Saturday, May 7, 2011

Week 7 Posting

Pros and Cons of JIT

A solid JIT system is built around a number of core elements:  build-to-order manufacturing, large-scale customization, partnerships with suppliers, just-in-time components inventories, direct sales, customer service, and extensive information sharing with both supply partners and customers. Utilizing this strategy it is possible for a company to achieve "virtual integration"—a combining of a company's business with its supply partners and customers in real time in such a way that all three entities appear to be part of the same organizational team.

There are numerous benefits to such a system. The most obvious benefit is near zero inventory which results in tremendous cost savings. A typical computer manufacturer, for example, has a tremendous amount of resources tied up in inventory. A company using JIT is in a very different financial position. An order would work something like this: a customer calls the company or visits the company website and places an order for a computer and pays for the order. The company then orders components from suppliers and begins assembly when they receive the components. The company typically pays the supplier within 30 days. Instead of having millions of dollars tied up in inventory which may not sell for weeks and months, a company using JIT can be paid by the customer before they incur any significant costs. Also, the cost of computer components tend to go down over time so a traditional manufacturer's cost of components may be higher. In addition to freeing up cash, other resources, such as resources used for warehouse space and workers, are liberated to use elsewhere in the company. 

The primary disadvantage to JIT is its relative complexity. Management must reconsider the entire work flow of the company, from the intake of raw materials to the output of a finished product. Supply-chain relationships must be nurtured involving multiple suppliers, closer locations, or companies that can supply materials with little advance notice. Quality control issues can lead to shutdowns due to defects. Staff must be flexible and well trained to understand more of the entire process and shift to where they are needed as work flow ebbs and surges due to customer demand swings. This overhaul requires a sizable investment of time and money initially, plus a commitment to stay the course in implementing JIT, otherwise the system may never gaining traction within the corporate culture. Supply-chain interruptions can also be problematic. The recent disaster in Japan has created numerous hardships for companies with suppliers in that region.


Quality Control Gone Awry

A common problem with quality control occurs when management uses quality assurance metrics as part of employee evaluation. One reason this can be a problem is that the metrics can be manipulated by the employee.  The purpose for using metrics as an evaluative tool is to influence the behavior of the employee, often with the best of intentions. Unfortunately there are often unintended consequences of using metrics to evaluate employees.

Years ago I worked for a well known bank which used a customer service metric as part of employee evaluation for their brokerage division.  Customer wait time was considered an important measure affecting customer satisfaction. A monitor with real time data for customer wait time and the number of customers waiting was prominently displayed. when the work load was manageable customers usually experienced little or no wait. However, during heavy volume times the number of calls could overwhelm the ability of the brokers to service the customers within a reasonable time. Wait times could exceed 10 minutes with heavy volumes. The long wait times created considerable anxiety with customers concerned that they might lose money or miss an opportunity to make money while on hold. In an attempt to improve customer service management decided to make wait times and the number of calls answered a quality control metric for employee evaluation.

There were at least two unintended consequences of this method of evaluation. The first was that while brokers began answering more calls the calls tended to be shorter in duration, often to the point that the customers complained that they were not getting the service they required. Another problem was that brokers began to "game" the metric by answering and immediately releasing calls. The customer had no idea what happened since they never spoke with a broker so they would call back. This manipulation of the metric was a particular problem at closing time-5pm. The departmental policy was to answer any calls remaining in the queue at closing before switching over to an answering machine. The problems surfaced during heavy volume days when 40 customers could be in the queue at 5pm. Some brokers would simply answer and release calls in a rapid-fire manner to empty the queue.

While the metrics may have shown a substantial improvement in calls answered and wait time customer complaints increased accordingly. Unfortunately management was slow to realize that their metric was creating problems so the division lost a number of customers. I have posted a cartoon which, I believe, summarizes my point well.   


1 comment:

  1. I like how you pointed out that JIT also allows companies to take advantage of the fact that prices of technical components often fall as time goes on and newer technology is released. I overlooked that benefit of utilizing JIT nventory controls, but it definitely makes a lot of sense. Not only are you saving money on not storying a large unneeded inventory, but you also pay less overall than you might have if you bought it all upfront when price was at a premium.