The management of inventory is a problem common to all business organizations. Basically, inventory is a resource idle for the present but useful for the future. If it is for the future, then why store it now physically and incur costs? Why not procure it only when needed? These questions lie behind the philosophy of Just-in-Time (JIT).
JIT is a process for achieving excellence in a manufacturing company based on the continuing elimination of waste, and waste is considered to be anything that does not add value to the product. The principle of JIT is to eliminate sources of manufacturing waste by getting the right quantity of raw materials and producing the right quantity of products in the right place at the right time.
In an effort to control costs during fiscally challenging economic times, the JIT system was developed in Japan after WWII. Many Japanese companies in the post-war era were challenged to find a way to meet the needs of customers and businesses while utilizing as few resources and as little capital as possible.
The Japanese developed these set of techniques in order to control production, limit unnecessary products and reinvest the valuable capital left from the savings back into the business structure. Taiichi Ohno first adopted JIT for Toyota manufacturing plants, and he was named the Father of JIT because of its success. By the mid 1970s, JIT gained extended support and became widely used by many companies. JIT is a management philosophy that strives to eliminate sources of manufacturing waste by producing the right part in the right place at the right time. Waste results from any activity that adds cost without adding value, such as moving and storing.
JIT, also known as lean production or stockless production, should improve profits and return on investment by reducing inventory levels or increasing the inventory turnover rate, improving product quality, reducing production and delivery lead times, and reducing other costs such as those associated with machine setup and equipment breakdown. In a JIT system, underutilized or excess capacity is used instead of buffer inventories to hedge against problems that may arise. JIT applies primarily to repetitive manufacturing processes in which the same products and components are produced over and over again.
The general idea is to establish flow processes by linking work centers so that there is an even, balanced flow of materials throughout the entire production process. To accomplish this, an attempt is made to reach the goals of driving all queues toward zero and achieving the ideal lot size of one unit. JIT is not about automation. Instead, JIT eliminates waste by providing the environment to perfect and simplify processes. JIT is a collection of techniques used to improve operations, and it can be a new production system used to produce goods or services.
The American Production and Inventory Control Society (APICS) has the following definition of JIT: “a philosophy of manufacturing based on planned elimination of all waste and continuous improvement of productivity. It encompasses the successful execution of all manufacturing activities required to produce a final product, from design engineering to delivery and including all stages of conversion from raw material onward.
The primary elements include having only the required inventory when needed; to improve quality to zero defects; to reduce lead time by reducing setup times, queue lengths and lot sizes; to incrementally revise the operations themselves; and to accomplish these things at minimum cost.” JIT is best suited for repetitive production environments. However, JIT principles can be applied to all parts of an organization including order-taking, purchasing, operations, distribution, sales, accounting, design, etc.
The goal of JIT is to eliminate any function in the manufacturing system that causes overhead, slows productivity, or adds unnecessary expense. JIT allows for the elimination of inventory stockpiles and inefficiency and waste; raw materials arrive “just in time” for production and finished goods “just in time” for sale. When JIT principles are implemented successfully, significant competitive advantages are realized.
The Just-In-Time (JIT) inventory system was developed in Japan after WWII, in an effort to control costs during fiscally challenging economic times. The challenge that faced many Japanese companies in the post-war era to find a way to meet the needs of customers and businesses while utilizing as few resources and as little capital as possible.
The Japanese developed these set of techniques in order to control production, limit unnecessary products and reinvest the valuable capital left from the savings back into the business structure. Much of the success of many Japanese corporations over the past four or five decades has been was linked to the principles of JIT.
The basic premise for JIT is simple: a company only produces an item when there is a need, or just-in-time for a company or individual to purchase it. The theory of JIT also accepts that there may be a need for an item at another workstation and this would also create the need for production. Rather than utilizing the common practice of mass production and attempting to sell and distribute the products after they are created, JIT waits until there is a defined need that must be met.
By doing this, JIT systems allow companies to decrease the level of production, decrease the necessary manpower hours utilized in mass production modes of supply, and eliminates the waste inherent in over-production. These techniques are especially effective for small companies, who are far less able to absorb the impact of unsold products. JIT has been shown to significantly impact reductions in overhead costs that reduce re-investments, and encourage stabilizing business practices.
In order to relate the most comprehensive picture of the effects of JIT, it is necessary to look at the way in which businesses utilize JIT systems. JIT has also developed an off-shoot theory called JIT II, and information and comparison of these two differing structures will be presented.
