CHAPTER - 3

Lean System & Innovation

Part I: Lean System

(1) Introduction to Lean System

1. Lean System is an organized method for waste minimization without sacrificing productivity within a
manufacturing system. Lean implementation emphasizes the importance of optimizing work flow through
strategic operational procedures while minimizing waste & being adaptable.

2. Waste is any step or action in a process that is NOT required to complete a process successfully (called "Non-
Value Adding"). When Waste is removed, only the steps that are required (called "Value-Adding") to deliver a
satisfactory product or service to the customer remain in the process.

3. There are generally 7 type of wastes which are [MT: TIM-WOOD]-

(a) Overproduction Producing ahead of demand

(b) Inventory Having more inventory than, what is minimally required at any point in the process,
including end-product

(c) Waiting Waiting includes products waiting on the next production step
(d) Motion People or equipment moving or walking more than, what is required to perform the
process

(e) Transportation Moving products that is NOT actually required to perform the process
(f) Rework from defects Non-right first time
(g) Over-Processing Unnecessary work elements (NVA activities)

(2) Lean Manufacturing Techniques

1. Many large companies like General Motors & Toyota are into lean manufacturing. Lean manufacturing involves a
shift in traditional thinking, from batch & queue to product-aligned pull production. Following are some of the
techniques of lean manufacturing-

Lean-1 Just-in-Time (JIT)

Lean-2 Kaizen Costing
Lean-3 5S [Sort (Seiri); Set In Order (Seiton); Shine (Seiso); Standardize (Seiketsu); & Sustain
(Shitsuke)]

Lean-4 Total Productive Maintenance (TPM)

Lean-5 Cellular Manufacturing/ One-Piece Flow Production Systems
Lean-6 Six Sigma

2. Principles: Most of these applications are based on the following principles-

(i) Perfect first-time quality

By Saksham Jain
 (ii) Waste minimization
(iii) Continuous improvement
(iv) Flexibility

3. Characteristics: Characteristics of lean manufacturing are-

(i) Zero waiting time

(ii) Zero inventory
(iii) Pull processing
(iv) Continuous flow of production
(v) Continuous finding ways of reducing process time

Part II: Lean 1- Just-in-Time (JIT)

(3) Introduction to Just-in-Time (JIT)

1. A JIT approach is a collection of ideas that streamline a company’s production process activities to such an
extent that wastage of all kinds viz., of time, material, & labour is systematically driven out of the process. JIT
has a decisive, positive impact on product costs.

2. CIMA defines-

Just-in-time (JIT) JIT Production JIT Purchasing

System whose objective is to Production system which is driven Purchasing system in which
produce or to procure products or by demand for finished products, material purchases are
components as they are required by whereby each component on a contracted so that the receipt &
a customer or for use, rather than production line is produced only usage of material, to the maximum
for stock. JIT is a Pull system, which when needed for the next stage. extent possible, coincide.
responds to demand.

3. A complete JIT system begins with production, includes deliveries to company’s production facilities, continues
through the manufacturing plant, & even includes the types of transactions processed by accounting system.

(a) Spare Parts/ Materials from suppliers on exact date & at exact time when they are needed.
(b) Straight delivery to production floor for immediate use in manufactured products.
(c) Visit of engineering staff at supplier sites to examine supplier's processes.
(d) Installation of Electronic Data Interchange (EDI) system that tells suppliers exactly how much of which
parts are to be sent.

(e) Dropping off products at the specific machines.

(f) Shorten the setup times.
(g) Eliminating need for long production runs/ Streamlined flow of parts from machine to machine.
(h) Training to employees how to operate a multitude of different machines, perform limited maintenance.
(i) Several alterations in supporting accounting systems.

Test Your Understanding [Learnings from QB]-

By Saksham Jain
1. Is JIT process different for purchase & production department? STATE the reason to support your opinion
& also EXPLAIN the effect of its introduction.

Hint-

(a) JIT is the management philosophy based upon demand pull system (rather than supply-push) throughout
the plant in order to reduce cost, with a single piece flow after considering takt time.

(b) JIT Purchasing & JIT Production-

(i) JIT process is different for purchase & production department, due to inherent nature of
functions rendered by them; despite the purpose of both is to de-clutter store/ assembly line at
the production floor & reduce the cost.

(ii) JIT if applied in purchases by purchase department then known as JIT purchasing, which meant
materials should only be purchased, when required for production.

