Operations Management - Just in Time System - Case Study Example

Operations Management Just In Time System Introduction When it comes to supply chain linking is very important, it is an unrelated business functions like demand planning, sourcing and logistics can often yield very positive results by reducing costs and improving performance in supply chain operations. When this business functions are looked keenly and taken care of properly they can go a long way to solving complex supply chain problems. This holds whether the supply chain extends across the state, the nation or the globe. When there is adoption of just-in-time (JIT) inventory principles it will undeniably make production operations more efficient, cost effective and customer responsive. Firms that are very used to using JIT, and implementing the principles of JIT are undoubtedly have a significant competitive advantages over competitors that don’t use this system. The biggest secret is knowing how and when to apply JIT principles that will enable a company to gain competitive advantages in its respective industry and business situation (Krajewski, & Ritzman, 1993). The best foundation of JIT is to enhance that there is the right amount inventory, whether raw material or finished goods, available to meet the demands of the production process and the demands of the end customers. There should be no more, nor less, as this concept is very useful to the food industry where the commodities are highly perishable. It is thus clear that the more a firm is operating in a perfect JIT situation, the more the more responsive one is to the customers, this implies there is very minimal capital that is held in raw material and finished inventory. The less one spends to store and carry inventory, the less obsolescence one has to right off, and the better one can optimize the transportation and logistics operations. The ultimate actions for this are that the company will save real money (Taiichi Ohno, 2006). Why JIT There are various benefits that accrue JIT usage by an organization especially our case that we are focusing on the food industry. The first benefit of the usage of JIT is that there is a great saving on Economic Order Quantity. The total cost of ordering and holding inventory. There is exploitation of the savings which that are realized by holding fewer inventories. The net benefit of JIT is the radical reduction in safety stock. There reasons as to why the safety costs exist, one, it can be due to variability in demand and second it can be due to variability in lead time from suppliers. Case study: McDonald and JIT It is with no doubt that just-in-time is the real and big thing today to anyone who is knows the benefits of operation management. JIT with other operations techniques such as six-sigma and lean operation are the words that are moving operation management to another level. What is the deal with operation management? First of all, JIT is a form of providing supplies to customers as the name suggests, just in time. McDonald is a good example in the food industry that has really utilized this operation method. McDonald’s doesn’t begin to cook until a customer has placed a particular order. Before McDonald began using JIT system, a batch of hamburgers would be precooked and then kept under heat lamps. The hamburgers could be kept for as long as possible and be discarded if they weren’t sold. The only way one could get a fresh hamburger was to order a specific hamburger. What really happens to this system is that the firm is able to provide the customer with their order as fast as possible while having the finished product siting in the inventory for as short as possible (Taiichi Ohno, 2006). This system has really benefited McDonald big time, the major one been that better food are offered at a lower cost. It is non-debatable that just-in-time lowers cost while at the same time raises quality. This is what exactly McDonald has done. The manner in which the system has allowed McDonald to improve quality is just amazing. A fresh burger is taste nice, and this implies that it is of high quality. So when McDonald waits for a customer to order for a burger, a few things are done to improve the customer service. This is so because JIT burger assembly can make a customer not to be patient, McDonald doesn’t panic that causes huge delays. This state where McDonald waits till the customer places an order then they make it is very essential. The ordering costs are much minimized and costs that are related with the customers such as ordering fast food which is not really fast. Second advantage is that the application of JIT by McDonald’s, enables them to adopt to demand in a much better way. Consequently, lower inventory levels would cause McDonald’s bigger problems in a higher demand because they wouldn’t have their safety stock, but because they can produce the burgers in a record time, they don’t have to worry about their pre-made burger inventories running out in the middle of an exceptionally busy shift. There are lower costs that are associated with JIT, the holding costs for the burger for example i.e. beef, and cheese, buns etc. are extremely high because of their spoilage costs. Frozen ground beef that’s good today might not be good in the next few months. It becomes worse