Just in time and lean thinking

Chapter 6Chapter 6
Just-in-time and leanJust-in-time and lean
thinkingthinking

Content
Just-in-time
Lean thinking
Vendor-managed inventory (VMI)
Quick response

Just-in-time
11
What are the implications of Just-in-time
for logistics?
22
How can just-in-time principles be
applied to other forms of material
control such as reorder point and
material requirements planning?
Key issuesKey issues

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

Just-in-time
Little JITLittle JIT
the application of JIT to logisticsthe application of JIT to logistics
Central themes surrounding Just-in-timeCentral themes surrounding Just-in-time
SimplicitySimplicity
QualityQuality
Elimination of wasteElimination of waste

Just-in-time
Pull schedulingPull scheduling
A system of controlling
materials whereby the use
signals to the maker or provider
that more material is needed.
Push schedulingPush scheduling
A system of controlling
materials whereby makers and
providers make or send material
in response to a pre-set
schedule, regardless of whether
the next process needs them at
the time.
supplier
buyer
Push: traditional way
Pull: Just-in-time

Just-in-time
Computer Book/CD
Grocery
Demanduncertainty
Scale economics
ActivityActivity
Pull Push/Pull
Push

Just-in-time
Just-in-time systemJust-in-time system
JIT Pyramid of key factorsJIT Pyramid of key factors
Just-in-time
Minimum
delay
Minimum
inventory
2
1
Minimum
defects
3
Simplicity
and visibility
Minimum
downtime
5
4
6
Level 1
Level 2
Level 3

Just-in-time
Factor 1Factor 1
– The top of the pyramid is full capability for JITThe top of the pyramid is full capability for JIT
supply supported by Level 2 and Level 3 operation.supply supported by Level 2 and Level 3 operation.
Factor 2Factor 2
– ‘‘DelayDelay’’ andand ‘‘inventoryinventory’’ interact positively with eachinteract positively with each
otherother
– The concept of KanbanThe concept of Kanban
Factor 3Factor 3
– DefectDefect →→ delaydelay → inventory→ inventory

Factor 3Factor 3
– DefectDefect →→ delaydelay → inventory→ inventory
Bad design
Machine downtime
Unreliable
supplier
Poor quality
Inefficient
layout
InventoryInventory
hideshides
problemsproblems

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

Just-in-time
Factor 5Factor 5
– Simply and visible process help to reduceSimply and visible process help to reduce
inventory and could be better maintained.inventory and could be better maintained.
Factor 6Factor 6
– ItIt’’s more difficult to see the flow of a processs more difficult to see the flow of a process
with increased inventory.with increased inventory.

Just-in-time
The supply chainThe supply chain ‘‘game plangame plan’’
Forecasts Orders
Master
schedule
Material
plan
Purchase
orders Work orders
Source Make Deliver
Bill of
materials
Demand
management
Logistics
planning
Logistics
execution
MaterialMaterial
RequirementsRequirements
PlanningPlanning
Independent
demand
Dependent
demand

Just-in-time
The supply chainThe supply chain ‘‘game plangame plan’’
Independent demandIndependent demand
– Demand for a product that is ordered directly byDemand for a product that is ordered directly by
customers.customers.
– items are those items that we sell to customersitems are those items that we sell to customers
Dependent demandDependent demand
– Demand for parts or subassemblies that make upDemand for parts or subassemblies that make up
independent demand products.independent demand products.
– items are those items whose demand isitems are those items whose demand is
determined by other itemsdetermined by other items

Just-in-time
Case: Automobile
Case: Cake

Just-in-time
Demand characteristics and planningDemand characteristics and planning
approachesapproaches
Economic order quantities (EOQ)Economic order quantities (EOQ)
Buffer stock
Reorder point
Usage rate
Recorder
quantityStock
Lead time Time

Just-in-time
Assumptions in Economic Order Quantity ModelAssumptions 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.

