A smooth flow of stock and semi assembled items just as many as you need, just when you need them. No waste, no hidden inventory costs and reduced issues with obsolescence. JIT (just in time) implemented into a companies supply chain seems to provide a lot of benefits, and in most cases it does.
The internal logistics and accounting departments of many companies have come unstuck with the hidden costs of implementing JIT however, and here is just one example of where the appearance of a low stock level can be mis-leading, and have a high impact on stock cost.
A small company fabricating steel parts through cutting, pressing and CNC machines was looking to expand it’s production base with limited room. It was identified, and probably quite rightly, that stock space could be greatly reduced within the small facility to make way for more plan and machinery. To facilitate this reduction safely, the process of re-arranging delivery terms with raw material suppliers was begun. JIT delivery was required.
The process took a little longer than expected, and it turned out JIT seemed to cost a little more – but that was offset easily, so it seemed, by the potential revenue created by the increased manufacturing space and lower stock levels.
While the new contracts had quite a few new elements, in this case I’ll draw your attention to just one. JIT required that the production for each day be known beforehand, at least 72 hours before. Also, once a delivery slot for raw material was arranged, there would be an increasingly cost of re-arranging. It went up sharply and could be pretty steep if a re-arrangement was required within four hours of the 15 minute delivery slot.
Turning the stock away or re-arranging the delivery could, for instance, accrue costs that amounted to over 20% of the cost of the steel sheet involved.
The assumption was that this would rarely, if ever, happen.
Roll forward 12 months is JIT working?
Theses costs have been re-negotiated more than once since JIT was introduced. The overall cost of JIT is substantially more than the revenue created by the increased production. This small steel fabrication company is, in effect, paying for offsite warehousing by proxy. The proxy often being an 18 wheel lorry parked in a layby a few miles from the delivery point accruing costs for every 30 minutes that pass.
The moral of this (true story? Internal manufacturing control and stock handling systems need to match, and in all likelihood, be better than, the external supply based logistics controls.
A companies internal stock handling needs to be in tip top before highly nuanced supply chain logistics can be bolted on.