Transportation holds up its end of JIT bargain

By By Brian Milligan -- Purchasing, 9/7/2000

They helped manufacturers minimize their inventories and focus their efforts on streamlining the supply chain.

Now, can just-in-time materials delivery practices be fueled by the Internet and overcome troubling issues in the transportation industry?

Analysts say yes to the first question, and maybe to the second. In some ways, they say JIT will now face its biggest challenges.

JIT is the Japan-born process that is designed to eliminate waste in manufacturing processes through more frequent delivery of smaller lot sizes directly to the production line. Transportation, naturally, always played a key role in this process. And in many ways its work has been impressive.

"Transportation is key here," says John Fontanella, service director for e-commerce strategies at the Boston-based AMR Research. "Without consistent transportation or the ability to notify customers and rectify problems with shipping, it will always be a black hole when it comes to sending things out."

It is a key that has to be there.

"A chain implies links," says Joel Childs, vice president of marketing for the Ohio-based Fed Ex Custom Critical Inc. "If you have a weak link, how is that chain doing? You need reliable, consistent links."

But even as many companies continue to strive for JIT's standards, some purchasing managers say there is need for improvement. Some, like Randall Moss, say their companies need to strive harder to adopt the concepts. His company relies on JIT shipments of up to 20,000 pounds of carbon and stainless steel bar per week.

"We use some JIT concepts, but we probably could use a few more," Moss says.

JIT works

There is plenty of evidence that JIT is working. The inventory-to-sales ratio for American manufacturers for the past 10 years, for example, has dropped from 1.7 months worth of stock on hand to 1.33. AMR reports that 25% or more of the inventory has been taken out of the system.

To fuel the fire here, manufacturers are:

• Learning to make overnight delivery carriers a planned part of the transportation equation, instead of an exception,

• Dealing with fewer carriers and making sure that those chosen carriers are high quality, and

• Increasingly turning toward the Internet to keep track of their orders.

All of this brings the fruits of JIT to fruition. It allows manufacturers to handle less inventory, spend less on labor, and worry about fewer stocking sites.

The process works for Julio Arce, senior sourcing agent for the North Carolina-based Clariant Corp. Clariant, which makes specialty chemicals for the textile industry, provides its suppliers with precise inventory forecasts.

"We give it to the supplier and, based on that, expect them to have the material at the warehouse for say September or the end of August," Arce says. "And come Sept. 1, we place orders on that forecast and expect the goods to be delivered in a timely basis."

On the day that Arce was interviewed, for example, he was preparing to place an order for the next day's materials before 2 p.m. As long as that order is placed, he says, the system will work for Clariant. Distributors receive the information, load inventory on a truck, and get it to the company in time for production lines.

"It works beautifully, beautifully for commodities, bags, drums, and it carries over for so many factories," Arce says. "As long as we forecast well, the distributors will be ready."

Arce says his company would be hard pressed if suppliers and distributors were not working according to JIT principles. But he maintains that many of them are, and are staying committed.

"We are not in the business of warehousing," he says. "They are. We just order from suppliers."

By not having inventory on site, Arce says his company is able to use the space for much more valuable pursuits. The company uses some of its space for an integrated supplier program, where suppliers work on site and help order inventory as needed. This principle, referred to as JIT II, allows the production lines to keep moving on time, Arce says.

Arce says it is easy to see the benefits here. Whereas carriers once replenished an on-site inventory two or three times a day, the company now relies on precise load deliveries of 50,000 pounds or less three times a week. Inventory that once took up valuable space is gone.

"We once had 10,000 pounds of material sitting there," Arce says. "It's not that way anymore. There is no 10,000 pounds, but an integrated supplier."

Arce says adapting to JIT was challenging in the beginning, but not now.

"Now, there is not a problem with people not believing," he says. "Initially there was a lot of apprehension."

Bob Delaney says it should be easy to recruit believers from now on.

Delaney is the vice president of Cass Information Systems, an analytical firm in Missouri. He says an indication that JIT is working can be affirmed through U.S. companies' annual cost of business logistics in relation to Gross Domestic Product. If manufacturers can drive business logistics costs below 10% or equivalent nominal GDP and hold them there for most years, the system is working.

The firm's 1999 State of the Logistics Report states that the value of nominal business inventory investment has been reduced by about 3.0% annually. These revisions have reduced the annual cost of business logistics in relation to nominal Gross Domestic Product by 0.3% to 0.5%.

For many years, prior to the 1990s, logistics costs were at 10.6%. By 1999, long after JIT had become a familiar term in this country, it dropped to 10.3%

Delaney attributes much of this success to the Internet. Manufacturers, he says, are turning to it to keep track of their inventory orders. And it's giving back precise information.

"It all means that while there was progress since 1999, the most recent progress in the last six quarters occurred at the same time that we had more visibility of inventory through the Internet," says Delaney. "This is more reliability."

Delaney says carriers' advancements in tracking and tracing technology are to thank for much of this. They took a hard lesson from Federal Express, which was so ahead of the pack 10 years ago when it came to tracking shipments.

"Motor carriers today provide information on shipments in transit at the same level and detail that Federal Express did in 1990," Delaney says. "In 1990, Federal Express provided tracking and tracing of inventory all over the world. Today, the leading motor carriers can give the same information."

Delaney says all of this good news points back to JIT practices and the manufacturers that are depending on them.

"What we have been doing is reducing inventories, freeing up working capital for more productive things in the business, like investing it in machinery and systems," Delaney says. "All inventory does is suck up working capital. So we are taking it down and freeing up the capital."

