Chapter 6
Just-in-time and lean
thinking
Content
Just-in-time
Lean thinking
Vendor-managed inventory (VMI)
Quick response
Just-in-time
Key issues
1
2
What are the implications of Just-in-time
for logistics?
How can just-in-time principles be
applied to other forms of material
control such as reorder point and
material requirements planning?
Just-in-time
Just-in-time: A definition
Uses a systems approach to develop and
operate a manufacturing system
Organizes the production process so that
parts are available when they are needed
A method for optimizing processes that
involves continual reduction of waste
Just-in-time
Little JIT
the application of JIT to logistics
Central themes surrounding Just-in-time
Simplicity
Quality
Elimination of waste
Just-in-time
Pull scheduling
A system of controlling
materials whereby the use
signals to the maker or provider
that more material is needed.
buyer
Pull: Just-in-time
Push scheduling
A system of controlling
Push: traditional way
materials whereby makers and
providers make or send material
in response to a pre-set schedule, supplier
regardless of whether the next
process needs them at the time.
Just-in-time
Activity
Push/Pull
Pull
Demand uncertainty
Computer
Book/CD
Grocery
Scale economics
Push
Just-in-time
Just-in-time system
JIT Pyramid of key factors
Level 1
Level 2
Level 3
Just-in-time
1
Minimum 2 Minimum
6
inventory
delay
3
4
Minimum
Minimum
5
Simplicity
defects
downtime
and visibility
Just-in-time
Just-in-time system
Factor 1
– The top of the pyramid is full capability for JIT
supply supported by Level 2 and Level 3 operation.
Factor 2
– ‘Delay’ and ‘inventory’ interact positively with each
other
– The concept of Kanban
Factor 3
– Defect → delay → inventory
Just-in-time system
Factor 3
– Defect → delay → inventory
Inventory
hides
problems
Machine downtime
Bad design
Unreliable
supplier
Poor quality
Inefficient
layout
Just-in-time
Just-in-time system
Factor 4
Preventive
maintenance
Breakdowns
Planned maintenance
Machine
downtime
Changeover
Flexible
production
Safety
stocks
Just-in-time
Just-in-time system
Factor 5
– Simply and visible process help to reduce
inventory and could be better maintained.
Factor 6
– It’s more difficult to see the flow of a process with
increased inventory.
Just-in-time
The supply chain ‘game plan’
Demand
management
Forecasts
Orders
Independent
demand
Master
schedule
Logistics
planning
Dependent
demand
Logistics
execution
Material
Requirements
Planning
Material
plan
Bill of
materials
Purchase
orders
Work orders
Source
Make
Deliver
Just-in-time
The supply chain ‘game plan’
Independent demand
– Demand for a product that is ordered directly by
customers.
– items are those items that we sell to customers
Dependent demand
– Demand for parts or subassemblies that make up
independent demand products.
– items are those items whose demand is
determined by other items
Just-in-time
Case: Automobile
Case: Cake
Just-in-time
Demand characteristics and planning
approaches
Economic order quantities (EOQ)
Stock
Recorder
quantity
Usage rate
Reorder point
Buffer stock
Lead time
Time
Just-in-time
Assumptions in Economic Order Quantity Model
 Demand is deterministic. There is no uncertainty about the
quantity or timing of demand.
 Demand is constant over time. In fact, it can be represented as a
straight line, so that if annual demand is 365 units this translates
into a daily demand of one unit.
 A production run incurs a constant setup cost. Regardless of the
size of the lot or the status of the factory, the setup cost is the same.
 Products can be analyzed singly. There is only a single product.
Notation
D = Demand rate (in units per year).
c = Unit production cost, not counting setup or
inventory costs (in dollars per unit).
