Purchasing and Supply Chain Managementby W.C. Benton

Chapter SixJust-in-Time (Lean)

Purchasing

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Learning Objectives1. To understand lean production systems.2. To identify the differences between JIT and MRP.3. To identify the relationship between JIT and

purchasing.4. To identify critical JIT-purchasing advantages.5. To identify the activities needed to implement JIT

purchasing.6. To determine the role of culture in the

implementation of JIT purchasing.7. To critically analyze the impact of JIT purchasing on

a buying firm.

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Introduction to Lean Purchasing• There has been a shift in manufacturing business

processes in practically every American industrial setting.

• The lean thinking paradigm now includes the purchasing function. Lean concepts have had a significant effect on the profitability in almost all industrial settings.

• The key lean principles focus on people, postponement, efficiency, and the elimination of waste. All of these key business principles have a direct effect on the purchasing function.

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Lean Purchasing• The just-in-time (JIT) system is no longer an esoteric concept

in the manufacturing world today. In the face of intense global competition, many firms in the United States are looking at improved techniques to manage their manufacturing operations.

• A comprehensive survey of just-in-time practices in the United States found that 45 percent of the firms contacted had implemented JIT programs and another 22 percent were planning to implement JIT the following year.

• JIT has evolved as a novel manufacturing concept based on a philosophy of trust and commitment of the entire organization. The benefits of implementing a JIT system impact all entities involved in supply-chain management

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Lean Production Systems• In its simplest form, “the manufacturing process” is a

composition of the material flows. Just-in-time (JIT) is designed to manage the flow of materials, components, tools, and associated information.

• JIT is also referred to as lean production.

• An organization driven by a JIT philosophy can improve profits and return on investment by reducing inventory levels, reducing variability, improving product quality, reducing production and delivery lead times, and reducing setup costs.

• The JIT (lean) system is a powerful management tool that could easily determine the success or failure of the manufacturing system.

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JIT and MRP Production Systems• JIT and MRP production systems have followed two

independent research streams.

• As the popularity of JIT motivated by the success of Japanese manufacturing firms has grown, numerous global practitioners initiated complete changeovers from the traditional MRP-based methods to JIT methods.

• The current shift toward the so-called lean thinking manufacturing environment is one of the major motivations for future JIT research.

JIT Conceptual Framework

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Practices Essential for JIT Implementation

• The following practices are considered essential for a comprehensive JIT implementation:

1. Uniform production (also known as heijunka)2. Quick set times3. Small lot sizes4. Short lead times5. Preventive maintenance6. Multifaceted workforce7. Supplier development8. Kanban production control

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Just-in-Time Production System

• JIT is Toyota’s manufacturing philosophy to minimize waste, and the JIT production system is a subsystem controlled by kanban.

• The kanban-controlled JIT production system has been erected based on the premise of minimizing work-in-process inventories (waste) by reducing or eliminating discrete batches.

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Just-in-Time Production System

• According to Monden (1983), the success of Toyota’s kanban-controlled production system is supported by:– smoothing of production, standardization of jobs,– reduction of setup times,– improvement of activities,– design of machine layout, and– automation of processes.

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Just-in-Time Production System• Improvements in the kanban-controlled production systems

have followed a pragmatic approach, continuous improvement.

• Therefore, success of the JIT production system must be explained in conjunction with continuous improvement, total quality management, and lean thinking.

• The JIT production system is not a panacea. There is a list of reasons why the Toyota manufacturing system may not work for all firms. The reasons include: – cultural differences, – geographical dispersion of suppliers, – supplier power, – different management styles, and so forth.

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Just-in-Time Production System

• The Toyota manufacturing system has been viewed in following different ways:

– As a lean production system because it uses less of every resource compared with the conventional mass production system. (Womack, et al., 1990)

– As a conventional reorder point system with extremely small lot sizes (Zipkin, 1991).

– As a pull system as opposed to the conventional push system.

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Kanban Production Control System

• Kanban is the Japanese word for card.

