JIT: Just In Time – Still Relevant OR A Solution of the Past?
JIT is a methodology first developed and implemented in the 70's at Toyota Manufacturing Plant. Since then, it has been replicated and implemented across various manufacturing and supply chain companies across the word. All in a bid to keep their operations lean and reduce the failures, delays and cost stuck up in inventory or other resources. However, with uncertainties and high demand variability, due to natural calamities, increasing competition, changing technology and regulatory norms and hence systems like JIT might need to be re-looked at. This episode on the Counterpoint Podcast is a discussion to explore the shortcomings with JIT and if this methodology still holds relevance in the current conditions or do we need to evolve and move to a better and sustainable solution.
|Shubham Agarwal :||Companies all over the world have dealt with inventory, either too much of it or too little of it, often grappling with the right amount. While we have discussed on a lot of different aspects of inventory in our previous episodes, we are discussing another alternative that was developed way back in 1970s by Taiichi Ohno in the Toyota Manufacturing Plant to a good degree of perfection, and so it became a popular technique of managing material flow and inventory. It simply means, everything happens just at the right time.
For example consider yourself leaving for work in the morning, you leave the house, just-in-time to board the cab or catch a metro, just-in-time to arrive at the office, just-in-time to pick up your files for the meeting, just-in-time to walk into the meeting hall. Conceptually there is no problem about this, but we all know how difficult that it is to happen.
Companies have tried the same approach for managing material flow, producing at just the right time so that it reaches the retailer through the entire supply chain to be sold to the customer at just the right time. In an ideal world this might have worked, though extremely difficult still, but the current pandemic has brought in an entirely new variable in the equation.
We have Achal Saran Pande, Partner at the Vector Consulting Group and an expert at supply chain solutions, with us today to discuss this concept, how the pandemic affects it and how we need a more sustainable solution.
|Achal Saran Pande :||Hi Shubham – I Thank you for providing the opportunity to speak on a wonderful and rather controversial topic of JIT manufacturing but I assure you that by the end of this session we will have a lot of clarity on the subject!!!|
|Shubham Agarwal :||Achal was I correct with the way I defined JIT?|
|Achal Saran Pande :||I just want to make some additions to your definition of JIT. In the context of manufacturing environment JIT essentially means that the material movement happens as and when the real need/real demand arises. Any movement before can generate inventories and any movement later can create shortages. This movement or flow of material is controlled through the kanban system that provides necessary need/demand triggers.|
|Shubham Agarwal :||Why has JIT failed during the COVID?|
|Achal Saran Pande :||JIT was introduced to enhance speed to market and to reduce operational costs. The underlying assumption was that if the material flow in the SUPPLY CHAIN increased the desired objectives would be achieved. The increased material flow would bring down the material waiting periods, which would eventually bring down inventory and hence JIT would also be a tool for inventory reduction!!!However, the flow concept of JIT improved the material flow only for the OEMs (within their factory) with deterioration of material flow of the entire supply chain. The concept/methodology instead of inventory reduction of supply chain manifested as inventory relocation within supply chain.|
|Shubham Agarwal :||What do you mean by inventory relocation within the supply chain?|
|Achal Saran Pande :||Let us visualize the automotive supply chain as having 3 major entities- Suppliers, OEMs and DealershipsThe OEM implements the JIT principles and in the process of keeping itself lean it pushes out inventories on either side (Suppliers and Distributors, RM and FG). While the OEMs run lean, their suppliers and dealerships struggle with high inventories. To ensure reliable supplies, the OEMs ensure that the suppliers maintain enough material in their FG to support their production shifts. The amount of FG to be maintained at the supplier depends on the supplier’s degree of reliability. As per observation, it is seen that this varies anywhere from 3 days to 10 days of FG inventory across suppliers. (this is apart from the WIP and RM inventory they carry for their operations)
The other side of the supply chain – dealerships maintains at least a month’s inventory (conservative). During pandemic this has gone upto 3-4 months inventory and even more in some cases.
The inventory comes at a cost to both the supplier and dealerships. It is not only the inventory holding cost but also associated costs of Space, Resources such as manpower and equipment. This is in addition to the blocked working capital of both the entities. It’s a huge financial burden on themIf I have to put it in simple words, It is as if the OEMs are potraying“My inventory is your inventory”
“My cost is your cost”
So essentially this implies that it is not only relocation of inventories but relocation of costs as well!!!
|Shubham Agarwal :||So, do you want to say that while the OEM operates with a reduced inventory at its end, the supply chain inventory may remain the same, if not increased!!!|
|Achal Saran Pande :||Precisely!!! . There are cases where it has increased in the entire supply chain. And this is a very important conclusionThe relocation of inventories creates phenomenon known as the “Supplier Bull Whip Effect” and the impact of this phenomenon is maximum at Tier 3 suppliers. It is a big subject by itself and I believe should be taken up as a separate podcast topic where I shall explain in detail, the entire supplier problem!!!!|
|Shubham Agarwal :||So how does that affect during COVID times or any such pandemic?|
|Achal Saran Pande :||It has 2 aspects to it- Operational and Financial aspect
Operational – Imagine the OEM to be located in region A and it has implemented JIT manufacturing in its facility. An organization practicing JIT has most of its suppliers located near or inside its premises. However, some of its suppliers are located away in other parts of the country. The critical ones are closer and the non critical ones may be farther away. Also, the OEMs are assembly plants. Assembly plants where many parts come together to produce a vehicle. The inherent process issue with such plants is that even if a single part is missing the assembly/vehicle cannot be made (we call it as the A plant Effect). Since the OEM has implemented JIT , it would be operationally very lean. It will have very low inventories in RM, WIP and FG. During pandemic, it may happen that (and it actually happened) that the region where the OEM is located is open and operational, but Region B where the supplier is located, went into a complete lockdown. The lockdown would disrupt supplies from the supplier to the OEM. Even if the supplier is sitting with so much of inventory (which is essentially OEMs inventory in his books), which the OEMs require (remember relocation inventories), there would be a delay in supplies and the production of the OEM would suffer (remember A plant effect, even if a bolt is missing the vehicle cannot be produced).
