Question

Wk 4 dis 2 Please advise and provide example

The just-in-time (JIT) movement has long argued that firms should:

• Maximize their process flexibility so that ordering costs are minimal.
• Stabilize demand levels.
• Shrink lead times as much as possible.
• Assign much higher holding costs to inventory than has traditionally been the case.

Using the economic order quantity (EOQ) and reorder point (ROP) formulas, explain how such efforts would be consistent with JIT's push for lower inventory levels

Answer 1

Answer:

Just-in-Time:

  A philosophy of manufacturing based on planned elimination of all waste and on continuous improvement of productivity. It encompasses the successful execution of all manufacturing activities required to produce a final product, from design engineering to delivery, and includes all stages of conversion from raw material onward. The primary elements of Just-in-Time are to have only the required inventory when needed; to improve quality to zero defects; to reduce lead times by reducing setup times, queue lengths, and lot sizes; to incrementally revise the operations themselves; and to accomplish these activities at minimum cost. In the broad sense, it applies to all forms of manufacturing-job shop, process, and repetitive-and to many service industries as well.

Three JIT basics

Three JIT focuses warrant mention at the beginning: waste reduction, variability reduction, and pulling materials into a work center rather than pushing them in from the preceding center.

Waste reduction

Storage, inspections, queues at work centers, and defects all fail to add value while costing money and slowing down production. Through continuous improvement, JIT targets each of these conditions for step-by-step elimination. (Waste reduction is also a lean goal.)

Variability reduction

Continuous improvement includes elimination of variability discovered in the system no matter what the source, internal or external. The source might be inaccurate engineering drawings, equipment that fails to perform up to standards, or going into production without understanding customer requirements.

Pulling materials into production

In traditional systems, materials and parts move from place to place by being "pushed" from behind. Raw materials are extracted and sent to manufacturing. Materials and components move away from workstations when the operation there has been completed. Manufacturing ships goods out when they are in finished form. All of this activity takes place in accordance with schedules determined in advance on the basis of forecasts.

JIT takes the opposite approach and "pulls" items through the system when they are needed, not according to preset schedules. Materials don't move from supplier to plant until requested. Similarly, work-in-process (WIP) doesn't move from one work center to another until a signal indicates that the time is right. Lots sizes are kept small, and orders are entered more frequently. This reduces or eliminates any inventory waiting

to be processed. And that in turn brings quality problems to light more quickly. Defects in materials can be hidden when there are inventory buffers; a defective component can be discarded and another taken from the safety stock. But in JIT there is no buffer, so there are no quick substitutions possible when a defective component comes on line. Therefore, a defect causes a slowdown and signals the need for process improvement.

Just-in-Time. JIT is an approach that allows delivery of the right items at the right time to the right place in right amounts. Takt time, one-piece flow, and pull systems facilitate JIT. One-piece flow and pull systems were described earlier. Takt time needs further explanation. When a lean system is ticking along at the perfect rate, its production of finished goods is exactly synchronized with the rate of customer demand. This reduces inventories to a minimum, eliminating all but work-in-process and in-transit inventories. The heartbeat of such a synchronized system is called takt time. Derived from the German word for musical meter, takt time is computed as follows:

For example, say that customer demand for walking chronometers is running at 1,000 units per day and available capacity is rated at 700 minutes per day; takt time would be .7 minutes per unit (700 minutes divided by 1,000 watches). The production system would then have to be designed to produce a unit every 42 seconds (.7 x 60 seconds), or capacity would have to be increased.

The end result of JIT is that each process produces only what is needed by the next process in continuous flow

Economic order quantity (EOQ)

Economic order quantity (EOQ) is a more sophisticated form of FOQ that is widely used. EOQ involves cost calculations-fairly simple arithmetic-to determine the most cost-effective number of items to order when replenishing inventory using a fixed order quantity model. In short, the EOQ is the order size that gives you the lowest total cost for carrying and ordering ( or setup) costs. There's a need to balance those costs, because carrying costs tend to go up with larger order quantities while ordering costs tend to go down, since they respond to economies of scale.

The EOQ is the point on the total cost curve that lies directly above the intersection of the carrying cost and ordering cost curves. These curves are determined mathematically and they always produce the same result, with the minimum total cost lying directly above the intersection of the other two cost curves.

Although EOQ is more sophisticated than simpler fixed order models, it is still a fixed order model and so it depends upon the following set of assumptions:

+ Demand is constant and known.

+ Lead time is constant and known. (The same amount of time always elapses between the time you place the order and the time it arrives.)

+ The items ordered arrive all at once, not in stages.

+ There are no quantity discounts.

+ The variable costs in the calculation model are limited to carrying costs and ordering costs (whereas in reality other variable costs exist).

+ There will be no stock outs if you place orders on schedule.

The model's assumptions will no doubt be violated in the real world, but the EOQ model still provides good enough guidance that many companies rely upon it. If, however, these assumptions seem too unrealistic for your particular supply chain, you'll need to add some complexity to the calculation to account for, say, seasonal variations in demand, different lead (and arrival) times for orders from different suppliers, or the availability of significant quantity discounts. The beauty of the EOQ model is that even if there are considerable variations in the cost figures, the economic order quantity tends to vary within a fairly small range.

Re-Order point system:

Re-order point system determines the inventory level, or point, at which a reorder must be placed. This order point is the point at which we have enough inventory to cover anticipated demand that will be consumed during the replenishment process.

That point is our demand during the lead time plus safety stock:

Order Point = Demand During Lead Time+ Safety Stock

For example, if demand during the lead time averages 100 units a week, lead time is two weeks, and safety stock is 50 units, then the order point is when inventory falls to 250 units:

Order Point= (100 Units per Week x 2 Week)+ 50 Units= 250 Units

The saw tooth diagram illustrates the various components of an order point system.

In re-order point system, the time between replenishment orders is not fixed but varies based on the actual demand during the reorder cycle. Since the order point is based on the average demand during the lead time, if either the average demand or the lead time changes, the order point should also be changed or the level of safety stock will automatically change. A system based on average demand means that, at maximum demand, stock outs could occur, so some amount of safety stock may be included to reduce the risk of stock outs.