Term Paper on "Business Logistics and the Supply Chain"

Quoted Instructions for "Business Logistics and the Supply Chain" Assignment:

Assigmment:

For the majority of manufacturers, the plant floor is the wea***** link in their supply chains, yet that is where they are apt to find the biggest payoff from e-manufacturing. Industrial equipment manufacturers, for example, have been fairly slow to jump on the e-business train. About 11% of these manufacturers are actively tying the plant floor to the Internet. Two exceptions are the semiconductor and computer equipment industries, where ferocious competition is impelling manufacturers to connect their plant floors with the top floor of their enterprises. The number of companies that have plugged their shop floors into the Internet is not what one might expect, but it is rising rapidly, according to some experts.

Write a 4-5 page paper answering the above question. Please turn this in to me by the end of this module

Sources:

Factory Floors Go Online -- Pioneering manufacturers close the final gap in their supply chains

InternetWeek; Manhasset; Mar 12, 2001; Michael *****

Abstract:

For the majority of manufacturers, the plant floor is the wea***** link in their supply chains, yet that is where they are apt to find the biggest payoff from e-manufacturing. Industrial equipment manufacturers, for example, have been fairly slow to jump on the e-business train. About 11% of these manufacturers are actively tying the plant floor to the Internet. Two exceptions are the semiconductor and computer equipment industries, where ferocious competition is impelling manufacturers to connect their plant floors with the top floor of their enterprises. The number of companies that have plugged their shop floors into the Internet is not what one might expect, but it is rising rapidly, according to some experts.

Full Text:

(Copyright 2001 CMP Publications, Inc. All rights reserved.)

For the majority of manufacturers, the plant floor is the wea***** link in their supply chains, yet that is where they're apt to find the biggest payoff from e-manufacturing.

Industrial equipment manufacturers, for example, "have been fairly slow to jump on the e-business train," said Reinhard Geissbauer, head of the North American industrial equipment practice at strategy consultancy Roland Berger. About 11 percent of these manufacturers are actively tying the plant floor to the Internet, the company stated in a new report that found the manufacturing sector being slowly e-transformed (see graphic, page 22).

Two exceptions are the semiconductor and computer equipment industries, where ferocious competition is impelling manufacturers to connect their plant floors with the top floor of their enterprises. The number of companies that have plugged their shop floors into the Internet is not what one might expect, but it is rising rapidly, according to some experts.

Printer maker Lexmark International Inc. has been deploying systems that are used over the Internet to manage and monitor its ink- cartridge manufacturing at all of its plants worldwide.

Although the project is far from complete, these systems already are capturing manufacturing data on Unix servers and generating reports in HTML for viewing on thin clients. Lexmark is installing Camstar's InSite manufacturing execution system (MES) to use as a common platform for capturing and processing data at all of its plants.

It will take nearly two years from inception to complete the project, and it is too soon to quantify the savings from using the Internet to monitor production processes. But Todd Sills, IT project manager at Lexmark, is confident there will be bottom-line benefits.

Lexmark's primary motivation is to reduce the number of defective products or unusable manufacturing leftovers, which many manufacturers call "scrap." Last year, Lexmark had $1 million worth of scrap returned to one of its plants in a single lot, and plant engineers lacked sufficient data to pinpoint the source of the problem. Costly problems like this clearly showed that "engineers did not have adequate information online and in real time, and they couldn't do preventive and continuous process improvement," Sills said. "All they could do is react to a crisis."

Plant engineers now monitor ink cartridges throughout the production process and can also measure product quality, with real- time access to information on product tests via the Internet.

"For example, an engineer, after doing some studying of a returned or defective product, could come in through a thin client and put that entire batch on hold anywhere in the world," Sills said.

Perhaps the main reason so few manufacturers have transformed themselves into e-manufacturers is the complexity of adapting their existing manufacturing infrastructures. Although manufacturers have deployed technology on the plant floor for several years, they are likely to be proprietary or legacy automation systems that cannot talk to the rest of the enterprise's systems, said Ken Crater, president of Control.com, a manufacturing controller consulting company. "The shop floor today is where computing technology was in the '70s," Crater said.

The plant floor has focused more on manufacturing quality, optimizing production processes and productivity, and less on customer demand. Sophisticated controllers, other intelligent devices, LANs and MESes all collect data that could be used for marketing or customer service, but those data rarely cross the plant floor to an ERP, which may or may not be capable of processing that data.

Rob McKeel, vice president of marketing for GE Cisco Industrial Networks, said providing basic connectivity to an ERP is hard enough, but the advent of the Net means many customers are seeking to change their business models from a build-to-stock to a build-to-order model. Such moves require "another level of complexity requiring cultural, process and technology changes," he said.

Crater said manufacturers need to see this transformation as inevitable or they risk going out of business. E-business customers are demanding more customized products, faster delivery schedules and instant access to order status.

Manufacturers stand to benefit too. Ways to lower the cost of business include more accurate demand forecasting and planning; streamlined production scheduling; higher quality; and fewer errors as information moves from one business process to another.

"If you look at the problems that manufacturers say are their top challenges, a lot of them relate to competitive pressure, the need to respond [to their customers] faster, and to achieve top-line sales goals," Roland Berger's Geissbauer said. "Things like that actually lend themselves to e-business effects."

Manufacturers already using the Internet see annual cost savings of 6 percent across the value chain, from procurement to Web-based supply chain management and after-sales service, said Geissbauer. It may be possible to cut costs by as much as 8 percent to 10 percent, he said.

Semiconductor manufacturers, and many of the larger computer companies that have transformed themselves into e-manufacturers, are demanding that their key suppliers connect their plant floors to the Internet so they can get visibility into their supply chains-even peer into what's happening on the plant floor itself.

In fact, Lightwave Microsystems has accelerated its plans to connect its manufacturing processes to the Internet because customers such as Lucent are requiring it, said Doug Barnes, Lightwave's manager of IT development.

"We have to do it because if we don't, our competitors will," Barnes said. Lightwave is furthering the trend by requiring its suppliers to become e-manufacturers, he said.

Lightwave, which makes circuitry for optical communications, is busy trying to figure out "whether it has enough mileage in its ERP system for the supply chain or whether we have to go to a different platform," Barnes said. The trick will be not to "splinter the existing technology" the company already has, requiring IT to support a multiple of platforms, he added. "The better you can plan your supply chain, the more competitive you're going to be."

