Chapter 6Chapter 6

Just-in-time and lean Just-in-time and lean thinkingthinking

Content

Just-in-time

Lean thinking

Vendor-managed inventory (VMI)

Quick response

Just-in-time

1111What are the implications of Just-in-time for logistics?

2222How 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 definitionUses a systems approach to develop and Uses a systems approach to develop and

operate a manufacturing systemoperate a manufacturing systemOrganizes the production process so that Organizes the production process so that

parts are available when they are neededparts are available when they are neededA method for optimizing processes that A method for optimizing processes that

involves continual reduction of wasteinvolves continual reduction of waste

Just-in-time

Little JITLittle JITthe application of JIT to logisticsthe application of JIT to logistics

Central themes surrounding Just-in-timeCentral themes surrounding Just-in-timeSimplicitySimplicityQualityQualityElimination of wasteElimination of waste

Just-in-time

Pull schedulingPull schedulingA system of controlling

materials whereby the use signals to the maker or provider that more material is needed.

Push schedulingPush schedulingA 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

Dem

and uncertainty

Scale economics

ActivityActivityPull 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

54

6

Level 1

Level 2

Level 3

Just-in-time

Just-in-time systemJust-in-time systemFactor 1Factor 1

– The top of the pyramid is full capability for JIT The 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– ‘‘Delay’ and ‘inventory’ interact positively with each Delay’ and ‘inventory’ interact positively with each

otherother

– The concept of KanbanThe concept of Kanban

Factor 3Factor 3– Defect Defect → → delay delay → inventory→ inventory

Just-in-time systemJust-in-time systemFactor 3Factor 3

– Defect Defect → → delay delay → inventory→ inventory

Bad design

Machine downtime

Unreliable supplier

Poor quality

Inefficient layout

InventoryInventory hides hides

problemsproblems

Just-in-time

Just-in-time systemJust-in-time systemFactor 4Factor 4

Breakdowns

Planned maintenance

Changeover

Machine downtime

Safety stocks

Preventive maintenance

Flexible production

Just-in-time

Just-in-time systemJust-in-time systemFactor 5Factor 5

– Simply and visible process help to reduce Simply and visible process help to reduce inventory and could be better maintained.inventory and could be better maintained.

Factor 6Factor 6– It’s more difficult to see the flow of a process It’s more difficult to see the flow of a process

with increased inventory.with increased inventory.

Just-in-time

The supply chain ‘game plan’The supply chain ‘game plan’

Forecasts Orders

Master schedule

Material plan

Purchase orders Work orders

Source Make Deliver

Bill of materials

Demand management

Logistics planning

Logistics execution

Material Material Requirements Requirements

PlanningPlanning

Independent demand

Dependent demand

Just-in-time

The supply chain ‘game plan’The supply chain ‘game plan’Independent demandIndependent demand

– Demand for a product that is ordered directly by Demand 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 up Demand for parts or subassemblies that make up

independent demand products.independent demand products.

– items are those items whose demand is items 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 planning Demand characteristics and planning approachesapproachesEconomic order quantities (EOQ)Economic order quantities (EOQ)

Buffer stock

Reorder point

Usage rateRecorder quantityStock

Lead time Time

Just-in-time

Assumptions in Economic Order Quantity ModelAssumptions in Economic Order Quantity ModelDemand 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 modelAverage inventory level

The holding cost per unit

The setup cost per unit

The production cost per unit

2

Q

D

hQ

D

hQ

22

Q

A

c

Just-in-time

EOQ modelEOQ model

)quantityorder economic(2

02

)(

)unitpertcostotal(2

)(

*

2

h

ADQ

Q

A

D

h

dQ

QdY

cQ

A

D

hQQY

Just-in-time

PracticePracticePam runs a mail-order business for gym Pam runs a mail-order business for gym

equipment.  Annual demand for the equipment.  Annual demand for the TricoFlexers is 16,000.  The annual holding TricoFlexers is 16,000.  The annual holding cost per unit is $2.50 and the cost to place an cost per unit is $2.50 and the cost to place an order is $50.  What is the economic order order is $50.  What is the economic order quantity?quantity?

orderper units8005.2

50160002*

Q

Just-in-time

Demand characteristics and planning Demand characteristics and planning approachesapproachesPeriodic order quantity (POQ) and target stock Periodic 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 demandWeek No. Demand Order

quantityInventory

endInventory

startInventory 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 planning JIT and material requirements planning (MRP)(MRP)Material requirements planning (MRP) - Material requirements planning (MRP) - A A

methodology for defining the raw material methodology for defining the raw material requirements for a specific item, component, or requirements for a specific item, component, or sub-assembly ordered by a customer, or required sub-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 current when it is needed, and by having access to current inventories and pre-existing commitment of that inventories and pre-existing commitment of that inventory to other orders to other customers, will inventory to other orders to other customers, will indicate what additional items need to be ordered indicate what additional items need to be ordered to fulfill this order.to fulfill this order.