(iii) Whereas if JIT is applied by production department, it will be termed as JIT production under
which finished products should only be produced, as needed to meet actual customer demand.

(c) Effect of its Introduction-

(i) JIT purchasing reduces the inventory level which will result in reduction of carrying cost of
inventory, as well as reduces the level of W.C. which will save the opportunity cost in form of
interest expense. On the other hand, JIT production gives opportunity to customize the product as
per customers' needs.

(ii) Prerequisite of JIT purchasing or production is integration with vendor, if vendor is NOT
integrated properly or less reliable, then situation of stock-out can arise & which can result into
loss of contribution.

(iii) Multitasking by employee is another key feature of JIT, group of employees should be made based
upon product instead of function. Hence, functional allocations of cost become less appropriate.

(iv) Overall, JIT enhance the quality into product by eliminating the waste & continuous improvement of
productivity.

2. Under JIT, whether inspection at the point of receipt of raw material justified or NOT?

Hint-

(a) JIT aims to find a way of working & managing to eliminate wastes in a process. Achievement of this is
ensured through eliminating the need to perform incoming inspection.

(b) In general, inspection does NOT add value to the product. It simply serves as a means of identifying
defects the supplier has failed to recognize subsequent to the manufacturing of raw material.

(c) Organizations implementing JIT seeks to eliminate the need for performing incoming inspection
activities through a combination of following-

(i) Reducing the supplier base,

(ii) Selection through qualification, &
(iii) Vendor development.

By Saksham Jain
 (4) Principles of Just-in-Time (JIT)

1. "Process that vastly reduces the amount of RM inventory & improves the quality of received parts."

To begin with, a company In addition, deliveries Engineering Install EDI Dropping off
must ensure that products/ should be sent straight staff must system that tells products at
spare parts/ materials are to the production floor visit supplier suppliers exactly the specific
received from the suppliers for immediate use in sites & how much of machines.
on exact date & at exact time the manufacturing of examine their which parts are
when they are needed. products. processes. to be sent.

2. "Process in which company reduces the amount of WIP, while also shrinking the no. of products that can be
produced before defects are identified & fixed, thereby reducing scrap costs."

(a) Now, we shorten the setup times for machinery. When setups take a long time, company's management
authorizes long production runs, which spreads the cost of setup over far more units, thereby reducing the
setup cost on per-unit basis. Following is the problem with long-setup time & solution for the same-

Problem with long-setup time Solution under JIT system

With this approach too many products Under JIT system a different approach to setup issue is
are frequently made at one time, followed which focuses on making a video tape of a typical set
resulting in product obsolescence, up, instead of reducing the length of equipment setups &
inventory carrying costs, & many thereby eliminating the need for long production runs to reduce
defective products (because problems per-unit costs. In this, a team of industrial engineers & machine
may not be discovered until a large no. users examines this tape, spotting & gradually eliminating steps
of items have already been completed). that contribute to a lengthy setup.

(b) In addition to the reduction in setup time, problem of co-ordination between machines still needs to be
resolved. Following is the problem with lack of co-ordination between different machines & solution for the
same-

Problem with lack of co-ordination between different machines

1. Due to large difference between operating speeds of different machines, WIP inventory builds up in
front of the slowest ones.

2. Also defective parts produced by an upstream machine may NOT be discovered until next
downstream machine operator works his way through a pile of WIP & finds them.

Solution under JIT system

There are 2 ways to resolve both the problems-

❑ Kanban Card-

By Saksham Jain
1. It is a notification card that a downstream machine sends to each machine that feeds it parts,
authorizing the production of just enough components to fulfill the production requirements
being authorized in turn by the next machine further downstream.

2. This is also known as a "Pull System", since kanbans are initiated at the end of production
process, pulling work authorizations through the production system. This way WIP inventory is
NOT build up.

3. Kanban Inventory Management [Learnings from QB]-

(a) Kanban system is a visual signal-based workflow management technique.

(b) Kanban in inventory management-

(i) It can be used in pull system of inventory, where supplier supplies material based upon
consumption.

(ii) Kanban is a visual cue to worker to understand that further material is required.
(iii) Kanban reduce the cycle time & enhance predictability, in order to promote value to the
customer.

(c) Kanban Size & Number of Kanban-

Kanban Size = [(C) × (LT) × (L) × (SF)]

Where,

C = Consumption
LT = Lead Time
L = Location of Kanban (L is 2 unless otherwise provided)
SF = Smoothing Factor, which is used to set-off seasonal variations in consumption (SF is
1 unless otherwise provided)

Note: EOQ can also be practiced as kanban size.

