Just in Time Purchasing Assignment

Just in Time Purchasing Assignment Words: 4247

The manufacturing environment for many of these traditional, large-batch, high http cost Tells NAS change aromatically In ten past II to 20 years. For one thing, the competitive markets are no longer defined by national boundaries. Advances in transportation and communication have contributed significantly to the creation of global competition. Advances in technology have contributed to shorter life cycles for products, and product diversity has increased.

Foreign firms offering higher-quality, low-cost products with specialized features have created tremendous pressures for our domestic large-batch, high setup cost firms to increase both quality and product diversity while simultaneously reducing total cost. These competitive pressures have led many firms to abandon Economic Order Quantity (EGO) model in favor of a Just- in-time approach to manufacturing and purchasing. KIT manufacturing is a demand-pull system that requires goods to be pulled through the system by present demand rather than pushed through the system on a fixed schedule based on anticipated demand.

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Many fast-food restaurants, like McDonald’s, use a pull system to control their finished goods inventory. When a customer orders a hamburger, it is taken from the rack. When the number of hamburgers gets too low, the cooks make new hamburgers. Customer demand pulls he material through the system. This same principle is used in manufacturing settings. Each operation produces only what is necessary to satisfy the demand of the succeeding operation. The material or subassembly arrives Just in time for production to occur so that demand can be met.

Thus, complementary to and part of the total KIT system is the concept of KIT purchasing. KIT purchasing requires suppliers to deliver parts and materials Just in time for production. Supplier linkages are vital. Supply of parts must be linked to production, which is linked to demand. In survey among manufacturer in United States, 85 percent say that some or most materials, parts, and components are supplied to them on a KIT basis Noon Unclenched and Jill Cisco, 2001). Thus, KIT inventory systems now appear to be extensively used. KIT has two strategic objectives: to increase profits and to improve a firm’s competitive position.

These two objectives are achieved by controlling costs (enabling better price competition and increased profits), improving delivery performance, and improving quality. KIT offers increased cost efficiency and simultaneously has the flexibility to respond to customer demands for better quality and more variety. KIT manufacturing and purchasing represent the continual pursuit of productivity through the elimination of waste. Clearly, KIT is much more than an inventory management system. Inventories, however, are particularly viewed as representing waste. They tie up resources such as cash, space and labor.

They also conceal inefficiency in production and increase the complexity of a firm’s information system. Thus, even through KIT focuses on more than inventory management, control of inventory is an important ancillary benefit. 2. 0. Basic Features if KIT 3. 1. Plant Layout The Type and efficiency of plant layout is managed differently under KIT manufacturing. In traditional Job and batch manufacturing, products are moved from one group of identical machines to another. Typically, machines with identical functions are located together in an area referred to as a department or process. Errors won specialize In ten operation AT a specials manacle are located In can department. KIT replaces this traditional plant layout with a pattern of manufacturing cells. Manufacturing cells contain machines that are grouped in families, usually in semicircle. The machines are arranged so that they can be used to perform variety of operations in sequence. Each cell is set up to produce a particular product or product family. Products move from one machine to another from start to finish. Workers are assigned to cells and are trained to operate all machines within the cells.

Thus, labor in KIT environment is multi skilled, not specialized. Each manufacturing cell is essential a mini factory and cells are often referred to as a factory within factory. Cell structure usually produces reduced lead time and lower manufacturing costs. The cellular manufacturing design can also affect plant size and number of plants because it typically requires less space. . 2. Grouping and Empowerment of Employees Another major structural difference between KIT and traditional organization relates to the grouping and responsibilities of employees. As Just indicated each cell is viewed as a mini factory.

Thus, each cell vice departments must be scaled down and their personnel reassigned to work directly with manufacturing cells. Consequently, service personnel, such as manufacturing and quality engineers, are often assigned to cells. Training cell workers to perform multiple tasks also has the effect of relocating support services to the cell. In addition to direct production work, cell workers may perform setup duties, move partially completed goods from station to station within the cell, perform preventive maintenance and minor repairs, conduct quality inspections, and perform Janitorial tasks.

This multiple-task capability is directly related to the pull-through production approach. Producing on demand meaner that production workers (formerly direct laborers) may of the have “free” time. This nonproductive time can be used to perform selected support activities. Cell workers are also given a greater degree of participation in the management of he organization. Workers at Saturn and Southwest Airline and other KIT organizations are often involved interviewing and hiring other employees, sometimes even including prospective bosses. The reason?

