Just In Time (JIT) is an inventory strategy implemented to improve the return on investment of a business by reducing in-process inventory and its associated costs. The process is driven by a series of signals, or Kanban (Jp. カンバン also 看板), that tell production processes to make the next part. Kanban are usually simple visual signals, such as the presence or absence of a part on a shelf. JIT can lead to dramatic improvements in a manufacturing organization's return on investment, quality, and efficiency when implemented correctly. In finance, the return on investment (ROI) or just return is a calculation used to determine whether a proposed investment is wise, and how well it will repay the investor. ... Wall Street, Manhattan In economics, business refers to the social science of managing people to organize and maintain collective productivity toward accomplishing particular creative and productive goals. ... This article is about business inventory. ... Kanban (in kanji 看板 also in katakana カンバン) is a concept related to the Lean or Just In Time (JIT) production, but these two concepts are not the same thing. ... Japanese (日本語, ) is a language spoken by over 127 million people, mainly in Japan, but also by Japanese emigrant communities around the world. ... In finance, the return on investment (ROI) or just return is a calculation used to determine whether a proposed investment is wise, and how well it will repay the investor. ...

New stock is ordered when stock reaches the re-order level. This saves warehouse space and costs. However, one drawback of the JIT system is that the re-order level is determined by historical demand. If demand rises above the historical average planning duration demand, the firm could deplete inventory and cause customer service issues. To meet a 95% service rate a firm must carry about 2 standard deviations of demand in safety stock. Forecasted shifts in demand should be planned for around the Kanban until trends can be established to reset the appropriate Kanban level. In recent years manufacturers have touted a trailing 13 week average is a better predictor than most forecastors could provide. In financial terminology, stock is the capital raised by a corporation, through the issuance and sale of shares. ... Inside Green Logistics Co. ... The theory of supply and demand describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ... The term moving average is used in different contexts. ... Customer service is the provision of labor and other resources, for the purpose of increasing the value that buyers receive from their purchases and from the processes leading up to the purchase. ... Service rate is a performance metric used to to measure the customer service in a supply organization. ... In probability and statistics, the standard deviation is the most commonly used measure of statistical dispersion. ...

History

The technique was first used by the Ford Motor Company as described explicitly by Henry Ford's My Life and Work (1922): "We have found in buying materials that it is not worth while to buy for other than immediate needs. We buy only enough to fit into the plan of production, taking into consideration the state of transportation at the time. If transportation were perfect and an even flow of materials could be assured, it would not be necessary to carry any stock whatsoever. The carloads of raw materials would arrive on schedule and in the planned order and amounts, and go from the railway cars into production. That would save a great deal of money, for it would give a very rapid turnover and thus decrease the amount of money tied up in materials. With bad transportation one has to carry larger stocks." This statement also describes the concept of "dock to factory floor" in which incoming materials are not even stored or warehoused before going into production. This paragraph also shows the need for an effective freight management system (FMS) and Ford's Today and Tomorrow (1926) describes one. The Ford Motor Company (usually called Ford; sometimes called FoMoCo), (NYSE: F) is a multinational corporation that manufactures automobiles. ... Further information: Ford Motor Company Time Magazine, January 14, 1935 Henry Ford (July 30, 1863 – April 7, 1947) was the founder of the Ford Motor Company. ... material is the substance or matter from which something is or can be made, or also items needed for doing or creating something. ...

The technique was subsequently adopted and publicised by Toyota Motor Corporation of Japan as part of its Toyota Production System (TPS). Toyota redirects here. ... The Toyota Production System (TPS) (トヨタ生産方式) is the framework and philosophy organizing the manufacturing facilities at Toyota and the interaction of these facilities with the suppliers and customers. ...

Japanese corporations cannot afford large amounts of land to warehouse finished products and parts. Before the 1950s, this was thought to be a disadvantage because it reduced the economic lot size. (An economic lot size is the number of identical products that should be produced, given the cost of changing the production process over to another product.) The undesirable result was poor return on investment for a factory. The 1950s were a decade that spanned the years 1950 through 1959, although some sources say from 1951 through 1960. ... A factory (previously manufactory) or manufacturing plant is a large industrial building where workers manufacture goods or supervise machines processing one product into another. ...

The chief engineer at Toyota in the 1950s, Taiichi Ohno examined accounting assumptions and realized that another method was possible. The factory could be made more flexible, reducing the overhead costs of retooling and reducing the economic lot size to the available warehouse space. The 1950s were a decade that spanned the years 1950 through 1959, although some sources say from 1951 through 1960. ... Taiichi Ohno (大野 耐一, February 29, 1912 - May 28, 1990) is considered to be the father of the Toyota Production System, also known as Just In Time or JIT. He has written several books about the system, the most popular of which is Toyota Production System: Beyond Large-Scale Production. ...

