JUST-IN-TIME INVENTORY

                                     

JIT is a type of inventory management that calls for close coordination with suppliers to ensure that raw materials arrive at the exact time when manufacturing is supposed to start, but no earlier. It aims to have the minimum amount of inventory on hand to meet demand.

How does JIT work ?
JIT inventory management guarantees that stock will arrive at the exact time it is required for manufacturing or to satisfy consumer demand, but not earlier. The objective is to reduce waste and improve the effectiveness of your business operations. Since quality rather than the cheapest price is frequently the primary goal, JIT necessitates long-term agreements with dependable suppliers.

JIT is an example of a lean management technique. All components of any manufacturing or service system, including humans, are connected in JIT. They share information and depend on one another to produce effective results. The name Kaizen, which means “transformation for the better” in Japanese, is where this technique got its start. The business strategy has its roots in Japan and aims to continuously enhance operations while including every employee, from CEO to assembly line workers.

KANBAN – A critical element for the JIT Inventory System
The “nervous system” of lean JIT production, kanban regulates inventory movement and work-in-progress production. When it comes to reducing manufacturing waste brought on by overproduction, kanban is essential. 

Push inventory tactics are used in more conventional mass production techniques and are based on the anticipated quantity of sales. The pull approach used by Kanban allows for greater production floor flexibility because a business can only generate items in response to genuine customer requests. On a factory floor, Kanban uses cards—either paper or digital—to monitor the status of output. Kanban cards track the flow of inventory through the manufacturing process and can indicate when it’s time to place an order for additional stock.

Benefits of JIT
Just-in-time results in reduced scrap ,better quality products ,reduced cycle and setup times, higher productivity, higher workforce participation, etc. In addition to these benefits, JIT also improves relationships with suppliers.
It is clear that implementing a JIT system is a task that cannot be undertaken lightly. It will be expensive in terms of management time and effort, both in terms of the initial implementation and in terms of the continuing effort required to run the system over time.

Let us look more into the supplier side benefits of JIT.
Supplier gets a long-term guaranteed contract, steady demand and a good price. In return to these suppliers agrees to quality components (e.g. zero defects), guaranteed delivery times,
a “partnership” with its customer, contingency plans to cope with disruptions, common disruptions might be: the effect of bad weather, a truck drivers strike blocking roads/ports, a flu outbreak reducing the supplier’s workforce.

Criteria for supplier’s selection :
1) Good industrial relations (“involvement”, “value”, “dignity”, “ownership”), no strike deals
2) Close to production plant (else potential transportation delays)
3) You believe that the supplier can met their promises with respect to the list of factors given above that they are agreeing to.

You can decrease the total number of suppliers if they meet these requirements; in fact, it makes sense to do so. Why do you need five suppliers if five already meet all of these requirements? Obviously, for safety concerns, you can elect to have more than one supplier. A factory fire or an earthquake can affect even the best-run suppliers, but probably no more than two or three providers. Cost-wise, having a single supplier may be appealing, but one must weigh the danger versus the savings.

Some successful companies practicing Just-in-Time systems

Apple

Technology giant Apple has also used JIT concepts to improve the efficiency of its production process. The unique aspect of Apple’s JIT strategy is how they work with their suppliers to meet their objectives. With only one main warehouse in the

US and 150 major suppliers worldwide, Apple has built solid, strategic connections with its suppliers. This production outsourcing made Apple leaner, cut expenses, and decreased overstock as a result. The majority of their inventory is at their retail stores because they have just one central warehouse in the US. Apple started utilizing drop shipping, further adding to the JIT mix. This lowers the price of storage, shipping, and wastage.


Factors attributing Apple’s success
1) Apple is relieved of this obligation because to suppliers’ willingness to maintain stock on hand.

2) Keeping stock in their retail locations

3) Procedures for drop shipping internet purchases

McDonald’s

JIT inventory is used by fast-food businesses like McDonald’s to provide daily service to their consumers. These fast food restaurants typically have everything they need on hand, but they may wait until after the order has been received to assemble and prepare their hamburgers and sundaes, for example (except for a few finished products at peak times). This harmonizes the procedure so that customers always receive orders with the same consistent experience.


