Just In Time
Just In Time (JIT) is an inventory strategy implemented to improve the return on investment of a business by reducing in-process inventory and its associated costs. The process is driven by a series of signals, or Kanban, that tell production processes when to make the next part. Kanban are usually 'tickets' but can be simple visual signals, such as the presence or absence of a part on a shelf. When implemented correctly, JIT can lead to dramatic improvements in a manufacturing organization's return on investment, quality, and efficiency.
New stock is ordered when stock drops to the re-order level. This saves warehouse space and costs. However, one drawback of the JIT inventory system is that the re-order level is determined by historical demand. If demand rises above the historical average demand, the firm will deplete inventory faster than usual and cause customer service issues. To meet a 95% service rate a firm must carry about 3 standard deviations of demand in safety stock. Forecasted shifts in demand should be planned for around the Kanban until trends can be established to reset the appropriate Kanban level. Others have suggested that recycling Kanban faster can also help flex the system by as much as 10-30%. In recent years manufacturers have touted a trailing 13 week average as a better predictor than most forecastors could provide.
A related term is Kaizen which is an approach to productivity improvement literally meaning 'continuous improvement' of process. Here's a clip from our presentation materials on Kaizen..
The technique was first used by the Ford Motor Company as described explicitly by Henry Ford's My Life and Work (1922): "We have found in buying materials that it is not worthwhile to buy for other than immediate needs. We buy only enough to fit into the plan of production, taking into consideration the state of transportation at the time. If transportation were perfect and an even flow of materials could be assured, it would not be necessary to carry any stock whatsoever. The carloads of raw materials would arrive on schedule and in the planned order and amounts, and go from the railway cars into production. That would save a great deal of money, for it would give a very rapid turnover and thus decrease the amount of money tied up in materials. With bad transportation one has to carry larger stocks." This statement also describes the concept of 'dock to factory floor' in which incoming materials are not even stored or warehoused before going into production. The concept needed an effective freight management system (FMS).
The technique was subsequently adopted and publicised by Toyota Motor Corporation of Japan as part of its Toyota Production System (TPS). Japanese corporations cannot afford large amounts of land to warehouse finished products and parts. Before the 1950s, this was thought to be a disadvantage because it forced the production lot size below the economic lot size. (An economic lot size is the number of identical products that should be produced, given the cost of changing the production process over to another product.) The undesirable result was poor return on investment for a factory.
The chief engineer at Toyota in the 1950s, Taiichi Ohno, examined accounting assumptions and realized that another method was possible. The factory could implement JIT system which would require it to be made more flexible and reduce the overhead costs of retooling and thereby reduce the economic lot size to fit the available warehouse space. JIT is now regarded by Ohno as one of the two 'pillars' of the Toyota Production System.
Therefore over a period of several years, Toyota engineers redesigned car models for commonality of tooling for such production processes as paint-spraying and welding. Toyota was one of the first to apply flexible robotic systems for these tasks. Some of the changes were as simple as standardizing the hole sizes used to hang parts on hooks. The number and types of fasteners were reduced in order to standardize assembly steps and tools. In some cases, identical subassemblies could be used in several models.
Toyota engineers then determined that the remaining critical bottleneck in the retooling process was the time required to change the stamping dies used for body parts. These were adjusted by hand, using crowbars and wrenches. It sometimes took as long as several days to install a large die set and adjust it for acceptable quality. Further, these were usually installed one at a time by a team of experts, so that the line was down for several weeks.
So Toyota implemented a strategy called Single Minute Exchange of Die (SMED), developed by Shigeo Shingo. With very simple fixtures, measurements were substituted for adjustments. Almost immediately, die change times fell to hours instead of days. At the same time, quality of the stampings became controlled by a written recipe, reducing the skill level required for the change. Further analysis showed that a lot of the remaining time was used to search for hand tools and move dies. Procedural changes (such as moving the new die in place with the line in operation) and dedicated tool-racks reduced the die-change times to as little as 40 seconds. Today dies are changed in a ripple through the factory as a new product begins flowing.
After SMED, economic lot sizes fell to as little as one vehicle in some Toyota plants. Carrying the process into parts-storage made it possible to store as little as one part in each assembly station. When a part disappeared, that was used as a signal (Kanban) to produce or order a replacement.
Just-in-time (JIT) inventory systems are not a simple method that a company can adopt; it has a whole philosophy that the company must follow in order to avoid its downsides. The ideas in this philosophy come from many different disciplines including statistics, industrial engineering, production management and behavioral science. In the JIT inventory philosophy there are views with respect to how inventory is looked upon, what it says about the management within the company, and the main principle behind JIT inventory.
Inventory is seen as incurring costs, or waste, instead of adding value, contrary to traditional thinking. This does not mean to say that JIT is unaware that removing inventory exposes manufacturing issues. Under the philosophy, businesses are encouraged to eliminate inventory that doesn't compensate for manufacturing issues, and to constantly improve processes so that inventory can be removed. Secondly, allowing any stock habituates the management to stock and it can then be a bit like a narcotic. Management are then tempted to keep stock there to hide problems within the production system. These problems include backups at work centres, machine reliability, process variability, lack of flexibility of employees and equipment, and inadequate capacity among other things.
In short, the just-in-time inventory system is all about having 'the right material, at the right time, at the right place, and in the exact amount' but its implications are broad for the implementers.
Some of the initial results at Toyota were horrible, but in contrast to that a huge amount of cash appeared, apparently from nowhere, as in-process inventory was built out and sold. This by itself generated tremendous enthusiasm in upper management.
Another surprising effect was that the response time of the factory fell to about a day. This improved customer satisfaction by providing vehicles usually within a day or two of the minimum economic shipping delay.
Also, many vehicles began to be built to order, completely eliminating the risk they would not be sold. This dramatically improved the company's return on equity by eliminating a major source of risk.
Since assemblers no longer had a choice of which part to use, every part had to fit perfectly. The result was a severe quality assurance crisis, and a dramatic improvement in product quality. Eventually, Toyota redesigned every part of its vehicles to eliminate or widen tolerances, while simultaneously implementing careful statistical controls. Toyota had to test and train suppliers of parts in order to assure quality and delivery. In some cases, the company eliminated multiple suppliers.
When a process problem or bad parts surfaced on the production line, the entire production line had to be slowed or even stopped. No inventory meant that a line could not operate from in-process inventory while a production problem was fixed. Many people in Toyota confidently predicted that the initiative would be abandoned for this reason. In the first week, line stops occurred almost hourly. But by the end of the first month, the rate had fallen to a few line stops per day. After six months, line stops had so little economic effect that Toyota installed an overhead pull-line, similar to a bus bell-pull, that permitted any worker on the production line to order a line stop for a process or quality problem. Even with this, line stops fell to a few per week.
The result was a factory that became the envy of the industrialized world, and has since been widely emulated.
The Just in Time philosophy was also applied to other segments of the supply chain in several types of industries. In the commercial sector, it meant eliminating one or all of the warehouses in the link between a factory and a retail establishment.