by Rene T. Domingo (email comments to rtd@aim.edu)

The Just-in-Time (JIT) manufacturing system was pioneered and perfected by Toyota Motors Corporation of Japan in the 70’s in order to survive and be competitive in the local and international markets. It was later adopted and adapted since the early 80’s by other companies in Japan and the rest of the world after it has proven to radically improve corporate performance In terms of better quality, faster delivery, lower cost, higher productivity and profitability. JIT, after gaining world-wide acceptance, was renamed as “world-class manufacturing”, “lean-and-mean production system”, kanban system”, “pull production system” and “zero inventory system.” JIT, as originally formulated by Toyota and referred to as the “Toyota Production System”, is anchored on three fundamental principles:

1. Do not send defective products to the subsequent process.

2. The subsequent process comes to withdraw.

3. Produce only the quantity withdrawn.[1]

From these basic principles, JIT is deployed into the following policies and strategies:

1. Reduce lot sizes at all stages of production.

2. Apply the kanban (signal card) system or pull system of production

3. Improve market response times by cutting all lead times: order processing, manufacturing, engineering, and procurement.

4. Reduce machine setup time or changeover time to cut lot size and increase number of models produced.

5. Apply visual control and fool-proofing devices (pokayoke) to spot and stop problems, breakdowns, and defect before they become big.

6. Reduce the number of suppliers and partner and train the remaining few.

7. Institute kaizen or continuous improvement program to encourage all employees to continuously improve quality, cut inventory levels and lot sizes, and reduce all lead times and setup times.

DRAMATIC JIT RESULTS

JIT application in Japan has resulted in dramatic achievements in competitiveness, especially in the car industry. As The Economist noted:

“In car assembly and car parts, it is not unusual for Japanese companies to make three times as many products, in volumes one third as big, using a quarter the number of workers, at a unit cost half as high, as their western competitors do.”2

The Takaoka plant of Toyota in Japan achieved an average of 2-hrs of parts inventory, in contrast to 2 weeks in a similar GM factory at Framingham, Massachusetts. Because of less space devoted to storage and inventory, the Japanese plant utilized an average of 4.8 square feet per year to assemble each car while the U.S. plant used 8.1 square feet.3 Over-all, Toyota’s inventory turnover was 36 times in 1983 while each of the three American firms – GM, Ford, and Chrysler – had about 12 times.4

In terms of lead time reductions, JIT practitioners have achieved the following reduction:5

% Reduction in Time

Order processing 90%

Engineering lead time 75%

Procurement lead time 50%-75%

Manufacturing lead time 50%-90%

A critical time reduced under JIT is setup time or changeover time. While the direct effect is reduction of lot size, the another equally important benefits are flexibility in terms of more models produced, and higher productivity in terms of less downtime and more production hours and more production hours. Typically setup time from 8 hrs. to 58 seconds.6 Mr. Shingo advocates SMED or “single minute exchange of die.” Because of shorter setup times, Japanese car makers have an average 72 models in production vs. the American firms with 36.7

INVENTORY PHILOSOPHY

The basic principle of JIT is the continuous reduction of all inventory while satisfying changing market demand with short lead times and flexible production. Service level or the ability to satisfy demand comes from fast production and delivery, rather than through pre-produced inventory from the warehouse as in the case of traditional management. High sales and good service are achieved by JIT without the high cost of inventory, foremost of which are financing cost, space, and risk of obsolescence. In a volatile and competitive market, inventory is deemed as risk and waste, rather than as safety buffer and asset.

JIT’s view of inventory can be summarized as follows:

Inventory can reduce profits.

Inventory is not a safety buffer.

Inventory is not an asset but waste.

Inventory cannot be optimized.

Inventory can adversely affect quality.

Inventory Can Reduce Profits

Inventory is not an innocent entry in the balance sheet. Indirectly, it can affect the income statement and reduce profits. Companies usually see their hard-earned operating profits drastically diminished, if not eliminated, by non-operating interest expenses mostly due to funds tied up in unseen idle inventory. Inventory, though not an income statement item, also pushes up operating costs in a silent but no small way – rent, leases, energy, and insurance. Expensive manpower to maintain and handle inventories are safely hidden and embedded in direct and indirect labor costs. Defects and spoilage due to excessive inventory (explained below), can bloat material consumption and costs unnoticed. Most cash flow problems resulting in expensive borrowing and frantic juggling of funds come from failure to liquidate inventories. Inventory is not free.

