Many of us remember the Just-in-Time or JIT philosophy that swept the business world in the 1980s and 1990s. In many cases this philosophy was misunderstood and became epitomized by the practice of forcing your inventories back on your suppliers. This short-sighted interpretation of JIT gave the philosophy a bad name — especially among suppliers!
In fact, JIT is not that far removed from classic Lean Manufacturing theory. JIT has as its cornerstone the planned elimination of all waste. Inventories, both raw material and work in process, was classified as waste. A second cornerstone of JIT was the process of continuous improvement in all phases of manufacturing. The premise of JIT was to assume inventories were a form of waste. By questioning why inventory levels were needed, you could identify areas for improvement. The resulting improvement would reduce the justification for inventory levels and allow the company to reduce inventories and speed through put.
For example: if you carried large inventories of parts to meet customer orders while you made long production runs; you would question why you were making long production runs. If the justification for long production runs was the long set up time, then address the problem of set up time and reduce it. A reduction in set up time makes it economical to have smaller production runs. Making smaller production runs, can allow you to switch more economically to meet customer demand. Thus, you can reduce your finished goods inventory.
The important measurement introduced with JIT was “inventory turns”. Inventory turns are calculated by dividing the annual sales by the value of the entire inventory. (You could apply this calculation to time periods shorter than a year.) If your inventory turns were increasing, it was because your inventory in relation to sales was decreasing. Thus you could expect profits to increase and through put to increase. If you were holding too much inventory, you were tying up corporate money unnecessarily. Although accountants classify inventory as an asset and therefore desirable on the balance sheet; inventory has a carrying cost which is an expense on the income statement. Moreover, parts and labor added to raw material increases the investment in the inventory. Thus the value of work in process inventory is higher than raw material inventory. Although the value increases, you get no return on this investment in materials and labor until the product is sold. The faster you convert inventory into a shipped product, the higher your inventory turns, and the higher your income.
The goal of JIT is to have only the amount of inventory needed at each stage of production and nothing more. Any reason that justifies inventory (poor vendor delivery performance; high scrap rates; long set up times; lot size rules; safety stock levels; etc.) must be questioned and the cause considered a project for improvement.
Perhaps it is time for you to reassess your manufacturing operations with a JIT mind set. Are you tying up too much money in inventory?
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