Barnes estimated that the company will have a pilot deployed by the third quarter of this year. He anticipates that it will cost about $500,000 for hardware, software and development work for the first phase of the project, and $500,000 more for a fully Internet- capable manufacturing supply chain.

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Automotive Design & Production. Cincinnati: Aug 2002. Vol. 114, Iss. 8; pg. 70, 3 pgs

Abstract (Document Summary)

There is room for improvement in automotive's management of inventory. First, automotive should do unto logistics management as it has done to production management. Second, automotive should infuse the supply chain with more information. Third, automotive should do a better job collaborating with its supply chain partners. Last, automotive should implement new software. The best bet is to lean out business operations. Implementing supply chain collaboration is a great opportunity for taking some of the empty costs out of the supply chain. Another approach to inventory management is to apply service-parts technology to the inbound supply side.

"It's not like the automotive industry has all this inventory lying around," says Karen Peterson, vice president and research director for Gartner Inc. (Stamford, CT). In fact, adds Paul Hebeler, automotive industry director for Oracle Corp., from his office in Troy, Michigan, "The industry has inventory as tight as it can get without sacrificing cost and service." The 11 sweet spot" nowadays in automotive, he says, seems to be in chasing premium freight cost reductions. But there is room for improvement in automotive's management of inventory. First, automotive should do unto logistics management as it's done to production management. Second, automotive should "inf use the supply chain with more information-replace inventory with information," says Peterson. Third, automotive should do a better job collaborating with its supply chain partners. Last, automotive should implement new software.

Implement "lean" appropriately

Inventory results from at least one of two conditions, says Kevin Prouty, research director at AMR Research (Boston, MA). "Ignorance equals inventory. Or variability equals inventory," (Even the leanest of automotive manufacturing operations, namely Toyota, keeps inventory, he adds.)

In the first condition, if you don't know what the guy upstream or downstream is going to do, you keep inventory just in case. (Optimizing asset utilization is another reason, but this article will skip over that.) In the second condition, you can have all the inventory in the world, yet you still might not have enough for optimized manufacturing because of the variability driven by demand spikes (namely customer orders), by the manufacturing processes themselves (such as the effect of automotive options on assembly schedules), by logistical upsets (think September lith), or a combination thereof.

When companies try to circumvent Prouty's Little Law of The Conservation of Inventory, somebody gets caught holding the, uh, inventory. "If you push inventory away from one partner operation, it'll move out in either direction-either to finished inventory or down to the suppliers." That's fine in the short term for reducing localized costs; namely, for the partner pushing inventory somewhere else. But in terms of lifecycle costs, the carrying costs add up and too many instabilities creep into the supply chain.

The best bet is to "lean" out business operations. North Amer ican automotive companies have done this in manufacturing, says Prouty, but they haven't leaned their supply chain processes. "And I don't mean 'lean' to the point where you don't have inventory; I mean lean in the way you operate the company." For instance, instead of fighting change and trying to create a steady-state supply chain, come up with ways to better respond to change faster and more efficiently-even if that means building up inventory.

Gain visibility

Implementing supply chain collaboration, says Jim Kowalski, group vice president of automotive for Manugistics Group, Inc. (Rockville, MD), is a "great opportunity for taking some of the empty costs out of the supply chain." By the way, Kowalski defines "collaboration" as "real, two-way communication, where there are discussions about what should be done." For instance, Kowalski suggests joint capacity planning, where supply chain partners share in calculating capacities across multiple suppliers and tiers. Helping such collaboration is, for example, the Supplier Network Collaboration that Manugistics helped implement at DaimlerChrysler. Rather than transmit a series of ever-truncated electronic data interchange (EDI) commands from one tier to another over what used to take 14 days, DaimlerChrysler broadcasts demand and production information down through all the tiers of its supply chain simultaneously using email. All partners in the supply chain get notification within 24 hours-and can reply in kind, and in time to offset any anomalies coming down the supply chain.

Oracle offers similar capabilities. Suppliers can surf over to the OEM's Web portal to see data at the granular level, including customer demand, production data (line, date, and time), and billing. "There's no software to load," explains Frank Prestipino, vice president of SCM and worldwide marketing for Oracle Corp. (Redwood Shores, CA).

What are these companies doing? Answers Oracle's Hebeler, "Upgrading their technology to be more collaborative."

Better decision support

"Pure visibility by itself is real-time access to bad data," points out Prouty. Advanced planning and scheduling (APS) tools can filter those data to improve inventory visibility. In the past, optimization and constraint-based planning, says Hebeler, focused on machine capacity and production bottlenecks. Now these same tools are being applied to inbound logistics.

Deere & Co. (Moline, IL), for example, recently implemented a transportation command-and-control center using Manugistics' supply chain applications. This center helps Deere optimize its logistics scheduling and maximize transportation loads based on real-world data, such as truck trailer size, transportation rates, and day of the week. As a result, Deere has reduced logistics costs approximately 10%.

By including event management and workflow, users can set up thresholds and other parameters for a wide variety of variables associated with forecasts, customer demand, production, material movement, and logistics management. These tools watch the incoming data and then send alerts (email and even voice mail) when appropriate. For instance, if you're a carrier, the software can tell you when new loads are tendered. If you're a supplier, the software can alert you to major changes in the forecast so you can adjust your production plan accordingly.

Enterprise resource planning (ERP), says Prestipino of oracle, "was supposed to deliver this wonderful thing called 'ATP'available-to-promise. Up to now, that was impossible to do. At best, ERP could inspect your warehouse. if the inventory requirement wasn't in your warehouse, then ERP would backorder the requirement. Full stop." Now enterprise systems comprising ERP, APS, and warehouse and logistics management can "peer" into your warehouses and your suppliers' warehouses around the country, even the world. Moreover, they can analyze manufacturing schedules and actually look inside the supply chain. From this, they can. respond with the particular day inventory will be available-even if the physical inventory is nowhere to be seen.

The lesson here? Evaluate-and implement-the integrated enterprise applications coming onto the market today. Or, at the very least, implement individual software applications that follow those standards that make seamless software integration a reality.