A = Constant setup (ordering) cost to produce
(purchase) a lot (in dollars).
h = Holding cost (in dollars per unit per year)
Q = Lot size (in units); this is the decision variable
Just-in-time
EOQ model
Q
Average inventory level 
2
Q
h
hQ
2

The holding cost per unit 
D
2D
A
The setup cost per unit 
Q
The production cost per unit
c
Just-in-time
EOQ model
hQ A
Y (Q) 
  c ( total cos t per unit )
2D Q
dY (Q)
h
A

 2 0
dQ
2D Q
2 AD
Q 
(economic order quantity )
h
*
Just-in-time
Practice
Pam runs a mail-order business for gym
equipment. Annual demand for the
TricoFlexers is 16,000. The annual holding
cost per unit is $2.50 and the cost to place an
order is $50. What is the economic order
quantity?
2 16000  50
Q 
 800units per order 
2.5
*
Just-in-time
Demand characteristics and planning
approaches
Periodic order quantity (POQ) and target stock
levels
How much to order?
Economic order quantity
When to order?
Periodic order quantity
Just-in-time
Economic order quantity with uncertain demand
Week No.
Demand
Order
quantity
Inventory
end
Inventory
start
Inventory
holding
1
100
1,000
900
1,000
950
2
100
0
800
900
850
3
200
0
600
800
700
4
400
0
200
600
400
5
800
1,000
400
200
300
6
1,000
1,000
400
400
400
7
800
1,000
600
400
500
8
400
0
200
600
400
9
100
0
100
200
150
10
200
1,000
900
100
500
Sum
4,100
5,000
5,100
5,200
5,150
Average
410
500
510
520
515
Just-in-time
Periodic order quantity (POQ) with uncertain demand
Week No.
Demand
Order
quantity
Inventory
end
Inventory
start
Inventory
holding
1
100
200
100
200
150
2
100
0
0
100
50
3
200
600
400
600
500
4
400
0
0
400
200
5
800
1,800
1,000
1,800
1,400
6
1,000
0
0
1,000
500
7
800
1,200
400
1,200
800
8
400
0
0
400
200
9
100
300
200
300
250
10
200
0
0
200
100
Sum
4,100
4,100
2,100
6,200
4,150
Average
410
410
210
620
415
Just-in-time
Target stock level (TSL)
constant
Periodic order quantity = Target stock level –
Stock on hand – Stock on order
TSL = cycle stock + safety stock
Just-in-time
supplier
采购
Distribution center
存货低于标准
进
货
搬运
盘
点
储
存
搬运
流
通
加
工
拣
货
搬运
分拣
装车
搬运
配
送
订单处理
retailer
Just-in-time
JIT and material requirements planning (MRP)
Material requirements planning (MRP) - A
methodology for defining the raw material
requirements for a specific item, component, or
sub-assembly ordered by a customer, or required
by a business process.
MRP systems will usually define what is needed,
when it is needed, and by having access to current
inventories and pre-existing commitment of that
inventory to other orders to other customers, will
indicate what additional items need to be ordered
to fulfill this order.
Just-in-time
Feature of MRP
MRP is based
on JIT Pull
scheduling logic
MRP is good at
planning, but
weak at control
JIT is good at
control, but
weak at
planning
TPS Vs. FPS
Just-in-time
Takt time: The
maximum time
allowed to produce a
product in order to
meet demand.
Jidoka: Autonomation
(人工智能的自动控制)
Heijunka: A system of
production smoothing
designed to achieve a
more even and
consistent flow of
work.(平准化)
Kaizen: Improvement
Heijunka box
Content
Just-in-time
Lean thinking
Vendor-managed inventory (VMI)
Quick response
Lean thinking
Key issues
1
What are the principles of lean
thinking?
2
How can the principles of lean
thinking be applied to cutting waste
out of supply chains?
Lean thinking
Taylorism: Frederick Taylor
1856-1915 The father of
scientific management
Fordism: Henry Ford
1863-1947 The father of
mass production
Toyota: Taiichi Ohno The
father of Toyota
Production System
Lean thinking
Lean thinking refers to the elimination of
waste in all aspects of a business and
thereby enriching value from the
customer perspective.
