Just-In-Time purchasing: both sides of the coin

An effective purchasing management does not just find exceptional suppliers anywhere they are, but it must find the kind of suppliers that would run the risk that new products imply. An organization that finds it economically positive to manufacture all the production material is just inexistent in reality. The advantages of specialization are really important, and no one should underestimate them in the actual world. The purchasing function is, maybe, the one that demands more money of all the operations of any company, and not just that. The purchasing function, on one hand, helps to identify the products and services that can be best obtained externally; and, on the other hand, it develops, evaluates and selects the best supplier, the best price and the best delivery process of the purchased products and services.

Thus, in order to increase profit margins, it’s never a bad idea to think how to reduce costs and seek more efficiency in this process and its respective procedures.

Just-In-Time purchasing

There are many potential delays in the traditional material flow during the transformation process. Just-In-Time purchasing, among other things, is a way for reducing the waste that is usually produced in the reception and incoming inspection of products; it also helps to reduce eventual excesses of inventories and, of course, the poor quality and delays of the supply chain. Just-In-Time purchasing has some particular characteristics when it comes to (A) Suppliers, (B) Amounts, (C) Quality and (D) Deliveries. Let’s see some of them:

  • Suppliers: They are few and trustable. Their location is close, or, if not, there are close groups of suppliers. The company tries to make exclusive contracts with the same suppliers. The company constantly evaluates the supplying process in order to let the convenient suppliers to stand competitive about prices. Competitive biddings are limited mostly to new purchases. Buyers avoid vertical integration and the consequent elimination of the supplier’s business.

  • Amounts: Constant production rate. Frequent deliveries in small batches. Long-term contractual agreements. Minimal paperwork to launch orders. Delivered amounts vary from one delivery to another, but are usually fixed for the entire contractual term.

  • Quality: Suppliers follow minimal specifications about the products. Suppliers use process control charts instead of sampling inspection of batches.

  • Deliveries: To keep control by using an own transport company or hiring an outsourcing company for transportation and storage.

Just-In-Time purchasing has four main objectives. The first one is to eliminate unnecessary activities. The second, to reduce raw material inventories to the minimum. In third place, the complete reduction of inventories in transit. And the fourth one is to reduce the number of suppliers in order to increase long-term agreements for improving the supplier quality and reliability.

Time is Money_david kiger_Just-In-Time
Image courtesy of Tax Credits at Flickr.com

Benefits and risks

It’s important to evaluate both sides of the coin. Just-In-Time purchasing bring many benefits, but there are also risks that require your attention.

One of the well-known benefits is that long-term contracts and the use of technology actually decreases the cost of inventories. It’s easy to explain it. Long-term contracts are a big factor because you lock in an inventory price with a supplier by this kind of agreements, and, as a consequence, the amounts to be purchased over time. Long-term contracts are very useful for reducing price fluctuations: without a doubt, it makes it easier and more practical to make plans in the mid and long term. In addition, you can expect superior qualities. Nevertheless, suppliers will demand higher prices as a consequence of your actual chance of buying at the last minute, and being able to buy smaller amounts than the originally signed in the contract. Because of it, you should be ready to pay higher unit costs if you need purchasing more products over and above the supplying agreement. That’s why it’s vital that, in order to meet your needs, the long-term contract provides a sufficient inventory.

And what about technology? Using it represents less expenses, as an effect of fewer staff hours. Why? Because the number of hours that your staff spends on inventories is reduced by having access to real-time inventory quantities. Another benefit is the possibility of creating and approving purchasing orders, paying for inventories electronically and updating the inventory records thanks to software.

However, there are risks. One of the most significant is eventual stockouts (exhausted inventories can easily take a business to sharp falls). Another one is carrying costs by carrying less inventory: a huge storage won’t be needed, but you could pay the same amount of money for storage until the end of the lease. The carrying cost per unit will rise because you would be spreading the same lease price over a smaller number of units in inventory. And, finally, fixed costs could include more staff (or better computers for processing more orders) if you place smaller orders regularly because your supplier would cover its costs by increasing the cost per order.

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