Just-in-Time Inventory Management
You’ve heard of JIT to use warehouse space better and to deliver goods to customers more efficiently. Can it work for your operation? How do you implement it?OVERVIEW [top]
When ordering inventory, two of the biggest issues are quality and cost. When all else is equal, choosing one supplier over another generally comes down to which supplier offers the best price break for the largest order.
But stock eventually runs low and negotiations begin again. Multiply that by the number of supplies you use, and picture how much time your purchasing agents spend trying to cut better deals. Just-in-Time (JIT) inventory management is designed to help streamline your operation, ensure consistent quality and reduce on-site inventory.
JIT is an inventory management system based on placing smaller, more frequent, inventory orders. JIT can quickly reveal areas that need improvement, improve efficiency and productivity, free up additional workspace and free up more working capital.
In this Quick-Read you will find:A description of JIT. Four quick tips to help determine if JIT might work for you.
Switching between suppliers to secure the lowest price is fine when you have extra storage space and won’t suffer if the order is a day or two late. The problem is, when faced with overlapping deadlines, suppliers have to put their best customers first, so if you’re a first-time or occasional customer, you could get caught short.
That’s why JIT relies on long-term contracts with reliable suppliers, often ordering several parts from the same supplier, even if the parts might be cheaper through another vendor. By working closely with suppliers — in effect, making them partners in your manufacturing process — they are in tune with your immediate needs and can provide smaller, more frequent shipments designed to meet your current requirements. This collaboration often results in:A consolidation of efforts on the part of the supplier. Long-term contracts securing the lowest prices possible. Freeing up your purchasing-and-receiving employees to work on other things.
For JIT to work, you need to have reliable suppliers who provide consistent-quality products, preferably with warehouses close enough to your location to make speedy deliveries. Cutting-edge automated equipment and high-tech inventory management systems — things as universal as bar coding — are making JIT increasingly easier to implement.
A key part of JIT is the Kanban, a system of tracking supplies throughout the entire manufacturing process. It can be anything from a high-tech computerized system to a low-tech card or ticket system. Sort of a microcosm of JIT as a whole, a well-planned Kanban helps track the speed at which each part works its way through the system. This makes it easier to keep track of inventory. There are two basic models for the Kanban, a station-based system or a container system.
Station system. Workers "order" the exact number of parts they need from another station above them in the production line. When a station receives a request, they supply the part, then make or order a replacement (in turn, the stations they received parts from then order replacements for the parts they provided, and so on up the line).
Container system. Workers take parts directly from a container on the floor. Inventory is tracked by knowing precisely how many parts each container holds. A replacement container is brought out shortly before the first is emptied so workers are never short of supplies.
JIT programs won’t work for everyone. Not only do you need fairly consistent production so you can accurately predict how rapidly you go through every part or ingredient you use, but you also need to have a good communications system in place among your employees.
To help determine if JIT is for you:Assess your production flow. Do you produce a steady or predictable amount of products each day, week, month? Can you predict how much inventory you will need in a given day, week, month? If you cannot, implementing a JIT program could be difficult, if not impossible. Talk to your suppliers. Are they willing to make smaller, but more frequent, deliveries? Will they negotiate good deals, given the promise of guaranteed, long-term business from your company? Not every supplier is going to want the responsibility of being part of your JIT program, but some will accept the challenge and sign on for the long haul. Can you rely on them to make deliveries just in time? Talk to your employees. How well do the employees communicate with one another and with you? Is each willing to take the time to learn a new system and do what it takes to have it run smoothly? Be honest. Not just with your employees and suppliers, but with yourself. Switching over to a JIT system will take a lot of commitment. Don’t get involved with JIT simply because other companies have; do it if you think it will work for your company.
REAL-LIFE EXAMPLE [top]
When Baltimore-based Bruning Paint bought out Florida competitor Scott Paint, Bruning closed one of its own plants and consolidated all area manufacturing.
One of Scott Paint’s local raw-materials suppliers, Gulf Coast Chemical, immediately saw an opportunity for more business — orders for two plants now coming from one location — and also a challenge. Said Gulf Coast CEO Daryl Allen: "Everyone who had sold products to the original Bruning plant would want to reclaim their business."
