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PRODUCTION PLANNING & CONTROL, 2002, VOL. 13, NO.

8, 681687

Supply chain management: a just-in-time perspective


JAN OLHAGER

Keywords supply chain management, just-in-time, product structure, lead time Abstract. Just-in-time (JIT) has been a widely recognized production philosophy alternative since the early 1980s. JIT principles and techniques have been widely adopted in many manufacturing rms. More recently, supply chain management has evolved as a discipline focusing on the design, planning and control of processes linking the initial raw materials to the ultimate consumption of the nished product. Supply chain eciency is dependent on the eciencies of the individual manufacturing organizations and the ability to connect along the supply chain. In this paper supply chain management from a JIT perspective is investigated, focusing on the linking mechanisms between successive companies and the collective eciency of the supply chain.

1. Introduction The recent development of supply chain initiatives, focusing on linking, integration, collaboration etc., attempts to widen the spectrum of operations eciency to include not only the internal manufacturing operations, but also upstream as well as downstream operations. Competition in the future will not be between companies but between supply chains. In this respect it is important for any manufacturing rm to make sure that the operations at partner companies are ecient

and that the organizations have the same mindset as to values and what makes the nal products compete on the market. The just-in-time (JIT) philosophy has been successfully applied in many manufacturing rms during the last two decades. The primary focus of JIT has traditionally been on internal production activities, where a planning point equals a machine, a work cell, or a work centre. The corresponding planning point in a supply chain is a production system or a plant. It would therefore be of interest to investigate how the JIT philosophy can be applied to supply chains concerned with a number of organizations. The JIT philosophy contains both principles and techniques with the goal of improving the response to customer demand. The literature on JIT is both large and diverse and has been increasing during the last two decades; see e.g. Shingo (1981), Schonberger (1982), Hall (1983), Monden (1983, 1993), Ohno (1988), Harrison (1992), Schniederjans (1993), and Fujimoto (1999). The application of JIT/Kanban relative to other production and inventory management approaches in various manufacturing environments is treated in e.g. Karmarkar (1989), Maes and Van Wassenhove (1991), and Olhager and Wikner (2000). Supply chain management (SCM) is a processoriented, integrated approach to procuring, producing,

Authors: Jan Olhager, Linkoping Institute of Technology, International Graduate School for Management and Industrial Engineering, Department of Production Economics, SE-581 83 Linkoping, Sweden. Jan Olhager is a Professor of Production Economics at Linkoping Institute of Technology, Sweden. He received a Master of Engineering from University of California at Berkeley and a Ph.D. from Linkoping Institute of Technology. He authored two books on production manage ment and published in international journals such as European Journal of Operational Research, International Journal of Operations and Production Management, International Journal of Production Economics, International Journal of Production Research, International Transactions of Operational Research, International Journal of Technology Management, OMEGA, and Production Planning and Control. He serves on the editorial advisory board of the Journal of Operations Management, the editorial board of Production Planning and Control, and on the editorial review board of Production and Operations Management. His research interests include manufacturing strategy, global manufacturing, supply chain management, exibility, and modelling and analysis of production management systems.
Production Planning & Control ISSN 09537287 print/ISSN 13665871 online # 2002 Taylor & Francis Ltd http://www.tandf.co.uk/journals DOI: 10.1080/0953728021000058866

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J. Olhager are larger than one, and an item at a lower product structure level may appear in other product structures. Both these issues mean that an item at a lower level may have a higher volume than its parent item, whereas the reverse can never be true. Higher volumes typically lead to more stable volumes over time. Within a single organization, volumes are kept together to achieve economies of scale. The potential utilization of simpler production approaches, such as rate-based production and pull systems, also increases with increasing and more stable demand. However, in a supply chain some companies may practice dual or multiple sourcing. In doing so, a previously high volume is split among two or more suppliers, reducing economies of scale opportunities. Also, if every second order is placed with the other supplier in a dual sourcing situation, unnecessary discreteness in requirement plans is introduced. This latter eect is removed if requirements are continuously split between the suppliers. Consequently, single sourcing is preferable to achieve level volumes and economies of scale. Two issues arise with respect to gure 1: (i) how to transform the demand requirements from the consumer of the ultimate nal product to each actor in the supply chain, and (ii) how to synchronize the successive completion of the product over the various production stages. The rst is a planning issue whereas the second is an execution issue. It would be benecial for both planning and execution if the total supply network can be perceived as one entity. As for planning, the overall production rate needs to be transferred to all supply chain partners to avoid time delays. Information transparency is a key issue here. For execution, aiming at simplicity, a pull system such as Kanban can be employed. In order to avoid the bullwhip eect a supply chain cannot rely on locally distributed pull systems alone. The bullwhip eect (introduced in Forrester 1961, and discussed in e.g. Lee et al., 1997) typically appears in sequential inventory replenishment systems that are operated locally. A small rate change in the market leads to a bullwhip eect with increasing amplitude in orders between successive plants as well as in production levels at the plant level. The main reason is that an individually operated organization interprets an increase in incoming orders as a rate change and adjusts the parameters of its inventory replenishment system accordingly, i.e. both the expected demand during the lead time and the safety stock level will be increased. Consequently, orders between successive organizations contain both an element of real customer orders and an element of inventory model adjustment in terms of increasing the safety stock and the reorder point. A Kanban system shares some characteristics with the re-order point system, see e.g. Olhager (1995), and may cause a bullwhip eect if not managed correctly, e.g. by linking rate changes to the planning