1. Specify value
muda
4. Let customer pull
5. Perfection
muda
muda
2. Identify value stream
muda
3. Create product flow
Muda means waste, specifically any human activity
which absorbs resources but creates no value.”
Lean thinking
 Nine wastes
1. Watching a
machine run
2. Waiting for parts
3. Counting parts
4. Overproduction
5. Moving parts over
long distance
6. Storing inventory
7. Looking for tools
8. Machine
breakdowns
9. Rework
Lean thinking
Inconsistent
Process
Inconsistent
Results
Traditional = People doing whatever they can to get results
Consistent
Process
Desired
Results
Lean = People using standard process to get results
Lean thinking
Role of lean practices
Small-batch production
– Reduce total cost across a supply chain, such as
removing the waste of overproduction.
Rapid changeover
– Rely on developments in machinery and product
design
– Provide the flexibility to make possible smallbatch production that responds to customer
needs
Lean thinking
Design strategy
Lean product design
– A reduction in the number of parts they contain and
the materials from which they are made
– Features that aid assembly, such as asymmetrical
parts that can be assembled in only one way
– Redundant features on common, core parts that
allow variety to be achieved without complexity
with the addition of peripheral parts
– Modular designs that allow parts to be upgraded
over the product life
Lean facility design
Lean thinking
Design strategy
Lean product design
Lean facility design
– Modular design of equipment to allow prompt repair and
maintenance
– Modular design of layout to allow teams to be brought
together with all the facilities they need
– Small machines which can be moved to match the
demand for them
– Open systems architectures that allow equipment to fit
together and work when it is moved and connected to
other items
Case study
Barriers to knowledge transfers within
suppliers’ plants (Dyer and Hatch, 2006)
Network constraints
– Customer policies or constraints imposed by customers
– Example: One supplier was required by GM to use large
(4’×5’) reusable containers. When filled with components,
these containers weighed 200~300 pounds. By
comparison, Toyota had the supplier use small (2’×3’)
reusable containers weighing 40 pounds when filled.
Case study
Case study
Barriers to knowledge transfers within suppliers’
plants (Dyer and Hatch, 2006)
Internal process rigidities
– U.S. customer’s production process involved a high level of
automation or large capital investment in heavy equipment.
The large machines and equipment were bolted or
cemented into the floor, hence increased the costs of change.
These process rigidities resulted in plant managers waiting
until the vehicle model change before implementing a new
process.
– Toyota’s production network is designed as a dynamic
system, and the flexibility to modify the system is built into
the processes and procedures.
Content
Just-in-time
Lean thinking
Vendor-managed inventory (VMI)
Quick response
Vendor-managed inventory
Key issue
1
How can suppliers help to reduce
waste in the customer’s process?
Vendor-managed inventory
Conventional Inventory Management
Customer
– monitors inventory levels
– places orders
Vendor
– manufactures/purchases product
– assembles order
– loads vehicles
– routes vehicles
– makes deliveries
You call – We haul
Vendor-managed inventory
Problems with Conventional
Inventory Management
Large variation in demands on
production and transportation
facilities
workload balancing
utilization of resources
unnecessary transportation costs
urgent Vs. non-urgent orders
setting priorities
Vendor-managed inventory
Vendor-managed inventory
Customer
– trusts the vendor to manage the
inventory
Vendor
– monitors customers’ inventory
– customers call/fax/e-mail
– remote telemetry units
– set levels to trigger call-in
– controls inventory replenishment & decides
– when to deliver
– how much to deliver You rely – We
– how to deliver
supply
Vendor-managed inventory
VMI
An approach to inventory
and order fulfillment in the
way that supplier, not the
customer, is responsible for
managing and replenishing
inventory.