Improve marketing

It's a fact of life, explains Karen Peterson of Gartner: Projected demand in the automotive industry can change 400% up or down-daily. That has to be smoothed out-from the very beginning. One way is to limit the proliferation of options. Asks Peterson, "I mean, who's going to want a pink car with yellow seats?"

Mitsubishi America, for example, rationalized the number of options it was providing. Doing that improved the OEM's ability to forecast, as well as get more accurate forecasts. Likewise, continues Peterson, better market analysis is needed to gain a better idea of what customers actually want. "if the dealer has only yellow pickups and that's what people buy, that doesn't necessarily mean that's what people want."

Outsource inventory

Another approach to inventory management is to apply service-parts technology to the inbound supply side, namely, 11 vendor managed inventory" (VMI). For proof of concept, look at Dell Computer. Dell has virtually no inventory other than the finished product shipped to customers. All the inbound supply-side inventory is maintained by Dell's vendors. Granted, this approach makes Dell's no-inventory claim somewhat disingenuous-the suppliers are carrying the inventory in plants and warehouses camped around Dell's assembly plant in Austin. However, somewhere a happy medium exists between Dell's VMI and Japanese-style Keiretsus for North American automotive industry to further investigate.

Tighten partner relationships

"I'd love to say it's all technology and technology is going to win over everything else, but it's not," says Peterson. This is not necessarily an inventory or technology issue, she continues, but OEMs and suppliers must create win-win, or partnership, relationships in sharing information. Doing that requires another "implementation": Trust. "A vast difference exists between collaboration and dictation," explains Kowalski of Manugistics. Most automotive manufacturers, particularly the OEMs, tend to view their relationship with their supply chain as adversarial, command and control: "Here's our forecast, here's our production schedule, now meet it." Too often, meeting those demands is done at great expense, such as through premium freight.

How can automotive companies establish trust? "Not easily," says Peterson. One way is through better contracts that are less abrasive, better at quantifying the value for suppliers to implement changes, and more apt to actually share the benefits. Kowalski has these suggestions. Initiate programs that embrace suppliers and wherein you work cooperatively with your suppliers. "The last time I checked, that business model is much more popular than the Lopez model," adds Kowalski. Next, let people act on the information they're collecting and supposedly collaborating on. Such "empowerment" goes beyond typical procurement versus supplier relationships. Last, realize that trust is built upon sharing information. In the past, suppliers tended not to say too much because they were afraid that what they said would be held against them "in the court of purchasing," says Kowalski. Conversely, OEMs didn't say too much because they wanted something to hold over their suppliers.

In the final analysis, three things become obvious. First, sharing data is a competitive advantage. Second, actions speak louder than words. Third, OEMs tend to drive the supply chain, so the onus is on them to initiate, facilitate, and then stand by this collaboration with their supply chain partners.

Get back to basics

North American companies too often try shortcuts. "They'll take a technology, say it looks like a `best practice process,' put it in place, and make their people work around it with little regard to the legacy and human resource issue around it," says AMR's Prouty. "Usually some piece progresses the company, but the entire implementation never lives up to the expectation."

So, start small, have a vision, get your own house in order. Look internally. Determine what's the variability that's driving you to maintain inventory. Is it because of internal business processes or external? Too many companies collaborate with their supply chains before figuring out how to collaborate internally. Last, don't spend a ton of money on a product development system. Instead, focus on getting the tools to make you faster and better.

[Sidebar]

MASLOW'S HIERARCHY OF NEEDS & THE SUPPLY CHAIN

[Sidebar]

Nobody is going to self-actualize until they have their lower levels satisfied first, explains Karen Peterson, vice president and research director for Gartner Inc. "To me, supply chain planning is self-actualization."

Human psychologist Abraham Maslow wrote in the mid-'6os that some people reach higher levels of creativity, consciousness, and wisdom-called "self-actual ization"-after satisfying a hierarchy of basic needs. Biological/physiological needs are at the lowest, most-basic level. These needs include oxygen, food, water, and a relatively constant body temperature.

[Sidebar]

Now look at automotive suppliers. They have undergone a huge number of mergers and acquisitions, explains Peterson. They're still trying to bring that all together with their own data. They are also still trying to get basic systems processes all together, Till then, they're not ready to work on external initiatives. This is where Maslow's Hierarchy comes in-and a Catch-22. The suppliers "need to get through the technology that's going to enable them technologically to be more flexible in the future," says Peterson.

In particular, automotive OEMs and Suppliers need to implement a broad set of technologies called, for a lack of a better term says Peterson, "extended enterprise management tools." These will, as with Maslow's Hierarchy, provide the stability at the lowest levels of enterprise management and add the analysis tools at the top for intelligent decisionmaking.

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Steele, A. L. (2001). Cost drivers and other management issues in the JIT supply chain environment. Production and Inventory Management Journal. Alexandria, 42(2), 61-68

Abstract

Since Just-In-Time was introduced to the business world, companies have been scrambling to replicate the system. As simple as this system of production appears, 30 years later many companies are still struggling with the concept. The implementation issue is a very real problem in JIT, and ongoing problems can be one of the largest cost drivers for a corporation

Copyright American Production & Inventory Control Society, Inc. Second Quarter 2001

Since the early 1970s when Toyota introduced Justin-Time (JIT) to the business world, companies have been scrambling to replicate the system. As simple as this system of production appears, 30 years later many companies are still struggling with the concept. Some have had success implementing a hybrid of JIT, but as the experts will tell you, if the complete system is not implemented it does not qualify as JIT. Other organizations have tried to implement the system but had to scrap it because of internal problems or problems with their vendors or customers. Still others have stayed on the sidelines, waiting for the perfect set of implementation plans to come along.

The implementation issue is a very real problem in JIT, and ongoing problems can be one of the largest cost drivers for a corporation. A company must start internally and redesign the manufacturing setting for JIT. The system cannot simply be plugged into the existing setting and be expected to flourish. Even after successful internal implementation, companies can reach a point at which it is difficult to squeeze additional efficiencies from their internal operations. It is at that point the company must go beyond its own setting and look up and down the supply chain to identify areas in which its customers or suppliers can help improve its efficiencies [8].

