I just realized what buying a new home and production management have in common. Our family is looking to buy a new house, and we have put our current home on the market. Ideally, we would like to buy our new home and sell the old one at the same time, because that way we could avoid the risk of ending up with one too many (or one too few) houses. In practice, however, doing the deals simultaneously is difficult. Therefore, my wife and I need to consider and balance the risk of having to pay two mortgages, and the risk of having to move to a rental apartment until we find the right place for the right price.
Now you might be wondering: what does this situation have to do with production management or planning? While I was contemplating homes changing owners, I started thinking about material flow through a production plant. I realized that in both cases the ideal is the same: minimize the time between buying and selling. A manufacturing company should buy its raw material as late as possible in order to minimize the cost of carrying extra raw material inventory. Likewise, manufacturing operations should be performed as late as possible to avoid accumulating work-in-process inventory. These are some of the cornerstones of Just-In-Time (JIT) production philosophy.
But just as it is difficult for my family to sell our old house right at the same time as buying a new one, for many companies across various industries it is difficult to adhere to the JIT production ideal. There are many factors that prevent companies from getting rid of their inventories, including:
- Lead times demanded by customers are shorter than production lead times
- Batch production processes with large lot sizes compared to customer order sizes
- Preparing for periodic demand peaks