JIT
Less means more service to the
customer
More than just an inventory management
fad for
keeping track of the widgets,
just-in-time (JIT)
is proving to be an effective tool for turning
suppliers into business partners
By Nick Shepherd
New ideas in business management come and go. In inventory
management specifically, one idea that is no longer so new is the philosophy of
just-in-time delivery. How can businesses benefit by adopting this philosophy, and, more
importantly, by refining their existing JIT systems for use in new functions?
Aggressive inventory management is hardly a new idea. As
far back as Henry Ford's day, his factory used to receive parts packed in wooden boxes
that, when disassembled, furnished correctly-sized floor boards for his early cars. During
the 1970s, North American manufacturers attempting to improve their operations -
particularly in the automotive industry- focused on streamlining their inventory
management. They turned to the Japanese kanban system pioneered by Toyota in 1952
and used throughout that car marker's operations a decade later. The system had been
developed to permit the company to eliminate waste throughout its production process,
including overproduction; wasted time at machines; wasted transportation of units; waste
in processing; waste in taking inventory; waste of motion; and waste from defective units.
Looking for solutions to may of these problems in their own operation, North Americans
focused on part of the kanban system to reduce their inventory investment -
just-in-time.
Beyond lowering inventories, JIT held out a greater
benefit. Eliminating excess inventory revealed other serious deficiencies in operations
and production processes. Correcting these problems then allowed companies to concentrate
on improving supplier quality. Without "spare" inventory, they could quickly
focus on requirements for a "right the first time" approach, and were able to
pinpoint and drop suppliers whose parts failed to meet their quality standards.
Measure up - or else
During the 1970's for example, the Ford Motor Co.'s
worldwide operations had more than 4,500 suppliers. Since narrowing its focus onto quality
in 1980 the company has chopped it supplier numbers by more than half and has seen a
continual improvement in quality standards. Today, a key part of such industry standards
as Ford's Q1 and Q101 program, and the Targets for Excellence program run by
General Motors Corp. worldwide, is their suppliers' ability to operate under a JIT
delivery-based scheduling system. Failure to achieve these standards puts suppliers at
risk of losing their quality rating and, ultimately, their business.
In the automotive industry at least, JIT has become an
integral part of the drive to improve quality and manufacturing  techniques. Compared to inventory turns of about eight to 10 times for
manufacturers generally, competitive suppliers of major automotive components are now
achieving inventory turns of about 18 to 20 times. Beyond this achievement JIT has allowed
businesses to improve other functions, including more effective transportation systems:
improved production scheduling: improved sales forecasting; faster internal response time;
setting and achieving of performance goals; improved costing systems; improved production
facility reliability, and closer customer relations and partnerships.
Without these complementary process changes, suppliers have
still been able to reduce their inventories - but not without suffering lower performance
in such criteria as accuracy, timeliness and product availability. The result: as
suppliers are forced into "panic" delivery in the rush to make shipments at any
cost, they incur higher operating costs. Hence, many companies now audit their suppliers
to assess their processes not just for performance but for their predictability in these
criteria. if a supplier can reduce its inventory levels, but only by incurring higher
costs, then it will become less competitive.
Supplier reliability becomes even more critical when a
company introduces flexible manufacturing. Characterized by short production runs and
frequent change-over and retooling, flexible manufacturing requires a company's suppliers
to adjust their inventory levels to respond more quickly to these scheduling changes.
Small wonder that some companies want to ensure supplier predictability: under a JIT
system, customers are more vulnerable to work stoppages at suppliers' plants and to
delivery disruptions. Traffic tie-ups at the Canada-United States border during the 1991
Ontario truckers' dispute showed the importance to manufacturers of keeping their supply
routes open.
Big wins and little wins
No company can implement a successful JIT system without
considering what accompanying changes it needs to make in its related business practices.
All too often, companies fail to factor in these changes, resulting in poor
implementation.
FINANCIAL MANAGERS
must
understand and support the application
of sophisticated planning
and scheduling tools for
control purposes.
In order to function effectively under a JIT system,
materials managers require sophisticated management processes, from the selection and
evaluation of suppliers to the application of computer-based scheduling and planning
tools. Improved teamwork and co-operation are necessary for obtaining effective planning
data. Scheduling is not a precise art. In customer service, changes to forecasts and
schedules are inevitable. What's important is that, as the production date nears, the
company must continually narrow the margin for error.
Financial managers must understand and support the
application of sophisticated planning and scheduling tools for control purposes,
especially for tracking the cost of failures. In the push to meet schedules, the
temptation often arises to simply put aside defective production. An effective perpetual
inventory system, from inputs to finished goods, is imperative.
So far, improvements in production scheduling and
manufacturing cost and quality from JIT have come through "major" wins. For the
philosophy to succeed over the long term, however, a company must concentrate on
continuously improving its inventory management through a combination of small and big
wins. The better the system becomes, the harder the organization must work at finding more
room for improvement.
Up the improvement curve
Just-in-time is far from dead. In fact, for the financial
manager who truly understands and makes a commitment to innovation, the concept promises
major opportunities. However, making the effort pay off requires the company to implement
JIT in innovative ways, including changing the way it does business.
Companies have traditionally concentrated on cost
reduction, especially in direct material and direct labor costs. In the future, they must
look for ways to reduce direct and indirect overhead, both in absolute dollar terms and on
a per-unit basis. "Indirect materials" include maintenance materials, indirect
production supplies, office supplies and other items. Let's look specifically at
maintenance.
As an organization automates, its unit cost of overhead
usually increases as its direct cost decreases, with two important results. First, the
organization must change its traditional cost accounting method, discarding labor-based
costing in favor of machine- and/or activity-based costing. More importantly, equipment
availability and utilization becomes a more critical tool in decreasing per-unit costs.
