Introduction: Draper Instruments (DI) is adopting a JIT system. Currently, the company is facing inventory and quality control issues and employees are not acting in line with organizational goals. Employees are also preoccupied with the intense pressure to meet shipment schedules, leaving little time to attend to other areas. Inventory spoilage, obsolescence and build-up have resulted. Major critical success factors the company hopes to achieve include reducing inventory levels and improving quality. Issues: How can DI motivate employees to achieve JIT objectives and track progress on the implementation of the JIT system? How can DI successfully move towards implementing and utilizing a JIT system?
Analysis: The current performance evaluation and incentive system is causing workers to behave dysfunctionally as employees are aggressively focusing all efforts on factors that are measured to maximize their performance ratings and compensation. Other areas have been left to suffer as employees are not motivated to excel in them. DI’s performance evaluation system rewards poor-quality work and encourages high levels of production. Workers’ unmonitored access to an overabundance of materials has resulted in unecessary waste and the over or under production of various parts. Quality, reliability and process issues have been compounded by problematic suppliers and poor internal coordination. Considerations for Action: DI must review their performance measurement system to ensure it develops organizational goal congruence and reinforces the desired operating environment and methods.
A transition to JIT would also turn the system into a customer responsive system where items are only produced when there is a customer pull so as to reduce waste and inventory build-up. The plant layout may also require revision and emphasis must also be placed on enhancing workforce and machine flexibility and adaptability. Recommendations: Short-term: The plant should adopt a product layout. Performance measurements should lean towards non-traditional measures of quality, flexibility, time, innovation and customer service. Cross-functional training and communication is necessary to improve processes and coordination. Suppliers should be evaluated on reliability and quality and customers who commit to a schedule should receive discounts. Long-term: The JIT steering committee should continue meeting and the JIT system should be periodically reviewed for weaknesses. Front-line employees should be consulted for improvements. Performance measures should also be continually reviewed for strategy compatibility. Inventory buffers and safety stock should be reduced as processes become more reliable and unreliable suppliers should be dropped. Resources should also be spent on employee training and job rotation opportunities should be established.
DI is an instrument manufacturing company that is currently experiencing plant and inventory issues. Within its plant, the company’s incentive wage system is based on piece rates. Due to unmonitored access to an overabundance of materials, workers have considerable autonomy in parts they
choose to make and focus on those with the lowest standards, regardless of demand. Hence items with tougher standards are often in shortage while those with looser standards are in constant excess. Sheet metal workers also receive no supervision and are suspected of gaming the incentive system by purposely reworking a large amount of materials as the rate for reworking parts is higher than the rate for initial welding. A strong emphasis on efficiency ratings has also encouraged foremen to bypass the production control system by producing resistors in excess. Again, the materials for resistors are unmonitored and easy to access. Suppliers also pose a problem where declining quality and reliability are concerns. As for inventory management, DI’s production control system is not fully integrated into operations.
The system explodes backwards to determine raw materials needs and since production is planned on a monthly basis, workers are essentially building up four weeks of work-in-process inventory. Various issues prevent a weekly production schedule and one of DI’s most important customers contributes to scheduling volatility due to their resistance to commit to a preset schedule. Goods also often disappear from the stockroom without a trace. Materials control is also loose once materials leave the room as after this point, there is no further accounting of them until the yearly physical inventory. Loss factors have also been left unchecked and though yields improved dramatically over the years, loss factors have not been adjusted for purchases. To combat these issues, DI is implementing a JIT system. However, while DI would like to improve quality and reduce inventory, the intense pressure to meet output and shipment schedules poses concerns. This paper will examine the inventory and performance evaluation systems at DI and the proposed JIT system. ISSUES
How can DI improve the behavior of workers and motivate employees to achieve JIT objectives and track progress on the implementation of the JIT system? What measures should be used? How can DI successfully move towards implementing and utilizing a JIT system?
