Just in Time Inventory Practices

JIT Management

Eli Whitney developed the interchangeable parts system when accepting a contract to manufacture muskets for the U.S. Army in 1799 (A Brief History of (Just-In) Time). Over the next 100 years, large scale processes held focus while manufacturers focused on individual technologies. The system of engineering drawing developed and modern tools were perfected during this time.

In the late 1890s, Fredrick W. Taylor created "Scientific Management" by observing workers and work methods, then implementing Time Study and standardized work. Frank Gilbreth added Motion Study and invented Process Charting, which focused on all work elements, including non-value added elements. Lilian Gilbreth added the study of motivations of workers and how attitudes affected the outcome of processes. These three originated the idea of eliminating waste.

Around 1910, Henry Ford and Charles E. Scrensen created the first comprehensive Manufacturing Strategy. Ford is considered to be the first practitioner of Just In Time and Lean Manufacturing strategies. In the 1930s, Alfred P. Slogan developed business and manufacturing strategies for managing large processes and dealing with variety.

Just-In-Time refers to manufacturing and conveyance of only what is needed, when it is needed, and the amount needed at a specific time (Toyota Production System Terms). It operates on three principles of the pull system, continuous flow processing, and takt time. The pull production system is the concept that each manufacturing component must be in line with another department to build the final product (Pull Production - Understanding Kanban: Extended Entry). It is controlled by management authorization to produce or not and uses visual aids to show progress and control the movement between work stations. The pull system starts with low levels of stock based on demand in needing the product, usually a number of days, and purchases are only made at a need to purchase level indicated by the management.

The continuous flow processing is designed to improve environment performance, cut waste, and improve process control (Case Study 5: A Continuous-Flow System for Reusing Microetchant). Continuous flow processing identifies the processes involved to improve the processes for greater efficiency. It eliminates waste in materials and labor. The takt time is the time needed to produce one unit. It involves straight work time divided by the number of required units of production based on demand.

Economic Order-Quantity Decision Model, EOQ, determines how much of a product to order under a given set of assumptions (Horngren, 2006). EOQ assumes there are only ordering and carrying costs, the same quantity is ordered at each reorder point, demand, ordering costs, and carrying costs are known with certainty, purchasing cost per unit is unaffected by the quantity ordered, no stock outs occur, and costs of quality only to the extent that these costs affect ordering and carrying costs are considered. The reorder point triggers a new purchase and is computed by the number of units sold per unit of time times the purchase order lead time. Where EOQ assumes the demand and lead time are known with certainty, in cases of uncertainty, safety stock can be used as a buffer against unexpected increases in demand, uncertainty of lead time, and unavailability of stock from suppliers.

EOQ calculated order quantity can be different than the manager's choice of best performance due to the fact that EOQ ignores carrying costs. As a result of ignoring the carrying costs, managers would be inclined to order more. To achieve the optimal level between the two calculations, performance-evaluation models charge managers with carrying costs that require a certain level of return on investment.

Using EOQ parameters with JIT purchasing, companies establish long-term purchase agreements that define price and quality terms over an extended period. Individual orders are covered by the purchase agreements without additional negotiations. Use of electronic links, such as the Internet, cuts the cost of placing orders. The use of purchase-order cards with preset limits eliminates the use of individual dollar limits and procurement approval procedures.

'EOQ is designed only to emphasize the tradeoff between relevant carrying and ordering costs and is not designed to be the sole guide. Inventory management includes purchasing costs, stock out costs, and quality costs. Assuming an established purchase order link with the supplier, a single entry triggers a purchase order. Payments are made based on batches of deliveries instead of individual deliveries. This reduces the price of the single delivery. For example, consider the following;

Relevant Costs Under

Current

JIT

Purchasing

Purchasing

Relevant Item

Policy

Policy

Purchasing Costs

$14 per unit x 13,000 units per year

182,000

$14.02 per unit x 13,000 units per year

182,260

Ordering Costs

$2 per order x 13 orders per year

26

$2 per order x 130 orders per year

Opportunity carrying costs, required return on investment

0.15 per yr x $14 cost per unit x 500 units of avg inventory per yr

1,050

0.15 per yr x $14.02 cost per unit x 50 units of avg inventory per yr

Other carring costs (insurance, materials handling, breakage, etc.

$3.10 per unit per yr x 500 units of avg inventory per yr

1,550

$3.10 per unit per yr x 50 units of age inventory per yr

Stock out costs

No stock outs

0

$4 per units of 150 units per year

Total annual relevant costs

184,626

183,380

Annual difference in favor of JIT purchasing

1,246

This shows annual saving in costs of $1,246 by using Just-In-Time purchasing.

The Materials Requirements Planning (MRP) is a tool that takes the lead time required to purchase material to produce the master production schedule that specifies the quantity and timing of each item to be produced. MRP uses 1) demand forecasts, 2) a bill of materials detailing the materials, components, and subassemblies for each final product, and 3) the quantities of materials, components, and product inventories to determine the necessary outputs at each stage of production. Once production starts, each department's output is pushed through the production line whether or not it is needed. This can sometimes cause an inventory buildup if the department is not ready for it.