ISE Magazine, Volume : 50, Number: 5
By Edmund S. Fine
Grafting just-in-time onto economic production quantity can increase costs
Just-in-time and economic production/order quantity, or JIT and EPQ, are both important manufacturing concepts. However, they may conflict with each other. The following example, with names omitted to protect the guilty, shows how a strategy of compromise and a slight amount of deception can lead to unintended effects that manufacturers would prefer to avoid – no matter their governing manufacturing concept.
When two tenets of manufacturing collide head-on, the results can include confusion and conflict, not to mention a loss of business that is a detriment to all. The concept of EPQ has been around for nearly 100 years. It is a function of manufacturing cost, transportation cost, storage cost and holding cost. Holding cost has the implicit risk of obsolescence, which would result in the need to eat the cost of scrapping any remaining inventory.
JIT reduces the inventory on hand to a small safety stock and minimizes warehousing and obsolescence costs. In an ideal situation, a component manufacturer’s output feeds into the assembly process directly from the final step of component manufacture as if it were a seamless part of the assembly line. Final inspection and incoming inspection are one and the same.
A wish granted?
Long ago in New England, there was a manufacturer of a specialty grade of industrial paper that required substantial setup and tear-down time. The paper was produced on the same machinery as the company’s high demand consumer-used bread-and-butter product, merchandise that required the plant to run two or three shifts depending on the season.
The economical quantity for cutting over to this industrial paper and back to the consumer product worked out to a run roughly twice a year when all factors were considered, and this was scheduled to coincide with relatively slack demand time for the consumer goods. The paper was then shipped in a large climate-controlled semitrailer to the customer in the Midwest. The customer used the industrial paper as a critical component of its end product. This system was in place for quite a few years, with both manufacturer and end user happy with the product, cost and price.
In the mid-1980s, the customer had a change in upper management that read how Japanese companies had reduced their overall material costs (particularly storage and obsolescence) by using JIT. Naturally, management mandated that all materials be procured on a JIT basis. This meant that the customer wanted a freshly manufactured roll of the specialty paper every 10 days, with one roll held aside as safety stock, and yes, they would use the safety stock roll when the new roll was to have arrived, replacing it with the new roll.
If the manufacturer of the paper agreed to produce one roll every 10 days, that schedule would have resulted in a tremendous increase in price to the user. The manufacturer also would have had a substantial increase in cost to produce its consumer product because the change to JIT for the intermittent industrial paper customer would have required doing setups for it every 10 days as opposed to letting the consumer product run for months on end. And the manufacturer also would have had to make another arrangement for transportation at a large additional expense.
Therefore, the requirement was a nonstarter option for the paper manufacturer, as the user would obviously not pay for the disruption to the routine – the user was looking to JIT under the impression that it would reduce costs, not increase them.
To further complicate the problem, the user did not have a viable second source for the paper, regardless of its quest for JIT. Nobody else had the machinery or know-how to make it to the customer’s exacting specifications, and the volume was low enough that none of the paper manufacturer’s competitors wanted to make the substantial investment necessary to gain a share of the market.
The paper manufacturer came up with an innovative solution that let the customer think it was getting JIT, a scheme the manufacturer referred to as “bull JIT.” The paper was produced as before (keeping the cost of manufacture constant) but was shipped to the end user every 10 days from a Midwest location near the user facility, rather than twice a year.
The paper manufacturer factored the cost of storage, local delivery and additional billings into the new price to comply with the JIT mandate. In this case, complying with the mandate shifted the cost of storage from the user to the manufacturer and resulted in additional paperwork on both sides.
This effectively increased the cost – not the optimal result from the JIT mandate. When paradigms collide, the resolution may lead to unforeseen consequences. So be careful what you ask for.
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