Inventory Is Not A Safety Buffer

Conventional wisdom dictates that inventory should be carried as buffer or safety stock to absorb sudden or abnormal rise in customer demand. But in case of sudden drop in demand, which is the more common occurrence in this highly competitive environment, inventory becomes a drag. Most inventory control systems are designed to cope with quantitative but not qualitative changes in demand. If you have adequate stocks of the wrong products, then your safety stock is unsafe. A more formidable challenge at present is adapting to changes in variety or product mix that the market wants, rather than changes in volume – a task that conventional inventory management cannot effectively do.

A specific level of finished goods inventory is often maintain to provide a targeted customer service level – satisfying the customer, say, from 95% to 99% of the time. Increasing inventory may be the simplest way to increase service level, but it is also the most expensive; moreover, it is inflexible and cannot quickly adopt to high product variety situation. Reducing lead time or processing time is more effective and less expensive. The logic of the brisk fast food business is lead time management with minimum inventory and minimum space. This JIT principle was successfully applied by Toyota to car manufacturing. Short lead time, rather than huge inventories, is ideal for high variety, perishable, fashionable, and high obsolescence products that describe most of the consumers products of today and tomorrow.

In case of raw materials and supplies, these are often stockpiled to maintain a buffer or hedge against future price increases. True, prices go up, but they also go down; and in case prices continuously go up, no amount of inventory build-up will give you long term protection and advantages if you are in operation indefinitely. The main business of any business is business, not speculative activity, gambling included, there are always more losers than winners. Any short-term gain from hoarding is windfall due to luck and not management.

Inventory Is Not An Asset But Waste

What makes most managers treat inventory indifferently or favorably is its accounting treatment as a “current asset.” More often than not, inventories are neither current nor assets; and to further complicate things and multiply the illusion, many companies use the current ratio (current assets/current liabilities) to gauge their liquidity position. Current liabilities are usually more current than current assets. It is often much harder to liquidate current assets – inventory and its sister, accounts receivable – than it is to postpone payment of current liabilities. One company tried to borrow a $50,000 working capital loan from a bank which refused to give it after examining its balance sheet and discovering that it had $1,000,000 in inventories. The company hesitated to explain that the bulk was made up of old stock, slow-moving and never-moving obsolete items which were carried over in the books for years.

The primary accounting basis for classifying an item an asset is cost, because cost is objective and documented, rather than market value which is subjective and unrealized. But cost does not necessarily confer value to an asset. The fact that the company incurred cost in purchasing or producing an asset does not mean it can be sold. Fixed assets like land retain and increase in value over time, but inventories are subject to high degree of obsolescence and spoilage and therefore their costs seldom reflect their true market value. In case of drop (but not increase) in market value, accounting practice allows the devaluation of inventories. But this painful task is rarely done since it would drastically reduce the company’s asset base and serve to expose the negligence and incompetence of the current management.

Inventory Cannot Be Optimized

Most literature on production and inventory management subscribes to the traditional view that the level of inventory can be optimized by ordering an economic order quantity (EOQ). The EOQ formula states that the optimum order or production quantity is the amount at which the carrying costs (insurance, interest, etc.) equals the ordering or setup costs (paperwork, machine-set-up time, etc.). The principle says that any amount below or above this EOQ will tend to increase total costs. The theory is correct, simple, beautiful, but seldom applied in practice.

Why is the EOQ approach a failure? One reason is its utter simplicity – it is limited to unrealistic single-product, steady demand and static costs assumptions. The EOQ principle also requires lots of accurate information as inputs, carrying costs, setup cost, unit costs, and demand for each product. Most companies do not possess, update, nor monitor these information consistently or accurately.

JIT’s zero inventory has none of the EOQ’s drawbacks. It is easy and simple to formulate, understand, instruct, follow, and execute. Under zero inventory, minimum is optimum. The object is to minimize all inventory and order quantities until these reach zero levels. It is not deriving some vague magic number from other vague numbers. Zero inventory can be applied in the most static or dynamic situation even with the most imperfect or incomplete information. The zero targets stay even when products, costs, or demand pattern change, and whether or not you know all about your costs and products.