One example of the utilization of JIT principles has been within the business operations of oil refiners. The push to reduce inventory costs has led oil refiners to develop JIT techniques within their process. Rather than carrying the cost of over production and storage of oil, the refiners have chosen to utilize JIT principles and only produce what is needed to meet the day to day requirements of supply. Although this example has caused much concern within the oil industry because of the sharp decline in oil inventories, the long-term effects of utilizing these techniques could sharply reduce the price of oil.
Another example is the use of JIT structures in Japanese companies currently developing business structures in the United States. The auto industry is one area that could significantly benefit from the limited production methods of JIT and current Japanese companies are utilizing these techniques to better compete with American automakers. The results of JIT are not simply realized in the push towards lowering overhead, but they also incorporate the system of re-investment, that increases business capital, and create more suitable business operations.
The JIT principles in larger companies effectively link plant and floor operations in order to provide supplies for the product lines. In other words, JIT does not diminish the production of supplies necessary for the continued creation of additional products. If a company creates radios, for example, they may also create a number of the intricate mechanical parts necessary for the creation of the final product. The utilization of JIT systems recognizes the continual need to address supply issues with the company structure in order to fulfill the order requirements necessary to complete the JIT cycle. This link between plant and floor operations is one of the basic premises of JIT operations.
Critics have argued that the financial gains of JIT systems are limited because of the lack of focus on the financing and operational decisions necessary for this system to succeed. Chhikara and Weiss visited an OEM (Original Equipment Manufacturer) supplier and recognized the changes implemented under JIT systems (1995). The representative from the company explained that empty inventory shelves were a direct result of the newly implemented system and that the company currently does not hold more than a days worth of goods at any one time.
The representative was also clear to explain that the company now machines parts in smaller batches, and through this may appear to effect the cost savings of the process because of the additional expenses incurred by frequent setups, this cost was more than offset by the reduction in inventory holdings. This is the basic belief under the JIT systems, through arguments that this reduction in cost is never realized have led some to question the applicability of JIT systems for all business structures.
Companys like Bose Corporation of Framingham, MA, have recognized the significance of developing JIT systems within their company, and have also been central to the development of JIT II, a concept that hopes to reduce costs and save time in transactions with suppliers. JIT II is based on the reduction of lead times by increasing designs and responding more quickly to the needs of customers through a customer supplier partnership.
This theory is an extension of the JIT I systems, though the difference between the two systems is significant. While JIT I systems are based on the supplier meeting the immediate needs of the customer, JIT II requires participation by the customer in order to promote faster returns. When this system was first developed by Bose, it was expected to dramatically change the cost structure and time involved in the day to day transactions between customers and suppliers. JIT II calls for presence of a full-time sales representative within the customers company structure. The partnership comes because the representative is paid by the supplier, but works within the customer company in order to reduce the delays inherent to order systems and inventory retrieval.
The development of JIT I and JIT II have changed the face of supplier/customer relationships since their introduction in the U.S. in the early 1980s. Japanese companies that have opened plants within the United States continue to utilize the principles of JIT systems in their business structures. At the same time, American companies are recognizing the benefits and transitioning their common practices of mass-production in order to reduce overhead, decrease costs, and allow for the utilization of capital that is available because of lower inventory expenditures.
JIT II has come as a natural extension of processes that save time and money for many companies. The utilization of an in-house sales-representative available to promote and distribute product lines while also decreasing lead times has had a monumental impact on business structures. The trend appears to moving towards the minimization of inventory procedures rather then remaining steadfast in mass production. JIT systems have led the way in creating a more streamlined inventory processes across the globe.
References
- Anonymous (1996, May). The New Supplier Partnership: An Inside Story. Nations Business, vol. 84(5), pp. 21.
- Chhikara, J. & Weiss, E. (1995, May June). JIT Savings Myth or Reality? Business Horizons, vol.38(3), pp. 73-78
- Manoochehri, G. (1988, October). JIT for Small Manufacturers. Journal of Small Business Management, vol. 26(4), pp. 22-30.
- Pragman, Claudia (1996, July August). JIT II: A Purchasing Concept for Reducing Lead Times in Time-Based Competition. Business Horizons, vol. 39(4), pp. 54-58.
- Waguespack, K. & Cantor, B. (1996, July). Oil Inventories Should be Based on Margins, Supply Reliability. Oil & Gas Journal, vol. 94(28), pp. 39-41.
- http://ourworld.compuserve.com/homepages/ncwsa/pg3a.htm
- http://www.freequality.org/Training%20Slides/JITmanufacturing.ppt
- http://sunny.crk.umn.edu/courses/mktg/1100/ppfolder/CHAPTR17.PPT
- http://www.freequality.org/Training%20Slides/Just-In-Time%20by%20Steve%20Spangler.ppt