Safety Stock + Consumption during lead time

No. of Kanban =
Kanban Size

(d) While calculating Kanban size & no. of Kanban required following assumption need to be taken-

(i) Consumption is constant throughout the period.

(ii) Supplier will deliver material directly to the point of use area.
(iii) Space requirement to store no. of kanban is met.

4. Kanban in non-manufacturing facilities [Learnings from QB]-

(a) It can be applied to non-manufacturing concern as well, for smoothening of workflow rather
than inventory management.

(b) In kanban, signal based dashboard is used to manage & improve the work flow. It also
categories the work into to-do, on-going & done (in some cases, backlog category is also be
added).

By Saksham Jain
 5. Factors to be considered & specific precautions/pre-requisite to kanban system [Learnings from
QB]-

(a) Kanban try to smoothen the workflow process by visualizing the work flow, reducing WIP,
managing process, making process policies explicit, incorporate feedback & using scientific
techniques.

(b) For this, factors to be considered are as follows-

(i) Will supplier be ready to supply material in the lot size equal to Kanban Size?
(ii) Will supplier participate in the pull system of inventory & agree upon Kanban Stocking
program?– reliability on supplier.

(iii) Will supplier agree to supply material directly at the point of use i.e., assembly line?
(iv) Is the consumption pattern comprising significant variations or constant throughout?
(v) What is the material handling & storage requirement?
(vi) Contribution margin on sale of product in which RM is used.

Note: These factors have major impact on the calculation of kanban size as well.

❑ Group Machines into Working Cells-

1. A working cell is a small cluster of machines which can be run by a single machine operator. This
individual machine operator takes each output part from machine to machine within the cell; &
thus there is no way for WIP to build up between machines.

2. Also, operator can immediately identify defective output which otherwise is difficult for each
machine of the cell.

3. This configuration has additional benefit of lower maintenance costs & ease of re-configuration
of the production facility to produce different products.

4. Major change must also be made in the work force. With full responsibility for a no. of machines,
as well as product quality, workers become much more interested in what they are doing.

5. For this HRD must organize training classes to teach employees on how to operate a multitude of
different machines, perform limited maintenance on machines without having to call in the
maintenance staff, spot product errors, understand how the entire system flows, & when to halt
the production process to fix problems.

6. A major result of having an empowered workforce is that employees are allowed to stop their
machines when they see a problem, & either fix it on the spot or immediately call in a repair
team. This reduces the time wasted in variance reporting.

3. "Processes in which company alters in supporting accounting system."

The massive changes caused by JIT system also requires several alterations in the supporting accounting
systems.

Problems Solutions

By Saksham Jain
 1. Due to large no. of daily supplier 1. For the first problem, company can switch to making a
shipments, accounting staff faces the single consolidated monthly pymt. to each supplier.
prospect of going through a large pile of
2. To prove that a supplier has delivered the parts,
accounts payable paperwork.
determine the amt. of finished products created during
2. Also, there will be no receiving the period & then multiply these quantities by the parts
paperwork, because suppliers deliver listed on BOM for each product (adjusted for scrap),
parts directly to the production obtaining a total qty. for each part used. This way there
operation, so there is no way to is no need for suppliers to send invoices as co. relies
determine if the deliveries have been solely on its internal production records to complete
made. pymts.

Conclusion-

1. Clearly, the changes imposed by JIT system are profound & can greatly improve the company's operations
when installed & operated correctly. They can also have a profound effect on product costs.

2. So, JIT system aims at-

Meeting the customer demand in a Providing high quality products Providing products at lowest
timely manner possible total cost

(5) Features of JIT Production System

5 main features of JIT production system are as follows-

Material–handling Labour idle-time Eliminating defects as Faster response to Carefully selected

cost is reduced: gets reduced: Hire & quickly as possible: customer demand: suppliers are
Grouping of retain workers who Apply TQM to eliminate Place emphasis on capable of
machines are multi-skilled so defects. As, there are reducing set-up delivering high
sequentially so that that they are tight link stages in time which makes quality materials in
material move from capable of production line, & min. production in a timely manner
one machine to performing a variety inventories at each smaller batches directly at
another. of operations, stage, defect arising in economical & shop–floor, thereby
including repairs & one stage can hamper reducing inventory reducing the
maintenance tasks. the other stages. levels. material receipt
time.

