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Chapter 6 Just-in-time and lean thinking. Just-in-time. Lean thinking. Vendor-managed inventory (VMI). Quick response. Content. What are the implications of Just-in-time for logistics?. 1.

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Lean thinking

Vendor-managed inventory (VMI)

Quick response

just in time

What are the implications of Just-in-time for logistics?


How can just-in-time principles be applied to other forms of material control such as reorder point and material requirements planning?


  • Key issues
just in time1
  • Just-in-time: A definition
    • Uses a systems approach to develop and operate a manufacturing system
    • Organizes the production process so that parts are available when they are needed
    • A method for optimizing processes that involves continual reduction of waste
just in time2
  • Little JIT
    • the application of JIT to logistics
  • Central themes surrounding Just-in-time
    • Simplicity
    • Quality
    • Elimination of waste
just in time3
  • Pull scheduling
    • A system of controlling materials whereby the use signals to the maker or provider that more material is needed.
  • Push scheduling
    • A system of controlling materials whereby makers and providers make or send material in response to a pre-set schedule, regardless of whether the next process needs them at the time.


Pull: Just-in-time

Push: traditional way


just in time4

Demand uncertainty




Scale economics

  • Activity




just in time5

Level 1



Level 2

Minimum inventory

Minimum delay





Level 3


Minimum defects

Minimum downtime

Simplicity and visibility

  • Just-in-time system

JIT Pyramid of key factors

just in time6
  • Just-in-time system
    • Factor 1
      • The top of the pyramid is full capability for JIT supply supported by Level 2 and Level 3 operation.
    • Factor 2
      • ‘Delay’ and ‘inventory’ interact positively with each other
      • The concept of Kanban
    • Factor 3
      • Defect → delay → inventory

Poor quality

Machine downtime

Bad design

Inefficient layout

Unreliable supplier

  • Just-in-time system
    • Factor 3
      • Defect → delay → inventory

Inventory hides problems

just in time7


Machine downtime

Safety stocks

Planned maintenance


  • Just-in-time system
    • Factor 4

Preventive maintenance

Flexible production

just in time8
  • Just-in-time system
    • Factor 5
      • Simply and visible process help to reduce inventory and could be better maintained.
    • Factor 6
      • It’s more difficult to see the flow of a process with increased inventory.
just in time9

Demand management



Master schedule

Logistics planning

Material plan

Bill of materials

Logistics execution

Purchase orders

Work orders




  • The supply chain ‘game plan’

Material Requirements Planning

Independent demand

Dependent demand

just in time10
  • The supply chain ‘game plan’
    • Independent demand
      • Demand for a product that is ordered directly by customers.
      • items are those items that we sell to customers
    • Dependent demand
      • Demand for parts or subassemblies that make up independent demand products.
      • items are those items whose demand is determined by other items
just in time11
  • Case: Automobile
  • Case: Cake
just in time12

Recorder quantity

Usage rate


Reorder point

Buffer stock


Lead time

  • Demand characteristics and planning approaches
    • Economic order quantities (EOQ)
just in time13
  • Assumptions in Economic Order Quantity Model
    • Demand is deterministic.There is no uncertainty about the quantity or timing of demand.
    • Demand is constant over time. In fact, it can be represented as a straight line, so that if annual demand is 365 units this translates into a daily demand of one unit.
    • A production run incurs a constant setup cost. Regardless of the size of the lot or the status of the factory, the setup cost is the same.
    • Products can be analyzed singly.There is only a single product.
    • D= Demand rate (in units per year).
    • c = Unit production cost, not counting setup or inventory costs (in dollars per unit).
    • A = Constant setup (ordering) cost to produce (purchase) a lot (in dollars).
    • h = Holding cost (in dollars per unit per year)
    • Q = Lot size (in units); this is the decision variable
just in time14
  • EOQ model
    • Average inventory level
    • The holding cost per unit
    • The setup costper unit
    • The production cost per unit
just in time15
  • EOQ model
just in time16
  • Practice
    • Pam runs a mail-order business for gym equipment. Annual demand for the TricoFlexers is 16,000. The annual holding cost per unit is $2.50 and the cost to place an order is $50. What is the economic order quantity?
just in time17
  • Demand characteristics and planning approaches
    • Periodic order quantity (POQ) and target stock levels

How much to order?

Economic order quantity

When to order?