Vendor-managed inventory
buyer
•Acknowledgement
VMI data flow
•Number of items as ordered
•Number of items in back-order
seller
•Number of items in stock
•Consumption of previous period
•Any other specific customer- or
item-related parameters
Vendor-managed inventory
VMI does not stand for
The passing of the customer’s consumption history for a
specific item, from the customer over to the supplier,
who on the basis hereof, will follow-up the customer’s
stock level and at the moment of the stock having
reached a specific threshold, generates a purchasing order
so as to replenish the stock.
VMI in fact stands for
Granting inspection of the sales profile of a specific item
to the supplier, who on the basis hereof, will optimize the
replenishment policy and ensure the pre-defined service
level towards the end users of his customer.
Vendor-managed inventory
Advantages of VMI
Customer
– The stock as such disappears from the company’s
balance sheet and this way clears the way for a higher
amount of working capital.
– Customer only have to supervise the stocks, instead of
drawing up a detailed analysis for the placing of orders.
– Reduce the time interval between receiving goods and
making them available for consumption or sales.
– Stocks with customer will be reduced, because the
uncertainty due to variability in the supplier’s periods
of delivery will drop.
Vendor-managed inventory
Advantages of VMI
Vendor
–more freedom in when & how to
manufacture product and make deliveries
–better coordination of inventory levels at
different customers
–better coordination of deliveries to decrease
transportation cost (reduce the rush-order
and related high cost)
Vendor-managed inventory
Potential problems in setting up a VMI system
 Unwillingness to share data
 Seasonal products
 Investment and restructuring costs
 Customer vulnerability
 Lack of standard procedures (between different customers)
VMI Essentials
 System maintenance
Trust
•Accurate information provided on
a timely basis
•Inventory levels that meet
demands
•Confidential information kept
confidential
Technology
•Automated electronic
messaging systems to exchange
sales and demand data,
shipping schedules
Case study
Praxair’s Business
Plants worldwide
– 44 countries
– USA 70 plants
– South America 20 plants
Product classes
– packaged products
– bulk products
– lease manufacturing equipment
Distribution
– 1/3 of total cost attributed to distribution
Case study
Praxair’s Business------Bulk products
 Distribution
– 750 tanker trucks
– 100 rail cars
– 1,100 drivers
– drive 80 million miles per year
 Customers
– 45,000 deliveries per month to 10,000 customers
 Variation
– 4 deliveries per customer per day to 1 delivery per customer per 2
months
 Routing varies from day to day
Case study
VMI Implementation at Praxair
Convince management and employees of
new methods of doing business
Convince customers to trust vendor to do
inventory management
Pressure on vendor to perform - Trust
easily shaken
Praxair currently manages 80% of bulk
customers’ inventories
Case study
VMI Implementation at Praxair
 Praxair receives inventory level data via
– telephone calls: 1,000 per day
– fax: 500 per day
– remote telemetry units: 5,000 per day
 Forecast customer demands based on
– historical data
– customer production schedules
– customer exceptional use events
 Logistics planners use decision support tools to plan
– whom to deliver to
– when to deliver
– how to combine deliveries into routes
– how to combine routes into driver schedules
Case study
Benefits of VMI at Praxair
Before VMI, 96% of stockouts
due to customers calling when
tank was already empty or nearly
empty
VMI reduced customer stockouts
10
5
0
before VMI
after 2 yrs
Jan
Mar
May
July
Sept
Nov
Case study
What’s needed to make VMI work
Information management is crucial to the success of
VMI
– inventory level data
– historical usage data
– planned usage schedules
– planned and unplanned exceptional usage
Forecast future demand
Decision making: need to decide on a regular (daily)
basis
– whom to deliver to
– when to deliver
– How much to deliver
– how to combine deliveries into routes
– how to combine routes into driver schedules
Content
Just-in-time
Lean thinking
Vendor-managed inventory (VMI)
Quick response
Quick response
The application of quick response in apparel
industry
Development lead time have been compressed
Production lead time are shorter
Zara case