Inventory Can Adversely Affect Quality

Perhaps what is heretofore the most unrecognized adverse effect of inventory is its encouragement of bad quality and sloppy workmanship. The mere sight of abundant supply and stocks make most workers very careless in handling parts and products because it makes them think that there is a second or another chance to undo, rework, hide, or cover up first-time mistakes. Inventories, looked upon as buffer or back-up, make it very difficult for employees to “do it right the first time.”

In JIT companies, the output of one station immediately becomes the input of the next, and not thrown into a heap of buffer of work-in-process. With little stocks (ideally one piece), between them, JIT work stations are effectively coupled; defects are easily spotted and solved since the receiving station rejects them right away and returns them to issuing station that just produced them. This instantaneous feedback on quality is not possible under the conventional JIC (Just-in-case) systems in which molehills of buffer separate or “decouple” work stations that tend to mind their own business – until disaster suddenly strikes and the problem goes beyond control. Since the entire JIT production line would stop if any work station stops, the workers and managers make sure no problem occurs anywhere in the line.

EXCUSES FOR HIGH INVENTORY

There is an inventory of excuses which a typical manager uses to maintain the status quo of high inventory. Using the output-process-input framework, we can classify these into the following elements.

1. Output instability

¨ Unreliable demand

¨ Unsteady demand

¨ Poor forecasting

¨ Lack of market information

2. Process instability

¨ Long production lead time

¨ Long setup times

¨ Frequent machine breakdown

¨ High defect rate

¨ Labor unrest

¨ High absenteeism/employee turnover

¨ Equipment capacity imbalance

3. Input instability

¨ Unreliable suppliers

¨ Long lead time

¨ Unstable prices

We could add a fourth, very fashionable group of excuses:

4. Environment instability

¨ Bad roads

¨ Bad traffic

¨ Bad government

A typical manager who makes use of these excuses admits his own helplessness and incompetence in dealing directly with these problems, without actually solving or eliminating their roots. What is management for if its solution to practically all problems is to build up inventory? To incompetent managers, inventory is the easiest way to paper over problems, especially if the company has adequate financial resources at its disposal. High inventory is often a symptom of mismanagement or no management at all.

HOW JIT COPES WITH INSTABILITIES

The approach of a JIT manufacturer is totally different. To cope with output instability, it involves the customer in its planning and designing activities, and sets up flexible production processes that can cope with changes in market demand and variety. It therefore relies much less on forecasts and their accuracy; it assumes all forecasts are and will be wrong anyway.

To deal with process instabilities without resorting to inventories, the JIT manufacturer continuously reduces all lead times and setup times through Kaizen or continuous improvement. Machines and equipment are made reliable through Total Productive Maintenance (TPM). Employees and workers are formed into self-managing teams empowered to solve their own problems. Employees are trained with multiple skills so that capacity and productivity are not adversely affected by absenteeism and turnover.

A JIT manufacturer trains its suppliers to reduce instabilities in input quality and delivery. Establishing partnerships with suppliers, local and foreign, often leads to better quality and more reliable delivery of raw materials and supplies. To make them more manageable, the number of suppliers is also reduced. Toyota has about 200 suppliers while Ford has about 8,000, or 40 times more.8 Moreover, JIT manufacturers do not resort to speculation and hoarding when prices of raw materials fluctuate; these solutions usually create more problems.

What about environmental constraints or “things beyond one’s control?” The point is not to use them as excuses to defer action on the output-process-input instabilities. JIT manufacturers have demonstrated that substantial reduction in inventory can be achieved through improvement in internal system efficiency even within the most harsh environmental conditions.

PITFALLS IN APPLYING JIT

Failures in implementing JIT outside Japan, especially in other Asian countries, come from management’s lack of understanding of the JIT philosophy. They think it is just an inventory reduction exercise, and not a competitive strategy to improve quality, response time, productivity, and cost at the same time. A fat person trying to be slim does not succeed by having his fat surgically removed, or by eating less and taking medicine. Only a change in lifestyle will be effective. JIT is similar in that it requires a total and drastic system change including organizational structures, management styles, and company policies, especially in manufacturing. JIT does not begin with reducing inventory, and does not end with it. JIT begins with serving the customers - the market – fast anytime with the quality and quantity of goods they want – no more no less. This principle of customer service applies to all departments in the company. Every department is treated as the internal customer of the preceding department which must produce and serve only the quality and quantity its internal customer requires. The expectation is that if every department serves its internal customers well and fast, then the company can serve the paying or external customer similarly.