If the “chemistry is right” then the workforce will be more efficient and will work together better. Managers act more as facilitators than as supervisors. 3. 3. Total Quality Control KIT necessary carries with it a much stronger emphasis on managing quality. A defective part brings production to a grinding halt. Poor quality cannot be tolerated in a manufacturing environment that operates without inventories. Simply put, KIT cannot be implemented without a commitment to total quality control (ETC). ETC is essentially a never-ending quest for perfect quality, the striving for a defect-free product design and manufacturing process. . 4. Traceability of Overhead Costs A costing uses three methods to assign costs to individual products: direct tracing, driver tracing, and allocation. Of the three methods, direct tracing is the most accurate and, thus is preferred over the other two methods. In a department structure, many different products may be subjected to a process located in a single department (for example, grinding). After completion of the process, the products are teen transferee to toner processes located In Deterrent departments (Tort example, assembly, painting, and so on).

Because more than one product is processed in a department, the costs of that department are shared by all products passing through and, therefore, must be assigned to products using activity drivers (and occasionally allocation). In a KIT environment, many overhead costs assigned to products using either driver tracing or allocation are now directly traceable to products. Cellular manufacturing, multi skilled labor, and decentralized service activities are the major theatres of KIT responsible for this change in traceability.

Table below compares the traceability of some selected costs in a traditional manufacturing environment with their traceability in the KIT environment (assuming single-product cells). Comparisons are based on the three cost assignment methods. Manufacturing Cost I Traditional Environment I KIT Environment I Direct Labor I Direct Tracing I Direct Tracing I Direct Material I Direct Tracing I Direct Tracing I Material Handling I Driver Tracing I Direct Tracing I Repair and Maintenance I Driver Tracing I Direct Tracing Energy I Driver Tracing I Direct Tracing I

Operating suppliers I Driver Tracing I Direct Tracing I Supervision (department) I Allocation I Direct Tracing I Insurance and taxes I Allocation I Allocation I Plant depreciation I Allocation I Allocation I Equipment depreciation I Direct Tracing I Direct Tracing Custodial services I Allocation I Direct Tracing I Cafeteria services I Driver Tracing I Driver Tracing I 3. 5. Inventory Effect KIT typically reduces inventories to very low levels. The pursuit of insignificant levels of inventories is vital to the success of KIT.

This idea of pursuing insignificant inventories, however, necessarily challenges the traditional reasons for holding inventories. These reasons are no longer viewed as valid. According to the traditional view, inventories solve some underlying problem related to each reason. For example, the problem of resolving the conflict between ordering or setup costs and carrying costs is solved by selecting an inventory level that minimizes the sum of these costs.

If demand is greater than expected or if production is reduced by breakdowns and production inefficiencies, then inventories serve as buffers, providing products to customers that may otherwise not have been available. Similarly, inventories can reverent shutdowns caused by late deliveries of materials, defective parts, and failures of machines used to produce subassembly. Finally, inventories are often the solution to the problem of buying the best materials for the least cost through the use of quantity discounts. KIT refuses to use inventories as the solution to these problems.

In fact, inventories are not only viewed as wasteful but as being directly associated with the ability of a firm to compete. High inventories signal the existence of problems that need to be addressed and often mean poor quality, long lead times, and poor due date performance (among other things). KIT inventory management offers alternative manufacturing environment and a traditional manufacturing environment are summarized in Table below. We now turn to examining the detailed Inventory management Territories Detente ten two systems. I 1. Pull-through system 2. Insignificant Inventories 3.

Small Supplier base 4. Long-term supplier contracts 5. Cellular structure 6. Multistoried labor 7. Decentralized services 8. High employee involvement 9. Facilitating management style 10. Total Quality Control 11. Direct tracing dominates (product costing) | 1. Push-through system 2. Significant inventories 3. Large supplier base 4. Short- term supplier contract 5. Department structure 6. Specialized labor 7. Centralized services 8. Low employee involvement 9. Supervisory management style 10. Acceptable quality level 11. Driver tracing dominates (product costing)1 3. 0.

