Chapter 6

Just-in-time and lean

thinking

Content
Just-in-time

Lean thinking

Vendor-managed inventory (VMI)

Quick response

Just-in-time
Key issues
1

What are the implications of Just-in-time

for logistics?

How can just-in-time principles be

applied to other forms of material
control such as reorder point and
material requirements planning?

Just-in-time
Just-in-time: A definition
Uses a systems approach to develop and
operate a manufacturing system
Organizes the production process so that
parts are available when they are needed
A method for optimizing processes that
involves continual reduction of waste

Just-in-time
Little JIT
the application of JIT to logistics

Central themes surrounding Just-in-time

Simplicity
Quality
Elimination of waste

Just-in-time
Pull scheduling
A system of controlling
buyer
materials whereby the use signals
to the maker or provider that
Pull: Just-in-time
more material is needed.

Push scheduling

A system of controlling
Push: traditional way
materials whereby makers and
providers make or send material
in response to a pre-set schedule, supplier
regardless of whether the next
process needs them at the time.

Just-in-time
Activity
Push/Pull

Pull
Demand uncertainty

Computer

Book/CD

Grocery

Scale economics

Push

Just-in-time
Just-in-time system
JIT Pyramid of key factors
Level 1

Level 2

Level 3

Just-in-time
1

Minimum 2 Minimum
6
inventory
delay
3
4
Minimum
5
Minimum
Simplicity
defects
downtime
and visibility

Just-in-time
Just-in-time system
Factor 1
The top of the pyramid is full capability for JIT
supply supported by Level 2 and Level 3 operation.

Factor 2
Delay and inventory interact positively with each
other
The concept of Kanban

Factor 3
Defect delay inventory

Just-in-time system
Factor 3
Defect delay inventory

Inventory

hides
problems
Machine downtime
Bad design

Unreliable
supplier

Poor quality
Inefficient
layout

Just-in-time
Just-in-time system
Factor 4
Preventive
maintenance
Breakdowns
Planned maintenance

Machine
downtime

Changeover
Flexible
production

Safety
stocks

Just-in-time
Just-in-time system
Factor 5
Simply and visible process help to reduce
inventory and could be better maintained.

Factor 6
Its more difficult to see the flow of a process with
increased inventory.

Just-in-time
The supply chain game plan
Demand
management

Forecasts

Orders

Independent
demand

Master
schedule

Logistics
planning
Dependent
demand
Logistics
execution

Material
Requirements
Planning

Material
plan

Bill of
materials

Purchase
orders

Work orders

Source

Make

Deliver

Just-in-time
The supply chain game plan
Independent demand
Demand for a product that is ordered directly by
customers.
items are those items that we sell to customers

Dependent demand
Demand for parts or subassemblies that make up
independent demand products.
items are those items whose demand is
determined by other items

Just-in-time
Case: Automobile

Case: Cake

Just-in-time
Demand characteristics and planning
approaches
Economic order quantities (EOQ)
Stock

Recorder
quantity

Usage rate

Reorder point
Buffer stock
Lead time

Time

Just-in-time
Assumptions in Economic Order Quantity Model
Demand 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.

Notation
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 model

Q
Average inventory level
2Q
The holding cost per unit 2

A
The setup cost per unit
Q

The production cost per unit

hQ

2D

Just-in-time
EOQ model
hQ A
Y (Q)
c ( total cos t per unit )
2D Q
dY (Q)
h
A

2 0
dQ
2D Q
2 AD
Q
(economic order quantity)
h
*

Just-in-time
Practice
Pam runs a mail-order business for gym
equipment. Annual demand for the
TricoFlexers is 16,000. The annual holding
cost per unit is $2.50 and the cost to place an
order is $50. What is the economic order
quantity?

2 16000 50
Q
800 units per order
2.5
*

Just-in-time
Demand characteristics and planning
approaches
Periodic order quantity (POQ) and target stock
levels
How much to order?

Economic order quantity

When to order?

Periodic order quantity

Just-in-time
Economic order quantity with uncertain demand
Week No.

Demand

Order
quantity

Inventory
end

Inventory
start

Inventory
holding

100

1,000

900

1,000

950

100

800

900

850

200

600

800

700

400

200

600

400

800

1,000

400

200

300

1,000

1,000

400

400

400

800

1,000

600

400

500

400

200

600

400

100

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
Periodic order quantity (POQ) with uncertain demand
Week No.

Demand

Order
quantity

Inventory
end

Inventory
start

Inventory
holding

100

200

100

200

150

100

100

50

200

600

400

600

500

400

400

200

800

1,800

1,000

1,800

1,400

1,000

1,000

500

800

1,200

400

1,200

800

400

400

200

100

300

200

300

250

10

200

200

100

Sum

4,100

4,100

2,100

6,200

4,150

Average

410

410

210

620

415

Just-in-time
Target stock level (TSL)

constant

Periodic order quantity = Target stock level

Stock on hand Stock on order
TSL = cycle stock + safety stock

Just-in-time
supplier

Distribution center

retailer

Just-in-time
JIT and material requirements planning
(MRP)
Material requirements planning (MRP) - A
methodology for defining the raw material
requirements for a specific item, component, or
sub-assembly ordered by a customer, or required
by a business process.
MRP systems will usually define what is needed,
when it is needed, and by having access to current
inventories and pre-existing commitment of that
inventory to other orders to other customers, will
indicate what additional items need to be ordered
to fulfill this order.

Just-in-time
Feature of MRP
MRP is based
on JIT Pull
scheduling logic
MRP is good at
planning, but
weak at control
JIT is good at
control, but
weak at
planning

TPS Vs. FPS

Just-in-time
Takt time: The
maximum time
allowed to produce a
product in order to
meet demand.
Jidoka: Autonomation
(
)
Heijunka: A system of
production smoothing
designed to achieve a
more even and
consistent flow of
work.( )

Heijunka box

Content
Just-in-time

Lean thinking

Vendor-managed inventory (VMI)

Quick response

Lean thinking
Key issues
1

What are the principles of lean

thinking?