For managers, that can be a daunting task, but it may be where the true cost drivers in JIT reside. Managers must tackle issues such as product delivery logistics, purchasing communications, and any other unforeseen problems that might arise, but not even the most thorough managers can plan for catastrophic failures in the system, such as destruction of a supplier's manufacturing facility by fire or unexpected strikes by union workers.

This article will attempt to identify cost drivers, or problems, in the JIT production system and describe ways companies have successfully conquered them. The first part of this discussion will include issues of implementation, product delivery logistics, and purchasing. The section will conclude by addressing two concepts, total quality management and continuous improvement, which companies must master to make JIT work. Finally, common questions managers may have in regard to JIT production will be considered.

THEORY OF JIT PRODUCTION

A discussion of JIT would not be complete without considering Toyota Motor Corporation. Toyota is commonly cited as the originator of JIT, a production process that attempts to get the right quantity of quality parts to the assembly line at the exact time they are needed for production. This method in its most basic sense is a continuous process aimed at eliminating waste and solving problems throughout the supply chain [8]. It is synonymous with Japanese management techniques, which intimately integrate suppliers and customers along a supply chain, requiring total quality management (TQM) at every link in the chain.

Toyota will be the first to admit that the system is far from perfect. The company believes problems are an inherent aspect of the system and require the user to continually look for ways to improve the processes and efficiencies in the system. When the company feels it has reached a tangible level of JIT, it adjusts the goals to a higher level [7].

JIT production consists of three separate divisions. The first is the materials system within JIT. The flow of materials through a JIT production system is the most visible activity within JIT; often the materials flow is seen as the only activity to be managed in the system. However, it is the least important aspect. It is selfadjusting in accordance with customer demand and includes a buffer to absorb the natural variability within the system. The goal is to eventually eliminate the buffers. Frequently, failures with JIT have been attributed to poor demand forecasts. It is questionable whether or not the people making those kinds of claims truly understand JIT production; according to the theory of JIT, a demand forecast is not needed.

The second branch of JIT production is production planning prerequisites. The most important part is TQM.

TQM ensures that quality products will be made and a limited amount of inspection time will be required.

The final branch is continuous improvement of the system. Most organizations using JIT production fail to effectively execute continuous improvement. As a system becomes more efficient, many companies will be satisfied with the improvements they have achieved and will not seek to further improve the system. Even if a company sees an area in which it can make improvements, it may be difficult to justify doing so because the return on investment is very low.

COST DRIVERS OF JIT

The following section covers a variety of cost drivers related to JIT manufacturing. The first to be discussed is implementation of the system. It is important to know some of the costs and pitfalls associated with the internal reorganization of the firm that intends to use JIT production. A few of the issues relate to product and plant layout, computerizing supporting systems, improving the systems employed, and educating vendors and customers up and down the supply chain.

Other cost driver factors related to external implementation will be considered, including product delivery logistics, purchasing, and communication with customers. Unexpected events can occur in a JIT arrangement, causing cost overruns or lost sales. These issues will also be covered.

JIT Implementation

Successful implementation is critical to the success of JIT production. A study done in 1996 suggests that the production system must be willing to make strategic adjustments consistent with the demands of its environment [17]. Yasin and Wafa, the authors of the study, believe that these long-term strategic adjustments are not feasible without short-term costs. They say that in most cases a systemwide strategic adjustment will not yield desired results unless the subsystems, mainly the input, process, output, and managerial subsystems, are modified to make feasible systemwide changes. The researchers reason that all subsystems must actively contribute to and facilitate the incoming changes to ensure that the changes are successful. Plant layouts are also important according to the study They must be adjusted, relationships with vendors and customers must be reviewed, and quality circles implemented. Yasin and Wafa identified six potentially beneficial attributes of JIT that can increase organizational efficiency and effectiveness:

1. Tends to eliminate waste in production and material.

2. Improves communication internally (in the organization) and externally (between the organization and its customers and vendors).

3. Has the potential to reduce purchasing costs, which are a major factor for most organizations.

4. Is instrumental in reducing lead time, decreasing throughput time, improving production quality, increasing productivity, and enhancing customer responsiveness.

5. Tends to foster organizational discipline and managerial involvement.

6. Tends to integrate the different functional areas of the organization, especially to bridge the gap between production and accounting.

Yasin and Wafa concluded that successful JIT firms were more ***** toward computer-integrated manufacturing and were more likely to invest in process layout modifications. They reported that successful and unsuccessful JIT firms had invested equally in quality assurance, but the successful JIT firms used it more extensively.

Administrative costs to implement these changes can be high. One article reported that all suppliers in its study said the administrative burden had increased. However, some firms managed to use existing resources to meet the challenge so that no extra charges were incurred; others reported having extra costs [15].

One fundamental thought underlying JIT is that when suppliers implement JIT, they actually are becoming a part of their customer's operations. Toyota feels the key to using JIT successfully is educating its vendors. The company believes that when it creates the partnership with its vendors, the vendors take ownership of the responsibility to Toyota's customers [8]. ***** Hannah, president and CEO of the Reliance Steel and Aluminum metal service center, feels it is vital to the success of a JIT supply chain that all participants learn more about the entire industry supply chain. He says that distributors in all industries need to learn more about the customer's customer, how they need to change their operations to meet those needs, and how suppliers are going to help them do that. JIT cannot be viewed as an isolated supplier-customer relationship. The relationship must extend up and down the industry supply chain [13].

Product Delivery Logistics

Product delivery logistics is another factor critical to the success of JIT manufacturing. Tuning of shipments and supplies can make or break a company using JIT. A manager must pay close attention to this issue to ensure that production delays do not turn into obsolete products and lost sales, both costly to the firm. There appear to be two separate schools of thought regarding the locality of suppliers to customers, each carrying its own costs and benefits.

Toyota believes it is key for a company using JIT to pull as much material, parts, and subassemblies from suppliers as close to its assembly plants as possible. For example, North American suppliers provide 80% of the parts, materials, and assemblies used by Toyota's Georgetown, Kentucky, plant [7]. Most suppliers are located within 200 miles of the plant. This localized supply base makes it possible for Toyota to develop a closedloop distribution network known as a milk run. The milk runs allow Toyota to receive parts on a JIT basis. Often, suppliers are required to load shipments so that the containers come off the truck in the order they will be used. Kanban cards are used to signal to suppliers when the next lot of parts is needed. A Toyota assembly line person pulls the kanban cards when the first part out of a new lot is used. The cards are then gathered and returned to the supplier with a summary of the next order.

