Effects of Just In Time Inventory

 

Introduction

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In the world of business where every participant should be competitive and cost-productive, business organizations formulate and adopt strategies, practices and principles that will help the business cut cost, improve the management system and eliminate waste and non-value added activities. Also, because of the rapid changes in technology, most products today have a shorter life cycle, thus there is an increasing need to have amore responsive system. Companies have found success on such principles that even non-business organizations like the military have adopted them. One of these principles and practices that started in the business world is the just-in-time system.

 

Just in time (JIT) system, also known as lean manufacturing system in most manufacturing industry  is a principle which is said to be first practiced by the Japanese car manufacturer Toyota followed by other Japanese manufacturers, providing them the ability to compete with the American manufacturers. There are also some literatures saying that the concept was originally developed at the Ford Motors. JIT system started to be popular in the 1980s as part of the Japanese management system, founded on the kanban system, the idea of ordering the materials only when it is already needed and producing only the exact quantity of goods needed by the customer on the time when it was exactly needed.

Hall (1983) defines JIT as referring to the movement or transport or delivery of materials to have only the necessary materials at the necessary place at the necessary time. In other words, just in time system is composed of just in time delivery and just in time production. The system is considered to be the most efficient manufacturing system today being practice by Dell Computer, Honda Cars, Boeing and Pratt & Whitney to name a few.

The JIT system has gained popularity and acceptance in the manufacturing industry due to the benefits it can provide including: inventory reduction, quality improvement and prompt delivery of the products (Cook and Rogowski, 1996; Hobbs, 1994; and Payne, 1993). Other important benefits gained from JIT are: reduction of lead times, increased productivity, flexibility of both the workers and management, increased equipment utilization, reduced scrap and rework, elimination of the need for a large warehouse, reduction of scrap and rework, and formation of partnership and good relationship with suppliers who became more committed with the customer because of the JIT system.

 

These benefits are gained from the implementation of the JIT system which is primary focused on the elimination of waste and respect for people, according to Hobbs (1994) and Payne (1993). Gargeya and Thompson (1994) added that through the JIT system, waste elimination is achieved by adopting practices such as total quality management, focused factory, reduced set-up times, flexible resources, group technology layout, pull production system and effective use of technology: the elements needed to implement the JIT system effectively.

 

JIT system also requires respect for people by employee training, team work, competitive compensation, and employee participation, and good attitude towards supplier (Gargeya and Thompson, 1994) in order for the employees to adopt to the new working environment brought about by the JIT system.

 

It was also found out that most companies using the JIT system are also better compared to their rival companies not using the JIT system in terms of innovation, design and faster development of new product (Ulrich and Eppinger, 2000). A good example of this is the Dell Computer which has outperformed HP and IBM over the past years by having the exact number of raw materials needed delivered just in time, thus whenever there are new computer parts launched by the suppliers, Dell always have it first in their products before HP and IBM have it. This means that the JIT system can also result to better innovation and product development.

 

Aside from the manufacturing industry, the healthcare industry has also adopted the JIT system. Because JIT is based on the idea that only those items will be delivered when necessary, it has helped cut costs especially in the healthcare supply chain in which there is an estimated $11 billion worth of waste (Becker, 2001). These wastes include drugs and pharmaceutical products that have been expired in the stock room and over estimated quantity of supplies. The healthcare industry has seen the success of the manufacturing industry, thus has learned to adopt the practice.

 

One of the applications of JIT in the Healthcare industry is by having medication delivered to the floors in the dosage required (McCollum and Poe, 1990). With this practice, the medication is ready for administration in the quantity needed and nurses do not need to measure each dose for each patient (Noorda, 2000). Another application of the JIT system is the tray system used specifically used by anesthesia departments within the surgical department (Stroup and Iglar, 1992). With the tray system, the medications needed are packaged in a tray in limited amounts for a single procedure, reducing the amount of medication stored in each operating room and making it easier to check the expirations dates on the medications (Noorda, 2000).

