From 1915 with the model developed by Harris the Economic Order Quantity model, has been a fundamental methodology for the development of inventory, base of the development of many inventory purchasing models (Charabarty et al., 1998; Ray and Chaudhuri, 1997). But in recent years Schonberger (1982, p. 159) suggested an alternative approach called Just-In-Time (JIT) purchasing has advocated with smaller-sized and more frequent orders. He defined JIT as: "to produce and deliver finished goods just in time to be sold, subassemblies just in time to be assembled into goods, and purchased materials just in time to be transformed into fabricated parts". Despite the impressive success of JIT method, several companies still use the traditional approach to determine their purchase orders with the economic order quantity. The small manufacturing companies cannot effectively implement JIT (Temponi, 1995). We can undertake a comparative analysis of these two popular inventory management practices
According to Hong et al (1992, p. 255-266) the comparison of the total costs of JIT purchasing and setup reduction with the costs under the Economic Production Quantity model show that JIT purchasing when combined with order splitting and investments in setup reduction could be cost effective. To demonstrate that FAZEL, F et al, (1997, p.496) developed a mathematical model to compare the annual cost of inventory for JIT and EOQ purchasing. The model show an upper limit for the purchase price of any item under JIT, above which EOQ will be less costly than JIT.
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Figure 1: Cost difference between JIT and EOQ
This model stipulate that the JIT method will be recommended for inventory items with lower levels of demand, but moreover for higher holding cost, or higher ordering cost. Besides Johnson and Stice (1993, p 26-27) in their comparison of JIT and EOQ, identify that "traditional inventory management techniques may under-emphasize the costs of maintaining large inventories", but they remarked that "JIT may under-emphasize the costs of not maintaining inventories, particularly, since such costs are often difficult to identify and measure". So we can conclude that JIT is more cost effective than EOQ under conditions. Pull-type supply chain management is based on Just-in-Time (JIT) is based on the demand or actual demand assigned to later processes. Therefore, we have the Push method which is not make to Stock, but is based on demand forecast. So contrary to EOQ the implementation of JIT aimed to eliminate inventory and by this way reduce the factory space. This reduction permit to reduce overhead costs in order to finance the plant space. Schonberger (1982, pp. 121-2) and Wantuck (1989, p. 16) argue that the implementation of JIT reduce space in factories and show that this reduction is caused by the cancellation of the space required in storing inventory. S.M. Moattar Husseini and al (2006, pp.653-665)develop a model to determine in a JIT production plant the number of Kanbans for each stage in order to minimizing total inventory cost for a given planning horizon. EOQ system is not flexible because we are based on the demand.
Rao and Scheraga (1988, pp. 44-9) conclude in their study that if the JIT system is well implemented we can observe an improvement in the quality, lower manufacturing costs, lower ordering costs, streamlining of the production process, elimination of waste, and the elimination of production process bottlenecks in the production line. Rosemary and al (2001 pp.81-96) analyze the production performance benefits from JIT implementation and provide a table which resumes the percentage improved in production thanks to the JIT. They show that managers adopting JIT practices have found several improvements in all of the measured sectors: Employee flexibility, accounting simplification, firm profitability, time-based responses, and of course inventory reductions.
Figure 2: Responses to changes in production operations after JIT implementation
But the companies which implement JIT may meet several problems. Plethora of literature on the subject describing critical elements and defects of JIT implementation. We can find in some cases a removal of responsibilities from the purchaser to the supplier which leads a lack of supplier co-operation, particularly in terms of inventories. Moreover we can have the inability of the supplier to change to small lot production or to implement JIT purchasing them or the inventory is staggered due to widely fluctuating schedules. The lack of communication and the resistance by buyers to abandon competitive bidding and price first selection criteria can be the cause of JIT problems. Higginson and Bookbinder (1990, pp. 29-35) explain that JIT systems require precision in terms of timing and of course quantity, and they analyze that rail transportation would be preferable to Lorries. It's an important defect because of location of our supplier 250 miles away in UK. O'Neal (1987, pp. 7-13) agrees with Higginson and Bookbinder, indeed thanks to his survey he explain that regarding the need for precision and control over the mode of transport it's essential to ensure the time of transportation and avoid the traffic hazards.
Always on Time
Marked to Standard
Figure 3: JIT operational success factors
Schonberger and al (1984, pp. 76) suggest that when a JIT system is adopted instead of an EOQ system, there are dynamic forces for the continuous improvement for the reduction of the inventory. The dynamic nature of a JIT system should continuously achieve a cost advantage over an EOQ system while increasing production activity in order to meet increasing demand. A company which wants to implement JIT need rigor, education, training, improved relationship with suppliers, and waits for the proper moment, the moment when the organization will be able to continue its operations of productions as normally as possible. René Gélinas explain throughout a case study of a gearbox factory that It is thus useful, even necessary, to consider JIT implementation as a long term project, planned and controlled accordingly (more than 2 years in the case of Gearbox Inc.), and he remarks that it is not just an act of faith and it should be evaluated as any other investment project.