But many organizations are plagued by two problems: downtime hinders on-time delivery, and
mismatched equipment working at less than optimum capacity pushes unit costs higher. To
maintain its manufacturing cost competitiveness, the organization must resolve both
problems. This means applying the JIT concept to suppliers of indirect materials. And it
means ensuring that financial managers are part of the implementation process.
In maintenance, for example, the cost of purchasing parts
can be up to 60 per cent higher than the per-unit cost. Reducing the cost of parts could
dramatically lower overhead costs. But because these costs are incurred by various
functions within the organization, they appear on no single financial report. Unless the
financial
ABOUT 80 PER CENT
of the inventory in
the average
maintenance parts stockroom is
either excess or obsolete.
manager looks at the costs of each of these individual
functions - purchasing, stores, handling, inventory holding, obsolescence, excess safety
stocks - the potential payback will not be realized. The purchasing department, for
example, often attempts to reduce per-unit costs by taking on new low-cost suppliers. But,
as in manufacturing, trimming suppliers and single sourcing are the better way to reduce
costs.
Supplying part of the solution
According to a study this year by IMA (Inventory Management
Analysis) Systems Ltd. of Tillsonburg, Ont., about 80 per cent of the inventory in the
average maintenance parts stockroom is either excess or obsolete. This figure suggests
major cost saving opportunities - if suppliers, become part of the solution. Without such
partnerships however, companies have been unable to ensure supplier parts availability,
inventory requirements planning or performance criteria. Instead, the company
overcompensates, increasing its parts inventory as insurance against breakdowns. When
breakdowns do occur, the company adopts a "fix at any cost" stance. If parts are
not readily available the company incurs excessive downtime and higher maintenance cost.
Applying JIT to maintenance functions can yield significant
improvements. Implementing the concept allows a company to reduce its downtime and
inventory levels, improve suppliers' performance in availability or timeliness, and, most
importantly, create supplier partnerships to further improve processes. The company can
replace its paperwork with such systems as electronic date interchange (EDI), committing
suppliers to work to balance inventory and to meet measurable service standards like fill
rates.
Cost, while still important, becomes just one of several
variables in the relationship. Savings will come from cross-functional improvements, not
just from squeezing lower prices out of the supplier. Yet none of this can begin until the
financial manager looks beyond prices alone to ask, "Why are we doing it this
way?"
A 1989 study by the Distribution Education Research
Foundation in Washington, D.C., called "Just-In-Time for the '90s: A
Wholesale-Distributor's Guide to JIT Inventory Management," established guidelines to
help suppliers of indirect materials implement JIT for their customers. While the dollars
saved by implementing JIT in wholesale and distribution functions may not equal those
realized in production, the concept still applies. Attaining and maintaining the
competitive edge will come not form a few large victories but from many small ones.
Some businesses have attempted to apply the concept to
indirect materials. Working along with stationery suppliers, for example, some companies
have applied JIT to delivery of their business forms and computer paper. Because
maintenance parts are often more expensive, however, they offer a greater opportunity for
cost savings - if company and suppliers forge a true partnership. Parts distributors will
be more than willing to come to the table, but only if JIT offers a "win-win"
solution, as in production.
Elsewhere, many opportunities exist for instituting JIT.
Retailers, including Sears Canada Ltd., have adopted quality plans incorporating
just-in-time delivery for their merchandise suppliers. A major U.S. furniture supplier
promising delivery down to the precise day and hour - even to locations as far-flung as
the Yukon Territory - has achieved a success rate of 98 per cent. Other retailers,
including clothing retailer Benetton, schedule their factory shipments based on daily
store sales reports.
Since the late 1980s, the watchword for many businesses has
been customer service. Part of maintaining customer service depends on having ample
amounts of the product available. But in attempts to cut costs, organizations often impose
across-the-board- inventory reductions, only to see sales actually drop faster as product
availability decreases. In order to balance the need to reduce inventory with the need to
maintain service levels, the company must ensure that several factors are in place, as
follows:
1. Inventories are stratified;
2. Sales and inventory management co-operate;
3. The company is interested in more than simply squeezing
the lowest possible price out of its suppliers;
4. Suppliers become part of the team.
PARTS
DISTRIBUTORS
will
be more than willing to come to
the table, but only if JIT offers
a "win-win"
solution, as in production.
Typically, distributors of industrial products can predict
sales units on an item and quantity basis for only about 20 per cent of their sock keeping
units (SKUs). Greater information sharing with buyers thus improves service levels.
Inventory availability is a key to success for many service
businesses. Adopting JIT requires careful attention to detail,. This means being close to
the customer, both internally and externally. Financial staff need to play a careful role
in ensuring that the balance between inventory levels and service, and between costs and
operating efficiencies, is maintained. Failure to do so will create "short-term gain
and long term pain."
Just-in-time remains a viable inventory management concept
for organizations. For companies that have already adopted the philosophy, there's room to
employ it in new ways. Successful organizations will build on their experience with the
concept to strengthen buyer-seller relationships in every aspect of their business. They
must discard traditional adversarial relationships and accept the notion of a
"win-win" deal. And they must adopt a fresh perspective on the costs of doing
business. Each innovation will lead to further opportunities to reduce costs, a far cry
from the old notion of cutting costs and investment only to make the numbers look better.
CMA
Nick Shepherd, CGA,FCCA is president of AMH Training and
Consulting and Eduvision Inc. based in Oakville, Ont. He is director of training with IMA
Systems Ltd. and an associate with Business Resource International, Nick specializes in
cost quality, customer service and creating win-win business partnerships.
Reprinted from the CMA MAGAZINE |