Factors attributing McDonald’s success
1) Standardized procedures ensuring consistency

2) JIT method increases customers satisfaction as items are made more freshly


JIT helps business owners save money and reduce wastage, while still providing their customers with the products they want and need in a timely manner. As excess inventory is vastly decreased by ordering inventory stock on a “just when you need” basis, business owners will not need to keep large quantities of inventory stock parts reducing all the costs associated with this.

The Newsvendor Model

With the onset of the digital era, the print media has become obsolete and using digital devices to stay updated has become prevalent. But have you ever wondered how a newspaper vendor accurately decides how many newspapers to carry to sell just the right number?

A key idea in supply chain and inventory management is the newsvendor model. Simple is the idea. Consider a street hawker peddling newspapers. They only have one opportunity each morning to purchase numerous newspapers from the printer. Given that unsold copies of today’s newspaper become worthless, how many copies should the vendor keep on hand?

All things considered, the newspaper vendor’s conundrum is simple to resolve, but the approach employed to do so can be utilised to resolve a variety of other, more challenging issues. Let’s go over the fundamentals of the newsvendor model today, talk about how to develop a more complex model, point out instances where it excels, and mention a few typical drawbacks.

Let’s say the vendor sells papers for $2.50 after purchasing them in bulk for $0.50 apiece. Every paper sold brings in a profit of $2.00, while at the end of the day, unsold papers are thrown away at a loss of $0.50. Since it hurts more to turn away a customer than to toss out a paper, it makes sense that the merchant would prefer to have some extra papers. We’ll need to have some idea of anticipated demand in order to determine just how many more are needed.

We need to evaluate some expenses while taking demand into account in order to get the profit-maximizing point. The Critical Fractile (C.F.), which is determined as follows:

C.F. = CU ÷ (CU + CO) = $2.00 ÷ ($2.00 + $0.50) = 0.8, or 80%

Where CU is the cost of Underage and CO is the cost of Overage.

The Cost of Underage, or CU, is the opportunity cost of rejecting a customer. In this case, the $2.00 profit margin represents the expense of being underage.

The Cost of Overage, CO, is the expense incurred when a newspaper is not sold. For the vendor, it is the price they paid per newspaper, $0.50 in this case.

We need to take into consideration additional variables in the actual world since newsvendor issues are more complex. Utilizing more sophisticated overage and underage fees is the first step.

Overage costs are typically simpler to calculate. The following are some typical additions:

Salvage Value: Is there any value you can reclaim? Metal components and perishable food waste can both be sold to scrap yards for recycling.

Opportunity Cost of Capital: What else might you do with the money than buying inventory? Maybe your company has other ideas it wishes to work on. At worst, you may invest in US treasury notes and get some income without taking any risks.

Less terms are added to the cost of underage, but they might be difficult to understand:

The price paid in damaged goodwill for refusing a customer by a business. The client can become angry or dissatisfied and reconsider making an order the following time. You may consider this a decrease in the customer’s lifetime value.

Expedite Fees – On sometimes, stock-outs are just unacceptable, and you may be required to pay a supplier expedite fees to address a looming shortfall.

Increased Costs from Flexible Suppliers – Some businesses employ a dual supplier approach, with a first choice with a lengthy lead time and cheap cost and a secondary alternative with a short lead time and high cost. The underage cost might be adjusted to account for this cost differential.

The demand distribution is the model’s additional element. Demand was expected to be normally distributed in our scenario, which is a critical assumption. We should be prepared to support our use of the normal distribution with facts. The typical distribution is frequently incorrect for slow-moving items because sales can never fall below zero (consider the gamma distribution instead). Alternatively, construct the issue so that you can apply the normal distribution by using the central limit theorem.