NotationNotation
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 modelEOQ model
Average inventory level
The holding cost per unit
The setup cost per unit
The production cost per unit
2
Q
=
D
hQ
D
h
Q
2
2 =
×
=
Q
A
=
c=

Just-in-time
EOQ modelEOQ model
)quantityordereconomic(
2
0
2
)(
)unitpertcostotal(
2
)(
*
2
h
AD
Q
Q
A
D
h
dQ
QdY
c
Q
A
D
hQ
QY
=
=−=
++=

Just-in-time
PracticePractice
Pam runs a mail-order business for gymPam runs a mail-order business for gym
equipment.equipment.   Annual demand for theAnnual demand for the
TricoFlexers is 16,000.TricoFlexers is 16,000.   The annual holdingThe annual holding
cost per unit is $2.50 and the cost to place ancost per unit is $2.50 and the cost to place an
order is $50.order is $50.   What is the economic orderWhat is the economic order
quantity?quantity?
( )orderperunits800
5.2
50160002*
=
××
=Q

Just-in-time
Demand characteristics and planningDemand characteristics and planning
approachesapproaches
Periodic order quantity (POQ) and target stockPeriodic order quantity (POQ) and target stock
levelslevels
Economic order quantityHow much to order?
When to order? Periodic order quantity

Just-in-time
Economic order quantity with uncertain demandEconomic order quantity with uncertain demand
Week No. Demand
Order
quantity
Inventory
end
Inventory
start
Inventory
holding
1 100 1,000 900 1,000 950
2 100 0 800 900 850
3 200 0 600 800 700
4 400 0 200 600 400
5 800 1,000 400 200 300
6 1,000 1,000 400 400 400
7 800 1,000 600 400 500
8 400 0 200 600 400
9 100 0 100 200 150
10 200 1,000 900 100 500
Sum 4,100 5,000 5,100 5,200 5,150
Average 410 500 510 520 515

Just-in-time
Week No. Demand
Order
quantity
Inventory
end
Inventory
start
Inventory
holding
1 100 200 100 200 150
2 100 0 0 100 50
3 200 600 400 600 500
4 400 0 0 400 200
5 800 1,800 1,000 1,800 1,400
6 1,000 0 0 1,000 500
7 800 1,200 400 1,200 800
8 400 0 0 400 200
9 100 300 200 300 250
10 200 0 0 200 100
Sum 4,100 4,100 2,100 6,200 4,150
Average 410 410 210 620 415
Periodic order quantity (POQ) with uncertain demandPeriodic order quantity (POQ) with uncertain demand

Just-in-time
Target stock level (TSL)Target stock level (TSL)
Periodic order quantity = Target stock level –
Stock on hand – Stock on order
TSL = cycle stock + safety stock
constant

Just-in-time
进
货
储
存
盘
点
拣
货
分拣
装车
配
送
订单处理
采购
supplier
retailer
Distribution center
存货低于标准
搬运搬运搬运搬运
流
通
加
工

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

Just-in-time
Feature ofFeature of
MRPMRP
MRP is basedMRP is based
on JIT Pullon JIT Pull
scheduling logicscheduling logic
MRP is good atMRP is good at
planning, butplanning, but
weak at controlweak at control
JIT is good atJIT is good at
control, butcontrol, but
weak atweak at
planningplanning
TPS Vs. FPSTPS Vs. FPS

Just-in-time
Takt time: The
maximum time
allowed to produce a
product in order to
meet demand.
Jidoka: Autonomation
( 人工智能的自动控
制 )
Heijunka: A system of
production smoothing
designed to achieve a
more even and
consistent flow of
work.( 平准化 )
Kaizen: Improvement

Lean thinking
11
What are the principles of lean
thinking?
22
How can the principles of lean
thinking be applied to cutting waste
out of supply chains?
Key issuesKey issues

Lean thinking
Fordism: Henry Ford
1863-1947 The father of
mass production
Taylorism: Frederick Taylor
1856-1915 The father of
scientific management
Toyota: Taiichi Ohno The
father of Toyota
Production System

Lean thinking
Lean thinkingLean thinking refers to the elimination ofrefers to the elimination of
waste in all aspects of a business andwaste in all aspects of a business and
thereby enriching value from thethereby enriching value from the
customer perspective.customer perspective.
2. Identify value stream5. Perfection
3. Create product flow
1. Specify value
4. Let customer pull
muda
muda
muda
muda
Muda means waste, specifically any human activity
which absorbs resources but creates no value.”