and delivering products and services to customers, covering the management of material, information and nancial ows. SCM has a broad scope that includes subsuppliers, suppliers, internal operations, trade customers, retail customers, and end users. Thus, SCM goes beyond internal operations as well as two-party arrangements such as suppliercustomer relationships. The literature on SCM is steadily increasing; see e.g. Christopher (1998), Cooper and Slagmulder (1999), Handeld and Nichols (1999), Simchi-Levi et al. (2000), Stadtler and Kilger (2000), and Chopra and Meindl (2001). When looking at supply chains from a JIT perspective, a fundamental issue is that a chain is not stronger than its weakest link. In order for a supply chain to be competitive, and thus for the individual company in the supply chain to be competitive, the various organizations in the supply chain must all be ecient with respect to cost, quality, delivery speed and reliability and exibility. The fundamental change in scope between internal operations and supply chain operations is the product and time perspective, in that the total supply chain product structure and cumulative lead-time are deeper and longer, respectively. In this paper the total product structure connecting the initial raw materials to the ultimate nal product, and the supply chain lead-time eciency are specically addressed. These issues are treated from a JIT perspective in the next two sections. The nal section summarizes the ndings in this paper, with the aim of providing some insights into the relationship between JIT and SCM.

2. The total product structure The total product structure contains all items in a product from the initial raw materials to the nal product. If a rm owns all operations in the product completion process then the total product structure is also the product structure for that company. In supply chains where dierent organizations complement each other in the total production of the product, the total product structure is split among all organizations. Figure 1 illustrates these two situations. There are at least two problems with the separated product structure approach from a planning and synchronization point of view. First, the dependent demand that is experienced in the total product structure is transformed into multiple independent relationships, creating unnecessary uncertainties. Independent demand needs to be forecasted, whereas dependent can be calculated. Second, the total volume for items in any product structure is non-decreasing when moving downwards in the product structure. There may be quantities-per-item that

Supply chain management

683

Total product structure for supply chain

Firm 1 A

Firm 2 B

Firm 3 C

H D F G H

Firm 4 D

Firm 5 F

Firm 6 G

Firm 7 H

Figure 1. The total product structure links initial raw materials to the ultimate nal product, treating the supply chain as one entity (left), as opposed to the traditional approach with separate product structures (bills of materials) at individual rms (right).

systems of upstream supply chain partners. If the production rate changes over time, all parties involved need to have a uniform approach as to how to adapt, e.g. a policy for the calculation of the number of Kanban cards and when and how to recalculate if needed. Another implication of the total product structure approach concerns the physical plant layout. Within one plant, a product layout can easily be employed, where the successive completion of the product according to the product structure is mirrored in the plant layout. Manufacturing resources are dedicated to the specic product or product group that is to be produced in the production system, eliminating material ow crossings. Applying a total product structure approach to layout planning in supply chains would imply that all companies along the supply chain use a product layout. Since the volume per item is non-decreasing downwards the

product structure, upstream manufacturers have greater potential for applying a product layout than downstream.

3. Lead-time eciency Lead-time reduction is a central JIT initiative to improve delivery speed and reliability. The means include setup time reduction and lot size reduction. Setup time is a lead-time component, wherefore a setup time reduction leads to a direct lead-time reduction. Reduced setup times allows for lot size reduction, which reduces another lead-time component, i.e. the processing time per lot. Smaller lots are typically associated with smoother material ows, wherefore a reduction in queue times would be possible, further reducing the lead