Setup and Carrying Cost: The KIT Approach KIT takes a radically different approach to minimizing total carrying and setup costs. The traditional approach accepts the existence of setup costs and then finds the other quantity that best balances the two categories of costs. KIT, on the other hand, does not accept setup costs (or ordering costs) as a given; rather, KIT attempts to drive Hess costs to zero. If setup costs and ordering become insignificant, the only remaining cost to minimize is carrying costs, which is accomplished by reducing inventories to very low levels. This approach explains the push for zero inventories in a KIT system. . 0. Due Date Performance: The KIT Solution Due-date performance is a measure of a firm’s ability to respond to customer needs. In the past, finished goods inventories have been used to ensure that a firm is able to meet a requested delivery date. KIT solves the problems of due-date performance not by building inventory but by dramatically reducing lead times. Shorter lead times increase a firm’s ability to meet requested delivery dates and to respond quickly to the demands of the market. Thus, the firm’s competitiveness is improved. KIT cuts lead times by reducing setup times, improving quality, and using cellular manufacturing.

Most companies experience at least a 90 percent reduction in lead times when they implement KIT. 5. 1 . Long-Term Contract Ordering costs are reduced by developing close relationships with suppliers. Negotiating long-term contracts for the supply of outside for the supply of outside material will obviously reduce the number of orders and the associated ordering sots. Retailers have found a way to reduce ordering costs by adopting an arrangement known as continuous replenishment. 5. 2. 1 . Continuous Replenishment With continuous replenishment, a manufacturer assumes the inventory management functions for the retailer.

The manufacturer tells the retailer when and how much stock to reorder. The retailer reviews the recommendation and approves the order if it makes sense. Wall-Mart and Procter & Gamble, for example use this arrangement (Michael Hammer and James Champs, 1993). The arrangement has reduced inventories for Wall-Mart and has also reduced stockpot problems. Additionally, Procter & Gambler’s goods are often sold before Wall-Mart has to pay for them. Procter ; Gamble, on the other hand has become a preferred supplier, has more and better shelf space, and also has less demand uncertainty.

The ability to project demand better allows Procter ; Gamble to produce and deliver continuously in smaller lots – a goal of KIT manufacturing. Similar arrangement can be made between manufacturers and suppliers. 5. 2. 2. Electronic Data Interchange The process of continuous replenishment is facilitated by electronic data interchange. EDI is an early form of e-commerce that essentially is an automated method of transmitting information from computer to computer. In the beginning, value added networks (VANS) were required to transmit this information. In 1998, about 95 percent of EDI transactions moved over VANS.

However, internet communications alternatives are expected to reduce this van usage for EDI to less than 50 percent (Ken Volume, 2001). Although EDI is used for many different types of business-to-business transactions, our focus is on its usage for inventory management. For example EDI allows suppliers access to a buyer’s on-line database. By knowing the buyer’s production schedule (in the case of a manufacturer), the supplier can deliver the parts there they are needed Just in time for their use. EDI involves no paper – no purchase orders or invoices.

The supplier uses the production schedule, which is in the database, to determine its own production and delivery schedules. When the parts are shipped, an electronic message is sent from supplier to the buyer that a shipment is en route. When the parts arrive, a bar code is scanned with an electronic wand and this initiates payment fir the goods. Clearly, EDI requires a close working arrangement between supplier and the buyer – they almost operate as one company rather than two separates companies. 5. 2. 3. KIT II KIT II purchasing carries the KIT partnership arrangement to an even high level.

The KIT II partnership has the supplier’s sales representative working on site (on a full-time basis) at the customer facility while being paid by the supplier. The supplier employee is referred to as an in-plant representative. By being 100 percent of the time, the in-plant representative provides continuous supplier support. The in-plant representative attends the customer’s production planning meetings, has authority to lace orders on behalf of the customer, and can resolve any purchasing problems (such as order revisions and order delay).

The relationship reduces the administrative costs of both parties and greatly facilitates the use of KIT purchasing. The mutual arrangement is often cemented by open-ended, long-term contracts referred to as evergreen contracts. Evergreen contracts have no end date. Do not require rebinding, and thus, reduce the demand risk for the supplier. In exchange for reduced uncertainty id demand for its products, the supplier bears some of the purchasing costs of the customer because it pays the salary of the in-plant preventative. Examples of companies using KIT II are Bose, MOM, Intel, Honeywell, and AT;T. . 2. Reducing Setup Times Reducing setup times requires a company to search for new more efficient ways to accomplish setup. Fortunately, experience has indicated that dramatic reductions in setup times can be achieved. A classical example that of Harley-Davidson, upon adopting a KIT system, Harley Davidson reduced setup times by more 75 percent on the machine evaluated (Gene Sandwich, 1984). In some cases, Harley-Davidson was able to reduce the setup times from hours to minutes. Other companies have experienced similar results. Generally setup times can be reduced by at least 75 percents. 5. 0.