Periodic order quantity

just in time18

Economic order quantity with uncertain demand

just in time19

Periodic order quantity (POQ) with uncertain demand

just in time20


  • Target stock level (TSL)
    • Periodic order quantity = Target stock level – Stock on hand – Stock on order
    • TSL = cycle stock + safety stock
just in time21


Distribution center











just in time22
  • JIT and material requirements planning (MRP)
    • Material requirements planning (MRP) - A methodology for defining the raw material requirements for a specific item, component, or sub-assembly ordered by a customer, or required by a business process.
    • MRP systems will usually define what is needed, when it is needed, and by having access to current inventories and pre-existing commitment of that inventory to other orders to other customers, will indicate what additional items need to be ordered to fulfill this order.
just in time23
  • Feature of MRP
    • MRP is based on JIT Pull scheduling logic
    • MRP is good at planning, but weak at control
    • JIT is good at control, but weak at planning
  • TPS Vs. FPS
just in time24

Takt time: The maximum time allowed to produce a product in order to meet demand.

Jidoka: Autonomation (人工智能的自动控制)

Heijunka: A system of production smoothing designed to achieve a more even and consistent flow of work.(平准化)

Kaizen: Improvement



Lean thinking

Vendor-managed inventory (VMI)

Quick response

lean thinking

What are the principles of lean thinking?


How can the principles of lean thinking be applied to cutting waste out of supply chains?


Lean thinking
  • Key issues
lean thinking1
Lean thinking

Taylorism: Frederick Taylor 1856-1915 The father of scientific management

Fordism: Henry Ford 1863-1947 The father of mass production

Toyota: Taiichi Ohno The father of Toyota Production System

lean thinking2

1. Specify value



4. Let customer pull

5. Perfection

2. Identify value stream



3. Create product flow

Lean thinking
  • Lean thinkingrefers to the elimination of waste in all aspects of a business and thereby enriching value from the customer perspective.

Muda means waste, specifically any human activity which absorbs resources but creates no value.”

lean thinking3
Lean thinking
  • Nine wastes
  • Watching a machine run
  • Waiting for parts
  • Counting parts
  • Overproduction
  • Moving parts over long distance
  • Storing inventory
  • Looking for tools
  • Machine breakdowns
  • Rework
lean thinking4
Lean thinking





Traditional = People doing whatever they can to get results





Lean = People using standard process to get results

lean thinking5
Lean thinking
  • Role of lean practices
    • Small-batch production
      • Reduce total cost across a supply chain, such as removing the waste of overproduction.
    • Rapid changeover
      • Rely on developments in machinery and product design
      • Provide the flexibility to make possible small-batch production that responds to customer needs
lean thinking6
Lean thinking
  • Design strategy
    • Lean product design
      • A reduction in the number of parts they contain and the materials from which they are made
      • Features that aid assembly, such as asymmetrical parts that can be assembled in only one way
      • Redundant features on common, core parts that allow variety to be achieved without complexity with the addition of peripheral parts
      • Modular designs that allow parts to be upgraded over the product life
    • Lean facility design
lean thinking7
Lean thinking
  • Design strategy
    • Lean product design
    • Lean facility design
      • Modular design of equipment to allow prompt repair and maintenance
      • Modular design of layout to allow teams to be brought together with all the facilities they need
      • Small machines which can be moved to match the demand for them
      • Open systems architectures that allow equipment to fit together and work when it is moved and connected to other items
case study
Case study
  • Barriers to knowledge transfers within suppliers’ plants (Dyer and Hatch, 2006)
    • Network constraints
      • Customer policies or constraints imposed by customers
      • Example: One supplier was required by GM to use large (4’×5’) reusable containers. When filled with components, these containers weighed 200~300 pounds. By comparison, Toyota had the supplier use small (2’×3’) reusable containers weighing 40 pounds when filled.
case study2
Case study
  • Barriers to knowledge transfers within suppliers’ plants (Dyer and Hatch, 2006)
    • Internal process rigidities
      • U.S. customer’s production process involved a high level of automation or large capital investment in heavy equipment. The large machines and equipment were bolted or cemented into the floor, hence increased the costs of change. These process rigidities resulted in plant managers waiting until the vehicle model change before implementing a new process.
      • Toyota’s production network is designed as a dynamic system, and the flexibility to modify the system is built into the processes and procedures.