 

The pack system is also one of the JIT systems in the hospitals originally designed for surgery (Harmer, 1995). The pack system is having all the sterile and non-sterile disposable items needed for surgery such as sterile gowns, sterile drapes, sterile pans, basin clamps, sponges, scrub towels, and syringes are packed in one container (Harmer, 1995). The pack system has also been applied to other procedure such as in the delivery section and in the dialysis section.

With these systems, hospitals have reduced inventory, lessened some labor such as gathering of products in the shelves, reduce the number of suppliers for inventory, and improve utilization and standardization of products. The systems also reduced unnecessary handlings of products and then returning the excess. The systems also gave way to the determination of the specific items more needed in the hospital, thus having the most important items in more quantities.

 

Whether in the manufacturing or healthcare industry, one of the distinguishable benefits from JIT is efficient and effective scheduling. Materials are delivered on time, production takes place just in time usually in the assembly line and there is no space for waiting, thus there are no workers who wait for their task to take place and there is less or no inventory stocked in the warehouse.  However, despite of these advantages and benefits brought about by the JIT system, JIT also has its share of weaknesses and downsides. These downsides are determined in case of disasters such as earthquake when supplies are in limited quantities.

 

Effects of JIT on Earthquake Recovery

The effectiveness of JIT measured on inventory turns, cycle time, lead time, and delivery performance, measures that have significant effects on scheduling of an organization. JIT practices affect smaller lot sizes that increase timely feedback and lead to process reduction (Flynn, Sakakibara & Schroeder, 1995). The use of JIT also lower setup times which increases the likelihood that the setup will be performed by the operator that yields to a tighter feedback loop than under set-up crews. Additionally, JIT increases the synchronization of the production system, requiring a higher state of process control provided by techniques such as reduction of processing rates to avoid inventory, inspection on raw material defects just before the start of production, and correction of errors right in the assembly line (Flynn, Sakakibara & Schroeder, 1995).

 

However, there are times that businesses needed inventory to keep on hand. Hospitals and service industries must always maintain critical items in inventory to anticipate emergency situations and abrupt changes on demand (Savaglio & Freitag, 2005). For hospitals, demands on healthcare are higher when there is an outbreak of a disease or when there is a disaster like earthquake. JIT affect hospitals in way that it cannot meet the increase in demand during earthquake such as childcare, treatment to injuries and the needs to drugs and pharmaceutical products. Thus hospitals cannot practice the exact principles behind JIT but just to adopt some of its principles and integrate it in some aspects where it can be useful such as the systems mentioned above.

 

A disaster such as earthquake can cause damages to most businesses especially those practicing JIT. Some of the effects of earthquake in relation to inventory include: destructed physical access to businesses and off-site warehousing facilities, loss of surface transportation, power outage, damages on communication facilities used in communicating with the suppliers, and physical loss and damages on the business’ physical structure, facilities and equipments especially those that are used in production. Gorman (19) stated that “earthquake, floods, hurricanes and blizzard as well as prolonged strikes and supplier bankruptcies hampered deliveries while wars, coups, terrorist events, changes in trade and policy, and border-crossing restrictions have made delivery of goods and services problematic”.

 

As noted above, transportation of materials and close communication to suppliers are very critical in JIT thus during earthquakes, the problems and issues concerning companies utilizing JIT are the damages in transportation, communication and access of suppliers to the company as well as the inability of workers to access transportation and continue their work. According to Hill and Jones (19), JIT leaves a firm without buffer stock of inventory which can help tide a firm over shortages and disruptions. Because of shortage in the supply of materials businesses often find it hard to continue its operation after an earthquake has brought these effects. Shortages in supplies usually lead to increase in the price of the materials which is another disadvantage in the part of the companies that do not have stocked inventory. Instead of enjoying the reduction of cost due to JIT, JIT can result to higher cost in times of earthquake.

 

In order to address the after effect of an earthquake or any disaster, the importance of inventory is needed to be recognized in the business world. Hill and Jones (19) added that decisions concerning how much inventory to keep on hand are very important in the manufacturing, retail and service industries. Establishing a good inventory level is an important consideration in budgeting which should involved ordering costs, holding costs and shortage costs. It is therefore necessary for companies to also consider contingency plans and

risks assessment concerning inventory management.