The newsvendor model can assist in the resolution of a wide range of issues with a little imagination. It is possible to take into account tier pricing, different levels of security, discounts, and many other factors. It really is an effective method!

Where does the newsvendor model succeed?

When Uncertain Demand Occurs.

The newsvendor’s fundamental tenet is that you should seek less painful outcomes. Which would you rather have, if you were going to be wrong, overstock or understock? How far are you really willing to go? The newsvendor model offers a methodical approach to considering these options and picking a stocking point in the face of uncertainty. When there are many stakeholders and a variety of priorities, structured decision-making is very helpful. If something goes wrong, the newsvendor model and a sound business procedure may put everyone on the same page and cease blaming one other.

Seasonal or one-time decisions

The newsvendor concept is fantastic if you must select and stick to a choice. Since orders must be placed months in advance, many businesses use the model to determine how many Halloween costumes or Christmas decorations to carry. The newsvendor may also benefit from previous purchases of electronic components. Many components become outdated, forcing businesses to make “last-time-buys.” While engineering improves the design, the newsvendor is an excellent way to decide how many older parts to purchase.

Competitive markets

The newsvendor model works effectively for products supplied in competitive, liquid markets because overage and underage charges are straightforward to assess. Since customers have very low switching costs and may not even be aware of stock-out incidents, goodwill cost is frequently overlooked. Price elasticity also has a significant impact. Given a large enough discount, many things are nearly guaranteed to sell, which aids in identifying overage expenses. Profit-maximizing actions are encouraged by the current state of the market.

Common Challenges with the Newsvendor Model

Determining overage and underage expenses can be challenging, particularly for goods without a shelf life.

Nobody ever wants to refuse service to a customer due to a stock shortage. You might permanently lose their business! There may be a significant goodwill cost connected with underage events for industries that rely on strong client relationships (sometimes with hefty switching prices). How would you assess the possibility that a stock-out will be “the straw that broke the camel’s back” and prompt your customer to start exploring for alternative suppliers? The idea is simple, but coming up with a number is difficult, which frequently causes businesses to be overly risk-averse.

Overage expenses are typically easier to understand, but it’s a common mistake to believe that all inventory will be used eventually. Another mistake is relying on the engineering division to come up with ideas for using surplus stock. Engineers must prioritise a broad list of projects when parts become obsolete and consumer preferences shift. Although scrap is a reality, it might be challenging to estimate probability-weighted scrap costs or engineering expenses.

Sometimes, you can’t predict how a need will appear.

Demand ignorance and demand uncertainty are very different from one another. In the former situation, projections for both high and low outcomes are based on knowledge about the shape and nature of the demand. In the latter scenario, there is a much wider range of possible outcomes, and demand projections are speculative rather than supported by facts. In brand-new products with no track record, demand ignorance is most prevalent. Businesses should search for chances to get early signals of demand and utilise those to guide their actions. Making irrational assumptions will only lead to failure.

It is preferable to be unlucky than lucky.

The news seller maximises projected revenues, but this does not guarantee the most profitable results. Imagine flipping 1,000 coins; you would anticipate getting heads almost 50% of the time. However, there is a possibility of seeing 100% heads if you flip a coin five times. When making important, infrequent judgments, especially ones that have all-or-nothing repercussions, use extra caution. Your preference for betting on heads or tails can be determined using the newsvendor model, but the story shouldn’t end there. Engage in effective stakeholder communication and search for original approaches to lessen uncertainty.

References:

https://www.projectclue.com/mass-communication/project-topics-materials-for-undergraduate-students/the-role-of-newspaper-vendor-in-the-newspaper-process

Special Six Sigma stories

What is “Six sigma” in quality control?

The word “sigma” is a statistical term that measures how far a given process deviates from perfection

Six Sigma is a highly disciplined process that helps an organization focus on developing and delivering near-perfect products and services. To achieve six sigma quality, a process must produce no more 3.4 defects per million opportunities*.