Our company is not very big regarding the number of people who are working in the plant. But the location of the suppliers and the sourcing by the US manufacturer can't ensure a rigor in the delivery. The analysis of the company need more details to take a decision.
Part B: Analysis of the system constraint
Several manufacturing tools and practices appeared during the last few years. These innovative methods are changing manufacturing and of course operations management. We can speak about Soft Systems Methodology (SSM) which is a method to modeling the activity of human in a system, the Theory Of Constraints (TOC) which optimized production technology and Material Requirements Planning (MRP). We have to find the manufacturing tools which are suitable in finding system constraint. After a review of literature I can suggest that the TOC method is suitable in order to figure out our problem, and find system constraint. I will develop the reason of this choice. Mahesh C. Gupta and al (2008, pp 991-1012) develop a table that show three steps of the development of a process in the theory.
Figure 4: TOC as scientific approach
With the TOC we consider the line as a chain, and the purpose is to identify the constraint and to improve this link in order to "move" the limiting factors. TOC is a continuous improvement process, because unless the company's performance is very good, we have always a link that is the limiting factors. This link prevents the company to become better. With this precept of TOC, we identify and focus on constraints (bottlenecks) with the intention of improving productivity and throughput. We can take actions which are necessary to suppress the bottleneck with the identification of the weakest link. According to Pegels, C Carl and al (2005, pp. 302-311) using the TOC process, the main objective of management is reaching a point where the system's constraint lies outside the production arena. Constraints may be a physical constraint limited capacity in a machine, the stock of raw materials, but it's more often behavioral constraint or managerial-policy.
Figure 5: Simplified flowchart and the bottleneck
Ehie et al (2005, pp. 542) describe throughout a case study the implementation of the TOC in a company and how can we find the bottleneck and remove it. In order to find the bottleneck we have to analyze where the pile of inventory is. So in the case the cutting operation is determined as the bottleneck, and it is the new target of the TOC tool.
The TOC approach consider throughput an item produced and sold. Moreover in TOC the throughput is count in money and not as units, because we have to take in consideration that the goal of an organization is to make money. Goldratt (1990) said that the TOC scope is the desire to enhance performance of companies continually, through a process of ongoing improvement.
Figure 6: Process of on-going improvement
Noreen et al (1995) stipulate in their study that the implementation of these five steps can lead up to rapid and important improvements. But this process of ongoing improvement creates a transfer of constraints between the factory and the market. We can meet managerial constraint which is illustrated by insufficient demand. According to Michalski, Liz, (2000, pp. 126-132) We can enumerate several benefits after TOC implementation like shorter intervals, increased customer satisfaction , better on-time delivery performance, , effective use of resources, less re-planning of projects, and a less stressful work environmentâ€¦, the list is not limited. The hardest part to implement TOC is to establish buy-in. It can take from months to a number of years.
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Anton van der (2008, pp. 26-34) identify problems and inconsistencies in TOC. They analyze that TOC cannot answer for the opportunity cost and technology adoption decision scenarios. They list the inconsistencies of TOC. TOC may be not suitable for the company, or create internal inconsistencies or conflicts.
Figure 7: Generic conflict of distribution systems
The TOC is a pull methodology which is using in several companies in a lot of sectors. For example Watson et al (2003, pp. 741-65) explain the implementation of TOC in the company Crayola crayons, Procter and Gamble present the implementation in the sector of clothing. When TOC is implementing, we have always the need of forecasting but not with the same importance and of course change the manner which is applied. At every sales point the availability of the items is ensure. Schragenheim (2007) remarks that one of the principal difference between TOC and others tools is When TOC is implement with very flexible and fast logistical responses, it can quickly identify evolution, so it avoid the need for regular forecasting to support short-term decisions . A number of study describe a number of ways to increase throughput (Kendall (2005), Goldratt (2007), Schragenheim (2007) and Goldratt(2008)). These ways depend actually of the nature of the company and the sector.
After this short report its appears that implement a manufacturing tool or practices will not be a quick decision. A literature review is needed as an analysis of our system. Thanks to this report I develop the aspect of ongoing improvement, advantage and of course limitations of the systems chosen. TOC is a tool with a Â«Â throughput orientationÂ Â» and it's suitable of finding systems constraints.