Railway Age, July 1992

Beating the Trucks at Just-in-Time

The very sound of the term "Just-in-Time" sends chills up the average short line marketer's spine.

After all, isn't that the inventory management technique that means small batches of materials delivered frequently?

And doesn't it usually mean truckloads?

That's what it meant to the largest shipper on this hypothetical short line. The manager (we'll call him Jim Goode) got a call from Bill Lehman, purchasing director for Acme Products, his largest customer.

Lehman got right to the point. "Jim, management has decreed we're going to a Just-in-Time inventory management system. We'll be switching all our inbound materials to truck because it's faster and there's less inventory in a truck than a rail car. We're not dissatisfied with you. It's just that we have to cut inventory costs."

But this isn't a story about how one more short line lost one more key shipper. This is a story of how a short line can take on the trucks and beat them at the Just-in-Time game.

What Just-in-Time is. And isn't.

Successfully implementing a Just-in-Time (JIT) process requires total integration of production, marketing, and financial resources. It's not a one-step cost-cutting measure. It does require focusing on "clear, consistent material control procedures that respond to final-product demands."

The essence of JIT manufacturing is to make every item arrive for use at the precise time it is needed in inventory, on the assembly line, at the store, on the shelf, or in the end user's hands.

A sobering look at a reasoned approach to JIT is presented in "Does Manufacturing Need a JIT Revolution?", Harvard Business Review, Jan-Feb 1991. The article concludes, "Inventory management has always been a contentious area, for this is where concerns and careers of marketing, finance and production executives intersect. Because JIT is such a fungible concept, managers with different priorities are free to interpret it to suit themselves...and production managers are seen as responsible for all the useless inventory JIT promises to clean up."

From the look of things, Acme Products may have fallen for the romance of JIT without addressing some practical issues first. Jim Goode has been doing his homework, keeping his eye on his main shipper. He knows that Acme has been plagued with breakdowns and production downtime at its plant, and that it has been losing market share to competitors. Minimizing inventory won't fix factory breakdowns or build market share. Fixing the process will, and transportation -- logistics -- is part of that process.

Even if the JIT system works flawlessly, plant breakdowns mean buildups in both raw materials inventory and work-in-process inventory, slowdowns in the order-filling process, and diminished cash flow. Being out of stock costs money by losing customers to competitors as surely as having too much inventory costs money in carrying costs. One way to limit exposure to both is improved market intelligence.

But an error-free production process and first rate market data costs money. Jim Goode can save his account by showing how effective use of rail service can decrease Acme's logistical costs and increase margins, thus freeing funds to upgrade the plant and expand the menu of options in the marketplace.

Bring in the Class I Artillery

One of Goode's first calls should be to his friendly Class I line commodity market manager. (See "Getting First Class Service from Your Class I Connections," Railway Age, May 1992.) A while ago we called on CSX to help with a specialty aggregate move for a customer. The market manager's model showed how rail service could save $70,000 a year in material costs, of which transportation costs were only a part. We converted the Class I's mainframe model to Lotus 1-2-3 so the customer could see the bottom line effects of rail shipping on his own PC. We showed three scenarios (best guess, best case, worst case) and the savings by rail for each. The model compares product data (annual demand, price per ton), interest rates, track and rail rates per ton, tons and time per move, values of in-transit and in-plant inventories, plant handling costs by both modes, and the cost of running out of goods.

The second part of the sale was to demonstrate the railroads' ability to adhere to a delivery schedule. No problem. The customer, the short line, and CSX agreed on minimum and maximum transit times, best days of the week for ordering and delivery, and pricing for a three-year contract. A key issue was how quickly cars could be unloaded and released, thus keeping car hire down and contribution per car up.

The lesson for Jim Goode is this: work with Acme to learn exactly what commodities are required in what amounts at what intervals -- and everything else he can about the process. Find out the quantifiable objectives the switch to JIT is expected to achieve. Then work with his Class I contacts to put together a service delivery package that meets the JIT objectives.

Many logistics managers think of trucks automatically when they think of speed and flexibility. But as often as not, it only takes some information gathering and a little innovative thinking to put the savings of rail shipping to work meeting the other JIT objectives and making a positive contribution to the bottom line.

And that's something the trucks simply can't match.

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Created July 31, 1995. Send comments to lblanchard@aol.com