Just-in-time

Feature of MRPFeature of MRPMRP is based MRP is based

on JIT Pull on JIT Pull scheduling logicscheduling logic

MRP is good at MRP is good at planning, but planning, but weak at controlweak at control

JIT is good at JIT is good at control, but control, but weak at weak 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

Heijunka box

Content

Just-in-time

Lean thinking

Vendor-managed inventory (VMI)

Quick response

Lean thinking

1111What are the principles of lean thinking?

2222How 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 of refers to the elimination of waste in all aspects of a business and waste in all aspects of a business and thereby enriching value from the thereby 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 wastes1.1. Watching a Watching a

machine runmachine run2.2. Waiting for partsWaiting for parts3.3. Counting partsCounting parts4.4. OverproductionOverproduction5.5. Moving parts over Moving parts over

long distancelong distance6.6. Storing inventoryStoring inventory7.7. Looking for toolsLooking for tools8.8. Machine Machine

breakdownsbreakdowns9.9. ReworkRework

ConsistentConsistentProcessProcess

DesiredDesiredResultsResults

InconsistentInconsistentProcessProcess

InconsistentInconsistentResultsResults

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 practicesSmall-batch productionSmall-batch production

– Reduce total cost across a supply chain, such as Reduce 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 product Rely 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 customer batch production that responds to customer needsneeds

Lean thinking

Design strategyDesign strategyLean 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 strategyLean product designLean product designLean 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 within Barriers to knowledge transfers within suppliers’ plants (Dyer and Hatch, 2006)suppliers’ 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

Case study

Barriers to knowledge transfers within suppliers’ Barriers to knowledge transfers within suppliers’ plants (Dyer and Hatch, 2006)plants (Dyer and Hatch, 2006)Internal process rigiditiesInternal process rigidities

– U.S. customer’s production process involved a high level of U.S. customer’s 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 or The 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 waiting These process rigidities resulted in plant managers waiting until the vehicle model change before implementing a new until the vehicle model change before implementing a new process.process.

– Toyota’s production network is designed as a dynamic Toyota’s production network is designed as a dynamic system, and the flexibility to modify the system is built into system, and the flexibility to modify the system is built into the processes and procedures.the processes and procedures.

Content

Just-in-time

Lean thinking

Vendor-managed inventory (VMI)

Quick response

Vendor-managed inventory

Key issueKey issue

1111How can suppliers help to reduce waste in the customer’s process?

Vendor-managed inventory

Conventional Inventory ManagementConventional Inventory ManagementCustomerCustomer

– monitors inventory levels

– places orders

VendorVendor– manufactures/purchases product

– assembles order

– loads vehicles

– routes vehicles

– makes deliveriesYou call – We haul

Vendor-managed inventory

Problems with Conventional Problems with Conventional Inventory ManagementInventory ManagementLarge variation in demands on Large variation in demands on

production and transportation production 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 inventoryVendor-managed inventory

CustomerCustomer– trusts the vendor to manage the trusts the vendor to manage the

inventoryinventory

VendorVendor– monitors customers’ inventorymonitors customers’ inventory

– 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

Vendor-managed inventory

VMIVMIAn approach to inventory

and order fulfillment in the way that supplier, not the customer, is responsible for managing and replenishing inventory.

Vendor-managed 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

Vendor-managed inventory

VMI does not stand forVMI does not stand forThe 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 forGranting 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 VMIAdvantages of VMICustomerCustomer

– 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.

Vendor-managed inventory

Advantages of VMIAdvantages of VMIVendorVendor

–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 systemPotential problems in setting up a VMI systemUnwillingness to share dataUnwillingness to share dataSeasonal productsSeasonal productsInvestment and restructuring costsInvestment and restructuring costsCustomer vulnerabilityCustomer vulnerabilityLack of standard procedures (between different customers)Lack of standard procedures (between different 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

Praxair’s BusinessPraxair’s BusinessPlants 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

Praxair’s Business------Bulk productsPraxair’s Business------Bulk productsDistributionDistribution

– 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 PraxairConvince management and employees of Convince management and employees of

new methods of doing businessnew methods of doing businessConvince customers to trust vendor to do Convince customers to trust vendor to do

inventory managementinventory managementPressure on vendor to perform - Trust Pressure on vendor to perform - Trust

easily shakeneasily shakenPraxair currently manages 80% of bulk Praxair currently manages 80% of bulk

customers’ inventoriescustomers’ inventories

Case studyVMI 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 PraxairBefore VMI, 96% of stockouts Before VMI, 96% of stockouts

due to customers calling when due to customers calling when tank was already empty or nearly tank 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 studyWhat’s needed to make VMI workWhat’s needed to make VMI work

Information management is crucial to the success of Information 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 demandDecision 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

Content

Just-in-time

Lean thinking

Vendor-managed inventory (VMI)

Quick response

Quick response

The application of quick response in apparel industryDevelopment lead time have been compressedProduction lead time are shorter

Zara caseZara case