when the burger is cooked, the spoilage rate shoots up. Instead of having a shelf life of months or weeks, the burger needs to be sold within 15 minutes or so. The holding costs go from roughly 20% per week to 100% per hour (Krajewski, & Ritzman, 1993). In other words, the system that McDonald’s was using, produced at a level that gave them high inventories so that food would be available fast, which is the main benefit of fast food. Unfortunately, food that was not sold after a short period of time was scrapped and discarded. Food that was sold was to be sold at a higher price so that it would take care of the scrap costs of unsold food. Ultimately this meant higher costs for McDonald’s. Lean production and just-in-time One of the first elements of lean production to receive widespread acclaim among manufacturers was just-in-time inventory. Too often, just-in-time erroneously meant minimizing a company’s inventory by pushing inventory back onto their suppliers. While dominant companies in an industry sought lean objectives within their four walls, outside suppliers suffered. A number of suppliers in the U.S. auto-industry were bankrupted by this approach. In the end, the need to hold excess inventory to fulfill a customer’s just-in-time mandate resulted in a higher total supply chain cost. Leaning a supply chain means “pulling” a smooth flow of material through a series of suppliers to support frequent replenishment orders and changes in customer demand. To accomplish this, firms need to share information and coordinate demand forecasts, production planning, and inventory replenishment with suppliers and supplier’s suppliers throughout the supply chain. Developing and maintaining a lean production system within a firm is difficult enough; coordinating a lean supply chain across hundreds of different companies with different goals and cost structures is extremely challenging. The first step is to build a highly collaborative business environment that ensures all of the participants in the supply chain reap the rewards of a leaner system. Adopting the technology to support such a system is purely secondary. Time, as well as cost, is reduced in a lean supply chain; however, recent trends toward outsourcing great distances lengthen supply chain time and make it more difficult not only to coordinate suppliers but also to ensure their commitment to lean goals. In response, some companies are “near shoring” products that have volatile demand. Nike, for example, outsources the production of shoes to Asia, but locally produces personalized items such as bags (Martha, & Vratimos, 2003). Implications of operations not being just-in-time based The production planner will always strive to optimize production-oriented goals and objectives such as equipment utilization, labor efficiency, throughput and uptime. If these goals are to be optimized the production planners is forced to run large batch sizes or to run batch sizes that are dependent on the availability of raw lot sizes. This optimizes equipment and labor utilization and throughput, but what does it do to finished goods inventory level? And what will happen if the customer wants a different product? This makes it vivid that the operation planners should focus on the operations, but not at the expense of the bigger picture; JIT, while running smaller batches sizes with more frequent changeovers disrupts the production process, it is crucial to implementing the JIT principles to benefit the business (Huson, & Nanda, 1995). The purchasing manager sinks towards any principle that reduce the company’s spend overall. The sourcing manger will consolidate spend on strategic suppliers offering products or materials at the lowest per-unit costs through volume buys. The manager may even negotiate landed costs, meaning they get the shipping and freight costs included in the purchase price. The purchase managers are concerned with getting the best prices, supplier’s performance and reliability notwithstanding. When it to the logistics manager, he is tasked with getting raw materials in and the finished goods out of the production process and seeks to optimize the transportation and distribution network. This manager focuses on the lowest cost and reliability of the logistics and transportation solutions. Reliability is a requirement and the focus is on the lowest cost. It will therefore be fine if the purchasing team negotiates a delivered cost package deal with a supplier because it means lowest cost and the supplier is responsible for the reliability and performance of the carriers or transporters at least this is true for theory (Heizer, 2004). Implications of operations being just-in-time based Factors such as equipment utilization, labor efficiency, throughput and uptime are also the key focus on the part of the demand planners and managers. This is not very exclusively if the operations be based in just in time based. There are other equally important goals that support JIT operations, these include: changeover times, changeover per shift, establishing other measures of process flexibility and finished goods inventory targets that supports short-term customer demand and managing to them. In the JIT-based operation, day-to-day activities are driven by continuously restocking the customer-demands-driven finished