Purchasing in a JIT Environment: from

Buyer’s and Supplier’s Perspectives

Instructor: Asst. Prof. Alper Şen

Presenter: Gökhan Metan

Outline

Introduction Problem Definition & Concepts

Literature What about future?

Research Questions & Intuitive Answers Solution Methodologies

Introduction

What is JIT? JIT is a manufacturing philosophy (or strategy)

which aims to eliminate the wastes and to increase the efficiency of a manufacturing environment.

Waste is defined as anything that does not add value to a product.

Introduction

What is JIT manufacturing? JIT manufacturing composed of Japanese Kanban production

techniques, such as reduced manufacturing lot sizes, reduced manufacturing lead times, and enhanced quality assurance programs, required to implement flexible manufacturing processes

What is JIT purchasing? JIT purchasing refers to the frequent deliveries of small lot sizes

that facilitate inventory reduction of raw materials.

Introduction

JIT manufacturing JIT purchasing

JIT Philosophy

Introduction

Two aspects of JIT purchasing: From Buyer’s perspective JIT Purchasing –or– JIT

Sourcing –or– JIT Buying From Supplier’s Perspective JIT Selling

The characteristics of JIT purchasing differ from the traditional purchasing strategies.

Introduction

Characteristics JIT purchasing Traditional Purchasing

Lot Sizes Small and in exact quantities Large

Number of Suppliers Single-sourcing (ideally one for component or family of parts)

Multi-sourcing

Supplier selection & evaluation

Based on Quality and Delivery Performance as well as Price

Based on solely on Price decision

Quality inspection Performed at supplier’s facility Incoming material inspection

Design Specifications More freedom given to the supplier Concrete specifications given by the buyer

Relations & Bidding Long term relations Short term relations and frequent retendering

Packaging Standard Containers & low packaging costs

High packaging costs

Paper work Reduced and informal High level & formal

Table 1. Characteristics and differences of JIT purchasing & Traditional purchasing activities

Introduction

There are many objectives of JIT purchasing: Reduced Inventory Holding Costs Increased Quality Levels Increased Utilization ....

Introduction (Problem Def.n)

There are many potential benefits of JIT purchasing activities and the problem is to identify these benefits from both the supplier’s and buyer’s side.

More specifically, in what conditions JIT purchasing is beneficial for both parties of the supply chain and how it provides more benefits than the traditional purchasing activities?

Introduction (Problem Def.n)

There is a debate between the researchers and conflicts arose from the sharing of benefits and costs between the supplier and the buyer. One group proposes that JIT purchasing benefits for

both parties if it is implemented fully. (Advocate School)

Another group proposes that JIT purchasing only benefits the buyer by pushing its problems to the upstreams of the supply chain. (Pragmatic School)

Introduction (Problem Def.n)

Supplier

Buyer

Inventory $$$$$$Costs

$$$

Price Increased

Introduction (Problem Def.n)

The benefits and costs from both the supplier’s and buyer’s point of views.

What are the requisites of a successful JIT implementation in order to make both parties profitable?

Difficulty Most of the JIT benefits and costs are hard to quantify!

Literature

Three types of researches in the literature Descriptive (Definition of concepts, suggestions etc.) Empirical (Hypothesis testing based on data from the

firms or surveys) Theoretical (so few researches, most of them compares

JIT purchasing with EOQ model)

Literature

Research Brief Description

Schonberger, R. & Gilbert, J.

Descriptive + fully explains the JIT purchasing practices and their benefits for both the buyer and the supplier + JIT tactics and its strategic benefits discussed

Lyons, T. F. & Krachenberg, A. R. &

Henke, J. W.

Descriptive + advantages and the disadvantages of JIT purchasing from both the buyer’s and supplier’s perspectives based on the results of interviews performed with both sides

Lummus, R.R.&

Duclos-Wilson, L.

Descriptive + important characteristics of JIT philosophy + JIT purchasing activities investigated + clues to managers to achieve a successful implementation of JIT

Ansari, A. &

Modarress, B.

Descriptive + conducted interviews with four major US firms, GM, HP, Nissan and Kawasaki, and identified the major activities of JIT purchasing that have significant effects on product quality and productivity + depends on subjective interviews

LiteratureResearch Brief Description

Inman, R. A.&

Mehra, S.,

Survey from 114 firms that employ JIT purchasing activities and perform a statistical analysis (exploratory factor analysis, Pearson correlation etc.) + concluded that the firms should justify their JIT implementations and investments with their financial successes.

Karlsson, C. &

Norr, C.

Discussed the effects of JIT purchasing system from both the buyer’s and supplier’s perspectives and provided two case studies from the Swedish industry, Saab and Volvo. + Case studies indicate that the suppliers benefit from the implementation of JIT purchasing, as well as their buyers, Saab and Volvo.

Dong, Y. &

Carter, C. R. &

Dresner, M. E.

Model based on statistical hypothesis testing in order to investigate the benefits of JIT purchasing for the buyer and the supplier. + Performed a large survey + Their results indicated that the JIT purchasing has direct benefits only for buyers in terms of cost reduction. + In addition to this, if suppliers adopt JIT manufacturing techniques to them, suppliers too can benefit from the JIT purchasing activities indirectly.

Chapman, S. N. &Carter, P. L.

