What is an arrangement in which the supplier maintains title to the inventory until it is used?

Lean and Just-in-Time

Student Tip

JIT places added demands on performance, but that is why it pays off.

Just-in-time (JIT), with its focus on rapid throughput and reduced inventory, is a powerful component of Lean. With the inclusion of JIT in Lean, materials arrive where they are needed only when they are needed. When good units do not arrive just as needed, a “problem” has been identified. This is the reason this aspect of Lean is so powerful—it focuses attention on problems. By driving out waste and delay, JIT reduces inventory, cuts variability and waste, and improves throughput. Every moment material is held, an activity that adds value should be occurring. Consequently, as Figure 16.1 suggests, JIT often yields a competitive advantage.

A well-executed Lean program requires a meaningful buyer–supplier partnership.

Many services have adopted Lean techniques as a normal part of their business. Restaurants like Olive Garden expect and receive JIT deliveries. Both buyer and supplier expect fresh, high-quality produce delivered without fail just when it is needed. The system doesn’t work any other way.

Culinary Institute of America

Supplier Partnerships

Supplier partnerships exist when a supplier and a purchaser work together with open communication and a goal of removing waste and driving down costs. Trust and close collaboration are critical to the success of Lean. Figure 16.2 shows the characteristics of supplier partnerships. Some specific goals are:

Supplier partnerships

Partnerships of suppliers and purchasers that remove waste and drive down costs for mutual benefits.

Figure 16.1 Lean Contributes to Competitive Advantage

· Removal of unnecessary activities, such as receiving, incoming inspection, and paperwork related to bidding, invoicing, and payment.

· Removal of in-plant inventory by delivery in small lots directly to the using department as needed.

Figure 16.2 Characteristics of Supplier Partnerships

OM in Action Lean Production at Cessna Aircraft Company

When Cessna Aircraft opened its new plant in Independence, Kansas, it saw the opportunity to switch from craftwork to a Lean manufacturing system. The initial idea was to focus on three Lean concepts: (1) vendor-managed inventory, (2) cross-training of employees, and (3) using technology and manufacturing cells to move away from batch processing.

After several years, with these goals accomplished, Cessna began working on the next phase of Lean. This phase focuses on Team Build and Area Team Development.

Team Build at Cessna empowers employees to expand their skills, sequence their own work, and then sign off on it. This reduces wait time, inventory, part shortages, rework, and scrap, all contributing to improved productivity.

Area Team Development (ATD) provides experts when a factory employee cannot complete his or her standard work in the time planned. Team members trained in the ATD process are called Skill Coaches. Skill Coaches provide support throughout each area to improve response time to problems. Andon boards and performance metrics are used for evaluating daily performance.

Cessna Aircraft Company

These commitments to Lean manufacturing are a major contributor to Cessna being the world’s largest manufacturer of single-engine aircraft.

Sources: Interviews with Cessna executives, 2013.

· Removal of in-transit inventory by encouraging suppliers to locate nearby and provide frequent small shipments. The shorter the flow of material in the resource pipeline, the less inventory. Inventory can also be reduced through a technique known as consignment. Consignment inventory (see the OM in Action box, “Lean Production at Cessna Aircraft Company”), a variation of vendor-managed inventory ( Chapter 11 ), means the supplier maintains the title to the inventory until it is used.

Consignment inventory

An arrangement in which the supplier maintains title to the inventory until it is used.

· Obtain improved quality and reliability through long-term commitments, communication, and cooperation.

Leading organizations view suppliers as extensions of their own organizations and expect suppliers to be fully committed to constant improvement. However, supplier concerns can be significant and must be addressed. These concerns include:

1. LO 16.3Identify the concerns of suppliers when moving to supplier partnerships

1. Diversification: Suppliers may not want to tie themselves to long-term contracts with one customer. The suppliers’ perception is that they reduce their risk if they have a variety of customers.

2. Scheduling: Many suppliers have little faith in the purchaser’s ability to produce orders to a smooth, coordinated schedule.

3. Lead time: Engineering or specification changes can play havoc with JIT because of inadequate lead time for suppliers to implement the necessary changes.

4. Quality: Suppliers’ capital budgets, processes, or technology may limit ability to respond to changes in product and quality.

5. Lot sizes: Suppliers may see frequent delivery in small lots as a way to transfer buyers’ holding costs to suppliers.

As the foregoing concerns suggest, good supplier partnerships require a high degree of trust and respect by both supplier and purchaser—in a word, collaboration. Many firms establish this trust and collaborate very successfully. Two such firms are McKesson-General and Baxter International, who provide surgical supplies for hospitals on a JIT basis. They deliver prepackaged surgical supplies based on hospital operating schedules. Moreover, the surgical packages themselves are prepared so supplies are available in the sequence in which they will be used during surgery.

Lean Layout

Lean layouts reduce another kind of waste—movement. The movement of material on a factory floor (or paper in an office) does not add value. Consequently, managers want flexible layouts that reduce the movement of both people and material. Lean layouts place material directly in the location where needed. For instance, an assembly line should be designed with delivery points next to the line so material need not be delivered first to a receiving department and then moved again. Toyota has gone one step further and places components in the chassis of each vehicle moving down the assembly line. This is not only convenient, but it also allows Toyota to save space and opens areas adjacent to the assembly line previously occupied by shelves. When a layout reduces distance, firms often save labor and space and may have the added bonus of eliminating potential areas for accumulation of unwanted inventory. Table 16.1 provides a list of Lean layout tactics.