goods inventory targets. These targets “pull” or drive the production plan, the use of production assets, labor and even the reordering of raw materials from suppliers or warehousing/distribution operations. In essence, JIT requires production to be tied more directly to short term customer demand patterns. The sourcing manager remains focused on the lowest cost, too, but in the context of the bigger picture. If there was no application of JIT the best price may be realized as a result of buying material in bulk quantities and taking delivery all at once. This should not be a problem in terms of implementing JIT principles, but it causes big potential drawbacks. In the implementation of JIT first, bulk quantities of raw materials must be handled and stored. This means that a great deal of capital can be held, in addition to devouring assets and labor. Second, there might be a problem with material; the long lead time means one cannot get more weeks or months, leaving one with a large quantity of suspect material (Porter, 1990). In a JIT-based operations, purchasing focuses on the lowest total cost. This includes not only the unit cost of materials, but also transportation, storage and other related costs. After all this are considered together, purchasing in a JIT environment requires different types of contracts and relationships with suppliers. The logistics manger still focuses on cost and reliability, but many things will change many things. First, the days of exclusively using bulk carries and shipments are over. Instead the logistic manager should be interested in shipping smaller lots or quantities of material. It is important to note that in JIT full truckloads or shiploads are seldom used in JIT, the mangers in the transport department should be conversant in transporting smaller lots sizes using less-than-truckload carriers, 3PLs to share and integrate loads, and freight forwarders and consolidators for international and cross-borders shipments. These methods allow smaller lots to be moved at the same cost per unit as large loads while reducing the costs associated with storing and handling bulk shipments (Porter, 1990). Implementation of JIT in Food Company It is not easy to turn a company that is not using JIT to make it apply the principles of JIT. The following guidelines can be used in the transformation of a company to the usage of JIT (Heizer, 2004). Production planning The most enhancer of JIT manufacturing is a production process that minimizes the amount of time it takes for productions to flow through the production process from start to finish. In a lean production process the actual flow-through time is nearly equal to the actual value-added processing or manufacturing time. This implies that the material spends a minimal amount of time in work in process inventory queues and stockrooms. JIT production planning Production planning in a lean JIT environment means doing things differently. Since there is less margin for error, the planner needs to be very familiar with the process capability in terms of changeovers times, change over patterns and the true lead times of each product. Enhancing process flexibility Fundamentally, inflexible production process often run batches of one product before switching to other products. In a lean JIT environment, a cross-section of all products is made every day. In a lean JIT environment, a cross section of all products is made every day. If this has to be achieved the process has to be flexible enough (Porter, 1990). Demand-based Material Pull systems In JIT systems- often referred to as demand-pull systems- a demand signal is the trigger for material to move or be reordered. Pull systems should be deployed throughout the plant to manage both material flow and work-in-process inventory levels. Pull systems also used to manage the flow of raw materials into the process from outside plants and suppliers. Sourcing There should be suppliers that supply lowest-cost, acceptable-quality products and materials may not be sufficient. JIT requires your supplier partner to support you in other ways as well. Arrangement such as consignment inventory and setting up pull systems between you and your supplier where materials are replenished as you use them are examples of more JIT-friendly supplier partnership. The suppliers should be based on common geography so material can be pooled to effectively leverage logistics spending is another example of strategic sourcing. Before deciding on suppliers, one will need to define the parameters and qualifications of a JIT-capable supply base. One will need to know how to evaluate your current suppliers and the enhancements needed for them to serve your operations in converting to a JIT environment Supply chain management Distribution and marketing of food products require a supply chain which will create a diverse and marketability scenario for the products. An effective supply chain in this case should take into consideration some factors which are very essential in ensuring the competitiveness of the business. The factors which have been considered are selection of the supply chain for purposes of this study are analyses as in the following. The nature of the business; the supply chain in the food industry is very different from other industries. This