Johnson Controls Inc. (JCI) is a producer of seat assemblies, headliners, and instrument panels for the automobile industry. It is a supplier to New United Motor Manufacturing Inc. (NUMMI), a joint venture between Toyota and General Motors. JCI subscribes to the proximity theory of suppliers to customers. JCI maintains that its costs and, more important, its response times, can be trimmed because it is located only 35 miles from NUMMI. Its lead times could be even shorter if it did not build in buffers for unseen delays, specifically California traffic [8].

Although some customers prefer to have their suppliers near them, that does not appear to be highly correlated with low costs or success with JIT. Wafa, Yasin, and Swinehart [14] examined 130 companies and found that supplier certification programs and the existence of communication/information links are much more reliable predictors of success with JIT than the geographical location of suppliers. The study actually found that longer distances between supplier and customer were positively correlated with increased success with JIT. They concluded that an increased level of communication was required to compensate for the long distances between supplier and customer. The recommendation was made that companies interested in implementing or improving JIT systems performance should invest in communication and information technologies rather than pull suppliers closer to them.

For those companies engaged in an international supplier-customer relationship, border crossings and customs clearance can be an added challenge. They can create delays in transportation and increase uncertainty in the JIT supply chain. Distribution has been cited as one of the foremost challenges of the increasing trade between Mexico and the United States and one of two primary reasons U.S. firms close Mexican operations [12]. The authors found that managers of firms demonstrating high levels of JIT success perceived that they attained better transportation service performance than managers of non-JIT firms. This study also reinforces the idea that proximity of supplier to customer is not a prerequisite to JIT success.

Purchasing and Communication

Purchasing and communication between the supplier and customer in a JIT environment require a large investment. The supplier must not only make the investment in information technology but must take the time to truly learn about the client's business.

A new technique called JIT II has evolved in JIT purchasing. Lance Dixon, former Bose Coropration director of purchasing and logistics, is credited with creating this new concept. According to Dixon, JIT II empowers the supplier within the customer's organization [3]. JIT II is an intimate arrangement that allows a supplier, at its own expense, to place supplier representatives in the customer's organization. Generally, the representative is placed at the customer's site full time and has the responsibility of monitoring the buyer's inventory and keeping it replenished. Dixon feels the subsequent efficiency results in bottom line improvement for both supplier and customer.

It is now being suggested that electronic data interchange (EDI) systems, which most manufacturers currently use, can help suppliers eliminate the need for an employee at the customer's site. A system of information exchange for orders can be created and monitored by the customer's own employees or by a supplier's representative.

Radovilsky, Gotcher, Mistry, and Yip [11] surveyed plant managers of automotive, electronic, and machinery firms. Each plant used JIT purchasing to support its manufacturing plant. Fifty-one percent of the managers said that relationships with suppliers were the single most critical element to success in JIT purchasing. Twenty-three percent reported that the biggest difficulty in using JIT purchasing was the lack of support from suppliers. The authors concluded that the JIT philosophy in purchasing resulted in a number of positive outcomes. Some of those were inventory reduction, increased quality, and a reduction in overall production and inventory costs.

One of the benefits of JIT is that customers can reduce inventory and therefore eliminate capital outlays for inventory warehouses. However, many firms are now warehousing inventory or requiring suppliers to warehouse inventory. This buffer allows for fluctuations in demand and allowances for temporary supply interruptions. This type of JIT hybrid is becoming more popular and is sometimes costly to the supplier.

One example of the system is now being used in the automotive industry. General Motors, Ford, and Chrysler have set up steel warehouses that support regional stamping plants. The cost of storing the steel is covered by someone else, usually the steel supplier, because the automakers do not want to carry the inventory on their books [9]. Chrysler requires that 15 days of steel be inventoried at each warehouse. The steel is then delivered to the plant in JIT fashion. This type of JIT arrangement is used because the stamping schedules at the plants are erratic, which causes bloated lead times. Pete Peterson, director of automotive marketing for U. S. Steel, says that much of what they are dealing with is simply communication and information processing. His goal is to have a smooth flow of steel from the steel mill shipping dock to the stamping floor; he believes that will be accomplished in the next 10 years.

Unexpected Events

Some of the purchasing strategies explored in the previous section were less than ideal for a supplier in the JIT supply chain. Suppliers warehousing steel for an automotive customer at its own expense leads many to say that inventory is not eliminated or reduced but simply pushed up the supply chain. Many of the supply chain customers want these buffers to protect against unforeseen problems. Two situations in recent memory have reinforced the behavior.

The JIT method that includes larger than normal inventory buffers is sometimes called JIC, or just in case production. JIC is identical to JIT, but subscribes to the belief that bad things sometimes happen to good companies. It is thought that at some point lean inventory levels will be erased because of an unforeseen catastrophe. One such incident occurred in February 1997 when Aisin Seiki Company, a supplier for Toyota in Japan, had an entire brake parts factory burn to the ground. Aisin had just three days supply in its warehouse. Because of this problem, Toyota missed selling an estimated 50,000 passenger cars. Contributing to the problem was the fact that all of Toyota's parts plants were at full capacity so the company could not pass production off to one of its own plants [5].

The International Brotherhood of Teamsters' strike in 1997 disrupted UPS shipping services throughout the United States. That type of situation is exactly what risk managers at Johnson and Johnson try to avert. Johnson and Johnson had put contingency plans into effect well before the strike and saw only minimal disruptions in deliveries to its customers. Insurance is available for these types of business interruptions; however, although insurance can give a company its money back it will not bring back its customers [18].

General Motors experienced problems in 1996 when a labor strike halted operations at 22 of its 29 car and truck plants in North America. The strike cost the company $600 million to $800 million in lost profits. Executives at GM say that though the lack of finished goods inventory in the supply chain affected shortterm performance, the long-term advantages of JIT far outweigh the risks [6].

One final case for the JIC approach to manufacturing is the incidence of missed sales due to unexpected demand. Some companies regard inventory as opportunity inventory. In general, they say this particular inventory does not sell quickly but when it does, margins on the inventory are higher than for typical products [16]. Demand Forecasting-A JIT Problem?