Table 16.1

Lean Layout Tactics

Build work cells for families of products

Include a large number of operations in a small area

Minimize distance

Design little space for inventory

Improve employee communication

Use poka-yoke devices

Build flexible or movable equipment

Cross-train workers to add flexibility

Distance Reduction

Reducing distance is a major contribution of work cells, work centers, and focused factories (see Chapter 9 ). The days of long production lines and huge economic lots, with goods passing through monumental, single-operation machines, are gone. Now firms use work cells, often arranged in a U shape, containing several machines performing different operations. These work cells are often based on group technology codes (as discussed in Chapter 5 ). Group technology codes help identify components with similar characteristics so they can be grouped into families. Once families are identified, work cells are built for them. The result can be thought of as a small product-oriented facility where the “product” is actually a group of similar products—a family of products. The cells produce one good unit at a time, and ideally, they produce the units only after a customer orders them.

Increased Flexibility

Modern work areas are designed so they can be easily rearranged to adapt to changes in volume and product changes. Almost nothing is bolted down. This concept of layout flexibility applies to both factory and office environments. Not only is furniture and equipment movable, but so are walls, computer connections, and telecommunications. Equipment is modular. Layout flexibility aids the changes that result from product and process improvements that are inevitable at a firm with a philosophy of continuous improvement.

Impact on Employees

When layouts provide for sequential operations, feedback, including quality issues, can be immediate, allowing employees working together to tell each other about problems and opportunities for improvement. When workers produce units one at a time, they test each product or component at each subsequent production stage. Work processes with self-testing poka-yoke functions detect defects automatically. Before Lean, defective products were replaced from inventory. Because surplus inventory is not kept in Lean facilities, there are no such buffers. Employees learn that getting it right the first time is critical. Indeed, Lean layouts allow cross-trained employees to bring flexibility and efficiency to the work area, reducing defects. Defects are waste.

Reduced Space and Inventory

Because Lean layouts reduce travel distance, they also reduce inventory. When there is little space, inventory travels less and must be moved in very small lots or even single units. Units are always moving because there is no storage. For instance, each month a Bank of America focused facility sorts 7 million checks, processes 5 million statements, and mails 190,000 customer statements. With a Lean layout, mail-processing time has been reduced by 33%, annual salary costs by tens of thousands of dollars, floor space by 50%, and in-process waiting lines by 75% to 90%. Storage, including shelves and drawers, has been removed.

Table 16.2

Lean Inventory Tactics

Use a pull system to move inventory

Reduce lot size

Develop just-in-time delivery systems with suppliers

Deliver directly to the point of use

Perform to schedule

Reduce setup time

Use group technology

Lean Inventory

Inventories in production and distribution systems often exist “just in case” something goes wrong. That is, they are used just in case some variation from the production plan occurs. The “extra” inventory is then used to cover variations or problems. Lean inventory tactics require “just in time,” not “just in case.” Lean inventory is the minimum inventory necessary to keep a perfect system running. With Lean inventory, the exact amount of goods arrives at the moment it is needed, not a minute before or a minute after. Some useful Lean inventory tactics are shown in Table 16.2 and discussed in more detail in the following sections.

Lean inventory

The minimum inventory necessary to keep a perfect system running.

Reduce Inventory and Variability

Operations managers move toward Lean by first reducing inventory. The idea is to eliminate variability in the production system hidden by inventory. Reducing inventory uncovers the “rocks” in Figure 16.3(a) that represent the variability and problems currently being tolerated. With reduced inventory, management chips away at the exposed problems. After the lake is lowered, managers make additional cuts in inventory and continue to chip away at the next level of exposed problems [see Figure 16.3(b, c) ]. Ultimately, there will be little inventory and few problems (variability).

Student Tip

Accountants book inventory as an asset, but operations managers know it is a cost.

Figure 16.3 High levels of inventory hide problems (a), but as we reduce inventory, problems are exposed (b), and finally after reducing inventory and removing problems, we have lower inventory, lower costs, and smooth sailing (c).

“Inventory is evil.” S. Shingo

Bob Daemmrich/CORBIS-NY

Firms with technology-sensitive products estimate that the rapid product innovations can cost as much as 12%12% to 2% of the values of inventory each week. Shigeo Shingo, codeveloper of the Toyota JIT system, says, “Inventory is evil.” He is not far from the truth. If inventory itself is not evil, it hides evil at great cost.

Reduce Lot Sizes

Lean also reduces waste by cutting the investment in inventory. A key to slashing inventory is to produce good product in small lot sizes. Reducing the size of batches can be a major help in reducing inventory and inventory costs. As we saw in Chapter 12 , when inventory usage is constant, the average inventory level is the sum of the maximum inventory plus the minimum inventory divided by 2. Figure 16.4 shows that lowering the order size increases the number of orders, but drops inventory levels.

Ideally, in a Lean environment, order size is one and single units are being pulled from one adjacent process to another. More realistically, analysis of the process, transportation time, and physical attributes such as size of containers used for transport are considered when determining lot size. Such analysis typically results in a small lot size, but a lot size larger than one. Once a lot size has been determined, the EOQ production order quantity model can be modified to determine the desired setup time. We saw in Chapter 12 that the production order quantity model takes the form:

Q∗p=√2DSH[1−(d/p)]Qp*=2DSH[1−(d/p)](16-1)

Figure 16.4 Frequent Orders Reduce Average Inventory

A lower order size increases the number of orders and total ordering cost but reduces average inventory and total holding cost.