Just-in-time Procurement

Deepak Jakate

Managing Partner

Envision Management Services

Presentation Overview• Definition of Just-in-time

Procurement• History & evolution• Characteristics• Strategic Value & benefits• Process Steps• Advantages,Demands/Changes,

Summary

Just-in-time Procurement• An approach to inventory

management in which products are bought in small quantities to reduce inventory carrying costs and obtain delivery just in time for use.

• An approach to procurement that requires long-term agreements with few suppliers.

History• Just-in-time procurement (JITP) is

a productivity improvement program launched in the late 1970s and early 1980s in the US.

• Companies having implemented JITP estimated a 43 per cent increase in product quality and a 21 per cent improvement in productivity.

Characteristics of JIT ProcurementCharacteristics of JIT purchasing can be broadly categorized into two groups: external and internal. External characteristics require some changes in the way a purchasing department approaches procurement activities. Internal characteristics are those elements that require some organizational commitment.

External Characteristics • Supplier cooperation,• Purchased quantities,• Materials quality and• Transportation

External Characteristics

1. Supplier cooperation. In JIT purchasing, materials and parts are usually bought from a single source, as opposed to purchasing from multiple sources under traditional purchasing activities.

External Characteristics

Dealing with fewer suppliers for a particular item or items contributes to establishing a long-term, stable and satisfactory relationship between a supplier and buyer

External Characteristics

Supplier evaluation is also different under JIT purchasing from evaluation under traditional purchasing. JIT purchasing emphasizes supplier evaluation based on product quality, delivery performance and price. Supplying defective items is not tolerated.

External Characteristics

Under JIT purchasing, achieving product quality through a long-term contract at a fair price receives the highest priority. However, response flexibility and competitive price are also rated reasonably high.

External Characteristics (summary)

In terms of suppliers, JIT purchasing differs from traditional purchasing in terms of the number of suppliers, the selection and evaluation of suppliers, and the negotiating and bidding process. Thus, suppliers have a considerable effect on the implementation of successful JIT purchasing

External Characteristics 2. Purchased quantities. In JIT organizations, products are produced in small lot sizes when needed, and in turn, materials and parts are frequently delivered in small lots. Furthermore, most importantly, lots must be delivered in exact quantities, neither more nor less

External Characteristics 200 percent increase in number of deliveries

50 percent decrease in order lead times

50 percent reduction in order size

External Characteristics 3. Materials quality. When materials and parts are purchased in small lots and exact quantities, clearly, their quality receives more importance since defective materials and parts cause interruptions in production. As a result, supplied materials must have the correct quality attributes.

External Characteristics Counting and inspection of received materials and parts are reduced or eliminated under JIT purchasing. The selection of both suppliers and materials is based on quality. Good quality of materials is necessary in order to implement JIT purchasing. 33 percent of buyers reported higher quality in JIT purchased parts.

External Characteristics Changes related to purchased parts quality:

40 percent decrease in damaged purchased materials

20 percent decrease in buyer complaints about purchased materials

External Characteristics 4. Transportation. Under JIT purchasing, agreements define delivery dates or times according to the buyer's schedule, as opposed to shipping dates and times based on the supplier's schedule under traditional purchasing.

External Characteristics JIT purchasing involves both inbound and outbound freight, stressing on-time delivery, whereas traditional purchasing emphasizes outbound freight, stressing low freight cost. JIT purchasing requires faster, more responsive modes of transportation than traditional purchasing because of frequent deliveries in small lots.

External Characteristics Under JIT, companies switched to motor freight and private carriers from rail transportation and common carriers.

Internal characteristics Although purchasing activities are the same in both JIT and traditional purchasing, they differ in approach.

The essential elements include the following:

Top management commitment

Training

Teamwork

Top management commitmentTop management should make JIT purchasing a priority for the whole organization and clearly communicate this commitment to the employees. The necessary resources for the implementation of JIT purchasing should be provided by leaders.