Avoidance of Shutdown and Process Reliability: The KIT Approach Most shutdowns occur for one of three reasons: machine failure, defective material or exhaustedly, Ana unavailability AT a material or exhaustedly. Hanging Inventories is one traditional solution to all three problems. Those espousing the KIT approach claim that inventories do not solve the problems but cover up or hide them. KIT proponents use the analogy of rocks in a lake. The rocks represent the three problems, and the water represents inventories. If the lake is deep (inventories are sigh), then the rocks are never exposed, and managers can pretend they do not exist.

By reducing inventories to zero, the rocks are exposed and can no longer be ignored. KIT solves the three problems by emphasizing total preventive maintenance and total quality control and by building the right kind of relationship with suppliers. 6. 1 . Total Preventive Maintenance Zero machine failures is the goal of total preventive maintenance. By paying more attention to preventive maintenance, most machine breakdowns can be avoided. This objective is easier to attain in a KIT environment because of the interdisciplinary labor hilltop’s. It is common for a cell worker to be trained in maintenance of the machines he or she operates.

Because of the pull through nature of KIT, it is also normal for a cell worker to have idle manufacturing time. Some of this time, then, can be used productively by involving the cell workers in preventive maintenance. 6. 2. Total Quality Control The problem of defective parts is solved by striving for zero defects. Because KIT manufacturing does not rely on inventories to replace defective parts or materials, the emphasis on quality for both internally produced and externally purchased trials increases significantly. It is not unusual to experience a reduction in the number of rejected parts by 75 to 90 percent.

Decreasing defective parts also diminishes the Justification for inventories based on unreliable processes. 6. 3. The Kanata System To ensure that parts or material are available when needed, a system called the Kanata system is employed. This is an information system that controls production through the use of markers or cards. The Kanata system is responsible for ensuring that the necessary products (or parts) are produced (or required) in the necessary quantities at the necessary time. It is the heart of the KIT inventory management system.

A Kanata system uses cards or markers, which are plastic, cardboard, or metal plates measuring four inches by eight inches. The Kanata is usually placed in a vinyl sack and attached to the part or a container holding the needed parts. A basic Kanata system uses three cards: a withdrawal Kanata, a production Kanata, and a vendor Kanata. The first two control the movement of work among the manufacturing processes, while the third controls movement of parts between the processes and outside suppliers. A withdrawal Kanata specifies the quantity that a bequest process should withdraw from the preceding process.

A production Kanata specifies the quantity that the preceding process should produce. Vendor Kanata are used to notify suppliers to deliver more parts; they also specify when the parts are needed. The use Kansas ensures that the subsequent process (Final Assembly) withdraws the circuit boards from the preceding process (CB Assembly or first process) in the necessary quantity at the appropriate time. The Kanata system also controls ten preceding process Day allowing It to produce only ten quantities withdrawn by the subsequent process. In this way, inventories are kept at a minimum, and the components arrive Just in time to be used.

Essentially, the same steps are followed for purchased subassembly. The only difference is the use of vendor Kanata in place of a production Kanata. A vendor Kanata on a vendor post signals to the supplier that another order is needed. As with the circuit boards, the subassembly must be delivered Just in time for use. A KIT purchasing system requires the supplier to deliver small quantities on a frequent basis. These deliveries could be weekly, daily, or even several times a day. This calls for a close working relationship with suppliers.

Long-term contractual agreement end to ensure supply of materials. 6. 0. Discount and Price Increases: KIT Purchasing versus Holding Inventories Traditionally, inventories are carried so that a firm can take advantage of quantity discounts and hedge against future price increases of the items purchased. The objective is to lower the cost of inventory. KIT achieves the same objective without carrying inventories. The KIT solution is to negotiate long-term contracts with a few chosen suppliers located as close to the production facility as possible and to establish more extensive supplier involvement.

