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JIT savings - myth or reality? - just-in-time management

Business Horizons, May-June, 1995 by Jitendra Chhikara, Elliott N. Weiss

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Be Careful to Consider Out-of-the-Box Solutions

Let us now consider an example in which the benefits of JIT are actually greater than they might seem to be at first glance. A niche paper manufacturer provides uncoated writing, text, and cover papers to the premium communications market. In the basic paper-making process, cotton and wood are broken down into their cellulose fibers in a solution made up of more than 99 percent water; this fiber solution is then dried and pressed together to form a single sheet of fiber-interlocked paper.

More Articles of Interest: Just In Time - Industry Trend or Event; Just-in-time inventory system proves vulnerable to labor strife - Up Front -...; JIT tops management practices.(just in time)(Brief article); Beyond JIT.; Just-in-time deliveries - suppliers to companies using just-in-time inventory...

Paper machines make paper as wide as 104 inches that comes off in rolls with diameters of 29 to 40 inches. These huge "parent" rolls are then sliced into narrower rolls that can be mounted on the back end of the finishing machines that produce the final product. The company had traditionally kept five to six weeks of finished goods in stock. It replenished its warehouse as needed by scheduling the paper machines to run the various grades of paper, then cutting all of the paper into the final product. The paper machines were scheduled by grade of paper, according to a preset, fixed interval of time. These types were run once every two, four, or eight weeks, depending on the relationships among setup cost and time, demand, and annual holding costs. Finishing involved cutting the large rolls to the smaller SKU (stock keeping unit) size, then placing the finished product in boxes or on pallets.

Historically, the bottlenecks were the paper machines, which were run as close to 100 percent utilization as possible and the paper sent to finishing immediately after. Finishing capacity and labor were a fixed cost. By the logic of our previous two examples, there was no incremental cost in finishing the paper immediately, because total investment in paper was unaffected. An argument similar to the previous two examples had historically been made to show that the sum of work-in-progress (WIP) and finished goods was constant, irrespective of the finishing schedule. The finishing stage in this instance can be thought of as the bottling stage in our sauce example. Finishing merely converted one type of asset--rolls--into another--cut paper. Because finishing costs were fixed, and the difference in storage costs was negligible, no incremental cash flows were associated with the cutting process. We might conclude, therefore, that no benefit is accrued from a JIT finishing process.

This analysis, however, is not complete, and the conclusions would be incorrect because of possible savings in safety stock inventory. The product structure for the company was such that there were only 10 or 15 types of parent rolls, but almost 1,500 final SKUs. A tremendous savings in finished goods inventory could be had by stocking paper at the parent-roll stage, not at the final SKU stage. This occurs because if paper is stored in its most flexible form, the parent roll, the same rolls can provide protection against excess demand for many different products. Given enough flexible capacity, the total inventory could be reduced significantly by stocking paper in the generic parent roll state rather than in the specific SKU, cut-paper state.

Business Services Industry

JIT savings - myth or reality? - just-in-time management

Business Horizons, May-June, 1995 by Jitendra Chhikara, Elliott N. Weiss

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