Lean thinking
 Nine wastesNine wastes
1.1. Watching aWatching a
machine runmachine run
2.2. Waiting for partsWaiting for parts
3.3. Counting partsCounting parts
4.4. OverproductionOverproduction
5.5. Moving parts overMoving parts over
long distancelong distance
6.6. Storing inventoryStoring inventory
7.7. Looking for toolsLooking for tools
8.8. MachineMachine
breakdownsbreakdowns
9.9. ReworkRework

ConsistentConsistent
ProcessProcess
DesiredDesired
ResultsResults
InconsistentInconsistent
ProcessProcess
InconsistentInconsistent
ResultsResults
Traditional = People doing whatever they can to get results
Lean = People using standard process to get results
Lean thinking

Lean thinking
Role of lean practicesRole of lean practices
Small-batch productionSmall-batch production
– Reduce total cost across a supply chain, such asReduce total cost across a supply chain, such as
removing the waste of overproduction.removing the waste of overproduction.
Rapid changeoverRapid changeover
– Rely on developments in machinery and productRely on developments in machinery and product
designdesign
– Provide the flexibility to make possible small-Provide the flexibility to make possible small-
batch production that responds to customerbatch production that responds to customer
needsneeds

Lean thinking
Design strategyDesign strategy
Lean product designLean 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 designLean facility design

Lean thinking
Design strategyDesign strategy
Lean product designLean product design
Lean facility designLean 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 withinBarriers to knowledge transfers within
supplierssuppliers’’ plants (Dyer and Hatch, 2006)plants (Dyer and Hatch, 2006)
Network constraintsNetwork constraints
– Customer policies or constraints imposed by customers
– Example: One supplier was required by GM to use large
(4’×5’) reusable containers. When filled with components,
these containers weighed 200~300 pounds. By
comparison, Toyota had the supplier use small (2’×3’)
reusable containers weighing 40 pounds when filled.

Case study
Barriers to knowledge transfers within suppliersBarriers to knowledge transfers within suppliers’’
plants (Dyer and Hatch, 2006)plants (Dyer and Hatch, 2006)
Internal process rigiditiesInternal process rigidities
– U.S. customerU.S. customer’’s production process involved a high level ofs production process involved a high level of
automation or large capital investment in heavy equipment.automation or large capital investment in heavy equipment.
The large machines and equipment were bolted orThe large machines and equipment were bolted or
cemented into the floor, hence increased the costs of change.cemented into the floor, hence increased the costs of change.
These process rigidities resulted in plant managers waitingThese process rigidities resulted in plant managers waiting
until the vehicle model change before implementing a newuntil the vehicle model change before implementing a new
process.process.
– ToyotaToyota’’s production network is designed as a dynamics production network is designed as a dynamic
system, and the flexibility to modify the system is built intosystem, and the flexibility to modify the system is built into
the processes and procedures.the processes and procedures.

Vendor-managed inventory
Key issueKey issue
11
How can suppliers help to reduce
waste in the customer’s process?

Conventional Inventory ManagementConventional Inventory Management
CustomerCustomer
– monitors inventory levels
– places orders
VendorVendor
– manufactures/purchases product
– assembles order
– loads vehicles
– routes vehicles
– makes deliveries
You call – We haul

Problems with ConventionalProblems with Conventional
Inventory ManagementInventory Management
Large variation in demands onLarge variation in demands on
production and transportationproduction and transportation
facilitiesfacilities
workload balancingworkload balancing
utilization of resourcesutilization of resources
unnecessary transportation costsunnecessary transportation costs
urgent Vs. non-urgent ordersurgent Vs. non-urgent orders
setting prioritiessetting priorities

Vendor-managed inventoryVendor-managed inventory
CustomerCustomer
– trusts the vendor to manage thetrusts the vendor to manage the
inventoryinventory
VendorVendor
– monitors customersmonitors customers’’ inventoryinventory
– customers call/fax/e-mail
– remote telemetry units
– set levels to trigger call-in
You rely – We supply
– controls inventory replenishment & decidescontrols inventory replenishment & decides
– when to deliver
– how much to deliver
– how to deliver