DI is aware that quality, meeting shipment schedules and reducing inventory
is required for long-term success. However, the organization has fallen short of all expectations with the exception of meeting schedules. As explained by Atkinson (2012), “what gets measured gets done” and DI has an unrounded set of performance measurements. The current evaluation and incentive system is causing workers to behave in a dysfunctional manner as employees are aggressively focusing all efforts on factors that are measured, logically so as this maximizes their performance ratings and therefore translates into higher compensation. However, other areas have been left to suffer as employees are not motivated to excel in them. As compensation and promotions are based on meeting shipment schedules, quality has been sacrificed as workers rush to meet orders, leaving little time to worry about quality. Inconsistent product standards combined with piece rate compensation has also compounded the issue by encouraging workers to game the system to maximize their own personal well-being. In this case, workers are overproducing products with low standards, leaving products with more stringent standards in constant shortage.
Consequently, the company is in a constant time crunch with no time to worry about other factors such as quality and inventory reduction. To enhance quality and reliability, standards should be set to represent excellent performance and, while they should certainly be attainable, they should also be challenging. Setting consistent product standards would also help get employees into the mindset to always strive for quality.
Overall, the company’s performance measurement system is not placing the required emphasis on all critical success factors and there is a poor alignment with organizational goals. So that employees can recognize the various dimensions of their work and be less intent on maximizing a single target at the expense of other aspects of their jobs, DI should use a comprehensive set of performance measures that will fully cover company goals and strategy. Since employees have an incentive to concentrate on activities for which their performance will be measured, organizational performance can be enhanced by broadening the set of performance measures to ensure staff do not sacrifice on relevant but non-measured activities (Sisdyani, n.d.).
Weak controls in materials monitoring and management has resulted in unnecessary inventory spoilage, obsolescence and build-up. Since staff have unmonitored access to large amounts of materials and are compensated on efficiency and item piece rates, employees have both the freedom and motivation to constantly produce and focus on producing items which will provide them with the highest performance ratings and awards, regardless of customer demand. Quality control issues are also rampant as higher compensation rates for rework has encouraged workers to produce faulty products. This issue has been further aggravated by suppliers who have not been penalized for supplying DI with poor quality parts. Consequently, vendors are not motivated to increase product quality and this poses additional reliability concerns which risk slowing down the production process.
CONSIDERATIONS FOR ACTION
Employees carry out an organization’s strategy. To motivate desired behavior, DI must ensure their performance measurement system develops organizational-wide goal congruence and reinforces the desired operating environment and methods (Lessner, 1989). Green (1991) states, “[i]n a JIT environment any system for measuring performance must be designed to reflect the new production philosophy. Such a system should be capable of measuring and reporting progress toward total quality control, reducing inventory levels, faster setup times, reduced lead time, and new product launch times. Equally important would be measures indicating improvement in on-time deliveries, floor space utilization, and quality yield. . . .
Such a system may require the elimination of some traditional short-term financial measures and include some new, more relevant non-financial measures of performance.” DI current performance measurement system leans towards traditional measures which emphasize labor and machine utilization ratios. These measures are straightforward and easy to calculate and widely known and understood by managers. “[A]ny period (week, month, year) of performance can be evaluated quickly by simply comparing it to another period of interest” (Kang, 2008). On the other hand, “[t]hese measures emphasize performance to a standard and encourage over-production.” Traditional measurement also contradicts the JIT concept that calls for small batches, level production, pull not push and producing no more than what is immediately needed. Since a JIT system places emphasis on non-traditional measures including quality, flexibility, time, innovation and customer service, (Ahmad, et al., 2002) DI should move towards a greater balance of non-traditional metrics. A comparison of traditional versus non-traditional metrics is attached in appendices A and B.