In the purest form of JIT production, a demand forecast is not required. However, many hybrid production systems exist, and some suppliers feel it is wise to use forecasts from customers to pace their system. In this situation suppliers depend on the customer to provide them with accurate and timely demand forecasts. That is the case for suppliers who use a build-toorder system. Miller SQA, Inc., a company based in Holland, Michigan, makes a wide variety of office furniture. According to Bill Bundy, vice president of operations, schedule stability is often considered key to JIT production in the world of mass customization. He says that with hundreds of thousands of product variations and the demands of a build-to-order system, the company's schedule might be stable for only three or four hours. Its need for chair arms is one example. In one recent week the company needed 478 chair arms to meet demand; the next week it needed only 7. Without accurate information from the customer, suppliers cannot efficiently use JIT within their own manufacturing operation.

Much has been written about the growing disenchantment with suppliers who lack the ability to deliver product to customers on time. The underperforming supply base is only one of the problems that exist with JIT. A 1997 survey suggests that although information availability and communication are important, most companies rely on the sales and marketing departments to create forecasts. Only a few companies are providing suppliers with consistent real-time access to their fluctuating production schedules. Most participants in the JIT supply chain believe that an inventory system is only as good as the data put into it [10].

Others involved with JIT feel that each customer molds JIT according to its own needs. In a previously mentioned case within the automobile industry, suppliers were forced to stock steel in warehouses located near the stamping plants. They had to incur the expense to warehouse a minimum of 15 days of inventory just so the automobile manufacturers could withdraw the inventory in what they claimed was a JIT manner. Only the customer in this case realized the JIT cost savings; the supplier had to continue to produce and warehouse finished goods inventory. Arrangements such as those do nothing but reinforce the fact that the customer does not have to provide accurate demand schedules to the supplier. Such cases might support a JIT II situation in which the supplier can rely on its representative to provide accurate and timely orders.

In some situations customers who use JIT methods may want delivery within three months, whereas others need JIT delivery in three hours. Uneven and unpredictable demand means that suppliers must resort to holding more inventories of raw materials and finished goods [16].

Total Quality Management

No discussion of JIT production would be complete without considering TQM. It is the only component of JIT that can stand alone as its own concept. The Rover Group, a subsidiary of BMW, considers TQM an important part of delivering its customers the products they desire. The group is constantly challenged to deliver distinctive products with varying levels of style, quality, capability, and power. The Rover Tomorrow program was created to replace the traditional, functional, hierarchical structures with a flexible process***** organization built on the principles of multifunctional teamwork, empowerment, and continuous improvement [4]. The program focuses on delivering extraordinary customer satisfaction. As a result of this program, significant benefits have been realized, most notably product development times have decreased from seven years at the end of the 1970s to three nears in 1996.

One of the main underlying concepts of TQM is empowerment of the employee. Many people point out that this can be a major problem. It is emphasized that TQM will work only if employees truly care about their jobs. Keith Grint [21 explains that this is one management "wave" that tends to crash over and can drown an organization. He states that involvement and commitment of the workforce is required on all levels. And because quality control must be delegated to the lowest possible position, shop floor workers and office workers are responsible for their own quality control. Quality can be guaranteed only if everyone is fully committed and trusted. In a TQM environment managers cannot closely monitor their employees without undermining the trust and self-direction required. Grint asserts that employees must take ownership of their jobs and this ownership cannot be imposed from above. If it is, then what you have is employees being "forced to be free." Lack of employee commitment, therefore, sets a system up to fail.

Overall, TQM is a vital part of a JIT production system. It ensures that quality parts will be produced in the JIT supply chain. As stated before, this system relies on the employees closest to the production processes to control the quality of the products. In theory, final inspections are not needed nor are inspectors. If a problem occurs or a trend is identified that may lead to quality problems, employees have the right to stop the process and correct the problem. One study reports that managers using JIT production methods attribute the improved quality of incoming materials to the implementation of TQM and statistical quality control on the supplier's side [11].

Continuous Improvement of the JIT System

Continuous improvement is a concept closely tied to TQM. For the JIT production system to improve, employees must be the ones driving the change. Usually the most obvious and easiest to correct problems give organizations the largest return on their investment. Often, these problems center on costs related to setup times, plant layout, and material acquisition processes. According to Rod Rodin, president and CEO of Marshall Industries, to continuously improve means to eliminate costs; cut out duplication; eliminate transactions; and increase quality, market share, and customer satisfaction [1].

Once these problems are solved more problems may be identified but not acted on. This is where the breakdown of continuous improvement begins. Companies can identify factors they should change; however because of the influence of traditional performance measurement systems, financial justification for the change becomes important. Improving the process or the product is no longer the issue; the issue becomes whether or not it makes sense from a return on investment standpoint to improve the system. That mind-set may keep organizations from truly improving the JIT production system.

QUESTIONS FOR MANAGERS

The discussion above has focused on cost drivers and other problems associated with JIT production systems. It appears that any discussion about JIT production will be condensed to three main questions managers in these environments must answer. First, does JIT production really work? Second, does the system work better in some industries than in others? And finally, are the costs associated with JIT really worth the effort required to convert the svstem?

In response to the first question, we can conclude that, yes, JIT production does work. It appears that the main obstacle in making it work is the commitment of the company implementing the system. The company must be dedicated to implementing all three parts of JIT. The most easily implemented process is the materials movement system. Organizations must go beyond that to changing the production processes such as machine setups and production layout. TQM should be used to eliminate quality problems and the waste of rework. Continuous improvement is the vital third leg of JIT, but often this is where companies come up short. To implement continuous improvement in an organization, traditional performance measurements must be scrutinized and not allowed to get in the way of the overall goal of improvement of the products and processes of the company.

That leads us to the next question. Does JIT production work better in some industries? Again, the answer is yes. Managers must look at the type of production environment they operate in. If the system requires a great deal of customization or operates in an engineer-- to-order environment, JIT production may not be compatible. It will allow for some customization; however, it is best suited for a production environment with a high level of standardization and even lot sizes. Trying to use the wrong production technique in the wrong environment is a sure way to fail. Looking deeper, we see that even within the same industry some companies are more successful with JIT production than are others. The critical factor seems to be the discipline of the company while implementing JIT production and its commitment to continually improve the system.