Another common misunderstanding of JIT is that it starts with suppliers and the reduction of raw material inventory. Many companies find it tempting and easy to start JIT by requiring their suppliers to deliver just-in-time, i.e. more frequent deliveries with smaller lots sizes. More often than not, suppliers cannot cope with the sudden change in requirements because they themselves are not familiar with JIT principles. If one’s production system is not streamlined, then this approach simply results in transferring one’s inventory to the supplier’s warehouse. Because both buyer and suppliers are not ready for JIT, implementation fails, and then JIT is blamed and criticized for not being practical. The truth is that JIT principles are valid, but the implementors are ignorant and unprepared.

The proper way to start is to reduce finished goods inventory levels – inventory with the highest value and closest to the customer – by producing or assembling only what is ordered by the customer as close as possible. After succeeding at this level, then JIT is applied to work-in-process (WIP) inventory, the inventory with the next highest value-added, by applying the concept of internal customers and internal suppliers. The last stage is reduction of raw materials. This stage starts not by mandating suppliers to deliver just-in-time but by training them first on JIT and improving their internal production system. This is done through partnering with suppliers and subcontractors. Ideally, JIT should be applied on a pilot line which then becomes a model for JIT implementation in all other lines.

JIT CREATES A CRISIS

In spite of Japan’s unquestionable economic strength, the Japanese people seem to throb with vitality as if they were still reconstructing a country just devastated by war, as if they were no tomorrow. JIT could partly explain this crisis mentality amidst the prosperity of the 1990’s.

JIT has formalized crisis management into a total management philosophy which encompasses marketing, finance, human resource development and business policy – complete with maxims, pamphlets and mentors. JIT, though pioneered by Toyota, distinctly reflects the Japanese national character.

Though on the surface, it seems that JIT is all about inventory reduction, it also simulates a crisis so that managers and workers are always on their toes, ready to do their best, with or without any real crisis. Managers are trained to imagine the worst possible scenarios; plummeting sales, raw material supply cuts, walkouts and strikes, fires and accidents. The message is clear: “Do your best today to avoid disaster tomorrow.”

Production workers, however, are slow to appreciate any of the macro-level “crisis” which threaten Japan businesses today, such as cutthroat competition, import barriers, appreciation of the yen and imminent obsolescence of most of the present technology. The managers, therefore, induce an artificial crisis at the shopfloor level which can be felt by all the employees. This crisis may or may not be related to any real threat.

The tension generated by the stimulated crisis, however, is a positive tension and seldom results in any counterproductive fear or undue anxiety among workers. They become accustomed to using their survival instinct on a daily basis, and this makes every working day a challenge, a victory to achieve rather than merely a boring expanse of time. Toyota, the richest Japanese manufacturing company in terms of sales, profit and cash, may be one of the least vulnerable companies to the threats in the economic environment. Yet, Toyota continues to rely on crisis simulation in its management, and has substantially reduced working capital requirements and amassed tremendous cash reserves as a result.

By deliberately reducing all inventory, the lifeblood of any manufacturing concern, to a minimum, JIT induces a crisis at the shopfloor level. Stockpiles of everything from raw materials to finished goods are reuce – including nuts and bolts, paper clips, pistons, crates and even finished Corollas.

In theory, inventory should be reduced down to the one-piece level. Each work station would process only one piece at a time and would thus only need one piece from the preceding station. The result is a synchronized one-piece flow of goods from the raw materials receiving station to the finished goods packing department. The kanban or small signboard, which acts like an internal purchase order, is sent by one station, the internal customer, to the preceding one, the internal supplier, to cl another piece.

In reality, however, Toyota does not reduce inventory so much as it designs systems from the very start to operate on very low levels of inventory. It does not mean that Toyota cannot afford to stockpile inventory, but that it prefers to invest In the workers’ ability, flexibility and a sense of responsibility.

