters

VMI data flow

Vendor-managed inventory
VMI does not stand for
The passing of the customers consumption history for a specific item, from the customer over to the supplier, who on the basis hereof, will follow-up the customers stock level and at the moment of the stock having reached a specific threshold, generates a purchasing order so as to replenish the stock.

VMI in fact stands for

Granting inspection of the sales profile of a specific item to the supplier, who on the basis hereof, will optimize the replenishment policy and ensure the pre-defined service level towards the end users of his customer.

Vendor-managed inventory
Advantages of VMI
Customer
The stock as such disappears from the companys balance sheet and this way clears the way for a higher amount of working capital. Customer only have to supervise the stocks, instead of drawing up a detailed analysis for the placing of orders. Reduce the time interval between receiving goods and making them available for consumption or sales. Stocks with customer will be reduced, because the uncertainty due to variability in the suppliers periods of delivery will drop.

Vendor-managed inventory
Advantages of VMI Vendor
more freedom in when & how to manufacture product and make deliveries better coordination of inventory levels at different customers better coordination of deliveries to decrease transportation cost (reduce the rush-order and related high cost)

Vendor-managed inventory
Potential problems in setting up a VMI system
Unwillingness to share data Seasonal products Investment and restructuring costs Customer vulnerability Lack of standard procedures (between different customers) VMI Essentials System maintenance Trust Accurate information provided on a timely basis Inventory levels that meet demands Confidential information kept confidential Technology Automated electronic messaging systems to exchange sales and demand data, shipping schedules

Case study
Praxairs Business
Plants worldwide
44 countries USA 70 plants South America 20 plants

Product classes
packaged products

bulk products
lease manufacturing equipment

Distribution
1/3 of total cost attributed to distribution

Case study
Praxairs Business------Bulk products
Distribution
750 tanker trucks 100 rail cars 1,100 drivers

drive 80 million miles per year

Customers
45,000 deliveries per month to 10,000 customers

Variation
4 deliveries per customer per day to 1 delivery per customer per 2 months

Routing varies from day to day

Case study
VMI Implementation at Praxair
Convince management and employees of new methods of doing business Convince customers to trust vendor to do inventory management Pressure on vendor to perform - Trust easily shaken Praxair currently manages 80% of bulk customers inventories

Case study
VMI Implementation at Praxair
Praxair receives inventory level data via telephone calls: 1,000 per day fax: 500 per day remote telemetry units: 5,000 per day Forecast customer demands based on historical data customer production schedules customer exceptional use events Logistics planners use decision support tools to plan whom to deliver to when to deliver how to combine deliveries into routes how to combine routes into driver schedules

Case study
Benefits of VMI at Praxair
Before VMI, 96% of stockouts due to customers calling when tank was already empty or nearly empty VMI reduced customer stockouts
10 5 0 before VMI after 2 yrs Jan Mar May July Sept Nov

Case study
Whats needed to make VMI work
Information management is crucial to the success of VMI
inventory level data historical usage data planned usage schedules planned and unplanned exceptional usage

Forecast future demand Decision making: need to decide on a regular (daily) basis
whom to deliver to when to deliver How much to deliver how to combine deliveries into routes how to combine routes into driver schedules

Content

Just-in-time

Lean thinking

Vendor-managed inventory (VMI)

Quick response

Quick response
The application of quick response in apparel industry
Development lead time have been compressed Production lead time are shorter

Zara case