Over a period of several years, Toyota engineers redesigned car models for commonality of tooling for such production processes as paint-spraying and welding. Toyota was one of the first to apply flexible robotic systems for these tasks. Some of the changes were as simple as standardizing the hole sizes used to hang parts on hooks. The number and types of fasteners were reduced in order to standardize assembly steps and tools. In some cases, identical subassemblies could be used in several models.

Toyota engineers then determined that the remaining critical bottleneck in the retooling process was the time required to change the stamping dies used for body parts. These were adjusted by hand, using crowbars and wrenches. It sometimes took as long as several days to install a large (multiton) die set and adjust it for acceptable quality. Further, these were usually installed one at a time by a team of experts, so that the line was down for several weeks.

Toyota implemented a strategy called Single Minute Exchange of Die (SMED), developed by Shigeo Shingo. With very simple fixtures, measurements were substituted for adjustments. Almost immediately, die change times fell to about half an hour. At the same time, quality of the stampings became controlled by a written recipe, reducing the skill required for the change. Analysis showed that the remaining time was used to search for hand tools and move dies. Procedural changes (such as moving the new die in place with the line in operation) and dedicated tool-racks reduced the die-change times to as little as 40 seconds. Dies were changed in a ripple through the factory as a new product began flowing. Single Minute Exchange of Die (SMED) is one of the lean production many methods for reducing waste in a manufacturing process. ... Shigeo Shingo (1909-1990) was a Japanese industrial engineer who was one of the lesser-known but still highly regarded people to work with quality systems, compared to W. Edwards Deming and Walter A. Shewhart. ...

After SMED, economic lot sizes fell to as little as one vehicle in some Toyota plants.

Carrying the process into parts-storage made it possible to store as little as one part in each assembly station. When a part disappeared, that was used as a signal to produce or order a replacement.

Effects

Some of the results were unexpected. A huge amount of cash appeared, apparently from nowhere, as in-process inventory was built out and sold. This by itself generated tremendous enthusiasm in upper management.

Another surprising effect was that the response time of the factory fell to about a day. This improved customer satisfaction by providing vehicles usually within a day or two of the minimum economic shipping delay.

Also, many vehicles began to be built to order, completely eliminating the risk they would not be sold. This dramatically improved the company's return on equity by eliminating a major source of risk.

Since assemblers no longer had a choice of which part to use, every part had to fit perfectly. The result was a severe quality assurance crisis, and a dramatic improvement in product quality. Eventually, Toyota redesigned every part of its vehicles to eliminate or widen tolerances, while simultaneously implementing careful statistical controls. (See Total Quality Management). Toyota had to test and train suppliers of parts in order to assure quality and delivery. In some cases, the company eliminated multiple suppliers. Statistical process control (SPC) is a method for achieving quality control in manufacturing processes. ... It has been suggested that this article or section be merged with Quality management. ...

When a process problem or bad parts surfaced on the production line, the entire production line had to be slowed or even stopped. No inventory meant that a line could not operate from in-process inventory while a production problem was fixed. Many people in Toyota confidently predicted that the initiative would be abandoned for this reason. In the first week, line stops occurred almost hourly. But by the end of the first month, the rate had fallen to a few line stops per day. After six months, line stops had so little economic effect that Toyota installed an overhead pull-line, similar to a bus bell-pull, that permitted any worker on the production line to order a line stop for a process or quality problem. Even with this, line stops fell to a few per week.

The result was a factory that became the envy of the industrialized world, and has since been widely emulated.

The Just in Time philosophy was also applied to other segments of the supply chain in several types of industries. In the commercial sector, it meant eliminating one or all of the warehouses in the link between a factory and a retail establishment. To meet Wikipedias quality standards, this article or section may require cleanup. ... Inside Green Logistics Co. ...

Problems

Within a JIT System

The major problem with Just In Time operation is that it leaves the supplier and downstream consumers open to supply shocks. In part, this was seen as a feature rather than a bug by Ohno, who used the analogy of lowering the level of a river in order to expose the rocks to explain how removing inventory showed where flow of production was interrupted. Once the barriers were exposed, they could be removed; since one of the main barriers was rework, lowering inventory forced each shop to improve its own quality or cause a holdup in the next downstream area. Just In Time is a means to improving performance of the system, not an end.