How can the principles of lean

thinking be applied to cutting waste
out of supply chains?

Lean thinking
Taylorism: Frederick Taylor
1856-1915 The father of

scientific management
Fordism: Henry Ford
1863-1947 The father of

mass production
Toyota: Taiichi Ohno The
father of Toyota
Production System

Lean thinking
Lean thinking refers to the elimination of
waste in all aspects of a business and
thereby enriching value from the
customer perspective.
1. Specify value

muda
4. Let customer pull

5. Perfection

muda
3. Create product flow

muda
2. Identify value stream
muda

Muda means waste, specifically any human activity

which absorbs resources but creates no value.

Lean thinking
Nine wastes
1. Watching a
machine run
2. Waiting for parts
3. Counting parts
4. Overproduction
5. Moving parts over
long distance
6. Storing inventory
7. Looking for tools
8. Machine
breakdowns
9. Rework

Lean thinking

Inconsistent
Process

Inconsistent
Results

Traditional = People doing whatever they can to get results

Consistent
Process

Desired
Results

Lean = People using standard process to get results

Lean thinking
Role of lean practices
Small-batch production
Reduce total cost across a supply chain, such as
removing the waste of overproduction.

Rapid changeover
Rely on developments in machinery and product
design
Provide the flexibility to make possible smallbatch production that responds to customer
needs

Lean thinking
Design strategy
Lean 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 design

Lean thinking
Design strategy
Lean product design
Lean 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
suppliers plants (Dyer and Hatch, 2006)
Network constraints
Customer policies or constraints imposed by customers
Example: One supplier was required by GM to use large
(45) reusable containers. When filled with components,
these containers weighed 200~300 pounds. By
comparison, Toyota had the supplier use small (23)
reusable containers weighing 40 pounds when filled.

Case study

Case study
Barriers to knowledge transfers within suppliers
plants (Dyer and Hatch, 2006)
Internal process rigidities
U.S. customers production process involved a high level of
automation or large capital investment in heavy equipment.
The large machines and equipment were bolted or
cemented into the floor, hence increased the costs of change.
These process rigidities resulted in plant managers waiting
until the vehicle model change before implementing a new
process.
Toyotas production network is designed as a dynamic
system, and the flexibility to modify the system is built into
the processes and procedures.

Content
Just-in-time

Lean thinking

Vendor-managed inventory (VMI)

Quick response

Vendor-managed inventory
Key issue

How can suppliers help to reduce

waste in the customers process?

Vendor-managed inventory
Conventional Inventory Management
Customer
monitors inventory levels
places orders

Vendor
manufactures/purchases product
assembles order
loads vehicles
routes vehicles
makes deliveries

You call We haul

Vendor-managed inventory
Problems with Conventional
Inventory Management
Large variation in demands on
production and transportation
facilities
workload balancing
utilization of resources
unnecessary transportation costs
urgent Vs. non-urgent orders
setting priorities

Vendor-managed inventory
Vendor-managed inventory
Customer
trusts the vendor to manage the
inventory

Vendor
monitors customers inventory
customers call/fax/e-mail
remote telemetry units
set levels to trigger call-in
controls inventory replenishment & decides
when to deliver
how much to deliver You rely We
how to deliver

suppl

Vendor-managed inventory
VMI
An 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

Acknowledgement

VMI data flow

Number of items as ordered

Number of items in back-order

seller
Number of items in stock
Consumption of previous period
Any other specific customer- or

Vendor-managed inventory
VMI does not stand for
The passing of the customers consumption history for a
specific item, from the customer over to the supplier,
who on the basis hereof, will follow-up the customers
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 for

Granting 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 VMI
Customer
The stock as such disappears from the companys
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 suppliers periods
of delivery will drop.

Vendor-managed inventory
Advantages of VMI
Vendor
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 system
Unwillingness to share data
Seasonal products
Investment and restructuring costs
Customer vulnerability
Lack of standard procedures (between different customers)
VMI Essentials
System maintenance

Trust
Accurate information provided on
a timely basis
Inventory levels that meet
demands
Confidential information kept

Technology
Automated electronic
messaging systems to exchange
sales and demand data,
shipping schedules

Case study
Praxairs Business
Plants worldwide
44 countries
USA 70 plants
South America 20 plants

Product classes
packaged products
bulk products
lease manufacturing equipment

Distribution
1/3 of total cost attributed to distribution

Case study
Praxairs Business------Bulk products
Distribution
750 tanker trucks
100 rail cars
1,100 drivers
drive 80 million miles per year

Customers
45,000 deliveries per month to 10,000 customers

Variation
4 deliveries per customer per day to 1 delivery per customer per 2
months

Routing varies from day to day

Case study
VMI Implementation at Praxair
Convince management and employees of
new methods of doing business
Convince customers to trust vendor to do
inventory management
Pressure on vendor to perform - Trust
easily shaken
Praxair currently manages 80% of bulk
customers inventories

Case study
VMI Implementation at Praxair
Praxair 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 on
historical data
customer production schedules
customer exceptional use events
Logistics 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 Praxair
Before VMI, 96% of stockouts
due to customers calling when
tank was already empty or nearly
empty
VMI reduced customer stockouts

Case study
Whats needed to make VMI work
Information management is crucial to the success of
VMI
inventory level data
historical usage data
planned usage schedules
planned and unplanned exceptional usage

Forecast future demand

Decision making: need to decide on a regular (daily)
basis
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 industry
Development lead time have been compressed
Production lead time are shorter

Zara case