Purchasing and Supply Chain Management

by W.C. Benton

Chapter Six
Just-in-Time (Lean) Purchasing
 Learning Objectives
1. To understand lean production systems.
2. To identify the differences between JIT and MRP.
3. To identify the relationship between JIT and
purchasing.
4. To identify critical JIT-purchasing advantages.
5. To identify the activities needed to implement JIT
purchasing.
6. To determine the role of culture in the
implementation of JIT purchasing.
7. To critically analyze the impact of JIT purchasing on
a buying firm.
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 Introduction to Lean Purchasing
• There has been a shift in manufacturing business
processes in practically every American industrial setting.

• The lean thinking paradigm now includes the purchasing

function. Lean concepts have had a significant effect on
the profitability in almost all industrial settings.

• The key lean principles focus on people, postponement,

efficiency, and the elimination of waste. All of these key
business principles have a direct effect on the purchasing
function.

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 Lean Purchasing
• The just-in-time (JIT) system is no longer an esoteric concept
in the manufacturing world today. In the face of intense
global competition, many firms in the United States are
looking at improved techniques to manage their
manufacturing operations.

• A comprehensive survey of just-in-time practices in the

United States found that 45 percent of the firms contacted
had implemented JIT programs and another 22 percent were
planning to implement JIT the following year.

• JIT has evolved as a novel manufacturing concept based on a

philosophy of trust and commitment of the entire
organization. The benefits of implementing a JIT system
impact all entities involved in supply-chain management

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 Lean Production Systems
• In its simplest form, “the manufacturing process” is a
composition of the material flows. Just-in-time (JIT) is
designed to manage the flow of materials, components, tools,
and associated information.

• JIT is also referred to as lean production.

• An organization driven by a JIT philosophy can improve profits

and return on investment by reducing inventory levels,
reducing variability, improving product quality, reducing
production and delivery lead times, and reducing setup costs.

• The JIT (lean) system is a powerful management tool that

could easily determine the success or failure of the
manufacturing system.

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 JIT and MRP Production Systems
• JIT and MRP production systems have followed two
independent research streams.

• As the popularity of JIT motivated by the success of

Japanese manufacturing firms has grown, numerous
global practitioners initiated complete changeovers
from the traditional MRP-based methods to JIT
methods.

• The current shift toward the so-called lean thinking

manufacturing environment is one of the major
motivations for future JIT research.

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JIT Conceptual Framework

6-7
 Practices Essential for JIT Implementation

• The following practices are considered essential for

a comprehensive JIT implementation:

1. Uniform production (also known as heijunka)

2. Quick set times
3. Small lot sizes
4. Short lead times
5. Preventive maintenance
6. Multifaceted workforce
7. Supplier development
8. Kanban production control

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 Just-in-Time Production System
• JIT is Toyota’s manufacturing philosophy to minimize
waste, and the JIT production system is a subsystem
controlled by kanban.

• The kanban-controlled JIT production system has

been erected based on the premise of minimizing
work-in-process inventories (waste) by reducing or
eliminating discrete batches.

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 Just-in-Time Production System
• According to Monden (1983), the success of Toyota’s
kanban-controlled production system is supported
by:
– smoothing of production, standardization of jobs,
– reduction of setup times,
– improvement of activities,
– design of machine layout, and
– automation of processes.

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 Just-in-Time Production System
• Improvements in the kanban-controlled production systems
have followed a pragmatic approach, continuous
improvement.

• Therefore, success of the JIT production system must be

explained in conjunction with continuous improvement, total
quality management, and lean thinking.

• The JIT production system is not a panacea. There is a list of

reasons why the Toyota manufacturing system may not work
for all firms. The reasons include:
– cultural differences,
– geographical dispersion of suppliers,
– supplier power,
– different management styles, and so forth.

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 Just-in-Time Production System
• The Toyota manufacturing system has been viewed
in following different ways:
– As a lean production system because it uses less of every
resource compared with the conventional mass
production system. (Womack, et al., 1990)

– As a conventional reorder point system with extremely

small lot sizes (Zipkin, 1991).

– As a pull system as opposed to the conventional push

system.

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 Kanban Production Control System
• Kanban is the Japanese word for card.