Performed a hypothesis testing on the data from real world companies to investigate the relationships between the supplier inventory (and buyer inventory) and the other JIT independent variables such as delivery lot size, supplier manufacturing lot size etc. + Results: significant positive relationship with the supplier inventory and the supplier manufacturing lot size; significant positive relationship between the customer inventory level and the delivery lot size & the manufacturing lead time of the supplier.

Literature

Research Brief Description

Srinivasan, K.&

Kekre, S.&

Mukhopadhyay T.

Impact of EDI on the discrepancies of JIT shipments is investigated. + Large data from the suppliers of Chrysler Motors + Hypothesis testing + the impact of EDI on the performance of supplier’s shipments is highly significant under the JIT purchasing environment

Kekre, S. &

Murthi, B.P.S &

Srinivasan, K.

Empirical study + Investigates the relationship between the quality and the supplier availability + Conclusion: dealing with few suppliers significantly improves the quality levels & firms that face lower levels of competition, offer wider product lines, or undertake frequent product changes are more likely to reduce their supplier base.

Freeland, J.R. Subjective survey results from 60 firms + Statistical tests + Interesting results are provided.

Buvik, A.&

Halskau, Q.

Empirical study

Gonzalez-Benito, J. & Suarez-Gonzalez, I. &

Spring, M

Empirical study

Literature

Research Brief Description

Ramasesh, R. V. Theoretical + a modified version of EOQ model for JIT purchasing is presented + formula proposed does not handle much of the important potential benefits of the JIT but simple to use + only buyer’s perspective is considered.

Aderohunmu, R.&

Mobolurin, A.&

Bryson, N.

Theoretical + Aimed to optimize the total chain cost (vendor’s plus the buyer’s) taking into account the ordering, set-up, transportation and inventory holding costs in a JIT purchasing environment. + Results indicate that both parties benefit from this policy (exchange of cost info.) in terms of costs.

Fazel, F.&

Fischer, K.P.&

Gilbert, E.W.

Theoretical + Analytically compare the costs under the JIT purchasing and EOQ with a quantity discount + Conclusion: (1) EOQ results in better performance for items with higher levels of demand. (2) JIT model gain competitiveness as the holding cost, or ordering cost increase, or demand for the inventory item decreases. A break-even point for the models also provided, where both models result in same cost.

Schniederjans, M.J.&

Cao, Q.

Theoretical + Expand the above mentioned models by including an additional term for the JIT model. + Additional term is the cost advantage of JIT from the facility size reduction. + Reported facility size reductions vary from 25% to 80%. + After this modification, they compared two models again and found that JIT purchasing model is always superior to the EOQ model with a price discount.

Literature

Gunasekaran, A. Review Paper

Waters-Fuller, N. Review Paper

What about future?

Observations There is a difficulty of quantifying the benefits and the

costs of JIT purchasing system. The amount of these benefits highly/completely

depends on: The charateristics of the firm in question and the environment

it belongs to (demand level, level of external unceartainties faced etc)

The extend of JIT implementations (all functions of a successful JIT implementation is performed or only a small portion of it is employed)

That is why most of the researches in the literature are descriptive in nature or depends on the subjective surveys or empirical results.

Theoretical studies are so few. Exact answers to the questions provided at the beginning of the presentation are not given yet.

What about future?

1st Step Possible Research Questions How to quantify the approximate benefits (or

parameters) of the JIT purchasing system? Benefits of increased quality level and reduced inspection

activities previously caried by buyer Benefits of set-up reductions Benefits of reduced material handling operations Benefits of reduced paper work Benefits gained by having multi-skilled labor Benefits of reduced ordering costs ....

Hard to answer but caries the potential to triger the theoretical studies!

What about future?

1st Step Possible Research Questions (Cont’d) If it can be possible to quantify the previous benefits

what kind of interactions and at what level exist between the amount of benefits achieved and the level of JIT practices?

It is hard to determine the relation between the transaction costs required for a JIT purchasing system and the level of benefits achieved from the previously mentioned structures.

It is not possible to quantify all the benefits and determine the relationships between the extend of JIT practices and its benefits.

Theoretical studies can be possible up to some extend. Not all benefits and costs of JIT can be incorporated into the models.

What about future?

2nd Step Possible Research Questions The relation between the benefits and the extend of JIT

purchasing activities performed should be investigated. Intuitively, most of the failures of JIT purchasing caused

because of the poor implementation of the philosophy. In its basis, JIT seeks for eliminating all kinds of wastes. It is logically impossible for such a system to increase the costs. Also, most of the reported literature indicates that failures generally occured on the supplier’s side and all of these suppliers do not employ the JIT manufacturing techniques.

What about future?

2nd Step Possible Research Questions Some of the buyers not practice single-sourcing

but rather they employ two suppliers (double-sourcing) for an item. Inventory costs incurred for both parties in the latter case can be compared with the former one theoretically.

What about future?

Methodologies: Empirical: it seems empirical studies are more feasible

to implement JIT purchasing problems and it is the case in the literature, as well.

Simulation: there is no simulation based studies in the existing literature since the performance of the JIT purchasing is highly system specific.(it seems not appropriate for this area of research)

What about future?

Methodologies: Theoretical: there is a lack of theory in JIT purchasing.

It is hard to study the problem theoretically but good examples exist.

What about future?

Q & A