(6) Other Miscellaneous Concepts Related to JIT

1. Essential pre-requisites of JIT system-

(a) Low variety of goods

(b) Vendor reliability
(c) Good communication
(d) Demand stability
(e) TQM

By Saksham Jain
 (f) Defect free materials
(g) Preventive maintenance

2. Impact of JIT system on-

(a) Waste Costs JIT system focuses on eliminating all waste from a system. This can be a waste of
assets, waste of time, waste of materials or excessive inventory.

(b) Overhead Costs Costs of material handling, facilities, & quality inspection declines due to JIT system.
Also, reduction of inventory results in a massive reduction in space required for
warehouse facility.

(c) Product Prices Higher product quality & timely delivery will always command a pricing premium.

3. Back-flushing in a JIT System-

(a) Back-flushing requires no data entry of any kind until a finished product is completed. At that time, total
amount finished is entered into the computer system, which multiplies it by all the components listed in
BOM for each item produced. This yields a lengthy list of components that should have been used in the
production process & which are subtracted from beginning inventory balance to arrive at the amount of
inventory that should now be left on hand.

No. of RM units removed = [(No. of units produced × Unit count listed in BOM for each component) +
from stock Adjustment for scrap produced during the production process]

(b) However, there are some serious problems with back-flushing that must be corrected before it will work
properly. They are-

(i) Production Reporting Total production figure entered into system must be absolutely correct, or
else wrong component types & quantities will be subtracted from the stock.

(ii) Scrap Reporting All abnormal scrap must be diligently tracked & recorded; otherwise these
materials will fall outside the back-flushing system & will NOT be charged to
inventory.

(iii) Lot Tracing Lot tracing is impossible under back-flushing system. It is required when a
manufacturer need to keep records of which production lots were used to
create a product in case all items in a lot must be recalled.

(iv) Inventory Accuracy Inventory balance may be too high at all times because back-flushing
transaction that relieves inventory usually does so only once a day, during
which time other inventory is sent to production process; this makes it
difficult to maintain an accurate set of inventory records in warehouse.

Notes-

1. Worst situation is where production staff is clearly incapable of providing sufficiently accurate scrap
or production reporting for back-flushing system.

2. If there is an easily traceable cause, such as less capable workers on a particular shift, moving a few
reliable employees or experienced shift supervisor into these positions can provide immediate relief
from the problem.

By Saksham Jain
 3. However, where this is NOT possible for whatever reason, computer system users experience back-
flushing garbage in, garbage out (GIGO)- entering inaccurate information rapidly eliminates any
degree of accuracy in the inventory records, requiring many physical inventory counts to correct the
problem.

4. Consequently, the success of back-flushing system is directly related to company’s willingness to

invest in a well-paid, experienced well-educated production staff that undergoes little turnover.

4. Decision regarding implementation of JIT system [Learnings from QB]-

(a) On the basis of Costs & Savings due to JIT (Cost Benefit Analysis)-

(i) Determination of Costs & Savings due to JIT-

Savings due to JIT Costs due to JIT

1. Reduction in Holding Cost/ Warehousing Cost/ Storage 1. Increased Procurement Cost

Cost 2. Overtime Cost
2. Reduction in Insurance Cost 3. Ordering Cost
3. Reduction in Carrying Cost: It can be of following types- 4. Stockout Cost
5. Contribution lost due to
(a) Material Handling Cost
stockout
(b) Opportunity Cost of funds blocked in inventory
(c) Other Carrying Costs

4. Reduction in Quality Inspection Cost

Notes-

1. Holding, Insurance & Carrying Cost is to be calculated on average inventory.

2. Calculation of Average Inventory-

Order Size⁄EOQ
(a) In case of JIT Purchase =
2

Opening Stock + Closing Stock

(b) In case of JIT Production =
2

2AO
3. Economic Order Quantity EOQ =
C

Where,

A = Annual Consumption of Raw Material

O = Ordering Cost per order
C = Carrying Cost p.u. p.a.

Logic of Formula-

In case of JIT procurement system, EOQ is a level where-

Ordering Cost = Carrying Cost

By Saksham Jain
 EOQ A
C = O
2 EOQ

2AO
EOQ2 = C

2AO
EOQ =
C

4. Incremental/ Extra Overtime Cost in case of JIT Production System-

If labour is to be paid for minimum contracted hours Otherwise

Consider Overtime Wages + Premium Consider only overtime premium

(ii) Advice-

Based on the costs & savings determined above, decision regarding the implementation of JIT system
can be taken. However, a company should consider following factors as well before taking any final call
about implementing JIT production system-

Entity has to ensure To remove any Entity should also aim to Entity should also keep in
that it receives quality issues, improve quality at its mind the efficiency of
material from engineering staff process & design levels its work force. It must
suppliers on the exact must visit supplier’s for achieving "Zero ensure that labour's
date & exact time sites & examine Defects" in production learning curve has
when required. their processes. process. reached at steady rate.