(*An opportunity is a chance for non-conformance or not meeting required specifications)

• Six sigma allows to describe the performance of a process in terms of its variability and to compare different processes using a common metric known as defects per million opportunities (DPMO).
• This calculation requires three pieces of data:

1. Unit: The item produced or being serviced.

2. Defect: Any item or event that does not meet the customer’s requirements.

3. Opportunity: A chance for a defect to occur.

• A straightforward calculation is made using the following formula:

DPMO = Number of defects / (Number of opportunities for error per unit * Number of units * 1,000,000)

Analytical tools used in six sigma:

Flowcharts: They are used to show the connections between different stages of a process.

Run charts: They depict trends in data over time, and thereby help in understanding the magnitude of a problem at the define stage. Typically, they plot the median of a process.

Pareto charts: These charts help to break down a problem into the relative contributions of its components.

Check sheets: These are basic forms that help standardize data collection. They are used to create histograms such as shown on the Pareto chart.

Cause-and-effect diagrams: Also called fishbone diagrams, they show hypothesized relationships between potential causes and the problem under study. Once the C&E diagram is constructed, the analysis would proceed to find out which of the potential causes were infact contributing to the problem.

Opportunity flow diagram: This is used to separate value-added from non–value-added steps in a process.

Process control charts: These are time-sequenced charts showing plotted values of a statistic including a centerline average and one or more control limits. It is used to assure that processes are in statistical control.

Failure mode and effect analysis: This is a structured approach to identify, estimate, prioritize, and evaluate risk of possible failures at each stage of a process.

Design of experiments (DOE): sometimes referred to as multivariate testing, is a statistical methodology used for determining the cause-and-effect relationship between process variables (X’s) and the output variable (Y).

Six Sigma Methodology:

For already existing process-

Define, Measure, Analyze, Improve, Control (DMAIC)

For a new process-

Define, Measure, Analyze, Design, Verify (DMADV)

Six sigma uses Defects per million opportunities (DPMO) as a metric for understanding process variability.

DPMO is a mathematical calculation of the estimated quality of a process defined as the defects per million opportunities.

DPMO = Number of defects/ (No of opportunities for error per unit x No of units)

Motorola

The foundation pillar of Motorola was laid by Paul and Joseph E Galvin by acquiring a bankrupt company Stewart Battery Company in 1928. Till 1982 the company’s prime focus was on Research and Development. They innovated from mere battery eliminators to hand-held mobile phones. But in 1982 the company started facing financial losses. Market share dropped drastically. The problem identified was customer dissatisfaction due to defective products. This is when Motorola realized the need to lay down a strong defect elimination plan and came up with A 5-year goal of six sigma implementation. They shifted their focus to minimizing defects. The goal was to improve quality using the DMAIC approach (Define, Measure, Analyze, Improve and Control approach). Since the goal was large the required investment was large. Experts advised Motorola that it is a suicidal initiative given the prevailing financial stresses of the company. But Motorola was adamant about its decision. After the completion 5 years, Motorola was successful in implementing six-sigma quality levels in their products and was ruling the market again. The success of this plan inspired Motorola to implement Six Sigma in strategic decisions like business organization, processes, services, and administration. The six-sigma approach helped Motorola win the most prestigious quality award i.e., Malcolm Baldridge National Quality Award not once but twice.

Motorola worked significantly on reducing the DPMO as a result of which the variability was reduced drastically in the manufacturing process

The number of opportunities for error in a mobile phone could be hardware issues, functional issues, or assembly issues. Again, the error opportunities are multiplied by the number of parts assembled in the mobile and the functions it performs. DPMO can be at a minimum of 0 and a maximum of 1 million, the process gets better as DPMO moves from right to left on a scale of 0 to 1 million. Thus, if there are 0 DPMOs, the process can be considered the best one while 1 million DPMOs exhibit the worst processes.

Southwest Airlines

Defects are tangible in the manufacturing industry but intangible in the service industry. The no of opportunities for error per unit in an Airline industry can be in both Products as well as Services.