Now extrapolate the scenario to 500 or more suppliers since the OEM normally has that kind of supplier base and the pandemic disrupting supplies from each one of them at different points in time. The disruption is multiplicative and not additive. I would say it’s a nightmare for the OEM buyers!!!!. Cannot imagine how they would be dealing with such a scenarioNow lets discuss the financial aspect. As I mentioned previously the relocated inventories would significantly block the suppliers and dealerships working capital (dealer example). The capital rotation has also stopped. Many of them don’t have capital to restart operations as a large chunk of working capital is stuck in inventories. They are sitting on inventory time bomb that eventually explodes for some of them and many dealerships close shop due to this reason. It happens with the suppliers as well and many of them close down as they can hardly survive (particularly tier 2 and 3 suppliers). Such a financial impact creates operational distortions in the supply chain and disrupts the supplies to the OEMs.
Also, when operations resume,. Due to capital problems the supplies from different suppliers will ramp up differently. Financially strong suppliers will ramp up fast. The weaker ones will ramp up very slowly. This implies that with suppliers at different stages of ramp up, the Full Kit availability at OEMs is a challenge. So how will the vehicle be produced On Time!!!
|Shubham Agarwal :||So till now we have discussed that in a pandemic like situation the JITs adverse impact on supply chain partners of the OEMs. Do you think JIT adversely impacts internal operations of the OEMs as well?|
|Achal Saran Pande :||Yes , now lets move on to the internal operations of the OEM. JIT advocates the concept of balanced line. This essentially implies that all the work centres in a particular line are having the same capacity or balanced capacity. When you operate with a balanced capacity line, no particular work centre is a bottleneck. The entire line is the bottleneck because the capacity of the line is defined by the capacity of its work centres, which are all equal . The production efficiency of each work centre defines the production efficiency of the line. Therefore all the work centres have to operate with very high efficiencies. Imagine that in a balanced line having numerous work centres, even if one one person is absent. What do you think will the output of the line be?|
|Shubham Agarwal :||I think as u just described, if capacities of all work centres are the same and they are working in tandem then if one manpower is missing at a particular work centre implies that the entire production line would stop? Is it?|
|Achal Saran Pande :||Yes!!. There is a high risk of the entire line stopping or the output going down significantly. Now imagine in a pandemic like situation which brings along with it – resource crunch, particularly manpower, how would the OEM practicing JIT would run its operations. It’s a nightmare for production managers on the shop floor!!!!|
|Shubham Agarwal :||So Achal is there a problem with the JIT concept or is it the way it is implemented?|
|Achal Saran Pande :||It’s a bit of both. If we look at the automotive industry, it will be observed that its going through a major churn. The environment is becoming very uncertain. JIT’s Achilles heal is high uncertainty and demand variability. In the existing scenario 4 factors contribute to uncertainity. Competition, Technology Changes/Vehicle Norms/regulations and natural calamities. Competition is increasing and therefore the time to introduce new models is reducing. These days on an average across segments a new model or its variant gets launched in 2-3 years time and this time will reduce significantly in future. This implies that the OEMs portfolio of products are going to increase and the churn of the entire portfolio will also be very high. In addition technology is changing fast and new vehicle norms are being introduced at a rapid pace.Also the world is experiencing more natural calamities. These calamities are not only increasing in terms of variety but also in terms of frequency. In such a highly uncertain scenario I have my doubts on JIT the JIT methodology
Now lets move to the implementation part. In India, across most OEMs, the JIT principles are only deployed within the factory of the OEMs. They are not extended to Dealerships or Suppliers across tiers. For instance, a kanban system is not extended to dealerships or deployed across tier 1 , 2 and 3 suppliers and therefore there are 2 separate worlds created within the supply chain. The JIT world of the OEM and the non-JIT world of its Partners. This boundary creates the problems for the supply chain. If this concept is extended to include all channel partners many issues will get resolved. It’s not been done because it’s a humungous task and requires a lot of operational dicipline
Having said that I believe JIT is not the concept/methodology/management philosophy of the future
|Shubham Agarwal :||We would have liked to know in detail the alternative methodologies, however, given the paucity of time, Viewers /listeners, we will try to explore these sustainable methodologies in our future podcasts. Stay Tuned!!|
|Achal Saran Pande :||Thanks Achal Saran Pande for providing valuable insights on the subject. We look forward to many more such podcasts to throw light on many such interesting topics/subject!!|
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