Supply Chain Vector [Electronic resources] : Methods for Linking the Execution of Global Business Models With Financial Performance

Materials Requirements Planning versus Just in Time

In the preceding chapters, a great deal of space was dedicated to the importance of materials requirements planning (MRP) to contemporary SCM. Although a functional model, the biggest knock against MRP is its emphasis on carrying inventory to avoid disruptions in the supply chain. Just in time (JIT), on the other hand, has come to the forefront of SCM in recent years due to its goal of zero inventories. While very appealing on paper, the execution of JIT models in global markets is extremely challenging and can be likened to walking a tightrope without a net. A comparison of the principles of MRP and JIT is presented in Table 7.1.

Table 7.1: MRP Versus JIT

Noting that the DuPont formula was first utilized on a wide scale in the automotive industry, it is probably not a coincidence that JIT also has its origins in this sector. With large investments in raw materials, work in process and finished goods, it's no wonder that automotive executives have worked for years to devise methods to reduce inventories any way they can. However, the value of JIT has been somewhat discounted because of managers' obsession with eliminating inventories. The reality is that JIT is much more than a mere inChapter 3, the discipline focuses on:

Reduction of setup times and lot sizes

Zero defects in manufacturing

Commitment to continuous improvement of all processes and elimination of waste (waste is defined as any activity that does not add value to the overall process)

Employee involvement and effective use of human capital

From a wider vantage point, one should note that the additional elements of JIT go beyond inventory management and are consistent with the entire lean manufacturing philosophy. Extending the reach of JIT beyond lean thinking, its principles are also congruous with SCM's goals of effective lead time management and landed cost control. The first point, for example, can represent a high percentage of cumulative lead time, with the setup of production lines sometimes consuming an entire work shift. Of equal import, smaller lot sizes drive the level of inventory investment, beginning with the acquisition of raw materials, the value added to work in process and, finally, finished goods. Also, the size of production runs and how long they take to complete are components of cumulative lead times. Obviously, the smaller the run, the faster goods can be shipped out to customers.

Continuing on, the second point can have a devastating effect on supply chains. Stopped production runs or the return of defective merchandise will put any supply chain in reverse, cost thousands of additional dollars and offer no benefit to an organization. Taken individually, as well as in conjunction with other process improvement initiatives, proper management of these items makes a tangible contribution to the removal of wasted time, effort and money across the supply chain.

The last two points of the JIT value proposition are more enterprise-wide in nature, a trait that can bring benefit to the entire business model and not just inventory management programs. In a global model, continuous improvement implies uprooting the source of bottlenecks or challenges, taking an "upstream/ downstream" approach to problem solving. This means that organizations must harness the expertise and knowledge of all supply chain participants via a team approach, seeking to deal with core illnesses instead of the superficial treatment of their symptoms.

An excellent example of how JIT practices remove waste from enterprise-wide processes is the treatment of purchase orders. In large-scale operations, literally thousands of purchase orders can be sent out in a month's time. With this type of volume, it is easy to imagine the amount of administrative effort required to issue and follow up on product quantities, prices and delivery dates. In the lean school, the question is not to determine how best to manage the purchase order process but, rather, how to eliminate the need for purchase orders entirely. JIT practitioners do not issue purchase orders; they work off of a delivery schedule that is adjusted as demand dictates. The amount of time and human effort saved by working off of schedules permits buyers to dedicate resources to managing relationships instead of chasing paper. In this sense, the supplier dynamic becomes much more strategic and less administrative in nature.

These concepts go hand in hand with the second element of the fourth point, the effective use of human capital. Although rife with challenges, global supply chains are populated by people with diverse backgrounds and vast experience. The inability (or unwillingness) to harness this human capital will invariably result in a compromised business model and leave key players isolated from the process.

When taken in kind with the SCM goals of effective inventory management, landed cost control and lead time rationalization, JIT can be considered a precursor to the SCM philosophy. As a part of the overall lean manufacturing school of thought, JIT should be viewed as one of the most important elements of modern supply chain thinking. Like many business practices, however, it does not come without a caveat. Businesspeople must be cognizant of the fact that JIT models work best in a domestic environment or at least in an international model characterized by suppliers in close geographic proximity to the manufacturer. A comparison of the characteristics of a domestic JIT model and an international operation brings this point to life, perhaps leading the reader back to the benefits of an evolved MRP model.