VMIVMI
An approach to inventory
and order fulfillment in the
way that supplier, not the
customer, is responsible for
managing and replenishing
inventory.

buyer
seller
VMI data flow
•Number of items in stock
•Consumption of previous period
•Any other specific customer- or
item-related parameters
•Number of items as ordered
•Number of items in back-order
•Acknowledgement

VMI does not stand forVMI does not stand for
The passing of the customer’s consumption history for a
specific item, from the customer over to the supplier,
who on the basis hereof, will follow-up the customer’s
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 forVMI 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.

Advantages of VMIAdvantages of VMI
CustomerCustomer
– The stock as such disappears from the company’s
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 supplier’s periods
of delivery will drop.

Advantages of VMIAdvantages of VMI
VendorVendor
–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)

Potential problems in setting up a VMI systemPotential problems in setting up a VMI system
Unwillingness to share dataUnwillingness to share data
Seasonal productsSeasonal products
Investment and restructuring costsInvestment and restructuring costs
Customer vulnerabilityCustomer vulnerability
Lack of standard procedures (between differentLack of standard procedures (between different
customers)customers)
System maintenanceSystem maintenance
VMI EssentialsVMI Essentials
TrustTrust
•Accurate information provided on
a timely basis
•Inventory levels that meet
demands
•Confidential information kept
confidential
TechnologyTechnology
•Automated electronic
messaging systems to exchange
sales and demand data,
shipping schedules

Case study
PraxairPraxair’’s Businesss Business
Plants worldwidePlants worldwide
– 44 countries
– USA 70 plants
– South America 20 plants
Product classesProduct classes
– packaged products
– bulk products
– lease manufacturing equipment
DistributionDistribution
– 1/3 of total cost attributed to distribution

Case study
PraxairPraxair’’s Business------Bulk productss Business------Bulk products
DistributionDistribution
– 750 tanker trucks
– 100 rail cars
– 1,100 drivers
– drive 80 million miles per year
CustomersCustomers
– 45,000 deliveries per month to 10,000 customers
VariationVariation
– 4 deliveries per customer per day to 1 delivery per customer per 2
months
Routing varies from day to dayRouting varies from day to day

Case study
VMI Implementation at PraxairVMI Implementation at Praxair
Convince management and employees ofConvince management and employees of
new methods of doing businessnew methods of doing business
Convince customers to trust vendor to doConvince customers to trust vendor to do
inventory managementinventory management
Pressure on vendor to perform - TrustPressure on vendor to perform - Trust
easily shakeneasily shaken
Praxair currently manages 80% of bulkPraxair currently manages 80% of bulk
customerscustomers’’ inventoriesinventories

Case study
VMI Implementation at PraxairVMI Implementation at Praxair
Praxair receives inventory level data viaPraxair 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 onForecast customer demands based on
– historical data
– customer production schedules
– customer exceptional use events
Logistics planners use decision support tools to planLogistics 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 PraxairBenefits of VMI at Praxair
Before VMI, 96% of stockoutsBefore VMI, 96% of stockouts
due to customers calling whendue to customers calling when
tank was already empty or nearlytank was already empty or nearly
emptyempty
VMI reduced customer stockoutsVMI reduced customer stockouts
0
5
10
Jan Mar May July Sept Nov
after 2 yrs
before VMI

Case study
WhatWhat’’s needed to make VMI works needed to make VMI work
Information management is crucial to the success ofInformation management is crucial to the success of
VMIVMI
– inventory level data
– historical usage data
– planned usage schedules
– planned and unplanned exceptional usage
Forecast future demandForecast future demand
Decision making: need to decide on a regular (daily)Decision making: need to decide on a regular (daily)
basisbasis
– whom to deliver to
– when to deliver
– How much to deliver
– how to combine deliveries into routes
– how to combine routes into driver schedules

Quick response
The application of quick response in
apparel industry
Development lead time have been compressed
Production lead time are shorter
Zara caseZara case

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