• The kanban card contains the part number, the part description, the type of container, and various workstation information.

• The kanban production control system uses simple, visual signals to control the movement of materials between work centers as well as the production of new materials to replenish those sent downstream to the next work center.

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A Dual-card Kanban System

• There are two main types of kanban:

1. Production kanban signals the need to produce more parts. Each kanban is physicaly attached to a container.

2. Withdrawal kanban signals the need to withdraw parts from one work center and deliver them to the next work center.

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A Pull System Compared to A Push System

• In a pull system, removing an end item (or a fixed lot of end items) triggers the order release, by which the flow of materials or components is initiated.

• In contrast, push systems allow for the production or material flow in anticipation of future demand

• Thus, a kanban system is referred to as a pull system because the kanban is used to pull parts to the next production stage only when they are needed.

• The weakness of a pull system (kanban) is that following the JIT production philosophy is essential, especially concerning the elements of short setup times and small lot sizes, because each station in the process must be able to respond quickly to requests for more materials.

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Dual Card Kanban Rules1. No parts are made unless there is a production

kanban to authorize production. If no production kanban are in the “in box” at a work center, the process remains idle, and workers perform other assigned activities. This rule enforces the “pull” nature of the process control.

2. There is exactly one kanban per container.

3. Containers for each specific part are standardized, and they are always filled with the same (ideally, small) quantity

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JIT Kanban Production Planning System(Pull System)

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Significance Of Lean Purchasing• The cost of raw materials has traditionally, been a serious

concern of top management.

• Over the years, material cost as a proportion of total cost of the end product has risen sharply and is as high as 80 percent in some instances.

• Consequently, the role of the purchasing function in a manufacturing organization has become increasingly important.

• The just-in-time production control system focuses on reducing both raw materials and work-in-process inventories.

• Specifically, JIT requires that the right materials are provided to work stations at the right time

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JIT PURCHASING• The function of purchasing is to provide a firm with component

parts and raw materials.

• Purchasing also must ensure that high-quality products are provided on time, at a reasonable price.

• A comparison of critical elements associated with JIT purchasing and traditional purchasing approaches follows:

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Reduced Order Quantities. • One of the most crucial elements of the just-in-time

system is small lot sizes.

• Traditionally, long and infrequent production runs have in the past been considered beneficial for the overall productivity of a manufacturing organization.

• However, long production runs usually lead to high levels of raw-material and finished-goods inventories.

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Frequent and “on-time” Delivery Schedules

• Supplier performance can be measured more accurately under the JIT purchasing approach compared to the traditional one.

• In order to obtain small lot sizes for production, the order quantity size needs to be reduced and corresponding delivery schedules need to be made more frequent.

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Reduced Lead Times • To be able to maintain low inventory levels, it is critical that

replenishment lead times be as short as possible.

• The JIT philosophy inherently attempts to reduce lead times for order completions. Under traditional purchasing practices, the lead time is made up of the following components: paperwork lead time, manufacturing time for supplier, transportation lead time, and time spent on receiving and inspection.

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Comparison between Traditional and Just-in-Time (Lean) Purchasing Approaches

Traditional Purchasing JIT-Purchasing

Order quantities Based on trade-offs between ordering and carrying costs

Based on small lot sizes for production

Delivery schedules Infrequent, primarily because of high ordering costs involved

Frequent because of small lot sizes and low ordering costs

Delivery windows Relatively wide Very narrow

Delivery lead times Relatively long and relaxed

Stringent and reduced significantly

Parts quality Responsibility of the quality function in the organization

Responsibility of supplier

Supplier base Fairly broad Considerably smaller

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• Japanese manufacturers attempt to reduce incoming material inspection as much as possible. In order to eliminate the associated receiving inspection costs, a very high emphasis is placed on the quality of incoming materials under the JIT system.

• Since the JIT system does not provide for buffer stocks, unreliable supply, in terms of delivery time and quality of incoming material, may lead to frequent problems in production.

• The reliability of supply is a critical consideration in the selection of JIT suppliers.