Overall, DI’s current metrics are lacking in focus on quality with an overemphasis on outputs. Since evaluations and rewards are largely based on meeting shipment schedules, quality control problems have been neglected, leaving input and process considerations to suffer. Measures that pay mind to inputs and processes should be utilized (Bremer, 2005) as these would decrease internal and external failure costs. Through this, reliability and quality would also be better ensured and “[e]xperience shows it is much less expensive to prevent defects than to detect and repair them after they have occurred” (Atkinson, et al., 2012). Accordingly, compensation should be linked to quality results and performance measures of reduced waste and vendor reliability should also be utilized (Nugroho, 2007). To avoid delays and decrease lead times, defect-free parts must be produced and quality should be stressed to avoid spoilage and rework (Cheng and Podolsky, 1992).
A transition to JIT manufacturing would turn the system into a customer responsive system where items are only produced when there is a customer pull. Monitoring will also be simplified as managers would only expect to see workers producing when there are orders to fill and a signal received and workers would produce no more and no less than required. Since staff will experience idle production time when there are no orders, DI should discontinue the use of utilization and efficiency metrics as these contradict the JIT concept of small batches, level production, pull not push, and producing only what is immediately needed, no more and no less (Ahmad, 2002). Since items will be promptly shipped to customers after completion, the amount of finished goods sitting idly in storage would also
decrease. This will free up inventory storage space and DI can put the facility space to a more productive use (Broyles, et al., 2005).
Considerations in Transitioning to a (Total) JIT System
A JIT system would require DI to implement a product layout with a continuous flow with no interruptions after production commencement. As there will be no work-in-process inventory, a problem anywhere in the system will halt production so the company must also eliminate all sources of failure in the system. With the elimination of batch production, a substantial reduction in setup costs is required and processing systems must be reliable. The company will have to redesign the production process so the processing of one or a small number of products will not be prohibitively expensive. The distance over which WIP has to travel should be reduced and the company should focus on enhancing the adaptability of staff and equipment (Atkinson, et al., 2012). To promote continuous improvement, DI should also actively encourage learning and growth and promote cross-functional training. Since a JIT system requires adaptable and skilled workers, a decision-making system that incorporates bottom-up measures is appropriate and incentive systems should emphasize team-based performance (Nugroho, 2007).
1. Form a steering committee with senior management and members from all functional departments to guide the implementation of the JIT system. 2. Increase the level of education and training of employees so they become familiar with the JIT concept. A meeting should be held prior to JIT implementation to explain the goals and dynamics of the system to employees. To foster continuous excellence in the long-term, meetings and seminars should also be held anytime there are changes so employees stay informed and up to date on the system.
3. The plant layout should be changed into a product layout using product flow lines. Workstations should be organized into u-shaped cells so raw materials can enter the cell at one end and continuously and smoothly flow
from one workstation to the next until it exits as a finished product. This maximizes visibility and improves coordination and under or over production of parts will be discouraged as a continuous flow would bring about order. Workers will no longer be able to produce as they please and a downstream pull will determine what items require production.
Currently, it seems a traditional functional manufacturing layout is being utilized which is impeding communication and visibility between workers due to the distance between the functional areas. Because of this, it would be difficult to apply the demand pull concept to product flow and the development of customer-oriented working relationships among workers is being hindered (ie. it is difficult for workers to view their colleagues or the next manufacturing process as a customer). Furthermore, there is currently an emphasis on achieving functional goals by individual departments and each department may set goals which are incompatible with the overall manufacturing goal of the organization. For example, the various departments have a desire to maximize the quantity of parts produced. This emphasis on volume is contributing to waste and inventory obsolescence as the quantity of parts produced exceeds that required to meet customer demand (Cheng and Podolsky, 1992).
4. Employees should closely examine product workflows and eliminate all sources of failure to develop reliable processes. Coordination and communication with other functional areas along the stream is also necessary so smooth and continuous workflows can be established. Employees should also investigate ways to reduce machine set-up times.
5. The planning and production departments should jointly collaborate on developing shorter production schedules. The planning department needs to better understand processes and workflows to better grasp the coordination and timing of processes. Meetings should take place to promote cross-functional learning and the planning department should also spend time in the actual plant to study and better understand processes. In the long-term, schedules should become progressively shorter.