• The kanban card contains the part number, the part

description, the type of container, and various
workstation information.

• The kanban production control system uses simple,

visual signals to control the movement of materials
between work centers as well as the production of
new materials to replenish those sent downstream
to the next work center.
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 A Dual-card Kanban System
• There are two main types of kanban:

1. Production kanban signals the need to produce

more parts. Each kanban is physicaly attached to
a container.

2. Withdrawal kanban signals the need to

withdraw parts from one work center and
deliver them to the next work center.

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 A Pull System Compared to
A Push System
• In a pull system, removing an end item (or a fixed lot of end
items) triggers the order release, by which the flow of
materials or components is initiated.
• In contrast, push systems allow for the production or material
flow in anticipation of future demand
• Thus, a kanban system is referred to as a pull system because
the kanban is used to pull parts to the next production stage
only when they are needed.
• The weakness of a pull system (kanban) is that following the
JIT production philosophy is essential, especially concerning
the elements of short setup times and small lot sizes, because
each station in the process must be able to respond quickly to
requests for more materials.
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 Dual Card Kanban Rules
1. No parts are made unless there is a production
kanban to authorize production. If no production
kanban are in the “in box” at a work center, the
process remains idle, and workers perform other
assigned activities. This rule enforces the “pull”
nature of the process control.

2. There is exactly one kanban per container.

3. Containers for each specific part are standardized,

and they are always filled with the same (ideally,
small) quantity

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6-17
JIT Kanban Production Planning System
(Pull System)

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 Significance Of Lean Purchasing
• The cost of raw materials has traditionally, been a serious
concern of top management.

• Over the years, material cost as a proportion of total cost of

the end product has risen sharply and is as high as 80 percent
in some instances.

• Consequently, the role of the purchasing function in a

manufacturing organization has become increasingly
important.
• The just-in-time production control system focuses on
reducing both raw materials and work-in-process inventories.

• Specifically, JIT requires that the right materials are provided

to work stations at the right time
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 JIT PURCHASING
• The function of purchasing is to provide a firm with component
parts and raw materials.

• Purchasing also must ensure that high-quality products are

provided on time, at a reasonable price.

• A comparison of critical elements associated with JIT purchasing

and traditional purchasing approaches follows:

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 Reduced Order Quantities.
• One of the most crucial elements of the just-in-time
system is small lot sizes.

• Traditionally, long and infrequent production runs

have in the past been considered beneficial for the
overall productivity of a manufacturing organization.

• However, long production runs usually lead to high

levels of raw-material and finished-goods
inventories.

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 Frequent and “on-time”
Delivery Schedules
• Supplier performance can be measured more
accurately under the JIT purchasing approach
compared to the traditional one.

• In order to obtain small lot sizes for production, the

order quantity size needs to be reduced and
corresponding delivery schedules need to be made
more frequent.

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 Reduced Lead Times
• To be able to maintain low inventory levels, it is critical that
replenishment lead times be as short as possible.

• The JIT philosophy inherently attempts to reduce lead times for order
completions. Under traditional purchasing practices, the lead time is
made up of the following components: paperwork lead time,
manufacturing time for supplier, transportation lead time, and time spent
on receiving and inspection.

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 Comparison between Traditional and
Just-in-Time (Lean) Purchasing Approaches
Traditional Purchasing JIT-Purchasing
Order quantities Based on trade-offs Based on small lot sizes
between ordering and for production
carrying costs
Delivery schedules Infrequent, primarily Frequent because of
because of high ordering small lot sizes and low
costs involved ordering costs
Delivery windows Relatively wide Very narrow
Delivery lead times Relatively long and Stringent and reduced
relaxed significantly
Parts quality Responsibility of the Responsibility of
quality function in the supplier
organization
Supplier base Fairly broad Considerably smaller
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 High quality of incoming
materials
• Japanese manufacturers
attempt to reduce incoming
material inspection as much as
possible. In order to eliminate
the associated receiving
inspection costs, a very high
emphasis is placed on the
quality of incoming materials
under the JIT system.
Reliable suppliers
• Since the JIT system does not
provide for buffer stocks,
unreliable supply, in terms of
delivery time and quality of
incoming material, may lead to
frequent problems in
production.
• The reliability of supply is a
critical consideration in the
selection of JIT suppliers.
• Since JIT purchasing has gained
popularity within the United
States, the purchasing function
has been preoccupied with
trimming the overall supplier
base in quest of so called
superior suppliers.
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 Purchasing Benefits
• Implementation of just-in-time (Lean) purchasing
assists the purchasing function in its major objectives
of improving quality of incoming materials and
supplier delivery performance, along with reducing
lead times and cost of materials.