• Since JIT purchasing has gained popularity within the United States, the purchasing function has been preoccupied with trimming the overall supplier base in quest of so called superior suppliers.

High quality of incoming materials

Reliable suppliers

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Purchasing Benefits

• Implementation of just-in-time (Lean) purchasing assists the purchasing function in its major objectives of improving quality of incoming materials and supplier delivery performance, along with reducing lead times and cost of materials.

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1. Reduced Inventory Levels

• JIT purchasing facilitates reduction in inventory levels and the associated inventory holding costs.

• Firms like Toyota have been able to reduce inventory levels to such an extent that their inventory turnover ratios have gone up to over 60 times per year, compared to corresponding ratios of 5 to 8 reported by most American manufacturers.

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2. Improved Lead-Time Reliability • Compared to traditional purchasing approaches,

delivery lead times under the JIT system are considerably shorter.

• Lead-time reliability is usually much better for just-in-time systems.

• This implies higher levels of customer service and lower safety stock requirements for the company.

• Lower levels of safety stock contribute significantly to reduced working capital requirements for the firm.

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3. Scheduling Flexibility

• JIT emphasizes scheduling flexibility by aiming for reduced purchasing lead times and setup times.

• Such flexibility prevents confusion in the

manufacturing plant and offers unique competitive advantages to manufacturing firms since they are capable of adapting to changes in the environment more quickly.

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4. Improved Quality and Customer Satisfaction

• JIT purchasing results in improved quality and corresponding levels of higher customer satisfaction

• Since high-quality products are critical in achieving a competitive advantage in today’s global business world, manufacturers gain immensely by implementing the JIT production control system.

• High-quality incoming materials result in savings associated with reduced rework and scrap

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5. Reduced Costs of Parts

• As cooperation and relationships between suppliers and manufacturers build up in a JIT system, so do the opportunities to conduct an extensive value analysis and focus on reducing the cost of parts purchased.

• A comprehensive JIT progress report indicates that supplier costs were reduced by 11 percent when they adopted the JIT system in cooperation with their customers.

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6. Constructive Synergies with Suppliers

• A lean purchasing program involves close technical cooperation with suppliers. This particularly means the cooperation between manufacturing and design engineers.

• Because of smaller lot sizes and frequent delivery schedules, suppliers are in a position to receive quick feedback regarding any potential manufacturing or design problems.

• Also, manufacturing is in a position to implement engineering changes quicker because of the reduced inventory levels.

• The JIT progress report mentioned above indicates that supplier quality improved by 26 percent since the JIT system was adopted.

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Cost Decreases

It is well documented that JIT reduces physicalinventory level Reductions in physical inventory willalso have a favorable impact on:

1. Reduced insurance premiums associated with the storage of inventory.2. Reduced inventory holding costs3. Reduced labor cost in store rooms and material handing costs.4. Reduced clerical and administrative costs.5. Reduced waste from the manufacturing process.6. Reduced obsolescence costs.7. Reduced deprecation of handling and storage equipment.

Each of the cost savings will result in a leaner more profitable operation.

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Implementation of JIT Purchasing

• As attractive as the JIT purchasing philosophy might initially seem, it is quite difficult to implement.

• The switch to a JIT system presents formidable challenges. Marketing must be prepared to change their behavior when their customers are using the JIT system.

• Some of the common problems associated with implementing the JIT system are as follows

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1. Lack of cooperation from suppliers

In a detailed survey of U.S. firms involved with just-in time manufacturing, 47 percent of the respondents indicated that they had serious problems with some of their suppliers. The suppliers see little incentive in adopting the JIT approach when the primary benefits of the program go to the buyer

1. A long-term business agreement2. A fair return on supplier investment3. Adequate time for thorough planning4. Accurate demand functions5. Correct and firm specifications6. Parts designed to match supplier’s process capability7. Smoothly timed order releases8. A fair profit margin9. Fair dealings with regard to price10. A minimum number of change orders11. Prompt payment of invoices

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2. Lack of top management support

• Implementation of the JIT philosophy requires a cultural change in the organization.