Note: Factors to be considered before implementing JIT procurement system-

In JIT procurement system, company plans to eliminate its RM inventory altogether. Now, RM will be
delivered as per the production schedule directly at factory shop floor, from where the production
will begin. Mgt. should therefore carefully consider the following points-

1. Entire production process has to be detailed & integrated sequentially.

2. Since production is dependent on delivery & quality of RM, heavy reliance is being placed on
suppliers. They should be able to guarantee timely delivery of RM of appropriate quality.

(a) Lost sales opportunities due to unavailability of RM or non-conformance of material can

result in substantial losses to company.

(b) While, portion of this has been factored while doing the cost benefit analysis of
implementing JIT system, it needs careful consideration & monitoring even after
implementation.

(c) Therefore, to hedge its loss, mgt. & suppliers should agree on penalties or costs the supplier
should incur should there be any delay or non-conformance in quality of materials beyond
certain thresholds.

By Saksham Jain
 3. Accurate prediction of sales trends is important to determine the production schedule & finished
goods planning.

4. Continuous monitoring of system even after implementation is essential to ensure smooth

operations.

(b) On the basis of Manufacturing/ Process Cycle Efficiency (MCE)-

(i) Determination of MCE-

 To evaluate how much of the old cycle time was spent in inventory, organizations need to assess
the efficiency of their manufacturing processes.
 One commonly used measure is MCE & to calculate the same every process is breakdown into
combination of activities such as- VA activities, NVA activities & NVA but strategic activities.
 To generate highest value to customer, only VA activities are included in process. But NVA
activities, which are strategic in nature, also need to be part of process. Therefore, it may be
possible that entire process is NOT efficient.

 To measure efficiency of process, managers keep track of the relation between 'time taken by VA
activities' in comparison 'total cycle time'. Such relation/ratio is processing cycle efficiency-

Value Added Time

Process Cycle Efficiency =
Total Cycle Time

Where,

Total Cycle Time = [Value Added Time + Non-Value Added Time]

Value Added Time = [Processing Time]
Non-Value Added Time = [Inspection Time, Storage Time, Waiting Time, Moving Time, etc.]

(ii) Advise: If efficiency increases in JIT production system, then it should be implemented.

5. Implementation of JIT production method can be a major source of competitive advantage & success of
company [Learnings from QB]-

(a) JIT system aims at-

Meeting customer demand in a Providing high quality products. Providing products at lowest
timely manner. possible price.

(b) Main features of JIT production system are-

(i) Material handling cost is reduced

(ii) Multi-skilled labor
(iii) Minimizing defects, rework & scrap
(iv) Reduced set-up time
(v) Reduces lead time for receiving materials

By Saksham Jain
 (c) Eliminating inventory holding, scrap, material wastage, flexibility in operations by reducing set-up time,
better response time to customer’s demands, better skilled workforce, better quality of production, lower
workforce requirement, lower floor space requirement all of these contribute towards lowering W.C.
requirements. These contribute to company’s competitive edge & success.

6. Takt Time [Learnings from QB]-

(a) It is the maximum available time to meet customer demands; this will help to decide the speed of/ at
manufacturing facility.

(b) Takt time is the average time between the start of production of 1 unit & start of production of next unit,
when these production starts are set to match the rate of customer demand.

Available Production Time

Takt Time =
Total Quantity Required

Where,

Available Production Time = [Total available time for production – Planned downtime i.e. spent in
shutdown & cleaning]

7. Areas where JIT purchasing may reduce cost significantly to bring cost efficiency are [Learnings from QB]-

(a) Interest cost of W.C.: JIT purchasing will reduce the level of RM, which cause a reduction in the amount
blocked as W.C.; hence interest cost will reduce too.

(b) Reduction in storage cost.

(c) Since JIT purchasing reduces inventory level of RM, hence sorting becomes easy & motions are also
reduced, which therby reduces labour & overhead cost.

(d) Material is purchase as & when required hence wastage & scrap will be less due to a relative reduction in
evaporation & tendency to obsolete.

By Saksham Jain