With shipments coming in sometimes several times per day, Toyota is especially susceptible to an interruption in the flow. For that reason, Toyota is careful to use two suppliers for most assemblies. As noted in Liker (2003), there was an exception to this rule that put the entire company at risk by the 1997 Aisin fire. However, since Toyota also makes a point of maintaining high quality relations with its entire supplier network, several suppliers immediately took up production of the Aisin-built parts by using existing capability and documentation. Thus, a strong, long-term relationship with a few suppliers is preferred to short-term, price-based relationships with competing suppliers. Aisin Seiki Co. ...

Within a raw material stream

As noted by Liker (2003) and Womack and Jones (2003), it would ultimately be desirable to introduce flow and JIT all the way back through the supply stream. However, none of them followed this logically all the way back through the processes to the raw materials. With present technology, for example, an ear of corn cannot be grown and delivered to order [[1]]. The same is true of most raw materials, which must be discovered and/or grown through natural processes that require time and must account for natural variability in weather and discovery.

Oil

It has been frequently charged that the oil industry has been influenced by JIT (see here (2004), here (1996), and here (1996)). The argument is presented as follows:

The number of refineries in the United States has fallen from 279 in 1975 to 205 in 1990 and further to 149 in 2004. As a result, the industry is susceptible to supply shocks, which cause spikes in prices and subsequently reduction in domestic manufacturing output. The effects of hurricanes Katrina and Rita are given as an example: in 2005, Katrina caused the shutdown of 9 refineries in Louisiana and 6 more in Mississippi, and a large number of oil production and transfer facilities, resulting in the loss of 20% of the US domestic refinery output. Rita subsequently shut down refineries in Texas, further reducing output. The GDP figures for the third and fourth quarters showed a slowdown from 3.5% to 1.2% growth. Similar arguments were made in earlier crises.

Beside the obvious point that prices went up because of the reduction in supply and not for anything to do with the practice of JIT, JIT students and even oil & gas industry analysts question whether JIT as it has been developed by Ohno, Goldratt, and others is used by the petroleum industry. Companies routinely shut down facilities for reasons other than the application of JIT. One of those reasons may be economic rationalization: when the benefits of operating no longer outweigh the costs, including opportunity costs, the plant may be economically inefficient. JIT has never subscribed to such considerations directly; following Waddel and Bodek (2005), this ROI-based thinking conforms more to Brown-style accounting and Sloan management. Further, and more significantly, JIT calls for a reduction in inventory capacity, not production capacity. From 1975 to 1990 to 2005, the annual average stocks of gasoline have fallen by only 8.5% from 228,331 to 222,903 bbls to 208,986 (Energy Information Administration data). Stocks fluctuate seasonally by as much as 20,000 bbls. During the 2005 hurricane season, stocks never fell below 194,000 thousand bbls, while the low for the period 1990 to 2006 was 187,017 thousand bbls in 1997. This shows that while industry storage capacity has decreased in the last 30 years, it hasn't been drastically reduced as JIT practitioners would prefer. Katrina is a female name, a variant of Katherine. ... Rita can mean: St. ... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... Donaldson Brown (1885-1965) was a financial executive and corporate director with both DuPont and General Motors. ... Cover of Time Magazine (December 27, 1926) Alfred Pritchard Sloan, Jr. ... The Energy Information Administration (EIA), as part of the U.S. Department of Energy, collects and disseminates data on energy reserves, production, consumption, distribution, prices, technology, and related international, economic, and financial matters. ...

Finally, as shown in a pair of articles in the Oil & Gas Journal, JIT does not seem to have been a goal of the industry. In Waguespack and Cantor (1996), the authors point out that JIT would require a significant change in the supplier/refiner relationship, but the changes in inventories in the oil industry exhibit none of those tendencies. Specifically, the relationships remain cost-driven among many competing suppliers rather than quality-based among a select few long-term relationships. They find that a large part of the shift came about because of the availability of short-haul crudes from Latin America. In the follow-up editorial, the Oil & Gas Journal claimed that "casually adopting popular business terminology that doesn't apply" had provided a "rhetorical bogey" to industry critics. Confessing that they had been as guilty as other media sources, they confirmed that "It also happens not to be accurate."

Theory

Consider a (highly) simplified mathematical model of the ordering process.

Let:

K = the incremental cost of placing an order

kc = the annual cost of carrying one unit of inventory

D = annual demand in units

Q = optimal order size in units

TC = total cost over the year

We want to know Q.

We assume that demand is constant and that the company runs down the stock to zero and then places an order, which arrives instantly. Hence the average stock held (the average of zero and Q, assuming constant usage) is Q / 2. Also, the annual number of orders placed is D / Q.

