Mark S. Miller, CIRM |   2014 | 9 | 7
Does your company use just in time (JIT) to manage inventory, improve quality, eliminate waste, and enhance productivity? If so, it’s important to recognize that purchasing is a key player in supporting JIT. In order for JIT purchasing to function properly, there are six distinct challenges that organizations often face. By evaluating and resolving these issues, purchasing departments can be the JIT champions.
Issue 1: The drive to reduce prices. Purchasing’s primary goal is price reduction compared to part cost. Accounting sets a standard price for every purchased product, and purchasing is measured on its contribution toward favorable variance. Many purchased products have been outsourced to reduce expense without regard to inventory levels, lead times, quality, transportation costs, and customer service. In such situations, purchasing professionals may miss the big picture. The solution to this conflict is twofold: Purchasing must be tasked to reduce total costs, not just prices; and accounting should facilitate this by using a lean accounting system to help clarify the costs.
Issue 2: Purchasing’s role in waste reduction. One of the primary concepts of JIT is taken from the Japanese word “muda,” which the APICS Dictionary defines as “waste within a system.” There are seven categories of this waste, and purchasing can directly affect two of them—waiting (late deliveries or long supplier lead times) and defective units (supplier quality problems). They should be identified and quantified using cost of quality techniques—these are processes that find and calculate organization defects. Teams review defects and work to improve troubled processes. Here are some likely places to look for waste:
- All costs associated with incoming receiving inspection are wasteful. After all, if suppliers have perfect quality, incoming inspection is redundant.
- If supplier shipments are rejected, that also causes waste. Supplier rejects are detected at receiving, on the production line, or when a customer encounters the defect.
- Supplier late deliveries cause waste. They produce expenses associated with expediting, alternate sourcing, additional inventory, and even stopping production lines and missing customer due dates. Late deliveries also drain purchasing manpower by expediting parts to keep operations running.
- Long supplier lead times also are wasteful. The longer the lead times, the more “just in case” inventory is needed.
Finance professionals can help in calculating the cost of supplier defects, supplier late deliveries and long supplier lead times.
Issue 3: Conflicts over the role of inventory. The purchasing and inventory management departments often have differing goals, and problems arise for many reasons—supplier price quantity breaks, minimum order quantities, carrying volumes of safety stock, and price hedging, to name a few. Excess inventory is a waste that must be eliminated. Purchasing professionals can work toward this goal by measuring and documenting inventory reduction.
Issue 4: Failing to focus on the customer. The impact to the customer may be ignored when switching suppliers or negotiating a revised contract. Purchasing professionals can greatly influence customer satisfaction by improving supplier quality, delivery, and total cost. Think about implementing objectives for purchasing that are related to customer satisfaction. Examples of purchasing goals are on-time shipment and the cost of warranties. A customer satisfaction index is another great tool to consider.
Issue 5: Establishing a single partner supplier for each commodity. It’s true that having multiple suppliers often equates to less risk of one shutting down your operation. However, this conflicts with JIT’s principle of reducing your number of suppliers and establishing close partnerships with only a few. Strategic sourcing is a technique purchasing professionals can use to categorize suppliers by commodities and recognize which of them should be retained and which should be let go. With fewer suppliers, the volumes increase for the remaining providers, and it is possible to establish true partnerships. Global outsourcing is a related conflict: The farther away your suppliers are, the more exposure there is for supply disruption. Again, the JIT ideal is to have a few suppliers located very close to you.
Issue 6: Lack of trust between suppliers and the purchasing department. Purchasing must be encouraged to work collaboratively, honor commitments, and share information—production levels, forecasts, inventory levels, new product plans, and the like. In this way, long-term lasting relationships can be fostered. Consider establishing electronic links in order to communicate advanced shipping notices, invoices, payments, quotes, and purchase order releases. Another way to reduce waste with a true partner is to establish what some call a “JIT II” arrangement. With JIT II, supplier personnel work within your location in order to further enhance communication. The supplier personnel resolve delivery, quality, and forecasting issues; expedite and track shipments; and work in partnership with you on new product development.
If your company believes in JIT manufacturing practices, then decision makers would be wise to examine these key conflicts and suggested solutions. Unless the issues are resolved, purchasing professionals will be unable to contribute to a highly effective JIT initiative.
Mark S. Miller CIRM, is an associate professor of business at Carthage College. Prior to this, he worked for 31 years in private sector purchasing and supply chain management. Miller has more than 30 published articles and has written chapters in two books. He may be contacted at firstname.lastname@example.org.