But ironically, Fontanella says the actual term "just in time" is now becoming an extinct phrase. "You never hear JIT anymore, but everything is based on JIT philosophy," says Fontanella. "It's kind of a relic of the '80s."

Even if the name is dropped, he says, JIT has undoubtedly helped American manufacturers reduce inventories. The process has worked for Richard Eaton, purchasing manager for the Tennessee-based Eastman Chemical Co. Eaton says his department carefully manages inventory, holds tight control over stocking levels, and monitors supplier commitment to the practice.

"We are gaining more confidence in their capabilities," Eaton says. "We allow them to go into planning, setting inventory levels, and it gives them the flexibility to move the inventory out."

"It's going down because, first, it [JIT] had a real effect on how processes are executed," Fontanella says.

Fontanella says the framework for collaboration is now set. He says AMR Research is monitoring a reduction in manufacturing cycle time. "This tells me inventories are being reduced," he says. "No operations manager in the United States today can justify high inventories to support customer service. They were forced to minimize their inventories."

And Fontanella agrees with Delaney. He says the drop in logistics costs coincided with the Internet boom. Many companies are using the Internet to extend applications out over the Web. And the systems are becoming ever-more sophisticated.

"I may access tier-one suppliers at Ford, or access Ford systems myself through a browser, or there may be portals I can go into to get information," Fontanella says. "What we are seeing is some very innovative Internet applications."

Fontanella says the Internet is offering manufacturers an almost magical concept: They can use it to get visibility into dealers' inventories. Such visibility is only increasing shipment order accuracy.

"They are able to manage inventory at local levels and see what dealers have on order and commit real time to dealer orders," he says.

"What the company is really selling into is the customer base," Fontanella continues. "It would make it seem like it had a greater selection of inventory than they actually have. It's virtual inventory, so to speak."

Childs says this visibility is now a given in the transportation industry. Fed Ex Custom Critical, he says, has learned to take the Internet very seriously.

"We are now going toward the Web," Childs says. "We are going down that road because the customer requires it.

"We make the technology available to the customer, and they choose the server for their requirements," Childs continues.

The exchanges

But while the Internet is surely helping to streamline this process, some transportation exchanges say they are still learning to build on the system.

The exchanges set up online marketplaces between buyers and sellers. But some, like the Kansas-based Transportation.com, say they are still trying to work the rules of JIT into their delivery schedules. Getting these schedules onto the sites is still an uphill battle in many ways.

"There is a limited applicability with our site now," says Jim Ritchie, president and CEO of Transportation.com. "But it can play a role in the future."

But the advantage the exchanges have in this area, says Ritchie, lies in the spot market approach. A manufacturer can go to an exchange in an emergency and quickly order a shipment of a particular material or commodity with the click of a mouse.

"The spot market allows people to manage through the JIT environment instantly," Ritchie says.

But Ritchie also says the site is not specifically designed to handle the intricate complexities demanded by JIT systems.

"We are being pushed," Ritchie admits. "Our customers are pushing us. We are not ready to go, but they are pushing us."

Still, through tracking and tracing and the efforts of the exchanges, Fontanella argues that transportation is making a difference in the JIT arena. The industry has become vastly more accurate, he says, at communicating information about shipments.

"At a minimum, transportation has gotten a lot better at communicating status by using Internet tools to update customers on shippers' activity," Fontanella says. "That counts for a lot."

Childs agrees. "Transportation is a major factor in inventory reduction. It's reliability, not speed," Childs says. "You've got to know when the freight gets there."

Childs says carriers have adopted these systems after getting repeated input from customers. His company and other carriers feel the pressure from manufacturers. "Customers demand more reliability," Childs says. "Customers are going toward supply chain management, and the demand patterns are getting more complex."

Ambulance planning

One of the big changes for JIT and transportation is that so-called emergency or "ambulance" loads are being planned into the equation. This is a far cry from 10 years ago, when manufacturers started turning to Fed Ex Custom Critical and other overnight-delivery carriers when the transportation link in the supply chain broke down.

"Emergencies are being more planned," says Childs. "This is because when you get to supply chain strategies, you know that exceptions are part of the program.

"We were once the 'oops' guy, and their was a stigma attached," Childs continues. "There was an aura of failure in using us. Now, customers are saying, 'You are important to the overall program, and instead of saying, 'Oops,' I have a pre-planned strategy for dealing with these emergencies.'"

Change is coming

But can transportation remain on top of all this? Delaney says too many companies today may not realize that changes are afoot.

New, federally mandated trucking regulations are due to come to fruition in January. At present, federal regulations permit drivers to be on duty for 15 hours, during which they can drive for 10 hours. This will change in January, when the Federal Hours of Service Act will state that truckers can be on duty for only 12 hours. Delaney says this will surely call for adjustment into JIT delivery schedules across the country.

"The change in hours will gum up the works, and they will have to reevaluate what their service levels will be," Delaney says.

To keep up with JIT schedules, Delaney estimates that carriers will have to put an estimated 20% more trucks and 50,000 more drivers on American roads. This won't be easy to do for an industry that is now short some 80,000 drivers.

This rising challenge is giving way to what Fontanella describes as skepticism about JIT. And there are other challenges, too. One is the ongoing problem of "brain drain," where companies experience problems when new suppliers or supplier management come on board. A former employee who was used to the system may be less used to it or ill-prepared to take it on.

To make JIT work, manufacturers are:

Challenges facing JIT practices