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Art Smalley

Art Smalley: Just in Time 101

By Art Smalley, - Last updated: Monday, April 26, 2010 - Save & Share - Leave a comment

Robert’s question reminds me of the caption to an article in Business Week that I read on an airplane a few days ago. The article refers to the “perils of running too lean” and highlights how John Deere is losing sales due to a longer lead-time than the competition. The article implies that more inventory would automatically result in more sales and higher profits. I have no specific knowledge on the John Deere case and can’t comment on that with any factual insight. I can highlight several common mistakes that are made regarding Toyota’s Just-in-Time concept.

For starters the Toyota Production System in its most widely practiced form is a replenishment based production system. In other words it is generally a build to stock model and not normally a build to order system (and yes exceptions and shades of gray do exist). Many people fail to grasp this fundamental point however. In the Business Week (BW) article for example it mentions that John Deere had switched to a build to order model for their line of farm equipment. Toyota’s general Lean case though  is a build to stock model in the U.S. in contrast. (Click here for former North American President Atushi Niimi’s explanation). So for the BW article to talk about the perils of a lean inventory replenishment system when the case being discussed is a build to order systems tells me the author did not do his or her homework. Something else is probably going on.

For a build to order system to work you have to be very adept at maintaining a shorter lead-time than the competition and of course match or surpass them on cost and quality dimensions. If your lead-time is too long in a build to order world then you’ll often lose orders. That I suspect is the real situation in the John Deere article for example. The proper question that needs to be probed is why is the lead-time to produce so long for John Deere especially if they have lowered inventory? Other factors are thus limiting the production system and causing customers to opt for different products.  What is causing the problem? Lean thinking is required here and not just blindly reducing or adding inventory. The TPS goal is to produce and deliver quality products to the customer Just-in-Time so something sounds amiss in this case. For the record Toyota also runs build to order divisions with short lead-times for machine tools and custom housing. Those divisions are good for investigation if anyone out there is in the build to order world.

Other companies mistake the Just-in-Time part of Toyota’s system however even when they are replenishment driven. Inventory is one of the famous seven forms of wastes in TPS yet blindly eliminating it as some companies have done in the past is a recipe failure as Robert mentions in his question. Why? One reason is because the correct statement about inventory in TPS is that  inventory beyond what you need to run the system is waste. In other words not all inventory is waste. Some inventory is required to run the process in its current state. If you don’t believe me take all raw, WIP, and finished goods out of your factory tomorrow and see what happens. You’ll quickly shut all processes down and not make any shipments to the customer.

Here is how I like to think about replenishment scheduling using inventory stocking logic 101 that I picked up from production control experts inside of Toyota. Most of the time I like to think of inventory in three buckets for simplicity. The first bucket is “cycle” stock or what is the minimum to run the system given average demand. Of course you can’t run a system just on averages as there is virtually always variation in orders from the customer. The question is how much variation (you need to do the math here) and that amount of inventory is called “buffer” stock. In other words this inventory protects the supplying process from variation from the customer.

Of course in a perfect world this is all the inventory you would need but we don’t live in a perfect world. Production processes have downtime, scrap, and other problems. Catastrophic events can and do sometime occur that can interrupt production for a few days. When severe winter weather is forecast Toyota often requests suppliers to add an extra day of safety stock to their inventory calculations for a given period of time.

In the end a well run Just-in-Time production system will have a total inventory amount that covers cycle, buffer, and safety stock. Any less and you are facing danger. Of course you still want to minimize inventory to just what is needed by these main drivers however you first have to get the data and crunch the numbers. I like to tell clients that you earn the right to reduce inventory over time. A) Reduce downtime and quality issues to help minimize safety stock. Mother nature I can not help you with unfortunately. B) Jointly reduce demand variation with the customer by analyzing demand patterns to learn what is really happening. Buffer stock can be reduced if demand variation is brought down. C) Finally reduce the lead-time to replenish and you can lower cycle stock which is usually the largest component of inventory. Hence you hear the phrase “reduce lead-time to the customer” frequently in TPS discussions.

You also often hear a lot of catch phrases like “lower the water to expose the rocks” and hence find your problems in operations. That is a nice phrase for the consultant to make an analogy with but you still want to find out how much inventory you need to run the system and compare that to how much you have. Reduce inventory when and where you earn the right to do so. When done correctly this lowers the lead-time to the customer and should help you increase sales. When done incorrectly of course it disrupts production, causes delays to customers, and can damage business.

In one of his books in Japanese Taiichi Ohno the main architect of Toyota’s system comments that he had a favorite form of inventory and that it was raw material. His assumption was that he could always devise a system with a shorter lead-time than the competition and convert this raw material into the order they wanted. Conversely just adding inventory especially WIP or Finished Goods beyond the required amount makes a company sluggish and also has the adverse effect of covering up problems. Proper system design for the production system and the ability to problem solve over time is required to make all of this work on a consistent basis for any company including Toyota.

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