6. Following the pull rule of JIT production, workers should only produce when a signal is received. It should be acknowledged that it is sometimes necessary to have idle workers and machines. “In order to have the rule fully adhered to, it is crucial to communicate to workers that idle time does not mean future lay-offs.” Demand pull is not intended to reduce labor so idle workers can be put to use in other areas of the plant (Cheng and Podolsky, 1992).
7. Employee cross-training through seminars and workshops should take place. This will reduce boredom, foster appreciation for the whole picture and increase the potential for idea generation (Hopp and Spearman, 2000) to improve processes. Capacity planning will also be enhanced as it will be easier to maintain balance between workstations; in the event that the system runs out of synchronization, DI can increase or decrease the rate of operations on the upstream or downstream processes by transferring workers, allowing overtime, and or increasing inventory buffers (Cheng and Podolsky, 1992).
8. DI should communicate with their suppliers that they are adopting a JIT system. This would be best done through telephone and face-to-face meetings supplemented with written memos. JIT goals and requirements should be stated and DI should explain the need for supplier reliability and quality. Supplier knowledge of requirements is a prerequisite to excellent materials planning (Cheng and Podolsky, 1992) so DI should clearly communicate their expectations. A standardized supplier evaluation system should also be adopted to weed out inefficient vendors who cause consistent interruptions and delays in the production process.
9. DI should revise their performance measurement system and use a greater balance of non-traditional performance metrics and tie employee compensation to these measures. Metrics DI should adopt are starred (*) in appendices A and B. The new performance measurement system needs to be clearly communicated to employees through both memos and face-to-face meetings. The evaluation system should be changed during the initial stage of JIT implementation to reduce the possibility of employee resistance to these new
measures (Ahmad, 2002). Prior to finalization, the measures should undergo a peer review by both management and employees. Bonuses should also see deductions if rework/defective product rates and spoilage/obsolete inventory levels exceed a certain threshold. Compensation for rework should not be awarded.
10. Loss factors should be revised to avoid over purchasing raw materials. Currently, they have not been updated to reflect efficiency gains so workers have an overabundance of materials to work with. Hence, there is little pressure for staff to produce flawless units upon the first attempt. In the long-term, loss factors should be continually reviewed and revised as necessary.
11. Management’s attitude toward employees should focus upon building morale. Patience is crucial to changing work practices and it will take considerable time for workers to develop an understanding and appreciation for new work methods. Since the level of effectiveness in handing mistakes will determine staff motivation for change, mistakes should not be handled in a punitive manner but as a learning experience (Cheng and Podolsky, 1992).
12. Offer discounts to clients for committing to a pre-set schedule. Clients should also be charged a penalty or administrative fee for material changes to orders after a certain cut-off date. This should be done as it will take DI considerable time to develop into a stage where their operations and workforce and skilled and adaptable enough to respond to large, unexpected orders “just-in-time” without complications. As DI is maintaining some inventory levels, they are not adopting a pure JIT system so it would be advantageous for their large customers to commit to a schedule.
13. A clerk should be assigned to the inventory stockroom. Workers should also be required to supply the clerk with a production order in order to be granted permission to remove materials from the stockroom.
14. Within the plant, each part should also have one original location. This would help employees in determining where parts were extracted and would
allow inventory levels to be accurately estimated (Cheng and Podolsky, 1992).
1. The steering committee should continue meeting and periodically review the JIT system to ensure it is functioning efficiently.
2. Performance measures should be continually reviewed to ensure they are relevant, encourage desired behavior and are up-to-date with client needs and company goals and strategy.
3. Managers should periodically analyze strengths and weaknesses in the JIT system. Solutions for weak areas should be discussed and front-line staff should also be surveyed. Strengths should be incorporated into marketing campaigns to enhance the company’s brand image. Customers should also be surveyed for satisfaction and expectations.
4. As DI is not adopting a pure JIT system (the company has opted to retain some inventory), inventory buffers and safety stock will need to be retained. However, as workflows become more reliable, DI should strive to continually reduce these inventory levels over time.