TC consists of two components. The first is the cost of carrying inventory, which is given by Q * kc / 2, i.e. the average inventory times the carrying cost per unit. The second cost is the cost of placing orders, given by D * K / Q, the annual number of orders, D / Q. times the cost per order, K.

Thus total annual cost is

.

We differentiate TC with respect to Q and set it equal to 0 to find the Q for minimum total cost, giving In mathematics, the derivative is defined as the instantaneous rate of change of a function. ...

which is known as the Economic Order Quantity or EOQ formula. Economic Order Quantity (also known as the Wilson EOQ Model or simply the EOQ Model) is a model that defines the optimal quantity to order that minimizes total variable costs required to order and hold inventory. ...

The key Japanese breakthrough was to reduce K to a very low level and to resupply frequently instead of holding excess stocks. In practice JIT works well for many businesses, but it is not appropriate if K is not small. The theory above can be fairly easily adapted to take into account realistic features such as delays in delivery times and fluctuations in demand. Both of these are usually modelled by normal distributions. The delay in delivery, in particular, means that additional 'safety stocks' need to be held if a stockout is to be rendered very unlikely. The normal distribution, also called Gaussian distribution, is an extremely important probability distribution in many fields. ...

See also

• Business
• Lean manufacturing
• Logistics
• Management
• Manufacturing
• Statistical process control
• Total Quality Management
• Vendor Managed Inventory

Wall Street, Manhattan In economics, business refers to the social science of managing people to organize and maintain collective productivity toward accomplishing particular creative and productive goals. ... Lean manufacturing is a management philosophy focusing on reduction of the 7 wastes (Over-production, Waiting time, Transportation, Processing, Inventory, Motion and Scrap) in manufactured products. ... Look up Logistics in Wiktionary, the free dictionary. ... Management (from Old French ménagement the art of conducting, directing, from Latin manu agere to lead by the hand) characterises the process of leading and directing all or part of an organisation, often a business, through the deployment and manipulation of resources (human, financial, material, intellectual or intangible). ... Manufacturing is the transformation of raw materials into finished goods for sale, by means of tools and a processing medium, and including all intermediate processes involving the production or finishing of component parts (semi-manufactures). It is a large branch of industry and of secondary production. ... Statistical process control (SPC) is a method for achieving quality control in manufacturing processes. ... It has been suggested that this article or section be merged with Quality management. ... Vendor Managed Inventory, (VMI), describes a family of business models in which the buyer of a product provides certain information to a supplier of that product and the supplier takes full responsibility for maintaining an agreed inventory of the material, usually at the buyers consumption location (usually a store). ...

References

• Editorial, "The Inventory Land Mine", Oil & Gas Journal, Vol 94, Number 29, 15 July 1996.
• Goldratt, Eliyahu M. and Fox, Robert E. (1986), The Race, North River Press, ISBN 0884270629
• Liker, Jeffrey (2003), The Toyota Way: 14 Management Principles from the World's Greatest Manufacturer, First edition, McGraw-Hill, ISBN 0071392319.
• Ohno, Taiichi (1988), Toyota Production System: Beyond Large-Scale Production, Productivity Press, ISBN 0915299143
• Wadell, William, and Bodek, Norman (2005), The Rebirth of American Industry, PCS Press, ISBN 0971243638
• Waguespack, Kevin, and Cantor, Bryan (1996), "Oil inventories should be based on margins, supply reliability", Oil & Gas Journal, Vol 94, Number 28, 8 July 1996.
• Womack, James P. and Jones, Daniel T. (2003), Lean Thinking: Banish Waste and Create Wealth in Your Corporation, Revised and Updated, HarperBusiness, ISBN 0743249275.
• Womack, James P., Jones, Daniel T., and Roos, Daniel (1991), The Machine That Changed the World: The Story of Lean Production, HarperBusiness, 2003, ISBN 0060974176.
• Flinchbaugh, Jamie and Carlino, Andy (2006), The Hitchhiker's Guide to Lean: Lessons from the Road, SME, ISBN 0872638316

External links

• “NWLEAN: http://www.nwlean.net/” - The Northwest Lean Networks - A free knowledge-sharing website, with over 10,000 professionals discussing the various aspects of lean implementation.

• “Lean Blog” A blog focused on lean manufacturing, Toyota Production System, and lean healthcare news.

• Strengths & Weaknesses of Just In Time

• “Just In Time drives on” - The Manufacturer Magazine US - An article discussing the continued impact of Just In Time in the automotive sector