Now to address the final question. Are the costs associated with JIT production worth the benefits? The answer to that question can be seen as a function of the answers to the first two. To derive the greatest benefits from JIT production, an organization must be sure the system fits its production environment. Furthermore, the organization must be dedicated to appropriately implementing the system and empowering the workforce to make JIT work. As mentioned before, simply plugging JIT into an existing production system will not guarantee success. Change within the system must be managed to successfully achieve desired resuits. And according to the literature, when it is implemented correctly, JIT production benefits can far outdistance the costs.

CONCLUSION

JIT production systems can afford organizations many benefits. It is important, however, that companies know what the associated costs are. More important, the managers implementing the systems must be aware of the pitfalls and sometimes subtle costs related to JIT production. Some of the costs are due to implementation issues, which may require a company to redesign its production processes to better fit JIT. Other costs are linked to material or inventory flow through the system. Still more costs are related to material acquisition and communication to vendors. And, we should not forget, unexpected events can occur that can be catastrophic in a system that runs on lean inventories. These types of disruptions in the supply chain can be costly.

In addition to being aware of the cost-driving issues, managers in a JIT environment must use TQM and continuous improvement to keep the system functioning optimally. TQM ensures that the quality of the product will remain high. Continuous improvement forces managers and employees to search for ways to make the system more efficient. The continuous improvement requirement of JIT is usually where organizations fall short. For continuous improvement to occur in a JIT organization, traditional performance methods must be used only when deemed appropriate. Costs related to continuous improvement usually increase as return on investment decreases. It is because of this paradox that continuous improvement efforts usually cease.

JIT production continually strives to eliminate waste in the production system. When a supply chain in which JIT production is used, is looked at holistically, it is often noted that the lines between supplier and customer are almost invisible. Although organizations' internal managers manage JIT production, suppliers and customers themselves must look outside their companies and help each other make JIT production work. My definition of supplier-customer relationship extends beyond defining the customer as the ultimate end consumer of a product. It is my belief that the supplier-- customer relationship is a cycle that is repeated within the industry in route to the final consumer. To appropriately evaluate the relationship, you must look up and down the supply chain. Simply looking at one relationship in isolation is not enough. Oftentimes, relationships throughout the industry supply chain decide the success of JIT. Suppliers have a responsibility to learn about their customers and take ownership and responsibility to the end user of the product.

[Sidebar]

*This is an edited version of the prize-winning part-time graduate submission in the 2000 Donald W. Fogarty International Student Paper Competition sponsored by the APICS Educational and Research Foundation.

[Reference]

REFERENCES

1. Carbone, J. "Wanted: More VA from Distributors." Purchasing 121, no. 4 (1996): 47-51.

2. Grint, K. "TQM, BPR, JIT, BSC's, and TLA!s: Managerial Waves or Drownings?" Management Decision 35, no. 9-10 (1997): 731-738.

3. Henricks, M. "On the Spot.- Entrepreneur (May 1997): 80-82.

4. jina, J. "Automated JIT Based Materials Management for Lot Manufacture." International Journal of Operations and Production Management 16, no. 3 (1996): 62-75.

5. Koepfer, G. "A 7ust-in-Case' Case?" Modern Machine Shop (April 1997):10.

6. Minahan, I "Did the GM Strike Prove That JIT Doesn't Work?" Purchasing 120, no. 7 (1996): 28-29.

7. Minahan, T. "JIT.- A Process with Many Faces." Purchasing 123, no. 3 (1997): 42-46.

8. Minahan, T. JIT Moves Up the Supply Chain. Purchasing (Sept. 1, 1998): 46-47, 51-52, 54.

9. Ninneman, P "Just-in-Time Warehouses." (Steel Forum) New Steel 13, no. 7 (1997): 100.

10. Porter, A. "The Problem with JIT." Purchasing 123, no. 4 (1997): 18-19.

11. Radovilsky, Z., W. Gotcher, R. Mistry, and R. Yip. "JIT Purchasing: Analyzing Survey Results." Industrial Management (Nov./ Dec. 1996): 17-20.

12. Stank, T., and M. Crum. "Just-in-Time Management and Transportation Service Performance in a Cross-Border Setting." Transportation Journal (spring 1997): 31-41

[Reference]

13. Stundza, T. "Buyers Ask Service Centers: What Happened to JIT?....and a Few Other Things." Purchasing 126, no. 7 (1999): 1-4.

14. Wafa, M., M. Yasin, and K. Swinehart. "The Impact of Supplier Proximity on JIT Success: An Informational Perspective." International Journal of Physical Distribution 26, no. 4 (1996): 23-34.

15. Waters-Fuller, N. "The Benefits and Costs of JIT Sourcing: A Study of Scottish Suppliers." International Journal of Physical Distribution 26, no. 4 (1996): 35-50.

16. Yafie, R. "Profitability Becomes the New JIT Issue." American Metal Market 105, no. 160 (1997): 28A-29A.

17. Yasin, M., and M. Wafa. "An Empirical Examination of Factors Influencing JIT Success." International Journal of Operations and Production Management 16, no. 1 (1996): 19-26.

18. Zolkos, R. "Property Loss: Just-in-Time Approach Exacerbates Risk of Contingent Business Interruption." Business Insurance 31, no. 33 (1997): 3-5.

[Author Affiliation]

ANDREW L. STEELE

Orthothics and Prosthetics One, Inc., 527 Park Lane, Suite 200, Waterloo, IA 50702

[Author Affiliation]

About the Author

ANDREW L. STEELE, MBA, CPO, is vice president of Orthotics and Prosthetics One, Inc., a prosthetics (artificial limbs) and orthotics (orthopedic braces) outsourcing firm in Waterloo, Iowa. He earned a BS at the University of Iowa in 1991, completed his postgraduate prosthetics and orthotics education at Northwestern University, and earned an MBA at the University of Northern Iowa.

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Drickhammer, D. (2001, May 21). Peak performance. Industry Week. Cleveland, 250(8) 36-40.