Top management commitmentUpper management should demonstrate leadership in order to provide positive involvement of other functions. Companies which successfully implement JIT purchasing activities provide support at different levels of management.

TrainingMost importantly, purchasing people must be trained in the JIT philosophy. Also, purchasing people should be trained in the necessary statistical tools, such as statistical process control (SPC), in order to understand the variation in incoming materials.

TrainingFurthermore, training support in JIT purchasing and quality management should be provided to suppliers. Utilizing teamwork from both parties in reducing the common causes of variability in materials and parts can improve quality.

TrainingThe lack of training and education of suppliers has been a major impediment in the implementation of JIT purchasing.

TeamworkAcquisition teams should be established, which may include purchasing, material control, process/design engineering and production representation. This interaction provides the conditions necessary to solve supplier quality problems and facilitates communication within the entire organization

Strategic Value of JITP The purchasing department can serve as a profit-generating centre rather than cost cutting mechanism. A company can gain competitive advantage by utilizing the purchasing department's knowledge of supplier networks. The JIT concept brings such an opportunity to purchasing departments .

Benefits• Streamlined demand flow from customer to supplier

• High integration of customer’s and supplier’s supply chain managed by cumulative quantities

• Shorter process times• Reduction of inventories to a minimum

BenefitsAlthough there is not any perceived increase in profit from the products produced with JIT materials, 37 percent of firms reported an increase in their sales as a result of JIT purchasing. Improvement in the overall competitive position of the firm was the most positive effect of JIT purchasing.

BenefitsThe benefits of JIT purchasing can be classified into two groups: (1) direct and (2) indirect.

Direct Benefits • Increase in purchase material

turnover,• Increase in ability to meet delivery

promises,• Reduction in delivery lead time,

and• Reduction in scrap cost.

Indirect Benefits• Achievement in encouraging

suppliers to meet quality requirements,

• Improved product quality, and• Increased productivity.

Process Steps• Create scheduling agreement for vendor material

• Update scheduling agreement with forecast and JIT delivery schedules

• Enable traceability via batch or serial number assignment

• Create Scheduling Agreement Release

Process Steps•Print and Transmit Scheduling Agreement to vendor•Goods receipt posting with reference to scheduling agreement•Billing•Self billing to limit manual operations•Transfer of self-billing information to vendor

Advantages to JIT• Reduces the need for

warehousing and storage• More personal relationship with

suppliers• Long-term relationships that help

to certify suppliers• Receiving inspection is reduced

and in some cases eliminated

Advantages to JIT ……contd.• Lowered variety in suppliers• Reliable delivery schedules• High quality materials used• Reduced waste

Demands on Purchasing of JIT•Reduced number of suppliers•Stable and good communication throughout a firm•Locating suppliers nearby•Long-term relationships•Helping suppliers to increase quality•Not to get hung up by single sourcing•Buying from small firms

Limitations of JIT• Difficulty to change old ways • More pressure on workers• Success is varied• Employee commitment• Production levels• Employee skills

Differences between JIT and Traditional PurchasingJIT Purchasing•Smaller lot sizes•More frequent deliveries•No rejection from the supplier•Long-term contracts•Buyer decides delivery schedule•Innovation encouraged•Minimal paper work•Less formal communication

Differences between JIT and Traditional PurchasingTraditional•Relatively large lot sizes•Less deliveries at higher quantities•2% rejection from supplier•Lowest price is main objective•Time consuming, formal paperwork•Formal communication

Why organizations use JIT Purchasing• Reduce waste• Reduced cycle times• Higher quality in products• Fewer suppliers• Reduction in warehouses• Dependable delivery

Summary of JIT Procurement•Many advantages that lead to reduction in waste, storage, and other aspects that lead to saving money and time•Long-term relationships with suppliers•Many different techniques are used depending on the demand of the company•Higher quality material used

Deepak JakateManaging Partner

Envision Management ServicesSupply Chain Excellence

Six SigmaTraining & EducationBusiness ConsultingInvestment AdvisorySecondary Research

email : deepak.jakate@rediffmail.commobile : 09892700607