Though most workers still do not work for one piece at a time, working with very low inventory levels exerts tremendous pressure on them and drastically changes their working methods, habits and attitudes. This works in the same way that being lost in a strange town with little cash makes you very resourceful with your money. The lesson is clear: a vital resource pared down to a certain minimum, whether deliberate, accidental or natural, induced one to use that resource very wisely. The important point is not so much what happens to the resource, but what happens to the attitudes, outlook and level of alertness of the user.

In the JIT system, the vital resource is inventory and the user, though not the owner, is the worker. JIT stimulates the desired crisis mentality in the worker because failure to produce a piece for any reason stops subsequent operations. Without any buffer stock, this stoppage will be instantaneous and will affect the entire production line.

In practice, however, the factory does not close down simply because a worker breaks a piston or a machine overheats. All workers are trained to come to the rescue of a work station in trouble and to return the situation to normal as quickly as possible.

Each worker must press a signal button to alert others to any abnormal situation which might lead to work stoppage. This button ensures that everyone in the factory gets the message, activating giant light panels hanging from the ceiling as well as noisy buzzers. There are distinct lights and signals for different problems: red lights for a machine breakdown or a defective part from the previous station, yellow light for a time-out required to set up a machine or machine tool, and a white light for no part received from the previous station.

As each worker wants to avoid catching the attention of the whole workforce or annoying others by a production stop, he or she learns to develop a sense of responsibility for work usually only found in skilled craftsmen and high caliber managers. The beauty of the JIT system is in that it makes the worker realize, in practice as well as in theory, that he or she is a critical link in production.

The substantial savings and cost reduction due to low inventory requirements are just bonus side-effects of the kanban system. The ultimate goal is still profits, but the Japanese companies hope to reach their profit targets by perfecting their workers.

The workers also ensure that defects are reduced to an absolute minimum, because the absence of buffer stocks prevents them from hiding any defects. In spite of the pressure to finish one piece just in time to feed the next station, the workers are not tempted to pass on a defective product just to follow the cadence because they know that this will cause more chaos down the line and solicit immediate reprimands from the receiving station. A zero defect rate is not merely a target set by the managers, but is a condition implied and even required by the logic of the JIT.

The workers develop the ability to control the equipment as well as their own work. They do not go home until their machinery is repaired, so that they will not cause any inconvenience to coworkers the next day. Again the inherent logic of JIT naturally makes the workers experts in preventive maintenance – a feat which no amount of seminars or prodding from the factory head can accomplish. One Japanese worker even painted on his machine: “I will guard this machine with my life.”

The workers also learn to reduce setup and changeover times which can cause machine downtime and line stoppage. By minimizing changeover times, Toyota realized that multiple product brands and models could be processed on the same day without significant delays.

Toyota has eliminated the need for warehouse space and incoming inspection. Suppliers regularly unload raw materials or parts in small lots direct to the production line, while trucks pick up finished cars direct from the packing station for delivery to dealers.

One of the basic principles of JIT is to make problems visible so that they may attract attention and prompt early and speedy solution. Lowering inventory levels exposes problems in the factory: defective parts, inefficient workers, unreliable machines, poor working methods, excess equipment capacity, and dead or obsolete stocks.

The JIT system applies a Japanese adage to the business world: “In times of peace and prosperity, think always of the threats and hardships of war.” The Japanese have simply adapted their formula for survival into a formula for success.

References:

1. Japan Management Association, Kanban – Just-in-Time at Toyota, (Productivity Press, 1985), p. 88

2. The Economist, April 4, 1992

3. James P. Womack, Daniel T. Jones, Daniel Roos, The Machine that Changed the World, (Collier Macmillan Canada, Inc., 1990), p. 83

4. Michael A. Cusumano, The Japanese Automobile Industry, (Harvard University Press, 1985), p. 302

5. International Manufacturing Strategy Resource Book, (Strategic Direction Publishers Inc., 1991) , p. 267

6. Shigeo Shingo, Study of ‘Toyota Production System, (Japan Management Association, 1981), p. 64

7. International Manufacturing Strategy Resource Book, p. 37

8. Robert W. Hall, Zero Inventories, (Dow Jones-Irwin, 1983), p.207