Suppliers are not selected on the basis of price alone. Performance – the quality of the component and the ability to deliver as needed – and commitment to KIT purchasing are vital consideration. Other benefits of long-term contracts exist. They stipulate prices and acceptable quality levels. Long-term contracts also reduce dramatically the number of orders placed, which helps to drive down the ordering cost. Another effect of KIT purchasing is to lower the cost of purchased parts (it is for unusual for reductions to be between 5 and 20 percents). 7. 0.

Kit’s Limitation KIT is not simply an approach that can be purchased and plugged in with immediate results. It implementation should be more of an evolutionary process than a revolutionary process. Patience is needed. KIT is often referred to as a program of simplification-yet, this does not imply that is simple or easy to implement. Time is required, for example, to build relationship with suppliers. Insisting on immediate changes in delivery times and quality may not be realistic and may cause difficult confrontations between a company and its suppliers.

Partnership not coercion should be the basis of supplier relationship. To achieve the benefits that are associated with KIT purchasing, a company may be tempted to redefine unilaterally its applier relationships. Unilaterally redefining supplier relationships by extracting concessions and dictating terms may create supplier resentment and actually cause suppliers to retaliate. In the long run, suppliers may seek new markets, find ways to charge higher prices (than would exist with a preferred supplier arrangement), or seek regulatory relief.

These actions could destroy many of the KIT benefits extracted by the impatient company. Workers might also be affected by KIT. Sharp reductions in inventory buffers may cause a regimented workflow and high level of stress among production workers. A liberate pace of inventory reduction could be needed to allow workers to develop a sense of autonomy and to encourage their participation in broader improvement efforts. Forced and dramatic reductions in inventories may indeed reveal problems – but might cause even more problems such as lost sales and stressed workers.

If the workers perceive Tanat Jell wall simply more out AT teen, teen Jell e II likely De doomed. Perhaps better strategy for KIT implementation is one where inventory reductions follow the process improvements that KIT offers. Implementing KIT is not easy, and it requires careful and thorough planning and preparation. Companies should expect struggle and frustration. The most glaring deficiency of KIT is the absence of inventory to buffer production interruptions. Current sales are constantly being threatened by an unexpected interruption in production.

In fact, if a problem occurs, Kit’s approach consists of trying to find and solve the problem before any further production activity occurs. Retailers who use KIT tactics also face the possibility of shortage TIT retailers order what they need now – not what they expect to sell. The idea is to flow goods through the channel as late as possible, keeping inventories low and decreasing the need for Arkansas. ) If demand increases well beyond the retailer’s supply of inventory, the retailer may be unable to make order adjustment quickly enough to avoid lost sales and irritated customers.

Yet, in spite of the downside, retailers seem to be strongly committed to KIT. Apparently, losing sales on surprise hits is less than the cost of carrying high levels of inventory. The KIT manufacturing company also willing to place current sales at risk to achieve assurance of future sales, this assurance comes from higher quality, quicker response time, and less operating costs. Even so, firms must recognize that a sale today is a sale lost forever. Installing a KIT system so that it operates with a little interruption is not a short-run project.

Thus, losing sales is a real cost of installing a KIT system. An, alternative, and perhaps complementary, approach is the theory of constrain (TCO). In principle, TCO can be used in conjunction with KIT manufacturing; after all, KIT manufacturing environments also have constraints. Furthermore, the TCO approach has the very appealing quality of protecting current sales while also striving to increasing quality, lowering response time, and decreasing operating costs. 8. 0. Conclusion Many companies – large and small – have employed KIT with great success.

Among the major companies using KIT are Goodyear, Westinghouse, General Motors, Hughes Aircraft, Ford Motor Company, Black and Decker, Crystal, Borg-Warner, John Deere, Xerox, Tektronix, and Intel. The main benefits are the following: 1. Working capital is bolstered by the recovery of funds that were tied up on inventories. 2. Areas previously used to store inventories are made available for other, more productive uses. 3. Throughput time is reduced, resulting in greater potential output and quicker response to customers. . Defect rates are reduced, resulting in less waste and greater customer satisfaction.

As a result of benefits such as those cited above, more companies are embracing KIT each year. Most companies find, however that simply reducing inventories is not enough. To remain competitive in an ever changing and ever more competitive business environment, companies must strive for continuous improvement.

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