Abstract (Document Summary)

Industry leaders predict that tomorrow's top companies will succeed based on the strength of the relationships they establish, from their raw-material suppliers, through manufacturing and distribution, and ultimately to their customers. In this value chain of the future, information will replace inventory, and built-to-order, defect-free products with cutting-edge features will be delivered 100% on time at a very competitive cost. Among leading manufacturers during the last 20-plus years, people on the plant floor have finely honed their ability to recognize waste, in the form of excess handling, queue time, rework, and inventory, and to eliminate what does not add value. It is time, say industry observers, to direct a similar amount of attention beyond the factory walls.

If you're not managing your value,chain, you're not managing your business. That is the warning of industry leaders who predict that tomorrow's top companies will succeed based on the strength of the relationships they establish, from their raw-material suppliers, through manufacturing and distribution, and ultimately to their customers.

TEXT:

In this value chain of the future, all participants will know and focus on the value they add for the customer, information will replace inventory. and built-toorder, defect-free products with cutting-edge features will be delivered 100% on time at a very competitive cost. Information, products, and cash will flow in a synchronized fashion that optimizes the productivity and profitability of the entire value chain.

Most manufacturing companies fall far short of this ideal. They remain focused on one-to-one relationships, with little integration of internal processes let alone cross-organizational ones, at a time when a convergence of Webenabled information technology offers unprecedented opportunities for collaboration and sharing of information. Yet for the anticipated cost savings to be realized-analysts throw out figures in the billions of dollars manufacturers must successfully implement these software applications, and business partners must be able and willing to trust one another.

Twenty years ago purchased materials and components accounted for only a quarter of the cost of finished products. Today purchased materials represent three-quarters of that cost, so it's only logical that companies would be trying to collaborate more, with their suppliers certainly, but also with their customers. For these relationships to be effective, corporate managers first must do some hard work internally, clearing away legacy management practices and barriers between business functions. Product development, procurement, marketing, sales, manufacturing, human resources, and accounting all need to talk to one another. People have to change how they work and, equally important, how they measure success.

In effect, this is what has been happening within leading manufacturers over the last 20-plus years with the ongoing adoption of lean manufacturing. People on the plant floor have finely honed their ability to recognize waste, in the form of excess handling, queue time, rework, and inventory, and to eliminate what doesn't add value. It's time, say industry observers, to direct a similar amount of attention beyond the factory walls.

Lean at its purest is about increasing speed, removing waste, and serving the customer better," says Jeffrey C. Sinclair, a director in the Cleveland office of McKinsey & Co. and coleader of McKinsey's North American Manufacturing Practice. "In a value chain this translates into reducing leadtimes by 50% or more, slashing expensive LTL [less-than-truckload] and emergency air freight, and maximizing distribution-center productivity. This enables retailers, distributors, and manufacturers collectively to drive up customer service with much lower levels of inventory and cost throughout the chain."

Lean techniques have been so effective at transforming Deere & Co.'s internal operations that over the last three years the company has hired 94 supplier-development engineers whose full-time jobs are to work with the supply base to help them implement lean techniques. In the ***** of mutual cooperation, most cost benefits generated through the program are shared equally between Deere and its suppliers.

"Last year we spent $7 million on the program; the return in hard dollars was $22 million to Deere. That means it was roughly $22 million to the supply base as well," reports Dave Nelson, vice president, worldwide supply management, for the Moline, Ill. equipment maker and coauthor of The Purchasing Machine (2001, Free Press). "There's probably as much or more in soft dollars that we don't measure, in reduced inventory, reduced floor space, improved safety."

Toyota Motor Corp. and Honda Motor Co. Ltd. have similar histories of helping their suppliers improve their operations. Such win-win programs go a long way toward changing what is most often an adversarial relationship.

Nevertheless, today buyers in most procurement departments remain focused on squeezing their suppliers. "The problem with [such tactics] is, all you're looking at is the price of a particular component. I'm convinced that if you could really look at the systems cost of that decision you would probably realize that it is not going to get you savings. It may even end up costing you money," observes P. Jeffrey Trimmer, chairman of the National Initiative for Supply Chain Integration Ltd., who recently retired as director, operations and strategy for procurement and supply, for DaimlerChrysler AG's Chrysler Group.

"Supply chains are not about buying something a nickel or so cheaper," Trimmer continues. "These are strategic decisions. We need to be able to communicate to the CEOs, CFOs, and COOs that this is a strategic thing you need to think about."

The trendsetter of the manufacturing-outsourcing movement, the electronics industry, leads the way in taking a high-level, strategic view of value-chain management. Yet in recent months that didn't prevent overly optimistic forecasts from bloating inventory levels and straining relationships when the market turned sour.

"Leadtimes were being pushed out because of the amount of supply. Companies had to make long, threemonth commitments. Ordering product three months out tended to let a lot of inventory build up," recalls Jim Sacherman, senior vice president, Flextronics International Ltd., San Jose. At this time a year ago, everyone in the sector was doing their best to manage component shortages.

"In general our push is to not have product sitting on the water. That's a dangerous part of the supply chainthree or four weeks of stuff that there's nothing you can do about," Sacherman adds. Where possible, Flextronics has bulky items such as enclosures made near its manufacturing operations. The company invites suppliers to sit with them in the same industrial park, giving them space so material and components can be delivered on demand.

"Excess inventory is a direct result of poor communication, so you have to focus on improving communication. That means speed and accuracy," adds Dave Otterness, Flextronics' vice president, supplier management. Otterness says his job requires a lot more interface with customers than it did before. The primary reason is the amount of coordination and engineering support all of the electronics-manufacturing-service firms are providing their customers today.

"We're as much a facilitator as a product builder," he observes. "We have to facilitate our customer's forecasts, sales orders, and requirements. We have to facilitate our supplier's processes and leadtimes and cycle times back up into that."

The Tools

Aiding in the quest for the ideal value chain is a growing cadre of software and service providers. But no matter what mixture of software applications a manufacturer attempts to implement, it still comes down to the ability to get the right product to customers when they want it. The faster value-chain partners know what the customer wants, and the faster they are able to respond to that demand, the less waste in the system and the more competitive and profitable the chain.

"We talk a lot about collaboration and how important it is and everybody is talking about doing it, but in fact companies are run very inefficiently with sometimes grossly inaccurate data," says Karen Peterson, a research director with Gartner Inc., Stamford, Conn. "Start spreading that around and you're just spreading around bad stuff a lot faster."

Peterson says vendors have a long way to go toward providing scalable solutions that d