Lean thinking

Vendor-managed inventory (VMI)

Quick response

vendor managed inventory1
Conventional Inventory Management


monitors inventory levels

places orders


manufactures/purchases product

assembles order

loads vehicles

routes vehicles

makes deliveries

Vendor-managed inventory

You call – We haul

vendor managed inventory2
Problems with Conventional Inventory Management

Large variation in demands on production and transportation facilities

workload balancing

utilization of resources

unnecessary transportation costs

urgent Vs. non-urgent orders

setting priorities

Vendor-managed inventory
vendor managed inventory3
Vendor-managed inventory


trusts the vendor to manage the inventory


monitors customers’ inventory

customers call/fax/e-mail

remote telemetry units

set levels to trigger call-in

Vendor-managed inventory
  • controls inventory replenishment & decides
    • when to deliver
    • how much to deliver
    • how to deliver

You rely – We supply

vendor managed inventory4
Vendor-managed inventory
  • VMI
    • An approach to inventory and order fulfillment in the way that supplier, not the customer, is responsible for managing and replenishing inventory.
vendor managed inventory5
Vendor-managed inventory
  • Number of items as ordered
  • Number of items in back-order



  • Acknowledgement
  • Number of items in stock
  • Consumption of previous period
  • Any other specific customer- or item-related parameters

VMI data flow

vendor managed inventory6
Vendor-managed inventory
  • VMI does not stand for
    • The passing of the customer’s consumption history for a specific item, from the customer over to the supplier, who on the basis hereof, will follow-up the customer’s stock level and at the moment of the stock having reached a specific threshold, generates a purchasing order so as to replenish the stock.
  • VMI in fact stands for
    • Granting inspection of the sales profile of a specific item to the supplier, who on the basis hereof, will optimize the replenishment policy and ensure the pre-defined service level towards the end users of his customer.
vendor managed inventory7
Advantages of VMI


The stock as such disappears from the company’s balance sheet and this way clears the way for a higher amount of working capital.

Customer only have to supervise the stocks, instead of drawing up a detailed analysis for the placing of orders.

Reduce the time interval between receiving goods and making them available for consumption or sales.

Stocks with customer will be reduced, because the uncertainty due to variability in the supplier’s periods of delivery will drop.

Vendor-managed inventory
vendor managed inventory8
Vendor-managed inventory
  • Advantages of VMI
    • Vendor
      • more freedom in when & how to manufacture product and make deliveries
      • better coordination of inventory levels at different customers
      • better coordination of deliveries to decrease transportation cost (reduce the rush-order and related high cost)
vendor managed inventory9

VMI Essentials

  • Trust
    • Accurate information provided on a timely basis
    • Inventory levels that meet demands
    • Confidential information kept confidential
  • Technology
  • Automated electronic messaging systems to exchange sales and demand data, shipping schedules
Vendor-managed inventory
  • Potential problems in setting up a VMI system
    • Unwillingness to share data
    • Seasonal products
    • Investment and restructuring costs
    • Customer vulnerability
    • Lack of standard procedures (between different customers)
    • System maintenance
case study3
Case study
  • Praxair’s Business
    • Plants worldwide
      • 44 countries
      • USA 70 plants
      • South America 20 plants
    • Product classes
      • packaged products
      • bulk products
      • lease manufacturing equipment
  • Distribution
    • 1/3 of total cost attributed to distribution
case study4
Case study
  • Praxair’s Business------Bulk products
    • Distribution
      • 750 tanker trucks
      • 100 rail cars
      • 1,100 drivers
      • drive 80 million miles per year
    • Customers
      • 45,000 deliveries per month to 10,000 customers
    • Variation
      • 4 deliveries per customer per day to 1 delivery per customer per 2 months
    • Routing varies from day to day
case study5
Case study
  • VMI Implementation at Praxair
    • Convince management and employees of new methods of doing business
    • Convince customers to trust vendor to do inventory management
    • Pressure on vendor to perform - Trust easily shaken
    • Praxair currently manages 80% of bulk customers’ inventories
case study6
Case study
  • VMI Implementation at Praxair
    • Praxair receives inventory level data via
      • telephone calls: 1,000 per day
      • fax: 500 per day
      • remote telemetry units: 5,000 per day
    • Forecast customer demands based on
      • historical data
      • customer production schedules
      • customer exceptional use events
    • Logistics planners use decision support tools to plan
      • whom to deliver to
      • when to deliver
      • how to combine deliveries into routes
      • how to combine routes into driver schedules
case study7
Case study
  • Benefits of VMI at Praxair
    • Before VMI, 96% of stockouts due to customers calling when tank was already empty or nearly empty
    • VMI reduced customer stockouts
case study8
Case study
  • What’s needed to make VMI work
    • Information management is crucial to the success of VMI
      • inventory level data
      • historical usage data
      • planned usage schedules
      • planned and unplanned exceptional usage
    • Forecast future demand
    • Decision making: need to decide on a regular (daily) basis
      • whom to deliver to
      • when to deliver
      • How much to deliver
      • how to combine deliveries into routes
      • how to combine routes into driver schedules


Lean thinking

Vendor-managed inventory (VMI)

Quick response

quick response
Quick response
  • The application of quick response in apparel industry
    • Development lead time have been compressed
    • Production lead time are shorter

Zara case