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J. Olhager and Hout 1990) found that the time spent on value-adding activities in a manufacturing rm generally was between 0.05 to 5%, which they coined the 0.05 to 5% rule. An example of lead-time eciency in supply chains is reported in Womack and Jones (1996) that study the supply chain for a carton of cola, from the mine to the home storage before consumption. The complete chain consists of ten stages, including e.g. reduction mill, smelter, hot rolling mill, cold rolling mill, can maker, bottler, distribution centre, and store. Assuming eight production hours per day, the lead-time eciency was 0.12%. Since some of the supply chain stages operate or are open 24 hours per day, the lead-time eciency drops to 0.04% if the lead time is based on 24 hours per day. The latter ratio is even worse than the span reported by Stalk and Hout (1990). Another example is concerned with oce furniture; see Olhager (1998). The supply chain consists of sawmill, chipboard manufacturing, veneering, assembly, and oce furniture store before the nal product reaches the consumer. The lead-time eciency was 0.49% based on eight production hours per day and 0.12% assuming continuous production. Both these examples are in the lower region of the 0.05 to 5% rule. These two examples indicate that supply chains may well have poorer ratios than individual companies. There are two explanations to this phenomenon. First, the transportation of goods between companies is not necessarily included in the lead-time calculation for either party. However, these become obvious when the supply chain lead-time eciency is calculated. Secondly, the saying no chain is stronger than its weakest link is applicable to supply chains. Companies with poor leadtime eciency reduce the lead-time eciency of the entire supply chain. If a supply chain consists of some companies with good ratios and some with poor ratios, the combined result becomes rather mediocre. Only if all companies along the supply chain have a large proportion value-adding time will the total lead-time eciency be high. For example, if all companies have 5% valueadding time, then the ecient proportion for the supply chain will be 5%. This illustrates the importance of choosing the right supply chain for a manufacturing rm to operate in, and the notion that competition in the future will be between supply chains rather than between individual companies.

time. However, lot size reduction implies more setups, thus increasing the total setup time. To avoid unnecessary queuing due to increasing capacity utilisation rates, setup time reduction should be treated as a prerequisite for reducing lot sizes. Thereby, the total setup time at a resource need not be increased relative the situation before the setup time reduction, see e.g. Olhager (1993). Lead times play an important role in supply chain management. Fisher (1997) distinguishes between two types of supply chains; the physically ecient supply chain and the market-responsive supply chain. The former is appropriate for functional products with predictable demand, whereas the latter is appropriate for innovative products with unpredictable demand characterized by e.g. seasonal eects or short product life cycles. For both types of supply chains, a short lead time is desirable. This is especially accentuated in the market-responsive supply chain, where lead-time reductions should be pursued aggressively, whereas physically ecient supply chains impose a cost reduction constraint on lead-time reduction initiatives. When compared to internal operations where setup times and lot sizes are important determinants of the lead time, the main drivers of total supply chain lead time performance are not as well understood, see e.g. Olhager et al. (2002) and Persson and Olhager (2002). A vital performance measure for any manufacturing rm or supply chain is lead-time eciency, dened as follows: Lead-time efficiency Total processing time per unit excluding setups Cumulative lead time

The eects of lot sizing and setup times are removed from the numerator, only using the total processing time per unit. If the total processing time per lot and setup times were to be included in the numerator, the ratio would improve for larger lot sizes and longer setup times. Such actions are not coherent with lead-time eciency. The lead-time implication of lot sizes and setup times is however included in the denominator, which includes all lead-time components. This performance measure focuses on lead-time reduction, e.g. by means of reducing setup times and lot sizes. Thus, the components that were eliminated from the numerator are means for improving the denominator. Shorter setup time reduces the leadtime directly and is a facilitator of lot size reduction, which in turn may lead to a smoother material ow and as a consequence shorter and more reliable lead times. Such actions are central to the JIT philosophy. The value-adding part of the cumulative manufacturing lead time in a plant has typically been envisioned to be around 5%. A Boston Consulting Group study (Stalk

3.1. Analysing supply chain lead-time eciency Assume that a supply chain consists of N plants in sequence, each controlled by a separate organization. Furthermore, let:

Supply chain management Pi Li LTEi LTESC Processing time per unit at plant i Lead time at plant i, including its share of interrm transportation lead time Lead-time eciency of plant i Lead-time eciency of the supply chain

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It should be noted that Li includes both the cumulative internal manufacturing lead time and the part of the interrm transportation time that is controlled by plant i. Thereby, the total cumulative supply chain lead time includes all transportation lead times. The denition of lead-time eciency follows the discussion above. P LTEi i Li
N X

shorter processing time at company k in supply chain A, still needing the same lead time as the other companies, and then analyse the impact of a longer lead time at company k in supply chain B, having the same processing time as the other companies. For supply chain A, assume that the processing time of company k is Pi , 0 < < 1, but the lead time is the same as for all other companies in the supply chain. Thus, LTEk Pk Pi Lk Li 8i 6 k; i 1; . . . ; N

Then we compare the lead-time eciency of supply chain A to the case where all N companies have equal lead-time eciencies:
N X

Pi LTESCA Li

LTESC

i1 N X i1

Pi Li

i1 N X i1

N 1 Pi NPi 1 Pi NLi NLi NLi

It should be noted that lead-time eciencies are not additive. The supply chain lead-time eciency is calculated as the sum of the processing times divided by the sum of the lead times. If all companies along a supply chain have equal lead-time eciencies, the supply chain will have the same ratio.
N X