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 1. Reduced Inventory Levels
• JIT purchasing facilitates reduction in inventory levels
and the associated inventory holding costs.

• Firms like Toyota have been able to reduce inventory

levels to such an extent that their inventory turnover
ratios have gone up to over 60 times per year,
compared to corresponding ratios of 5 to 8 reported
by most American manufacturers.

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 2. Improved Lead-Time Reliability
• Compared to traditional purchasing approaches,
delivery lead times under the JIT system are
considerably shorter.
• Lead-time reliability is usually much better for just-in-
time systems.
• This implies higher levels of customer service and
lower safety stock requirements for the company.
• Lower levels of safety stock contribute significantly to
reduced working capital requirements for the firm.

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 3. Scheduling Flexibility
• JIT emphasizes scheduling flexibility by aiming for
reduced purchasing lead times and setup times.

• Such flexibility prevents confusion in the

manufacturing plant and offers unique competitive
advantages to manufacturing firms since they are
capable of adapting to changes in the environment
more quickly.

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 4. Improved Quality and Customer
Satisfaction
• JIT purchasing results in improved quality and
corresponding levels of higher customer satisfaction

• Since high-quality products are critical in achieving a

competitive advantage in today’s global business world,
manufacturers gain immensely by implementing the JIT
production control system.

• High-quality incoming materials result in savings

associated with reduced rework and scrap
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 5. Reduced Costs of Parts
• As cooperation and relationships between suppliers
and manufacturers build up in a JIT system, so do the
opportunities to conduct an extensive value analysis
and focus on reducing the cost of parts purchased.

• A comprehensive JIT progress report indicates that

supplier costs were reduced by 11 percent when
they adopted the JIT system in cooperation with
their customers.

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 6. Constructive Synergies with Suppliers
• A lean purchasing program involves close technical
cooperation with suppliers. This particularly means the
cooperation between manufacturing and design engineers.
• Because of smaller lot sizes and frequent delivery schedules,
suppliers are in a position to receive quick feedback regarding
any potential manufacturing or design problems.
• Also, manufacturing is in a position to implement engineering
changes quicker because of the reduced inventory levels.
• The JIT progress report mentioned above indicates that
supplier quality improved by 26 percent since the JIT system
was adopted.

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 Cost Decreases
It is well documented that JIT reduces physical
inventory level Reductions in physical inventory will
also have a favorable impact on:

1. Reduced insurance premiums associated with the storage of inventory.

2. Reduced inventory holding costs
3. Reduced labor cost in store rooms and material handing costs.
4. Reduced clerical and administrative costs.
5. Reduced waste from the manufacturing process.
6. Reduced obsolescence costs.
7. Reduced deprecation of handling and storage equipment.

Each of the cost savings will result in a leaner more profitable

operation.

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 Implementation of JIT Purchasing
• As attractive as the JIT purchasing philosophy might
initially seem, it is quite difficult to implement.

• The switch to a JIT system presents formidable

challenges. Marketing must be prepared to change
their behavior when their customers are using the JIT
system.

• Some of the common problems associated with

implementing the JIT system are as follows

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1. Lack of cooperation from suppliers
In a detailed survey of U.S. firms involved with just-in time
manufacturing, 47 percent of the respondents indicated that
they had serious problems with some of their suppliers. The
suppliers see little incentive in adopting the JIT approach
when the primary benefits of the program go to the buyer
1. A long-term business agreement
2. A fair return on supplier investment
3. Adequate time for thorough planning
4. Accurate demand functions
5. Correct and firm specifications
6. Parts designed to match supplier’s process capability
7. Smoothly timed order releases
8. A fair profit margin
9. Fair dealings with regard to price
10. A minimum number of change orders
11. Prompt payment of invoices
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 2. Lack of top management support
• Implementation of the JIT philosophy requires a
cultural change in the organization.