The challenge for Gulf Coast was to quickly demonstrate clear superiority in a key way. After much brainstorming, Allen and Gulf Coast personnel hit pay dirt — a just-in-time inventory-management program. Gulf Coast had participated in this sort of program with another customer, but had never initiated and created such a program itself.
Selling the program to the Bruning-Scott Paint management team depended on achieving three key tasks:Demonstrating cost savings and efficiencies with real numbers. Convincing Scott Paint to commit to an ambitious program, in the midst of a plant consolidation. Navigating the confusion and uncertainty that accompanied the merger.
The basic premise of the proposal was for Gulf Coast to assume responsibility for bringing in raw materials from various sources to the new, consolidated plant and managing those materials more effectively than Scott Paint could. Gulf Coast would offer to consolidate purchases, make more frequent deliveries to reduce inventory and help cut production costs.
Constructing a proposal that described the process and the results in clear terms was the next step. The proposal presented the following benefits for the customer:Reduced Inventories: Scott Paint’s floor inventory would drop approximately 25%. Competitive Pricing: Gulf Coast approached each of the principals that manufactured products sold to Scott Paint and obtained competitive pricing to support the program. Key point: This aggressive step showed that Gulf Coast would go the extra mile for Scott Paint and provided hard numbers for comparison.
Reduced Incoming Shipments: Scott Paint was bringing in material from many different suppliers. By consolidating various vendors, Gulf Coast reduced the volume of incoming shipments from 20 per month to four .Better Use of People: Gulf Coast’s expertise in distributing and shipping would free up time for Scott Paint’s managers and others to focus on paint production. Taking on less inventory would mean that receiving personnel could do other things. More Space for Finished Goods: The just-in-time program would reduce space needed for raw materials and allow Scott Paint to expand finished-goods inventory. Increased Working Capital: Reduced inventory would mean more cash for other major needs, especially building new sales outlets and increasing research and development.
Important business decisions often boil down to strong business relationships. Long-term, carefully nurtured relationships ultimately served Gulf Coast well in this case.
An unusual obstacle was that senior managers at Scott were considering Gulf Coast’s proposal while they were still consolidating operations of the two plants. Confusion over the quantity of products involved and concern over the wisdom of outsourcing such a longstanding and vital function were distractions that Allen had to minimize.
The key deal-making factor? Gulf Coast’s ability to leverage existing business relationships in a new environment.
Ultimately, the Scott Paint operations manager and head of purchasing said, "We’ve done business together for many years, and I trust you. If you are sure this program will benefit us, then now is the time to initiate the agreement. I don’t think we can wait for things to settle down."
When Scott Paint turned over its five highest-volume materials to the program, Gulf Coast had achieved a major coup; previously, Gulf Coast did not supply any of these products to Scott.
The vendor-managed inventory agreement with Scott Paint made Gulf Coast realize that it could expand its inventory expertise to higher-volume accounts. Gulf Coast found that it distinguished itself by adding a valuable time- and money-saving service to its customers: taking over the responsibility of controlling and managing massive inventory.
DO IT [top] Read The Goal by Eliyahu Goldratt. It’s one of the best introductions to JIT. Introduce your CEO to the concept of JIT by explaining how similar programs have benefited from JIT. Show the CEOs of any supply companies you might want to partner with how they can benefit from being part of your JIT program. List benefits your company might expect from a JIT program. Some universal benefits include reduced inventory cost, reduced manpower for deliveries and more contact with dedicated suppliers. Do a hundred-day test run by focusing on just a few key products or a single operational unit. Use this test to determine delivery schedules and set pricing. If the test worked, add your other products.
Fast Track to Waste-Free Manufacturing by John W. Davis (Productivity Press, 1999).
The Goal: A Process of Ongoing Improvement 2nd revised edition by Eliyahu Goldratt and Jeff Cox (North River Press, 1992). This one is in the fiction section at the library, but it’s very motivational, as well as educational. (Also available on audiotape).
Supercharging Supply Chains: New Ways to Increase Value Through Global Operational Excellence by Gene R. Tyndall (Wiley, 1998).
The Educational Society for Resource Management (formerly known as The American Production and Inventory Control Society)
APICS Magazine — To subscribe call RJV Data Resources (781-380-0945) or find more information at APICS’s Web site.
Writer: Paula Hendrickson
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