1 Pi LTE * < LTE* SC SC NLi since 0 < < 1. LTESCA is the lead-time eciency for supply chain A, and LTE * is the lead-time eciency SC of the supply chain with equal lead-time eciencies among all companies. For supply chain B, assume that the lead time of company k is Li , > 1, but the processing time is the same as for all other companies in the supply chain. Thus, LTEk Then,
N X

Pi Li

LTESC

i1 N X i1

X Li LTEi LTEi Li X X Li Li

LTEi

8i 1; . . . ; N

Pk P i Lk Li

8i 6 k; i 1; . . . ; N

since LTEi LTEj ; 8i; j; i 6 j; i 1; . . . ; N; j 1; . . . ; N. If one company has a lead-time eciency that is poorer that the rest of the supply chain companies, the overall eciency will suer. Let: LTEmin minfLTEi g LTEmax maxfLTEi g LTEmin < LTEmax Then, it can be shown that: LTEmin < LTESC < LTEmax The impact of processing time versus lead time can also be analysed. Assume that there are two almost identical supply chains, A and B. All companies except one (company k in both supply chains) in each supply chain have the same lead-time eciency ratio. For the sake of simplicity, these N 1 companies in each supply chain have the same processing time as well as lead time. Divide the analysis into two situations; rst analyse the impact of a

Pi Li

LTESCB

i1 N X i1

NPi N 1 Li

N 1 Pi 1Pi N 1 Li N 1 Li 1Pi < LTE * SC N 1 Li

LTE* SC

since > 1. LTESCB is the lead-time eciency for supply chain B. Now consider the situation where the lead-time eciency of company k is the same for both situations. This means that 1= . For this relationship, it can be shown that supply chain A always will have better lead-time eciency than supply chain B, i.e.:

686 LTESCA > LTESCB A numerical example illustrates this eect.

J. Olhager thereby removing unnecessary uncertainty in the system. Since the production volume per item and time unit increases (or at least is non-decreasing) when moving downward the product structure, two opportunities arise. First, rate-based approaches and pull type systems such as Kanban become successively more applicable. Second, product layouts can be employed, using dedicated manufacturing resources and streamlined material ows. In order to appreciate and understand lead-time management in supply chains, a vital performance measure is lead-time eciency, dened as the ratio between the total processing time per unit in the supply chain and the cumulative lead time. Setup time reduction and lot size reduction lead to improved ratios. However, no chain is stronger than its weakest link. Supply chain lead-time eciency is only obtained if all rms have strong leadtime eciencies. The overall eciency is especially hurt if some rm has long lead times. Instead, lead-time conformity is here presented as an approach to establishing supply chain balancing. The purpose of this paper is to provide some insights based on a JIT perspective on SCM practices. The issues discussed in this paper, i.e. the total product structure approach and lead-time eciency, impose a strong challenge for supply chain management. What has been achieved in manufacturing rms through JIT initiatives will have to be taken to a higher level for successful implementation in supply chains.

3.2. A numerical example Assume that each of two supply chains consists of ve companies. The lead-time eciency for four of these in each supply chain is 5%; the processing time is ve time units and the manufacturing and transportation lead time is 100 time units for each of the four companies. The fth company in supply chain A has a processing time of 0.5 time units and a lead time of 100 time units, whereas the fth company in supply chain B has a processing time of 5 time units and a lead time of 1000 time units. Thus, both companies have a lead-time eciency of 0.5%, which is ten times worse than its supply chain partners. Then, supply chain A has a lead-time eciency of 4.1% (20.5 time units divided by 500 time units), whereas supply chain B has a lead-time eciency of 1.75% (25 time units divided by 1400 time units). Thus, based on the analysis above and illustrated by the numerical example, lead-time conformity is more important than processing time equivalence in order to provide for supply chain lead-time performance. Transferring this result to internal production activities implies that it is important to have equal lead-times for successive operations, which is the fundamental idea of line balancing. Having some balancing loss at one station (or plant) is preferable to having one station (or plant) with excessive lead time. The latter would create large balancing losses at other stations. If a rate-based approach is to be successfully applied to supply chain planning, it is important to achieve equal cycle times as a principle for supply chain balancing.

References
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4. Summary and conclusions Supply chain management can benet from applying a JIT perspective. JIT traditionally addresses internal operations and suppliercustomer relationships, but the principles and techniques can be transferred to an entire supply chain. For example, JIT approaches to lead-time reduction, e.g. reducing setup times, small lot production, and product layouts, all apply to supply chain environments. In this paper the total product structure for a supply chain from the initial raw materials to the ultimate nal product, and the corresponding cumulative lead time eciency have been investigated. Approaching the supply chain as a total product structure, the links between organizations are transformed from independent demand to dependent demand,

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