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Just-in-Time in Kalamazoo Jim Ballenger was president of a medium-size firm Like others in the field, Jim’s company actually that manufactured mini motor homes in Kalamazoo, manufactured very few of its components. Virtually the Michigan. The firm had expanded from a local Midwest entire product was assembled from components pur market to a national one, including Southern California chased from outside vendors. There was, however, a and New England. As markets had expanded, so too had well-defined order in which the components could most sources of supply for the company with major suppliers efficiently be installed in the vehicle. Recently, it had located in Southern California, the Pacific Northwest. become clear to Jim that transportation and inventory and Michigan. The decision to found the company in costs were a relatively large portion of his component Michigan had been made for two reasons: Jim’s former parts expenses and that they might be ripe for a substan- associates in the auto industry were there, and the largest tial reduction. He had been hearing about just-in-time single component of the mini–the truck or van chassis (IT) systems. According to some notes he had taken at on which the rest of the vehicle is built-was purchased a professional meeting, the JIT production system was from one of the U.S. light-truck makers. developed by the Toyota Motor Company more than Chapter 2. Logistics and Information Technology 39 50 years ago. It involves an approach to inventory that, in generally tacit) assumption that there would be some turn, forces a complementary approach to production, defective components purchased and that there would quality control, supplier relations, and distributor rela- likely be something wrong with his product when it tionships. The major tenets of JIT can be summarized first came off the assembly line. For this reason, the as follows: Kalamazoo minis were extensively tested (Their advertis- 1. Inventory in itself is wasteful and should be ing said, “We hope you’ll never do what we do to your Kalamazoo mini”), as were the components prior to minimized 2. Minimum replenishment quantity is maintained installation. To the extent that only a few of a particular for both manufactured and purchased parts. type of component were on hand, the interruption in the 3. Minimum inventory of semifinished goods should production schedule would be that much greater. It might be maintained –in this case, partially completed entail expensive rush orders for replacement components motor homes. or equally expensive downtime for the entire plant. 4. Deliveries of inputs should be frequent and small. Jim was also concerned about his relationship with 5. The time needed to set up production lines should his suppliers, as compared, say, to a large auto manufac. be reduced to the absolute minimum turer. In the mini-motor home business, generally the 6. Suppliers should be treated as part of the produc large. In this situation, it was somewhat more difficult to manufacturers are small and the component makers are effort to provide outstanding service and quality see the idea of the supplier as a part of the production and that there is usually a much longer-lasting to make a special effort in either quality control or deliv- relationship with a smaller number of suppliers ery flexibility on behalf of one of its almost miniscule 7. The objective of the production system is zero accounts Despite these concerns, Jim was painfully aware defects. 8. The finished product should be delivered on a very usually contained between $500,000 and $1,000,000 in that he was using a public warehouse near his plant that short lead time. inventory, on which he paid more than 1.5 percent per To the U.S. inventory planner, vice president of month for the borrowed funds used to buy it, as well as logistics, and production planner , an operation run on expenses relating to the use of the warehouse itself. In the preceding principles raised a number of disturbing addition, his firm was now producing so many differ- prospects. Jim Ballenger was very aware of the costs ent models (one with a bath, one with a shower only) that might arise if a JIT production system were to be and using so many different appliances (various types established. From the materials management stand- of radio, three varieties of refrigerator, etc.) that the point, the idea of deliberately planning many small costs of a safety stock for each component were going shipments rather than a few large ones appeared to up every day. ensure higher freight bills, especially from more dis- As an aid to making his decision on whether tant suppliers, for which freight rates would make the to try a JIT orientation at his plant, Jim’s execu- most difference tive assistant, Kathy Williams, drew up a table that With regard to competition among suppliers, Jim summarized the anticipated impacts of a JIT system often had the opportunity, in the volatile mini-motor- (see Exhibit 2.A). The figures are based on random home market, to buy out parts and component supplies samples of inventory items. The major component of from manufacturers that were going out of business any mini motor home–the chassis-would always Those components could be obtained at a substantial be purchased on a one-at-a-time basis from Ford, savings, with the requirement that inventory in the par- Chevrolet, Dodge, or International. With rare excep- ticular parts be temporarily increased or that purchasestions, it would always be available on demand. It from existing vendors be temporarily curtailed. Perhaps would be delivered through the local dealer. If the the greatest question raised by IIT, however, had to do dealer did not have one in stock, one could easily be with the probability of much more erratic production as obtained from another area dealership. a result of tight supplies of components. Both with sup- Exhibit 2.A is a representative 10 percent sample pliers products and with his own, Jim operated with the of Ballenger’s components inventory. It covers weekly Current System Using JIT Average freight JIT lot cost per Item size Unit cost $105 100 15 unit (surface) 522 18 10 7 6 113 25 Distance Average Average from number of Current freight vendor units used lot size Unit cost per (in miles) each week purchased cost unit Gas range 1,145 10 200 100 $20 Toilet 606 10 240 80 18 Pump 26 56 125 16 3 Refrigerator Clarge 22 6 120 110 20 Refrigerator (small) 22 7 15 95 15 Foam cushion 490 575 1,500 8 2 DVD player (type D) 1.800 9 24 136 11 Dome lights 3 824 1,720 2 0 Awning Brackets 48 540 1,200 4 1 Insect Screens 159 570 1,240 7 1 EXHIBIT 2.A Ten Percent Random Sample of Component Inventory Note: The plant operates 52 weeks per year and produces 10 mini motor homes per week. 1 75 85 7 15 3 3 36 130 4 26 0 60 5 1 50 7 2 use of each item, the current lot size purchased, and Questions so on. Before figuring the total costs under the present 1. What is the total annual cost of maintaining the components and JIT systems, two additional facts must be noted. inventory under the present system? First, Ballenger’s inventory carrying costs are assumed 2. What would be the total annual cost of maintaining the to be 20 percent per year on the average investment components inventory under the JIT system (assuming no in inventory on hand, including its acquisition and safety stocks)? transportation costs. 3. Should Ballenger take into account any other costs or Second, under the current system, the number of benefits from the IT system? If so, what are they? units of each type of component kept in stock is calcu 4. If the JIT system is adopted, are there safety stocks of any lated as follows: For those items purchased from vendors item that should be maintained? If so, which ones and more than 500 miles away, a safety stock representing how much? four weeks of use is maintained. For items from vendors 5. If the JIT system is adopted, what changes, if any, should between 100 and 500 miles away, a safety stock repre- occur in the relationships between Ballenger’s firm and his suppliers of components? Discuss. senting two weeks of use is maintained. For items from 6. Assume that Ballenger has switched to the IIT system and closer sources, a safety stock representing one week of use that he receives a surprise phone call from a competitor is maintained. In addition to safety stocks, the average who is going out of business. The competitor wants to sell inventory of any item is the current lot size purchased, Ballenger 7.000 dome lights of the type listed in Exhibit 2.A. divided by 2. Should Ballenger buy them? If so, at what price? If you are familiar with Excel or other spreadsheet 7. Carrying costs are 20 percent. Is there a level of carrying software, you might try using it here, although it is not costs at which both Ballenger’s present system and a necessary system have similar costs? If so, what is it?