5. DI should continue evaluating suppliers on reliability and quality. Suppliers who fail to meet expectations should be dropped.
6. A suggestion box should be available for employees to submit ideas for improvements. Management should review all suggestions and employees should receive a bonus if their idea is utilized.
7. Establish job rotation opportunities for staff to rotate through different functional areas.
8. An annual budget should be allocated to employee training with the ultimate goal of enhancing processes and quality.
9. Once the JIT system is functioning smoothly, ownership of the cells should
be given to the team of workers rather than using a hierarchy of managers and task workers (Hopp and Spearman, 2000).
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Appendix A: Traditional Performance Measures (Financial Objectives) Measure
Direct labor efficiency
Contrary to the JIT philosophy, these measures would penalize workers for producing only on demand even though they might use the non-production time to make quality and productivity improvements (Ahmad, et al., 2002). “Worse still, maximizing the utilization rate encourages continuous machine usage at the expense of regular maintenance” (Adeyemi, n.d.). Overproduction of inventory would be encouraged, leading to increased rates of waste and inventory obsolescence. Variance reporting
“[T]raditional variance analysis encourages dysfunctional behaviors such as allowing inventory to build up so as to show a favorable volume variance.” Purchasing managers may also “act dysfunctionally by purchasing materials based on lowest price considerations at the expense of quality so as to show a favorable materials price variance. The consequences of inferior quality materials purchased are manifested in increased reworks, scraps, inspections and storage of defective parts leading to higher production costs and loss of competitiveness” (Adeyemi, n.d.). Margins and profits
Short-term financial measures promote a myopic viewpoint that emphasizes short-term financial results at the expense of long-term profitability. To achieve short-term gains, managers may make dysfunctional decisions to reduce discretionary expenditures on factors such as employee training (Adeyemi, n.d.). *Department budget control
*Cost-reduction: dollar savings
These measures would stimulate a continuous search for ways to realize efficiencies and streamline processes. *Inventory turnover
A high ratio denotes fast moving inventories while a low ratio denotes slow or obsolete inventories on hand. A low ratio may also result from maintaining excessive inventories needlessly which ties up funds that can be
used in other operations (Accounting for Management, n.d.). A successful JIT system should produce an ever increasing inventory turnover ratio.
Appendix B: Non-Traditional Performance Measures
Improve cost, quality and cycle times of production processes
*Supplier scorecard ratings: quality, delivery, cost
*Product and process defect rates
*Product cycle times
*Lead times, from order to delivery
*Changeover / setup times
*Hours lost due to equipment downtime
*Inventory scrap as a % of sales,
*% of rework
Suppliers will be held to greater standards and will be strongly motivated to improve on scorecard measures to continue the relationship
To meet customer demands directly from production rather than inventory, fast throughput of materials is essential (Pycraft, et al, 2000).
Equipment must be reliable as dependability is a prerequisite for fast throughput (Pycraft, et al, 2000).
These measures would encourage workers to reduce waste and look for ways to optimize materials handling and processing. Positive effects on quality control should result. Customer
Increase customer satisfaction & loyalty
Enhance customer profitability
*% of on-time deliveries
*Customer satisfaction surveys
*Number or % of unprofitable customers
A JIT system gives companies “a greater level of control over the entire manufacturing process, making it easier to respond quickly when the needs of customers change” (Conrad, n.d.)
Pricing should also be at an appropriate level as to ensure profitability. Learning & growth
Create a culture tuned into streamlining operations, reducing waste and teamwork
Share knowledge about best practices & customers
Enhance workforce cross-training & skills
*Employee culture survey
*Number of new practices shared and adopted
*Number of employee suggestions
*Number of employees with cross-training
JIT is a significant management innovation that requires a major cultural
change (Atkinson, et al., 2002)
These measures stimulate continuous improvement and teamwork.
This would facilitate process improvements and enhance employee flexibility and adaptability.