• Such a concept cannot be implemented successfully

without total support from top management.

• However, another survey of U.S. manufacturing firms

indicated that 48 percent of the firms did not receive
total support from top management in their efforts
to implement the just-in-time manufacturing system.

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 3. Lack of employee readiness
and support
• Many firms report lack of support from their employees
as being one of the major problems encountered in the
implementation of JIT (Lean) purchasing.
• Very often, such resistance is encountered because the
employees are required to change their long-standing
work habits, or because they interpret the new system as
being a threat to their jobs.
• Also, the JIT system requires most employees to assume
more problem-solving responsibilities on the job, which
may lead to additional frustration.

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 4. Lack of support from design engineering
personnel
• Design engineering is responsible for making
technical specifications for the materials a company
buys.
• Quite often, the purchasing function in an
organization does not receive adequate support
from engineering functions, and, as a result,
purchasing is often unable to advise suppliers on
material quality design options.
• Thirty-nine percent of the firms surveyed using JIT
practices in the United States indicated that they had
serious problems regarding lack of support from
engineering
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 5. Low product quality
• If suppliers fail to provide materials of adequate
quality on a regular basis, production slow-downs
and stoppages will occur regularly.

• The study reports that 53 percent of American

manufacturing firms implementing JIT cited this
factor to be a major obstacle

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 6. Lack of support from carrier companies
• The next slide show the huge sums of money that
the purchasing function of some major firms spends
every year in order to move materials in and out of
the factory.
• Few buying firms, however, work closely with
carriers to develop long-term relationships that
provide for highly structured delivery schedules that
lower costs for the buying firm.
• Buyers have traditionally accepted terms offered to
them by the carriers with regard to their inbound
freight.
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6-41
 7. Lack of communication
• Effective development and implementation of the just-in-time
system requires integration of important functional areas such
as purchasing, manufacturing, quality, production, and
transportation.

• Lack of proper communication among these areas poses a

major obstacle to the implementation of JIT.

• While there is no easy solution to this problem, the purchasing

function in an organization must assume the responsibility of
calling on top management regularly for leadership and
support.

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 Role of Culture
• A crucial issue to be considered is the relevance of culture in the
successful implementation of the just-in-time system in a
country.

• Honda’s culture and its focus on group-oriented activities are

particularly suitable to the implementation of the just-in-time
production control system in that environment.

• The need to have harmony in organizations provides for better

manufacturer–supplier relationships at Toyota and Honda.

• Severance of a business relationship between manufacturer and

supplier has a strong stigma associated with it, which both
manufacturers and suppliers try to avoid as much as possible.
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Critical Analysis of the JIT Concept
• Many companies turned to JIT looking for a relatively
painless financial surgery that would yield substantial
short-term benefits.

• Over the years, these companies have come to realize

the tremendous effort and commitment required to
make a JIT system run smoothly.

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 Critical Analysis of the JIT Concept
• The radical proponents of JIT manufacturing in the United
States during the 1980s and 1990s, the so-called JIT
revolutionaries, are to some extent responsible for this initial
misunderstanding.

• The practitioners painted an extremely romantic picture of

JIT emphasizing simplicity and efficiency, along with a state of
affairs where employee morale would be high and relations
between buyers and suppliers would be completely
harmonious.

• It takes time to change attitudes of the workforce and

nurture long-term relationships with suppliers.

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Critical Analysis of the JIT Concept

• The transition to JIT has not necessarily been a smooth

one for many companies in the United States. But this
does not imply that switching from a pure MRP system
to a JIT or hybrid system was a mistake for most
companies.

• There are two serious drawbacks with the MRP

production control system.
– First, the master production schedule that drives MRP is
based on estimated customer requirements; and second,
MRP’s production control system utilizes a “push” system for
manufacturing goods.
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 Critical Analysis of the JIT Concept
• Another critical issue for JIT manufacturers is the
variability in product demand.
• JIT systems seems to work best when its smooth
production and low inventory requirements are aimed
at meeting a relatively stable product demand.
• However, demand patterns are not stable for all
products. In order to induce a relatively stable
demand, companies using JIT manufacturing often
consolidate their product lines.
• Not all marketing strategies are compatible with the
JIT system.
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