• Such a concept cannot be implemented successfully without total support from top management.

• However, another survey of U.S. manufacturing firms indicated that 48 percent of the firms did not receive total support from top management in their efforts to implement the just-in-time manufacturing system.

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3. Lack of employee readiness and support

• Many firms report lack of support from their employees as being one of the major problems encountered in the implementation of JIT (Lean) purchasing.

• Very often, such resistance is encountered because the employees are required to change their long-standing work habits, or because they interpret the new system as being a threat to their jobs.

• Also, the JIT system requires most employees to assume more problem-solving responsibilities on the job, which may lead to additional frustration.

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4. Lack of support from design engineering personnel

• Design engineering is responsible for making technical specifications for the materials a company buys.

• Quite often, the purchasing function in an organization does not receive adequate support from engineering functions, and, as a result, purchasing is often unable to advise suppliers on material quality design options.

• Thirty-nine percent of the firms surveyed using JIT practices in the United States indicated that they had serious problems regarding lack of support from engineering

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5. Low product quality

• If suppliers fail to provide materials of adequate quality on a regular basis, production slow-downs and stoppages will occur regularly.

• The study reports that 53 percent of American

manufacturing firms implementing JIT cited this factor to be a major obstacle

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6. Lack of support from carrier companies

• The next slide show the huge sums of money that the purchasing function of some major firms spends every year in order to move materials in and out of the factory.

• Few buying firms, however, work closely with carriers to develop long-term relationships that provide for highly structured delivery schedules that lower costs for the buying firm.

• Buyers have traditionally accepted terms offered to them by the carriers with regard to their inbound freight.

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7. Lack of communication • Effective development and implementation of the just-in-time

system requires integration of important functional areas such as purchasing, manufacturing, quality, production, and transportation.

• Lack of proper communication among these areas poses a major obstacle to the implementation of JIT.

• While there is no easy solution to this problem, the purchasing

function in an organization must assume the responsibility of calling on top management regularly for leadership and support.

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Role of Culture• A crucial issue to be considered is the relevance of culture in the

successful implementation of the just-in-time system in a country.

• Honda’s culture and its focus on group-oriented activities are particularly suitable to the implementation of the just-in-time production control system in that environment.

• The need to have harmony in organizations provides for better manufacturer–supplier relationships at Toyota and Honda.

• Severance of a business relationship between manufacturer and supplier has a strong stigma associated with it, which both manufacturers and suppliers try to avoid as much as possible.

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Critical Analysis of the JIT Concept

• Many companies turned to JIT looking for a relatively painless financial surgery that would yield substantial short-term benefits.

• Over the years, these companies have come to realize the tremendous effort and commitment required to make a JIT system run smoothly.

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Critical Analysis of the JIT Concept• The radical proponents of JIT manufacturing in the United

States during the 1980s and 1990s, the so-called JIT revolutionaries, are to some extent responsible for this initial misunderstanding.

• The practitioners painted an extremely romantic picture of JIT emphasizing simplicity and efficiency, along with a state of affairs where employee morale would be high and relations between buyers and suppliers would be completely harmonious.

• It takes time to change attitudes of the workforce and nurture long-term relationships with suppliers.

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Critical Analysis of the JIT Concept

• The transition to JIT has not necessarily been a smooth one for many companies in the United States. But this does not imply that switching from a pure MRP system to a JIT or hybrid system was a mistake for most companies.

• There are two serious drawbacks with the MRP production control system. – First, the master production schedule that drives MRP is

based on estimated customer requirements; and second, MRP’s production control system utilizes a “push” system for manufacturing goods.

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Critical Analysis of the JIT Concept• Another critical issue for JIT manufacturers is the

variability in product demand.

• JIT systems seems to work best when its smooth production and low inventory requirements are aimed at meeting a relatively stable product demand.

• However, demand patterns are not stable for all products. In order to induce a relatively stable demand, companies using JIT manufacturing often consolidate their product lines.

• Not all marketing strategies are compatible with the JIT system.