Relationship of JIT/Lean to Total Quality and World-Class Manufacturing

The traditional production line pushes product from the front of the line to the final output, and even to the custom­ers, whereas kanban is the controlling agent in a pull system.

The two are incompatible. Similarly, implementing JIT/Lean in the absence of a comprehensive total quality system that includes the entire organization can be a problem. The tra­ditional organization is incompatible with JIT/Lean, just as the traditional push production system is incompatible with kanban. In a typical manufacturing company, separate de­partments exist for engineering, manufacturing, purchasing, accounting, and so on, each with distinct boundaries and agendas. JIT/Lean is no respecter of boundaries. It requires all departments to respond to its needs. If the manufactur­ing department has embraced JIT/Lean, but the organiza­tion as a whole has not at least started a total quality effort, manufacturing personnel will soon encounter obstacles. More often than not there will be outright resistance because JIT/Lean’s requirements represent change and departments without a commitment to change will fight it at every step.

As an example, in the defense industry it is common to defray overhead expenses (buildings, utilities, indirect employees’ salaries, all fringe benefits, and others) against direct labor dollars as a means of allocating the overhead burden across all contract programs. The more direct labor on a program, the larger the share of the overhead cost that accrues to that program. Direct labor is defined as the manu­facturing, engineering, purchasing, and other labor charged to specific contract programs. The company may also have more than one pool for overhead defrayment, such as a manufacturing pool and an engineering pool. Virtually all of these companies, and the U.S. Department of Defense, pay a great deal of attention to what they call overhead rate. In a typical company in the defense industry, overhead rate is calculated by dividing overhead (indirect) expenses by direct labor cost.

Suppose that for an accounting period there were indi­rect expenses of $200,000. At the same time, the wages paid for direct labor amounted to $100,000. The overhead rate for the period is $200,000 , $100,000 = 200%. Assume that we had been operating with that 200% rate for some time, and suddenly the manufacturing department discovered JIT/ Lean. After the period of time necessary for the implementa­tion to start showing results, manufacturing finds that it can eliminate direct labor positions for production control and material control and also use fewer assemblers on the pro­duction floor to get the same number of units out the door each period. A typical early reduction in the direct labor content of the work is 30 to 35%. The next period’s overhead expense is almost the same, decreasing slightly for removal of fringe benefits for the employees no longer needed, say, to $188,000. The direct labor is down by one-third to $67,000. This yields an overhead rate of $188,000 , $67,000 = 281%. That kind of an increase in overhead rate, if sustained, can cause the head of manufacturing serious problems. The ac­counting department uses this overhead rate as proof that JIT/Lean doesn’t work. All too often the accounting depart­ment blocks further progress in JIT/Lean. One might ask, “But isn’t that valid if the overhead rate went out of control?” The answer is nobody should care about the overhead rate. It is simply the ratio of two numbers and carries no mean­ing without a thorough understanding of the two. What happened to the cost of goods sold in this example? Look at the numbers before and after JIT/Lean:⁹

In this example, it cost the company $45,000 less to pro­duce the same goods after JIT/Lean implementation than it did before. Assuming the goods were sold for the same price, that $45,000 becomes pure profit. In the next competition for contracts, the lower cost becomes a competitive advan­tage (price to the customer can be lowered).

The solution to the overhead rate problem is to change from the obsolete accounting system and adopt an activity-based accounting system or some other more sensible method. In a total quality company, the account­ing department is part of the team and would respond to the needs of a production system (JIT/Lean) that is actu­ally improving company performance. But if the company as a whole is not involved in total quality, the accounting department, with its own walls and agendas, can be a for­midable obstacle to progress. The same is true of other departments on whom manufacturing depends. This ex­ample could just as easily have been one involving the engineering department and a design philosophy called concurrent engineering. Concurrent engineering requires that from the beginning of a new product’s design, manu­facturing and other departments (and even suppliers) be directly involved with engineering to make sure, among other things, that the product can be manufactured effi­ciently when it finally goes into production. Traditional engineering departments do not like to have this kind of help from outsiders and will resist—but not in a total quality setting, where the departments all work for the common goal.

For JIT/Lean to bring about the benefits inherent in its philosophy, it must be part of a total quality system. To bring JIT/Lean into a company not otherwise engaged in total quality can be worthwhile (and may even enlighten the lead­ership), but implementation will be much more difficult, and its results severely restricted.

Source: Goetsch David L., Davis Stanley B. (2016), Quality Management for organizational excellence introduction to total Quality, Pearson; 8th edition.