The Lean and Just-in-time (JIT) production concept was initially introduced in the industry by Toyota. A big factory needs raw materials to operate. Usually, factories order wholesale amounts of supply to enjoy wholesale discounts, and then they store the raw materials before they are uses, and the next batch is required. It was status quo in all industrial facilities until Toyota decided to look closely at the situation and asked some inconvenient questions.
The raw material storage is not for free. First, you need space to store, and it means you will need more significant facilities than you potentially need for production. Second, raw materials can expire or go wrong, so you need a particular tracking system, and you also need to adjust output to use materials before they expire. Doing this, you might not produce what your customers need right away. So, you will need storage space for the final products as well. Third, moving the materials is also labor, so you need to pay more for the workers who will do it. Forth, the supplier could provide you the wholesale batch size, which does not fit your needs (imagine that the factory produces 3-legged chairs, and the supplier offers only 4-leg packages). Finally, when buying excess, you freeze your money, while the business can use it for something else meanwhile.
So, Toyota decided to calculate if its suppliers’ wholesale discount is worth the additional cost. Unsurprisingly, it turned out that it does not worth it. And Toyota started its long journey to rebuild the supply chain. It came to its suppliers, and said, instead of 2000 suppliers, we will work only with 20, but you will supply under our conditions. The conditions are you will provide the raw materials with the quality we’ll set, the quantity we order and just in time (not before, not after), in return, you can set up the fair price and get life-long contracts… These negotiations made industrial history, and the arrangements are still in place for Toyota.
Though this might be an exciting story for outlook, what does it have in common with household and personal finances?
Continue reading “Lean household”
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