 

Just in time Inventory Effects on Porsche

 

Despite of the negative effects of JIT after a disaster, the advantages brought about by JIT is still cannot be denied. One of the famous companies that adopted and is currently practicing the principles behind JIT is the Porsche AG, a German car manufacturer that has achieved success, became affected by the changes in the global market, but still managed to cope up from crisis after accepting JIT.

Porsche started on 1930, being founded by the same man who designed the Volkswagen Beetle, an Austrian engineer named Ferdinand Porsche. Porsche has produced sleek car models and has been known in creating sports car. As a German company, it was built on the German tradition and thinking that the firm with the best product designed by the best engineers would win the tough competition of car manufacturing industry. The company also had a very hierarchical organizational structure, making problem identification and error correction very slow. Before, Porsche had about 950 suppliers for the purchasing department to manage, practiced 100 % inspection of the incoming materials, maintained a huge warehouse to avoid supply disruptions, and had long work cycles.  Porsche was also not concerned on the cost of parts, frequency and reliability of deliveries as well as the percentage of defective parts but was more focused on the contribution of purchased parts on the performance of the car (Anonymous, 2006). Problems started when Porsche experienced a decline in sales since 1987 that by 1992, Porsche was selling only about 14,000 cars worldwide. New product development also took about longer than 5 years to be developed due to its slow development system.

 

During this time, Toyota was gaining success due to its JIT practices accompanied by a more vertical type of organizational structure. Having the awareness of the principles and after thorough investigations, Porsche started the lean initiative in 1991 (Arts, 2004). The Kaizen Institute was invited to work for Porsche in a four-pronged offensive which includes: (1) restructure operations; (2) quality offensive; (3) a reward system for submitting suggestions; and (4) implementation of the Porsche Improvement Process (Swathwood, 2006). In 1992, Porsche restructured its organization; from six layers of management, it was changed to only four: the executive Vice President, the cost center managers, the production managers and the Meisters.

The Porsche Improvement Process was adopted on the JIT system, centered on setting measurable monthly and annual targets for each cost center, focusing on four dimensions: cost – reduction of rework, scrap and breakdown time for machinery; quality- number of time-through defects per component or per vehicle, and defects of road test; logistics – on-time deliveries to dealer, parts to next manufacturing operations, and reduction in inventory levels; motivation- suggestions per employee, housekeeping and training (Swathwood, 2006).

With this process, Porsche needed to have their suppliers to just-in-time deliveries, thus they have decreased the number of suppliers from 950 to 300, 60 of which are considered to be involved in the direct process.

After more than 5 years from its implementation, the success of Porsche on JIT can be proven by the table below:
1991
1993
1995
1997
Time

– Concept to Launch
7 years


3 years
– Welding to finished car
6 weeks

5 days
3 days
Inventories
17.0
4.2
4.2
3.2
Effort
120
95
76
45
Errors

– Supplied parts
10,000
4,000
1,000
100
– Off the assembly line
100
60
45
25
Sales
3,102
1,913
2,607

Profits
+17
-239
+2

Source: Swathwood (2006)

After its adoption of JIT principles and an overhaul on the company’s approach to management, production and other activities, Porsche has managed to overcome the crises and is still currently gaining a position in the car manufacturing industry.

 

Effects of JIT in the US Navy

The US military particularly the US Navy is also not exempted in using the JIT system. The US Department of Defense’s (DoD) concept on JIT is to reduce the amount and length of logistics tail, minimizing investment and get the bullet and spare parts to the troops on the line as they need them (ROA, 2006).

 

Conclusion

It therefore concluded that, based on the evaluation made on the effects of just in time system, JIT has brought about many benefits and success to manufacturing companies and other industries and has brought primarily cost reduction in the part of other sector such as the military. However, like any other principles, JIT has its shortcomings such as in times of disasters like an earthquake wherein the JIT system is cannot be effective due to certain situations such as inaccessible roads delaying the delivery of materials as well as the production process slower. These issues can be addressed by having a contingency plan and risk evaluation so that in times of disaster, a company practicing JIT has alternative solutions to the problems brought about by the negative effects of JIT.

 

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