Squeezing Profits Out of Inventory : ‘Just in Time’ Systems Can Slash Costs, Improve Quality

It isn’t the love of money that is the root of all business evils, say a growing number of executives and management experts. It is the love of inventory.

Inventory--supplies for production, work in progress or finished goods ready to be shipped--ties up needed cash, costs money to be stored and hides quality and production problems.

The solution, say executives from such large corporations as General Motors Corp. to smaller, job-oriented shops such as Cockeysville, Md.-based M. S. Willet Inc., is to weed out inventory using “just in time” systems.

“Just in time” technology permits a company to receive materials just in time to turn them into products, then finish those products just in time to meet customers’ deadlines.

Developed by Toyota in the early 1960s, JIT was adopted by some U.S. companies suffering from Japanese competition in the early 1980s.

In 1983, for example, Harley-Davidson Inc. was struggling in a motorcycle market increasingly dominated by Yamaha, Kawasaki and Honda. So the United States’ last remaining motorcycle maker threw out its bidding system for suppliers and gave long-term contracts to a few proven suppliers who promised to deliver one day’s worth of materials each morning to its York, Pa., final assembly plant.

Harley also rearranged the production line to reduce work in progress, cut setup time on machines to increase flexibility and dropped lot sizes from 25 motorcycles to one so that each day’s production matched that day’s orders from dealers.

Harley spokeswoman Kathyrn Molling said JIT saved the motorcycle maker by slashing costs while dramatically improving quality. For example, the company was able to sell 44 of its 50 forklifts because of the reduction in material handling. At the same time, it reduced defects discovered at final inspection by 70%, because JIT slows down some production processes to allow greater inspection, she said.

Helps Keep Clients

Common now among the nation’s biggest manufacturers, JIT is increasingly being adopted by smaller companies, said Richard Dickensheets, production manager for M. S. Willet.

Dickensheets said many job shops like Willet, a 50-year-old machining company, have developed JIT systems in order to keep as clients such JIT boosters as Harley-Davidson and Black & Decker Corp.

And Willet is pushing JIT on its suppliers to reduce its own inventory, he said.

“We are trying to find good vendors all the time,” Dickensheets said.

But JIT is no panacea. Because they are not considered important customers, some small firms may have difficulty getting suppliers to agree to daily deliveries of materials and may have to keep large inventories of materials on hand.

And companies selling to or supplied by unstable markets should probably not risk drastic reduction of inventories.

Also, firms that already have excellent records in quality, worker relations and on-time delivery records may not be willing to bear the costs of reshuffling inventory and production systems, explained Janice Klein, a Harvard Business School professor who specializes in JIT research.

The ideal in JIT production “is to have the company work like a robot,” she said. But people are not robots. “They each do things a little differently. JIT wants to take out the variability so everything is exactly the same. That means taking away the workers’ freedom to do things differently.”

But nearly any firm that has a fairly predictable customer and supply base can apply JIT concepts--such as reducing inventories to ensure that bottlenecks and failures are revealed and fixed correctly--to reduce long-term costs and improve quality, Klein said.

“JIT is a philosophy. It makes sense no matter where you are,” she said.

The most important difference between large and small companies’ shifts to JIT may be where they introduce it.

Change Takes Time

Big firms often start with the least internally painful and most immediately rewarding aspect by forcing suppliers to deliver only what they need when they need it.

Starting a JIT purchasing system requires time, scrupulous planning and careful negotiations with suppliers, said Tim Lewis, a purchasing expert with the Cambridge, Mass.-based JIT consulting firm Rath & Strong.

Paring down a 30-to 60-day supply level to a one-day supply takes years and starts with careful analyses of the firm’s purchasing patterns and the firm’s suppliers, Lewis said.

The company must know what its daily or weekly demands are for each part. Once its needs are established, the company should evaluate potential suppliers for their administrative talent, fiscal strength, inventories, delivery systems, quality levels, lead times and prices, Lewis said.

In each case the most reliable, not necessarily the cheapest, supplier is given a long-term contract to supply the part on a schedule determined by the buyer.

These negotiations should turn purchasing--which has traditionally rested upon adversarial relationships with suppliers--into a partnership with vendors, Lewis said.

“Working with your suppliers is quite an advantage,” he said. Even though competition for each part is reduced, most of his clients see their purchasing costs decline by from 6% to 20%, he said.

Once the supplier is converted to JIT, the company must convince its own workers that JIT will work. Company insiders are often harder to convince than outside suppliers, Lewis said.

“The person in the stockroom says, ‘I got in trouble the last time I ran out of this, so I have got to order more,’ ” Lewis said, explaining that internal politics can ruin the system. “It can be very territorial,” he said.

Merely Shifts Costs

A JIT purchasing system alone can cut inventory costs in half, he said.

But often, those savings are often accrued only by pushing costs onto suppliers or truckers, said Bruce Kennedy, a vice president for marketing for Preston Trucking.

Starting in the mid-1980s, Kennedy saw an increasing number of clients demand daily deliveries and attempt to “shift inventory costs onto us and their suppliers.”

Preston tries to fight the profit squeeze by “striving to show customers what is happening to our costs,” he said.

Last year, the regional trucking company started offering a higher-priced JIT program that uses radio-equipped trucks and guarantees next-day delivery to meet burgeoning demand for the quicker, smaller shipments.

Because of supplier opposition, many companies, both large and small, start JIT systems inside their own plants and try to reduce inventory of their own work in progress and finished goods waiting for shipment.

JIT experts say the best way to ensure the company is finishing the right products on the right day is to start at the final operation--such as assembly or packing--and work backward.

When the workers at the final operation need more of a certain product, they should walk back to the preceding operation and “order” whatever is needed. Workers should only produce to fill the orders from those ahead of them.

Thus the traditional “push” or supply-driven system is transformed into a “pull” or demand-driven system.