is because of the perishability and the high quality nature of the products which are directly consumed. As such, the type of supply chain should be the one which allows for the distribution of the food products to the target customers all over the market while still maintaining the freshness and the quality of the food (Simon & Hitt, 2003). Cost of distribution; the cost of production and distribution should not affect the supply chain un- proportionally. As such, the amount of resources sued in the supply chain should not affect the costs of food products by the time they reach the final destination. This involves regulation of the cost of distribution as raining in the cost of distribution will reduce the competitiveness of the business in the market (Hill, 2007). Flexibility; the supply chain chosen by the industry is chosen taking into consideration the flexibility. This industry in highly volatile in terms of taste and preferences of the food needed in the market as people keep changing their preferences as new menus and preferences emerge. As such, the supply chain should be flexible enough to allow for changes in such areas. This is because rigid supply chains will require an initial investment which may not be sustainable in the industry. Furthermore, the time taken for the supply chain to respond to the changes in the preferences of the customers affects the competitiveness of the business. The supply chain should thus keep pace with the changing and unpredictable nature of the industry (Teece, Pisano & Shuen, 1997). The nature of the global market place; many businesses are going international since globalization has become a trending phenomenon. Thus, when choosing the supply chain or this industry. The global impact should be considered. The supply chain should be able to handle the domestic and global markets. For the company to adjust according to the needs of the market there should be successful distribution strategies which should be adjustable to cope with the global market entry. This should be looked into perspectives of transport, storage and handling or food products over long distances (Simon & Hitt, 2003). Government Involvement: the government sets out regulations and rules to be followed in the distribution of the food products. The ministry of public health has very strict regulations about the requirements of the food industry as the public health and care depends on the food offered to the public as there could be massive consequences if regulations of high food quality and freshness are not followed by all the industries. Other regulations in this industry affect the labour and federal distribution operations. The taxes, labour and distribution activities affect the decision making of the choice of supply chain operations to be adopted for the distribution. Communication and information system: with the technological advancements in all spheres of the world. Nowadays, the key distribution channels are required to be in compliance with the technological software needed for successful distribution of operations. The technology to be used in the distribution of the food products should enhance fats distribution and be used effectively in real time. Technology enhances faster tracking of order processing of food products from different suppliers and retailers. This is enhanced by paperless transactions which are highly standardized (Teece, Pisano & Shuen, 1997). Accountability; the supply chain used in the distribution of products in the food industry should adhere to the concept of accountability. This should include clear distribution of information and communication between different levels of suppliers in the supply chain. Accountability of the supply chain in the food industry will require adherence to the standards of distribution and identify the opportunities to improve the supply chain at different levels. Accountability will also be concerned with the transparency of the cost of the distribution channel which will enhance fair cost use of the supply channel according to he forecasts of the business (Hill, 2007). References Hill, C.W.L., 2007. International Business Competing in the Global Marketplace, Irwin: McGraw Hill. Heizer, R., (2004). Transparency Masters to accompany Principles of Operations Management, and Operations Management, Prentice Hall, Inc., Upper Saddle River, N.J. 07458. Huson, M. & Nanda, D., (1995). The impact of just in time manufacturing on firm performance in the US, Journal of Operations Management, No. 12, pp. 297–310. Krajewski, L.J. & Ritzman, L.P. (1993). Operations management strategy and analysis, New York, Mac Millan. Martha, J. & Vratimos, E., (2003). Creating a Just-in-Case Supply Chain for the Inevitable Disaster, Harvard Business School, Working Knowledge. Porter, M.E. (1990). The competitive advantage of nations, New York, The Free Press. Simon, D. and M. Hitt 2003. Managing resources: linking unique resources, management, and wealth creation in family firms, Entrepreneurship, Theory and Practice, 27, pp. 339-351. Taiichi Ohno, (2006). Explanation of just in time philosophy of 12 manage rigor and relevance. Harvard Business School. Teece, D., G. Pisano, and A. Shuen 1997. Dynamic capabilities and strategic management, Strategic Management Journal, 18, pp. 509-533. Read More