The errors in the product are tangible and easy to identify but service errors are intangible which is quite difficult to detect. Thus, calculating DPMO is a bit difficult for this industry. Southwest airlines implemented lean six sigma quality tools in the services they offer. An immediate feedback mechanism was introduced to give voice to their customers. The action was taken on an urgent basis to every complaint received from customers. Southwest Airline was the first airline to introduce ticketless flying. This was a lean six sigma approach for cost-cutting. The key aspect for Southwest Airlines was Loyalty to the customers. The quality control approach helped Southwest Airlines operate efficiently in the era of recession and financial crisis. When every other airline was facing downsizing, lay-offs, and losses, Southwest Airlines operated successfully by eliminating non- value-adding activities. Also, they were the first airline to introduce the “Bags Fly Free” concept. The first two bags of luggage of the customer will not be charged. This was possible due to optimization in other aspects of the cabin like space optimization, increasing leg space, and other lean changes in the aircraft i.e., Boeing 737. The business strategy on which Southwest Airlines operates is a cost- cut-down approach by minimizing waste or NVAs.

Mumbai Dabbawalla

Complying with the best six sigma practices Mumbai Dabbawalla has been a phenomenal service industry when it comes to service quality. The six-sigma theory states an efficiency of 3.4 defect ppm (parts per million). But Mumbai dabbawalla has achieved an efficiency of 1 defect in 16 million Dabba deliveries.

They have proudly achieved the six 9 efficiency score i.e., 99.9999% efficiency in their supply chain. The DPMO score of Mumbai Dabbawalla is close to zero. As explained by the founder Shri Mahadu Havaji Bachhe, the pick-and-drop facility of the tiffin boxes was started as a service to people, and today also this service is worshiped by the 3000 employees of the company. Each Dabbawalla is assigned 35 tiffins per shift to be picked up from the tiffin provider’s houses, dropped at the consumer’s location, picked up empty tiffin from the same locations, and dropping it back at the providers’ homes. Discipline, Service to People, and Resilience are the defining qualities of Mumbai Dabbawalla. This principle helped them to minimize delays, increase efficiency and achieve the most effective quality level i.e., more than six sigma that the nation can witness. They have also combined Lean Six Sigma with the concept of unity. The people in the company come from the same locality, religion, and culture. The company does not follow a typical organizational hierarchy. Although there is a leader for each 20-30 dabbawallas, this leader also performs the same work as the other dabbawallas. This uniformity among its employees is the key to the sustenance of the organization. The supply chain and logistics of the dabbawallas are very simple and manual which makes it easy for the dabbawallas to understand and act immediately in case of any changes. They have given the world a very important lesson that six sigma is not necessarily technology and automation, you can keep it simple and still achieve the highest efficiency possible.

Starbucks

For a company that focuses a lot on brand value proposition, customer satisfaction is the key to their business. How a customer perceives their product and their service is of high importance to Starbucks. Howard Schultz, the former CEO of Starbucks brought the wave of lean six sigma to the company. One interesting incident of Lean Six Sigma was the espresso machine that was introduced in Starbucks in 2008. To increase operational efficiency the traditional espresso machines were replaced by automated ones.

These new machines surely decreased the customer waiting time and the taste of coffee was also enhanced but still, the customer base was decreasing. After analyzing the problem using a DMAIC approach Howard Schultz found out that the new machines are no doubt faster but also taller. Because of this, the baristas could not maintain eye contact with their customer hurting the customer experience.

Thus, new machines were introduced that were smaller in height. The learning from Starbucks’ Leans six sigma operational efficiency was that lean six sigma is not only about products and reducing defects but also how you can increase brand value by providing an enriching experience to your customers. For Starbucks, DPMO relied completely on the service they offer. Thus, they decided to give their customers an Experience of a lifetime by enhancing the service quality which helped them reduce service errors.

References:

https://pecb.com/article/six-sigma-a-case-study-in-motorola

https://www.henryharvin.com/blog/mumbai-dabbawalas

https://www.henryharvin.com/blog/starbucks