UNIT 9 AND 10

PURCHASING AND JIT

PURCHASING: PURCHASING INTERFACES, PURCHASING

CYCLE, VALUE ANALYSIS, CENTRALIZED VS DECENTRALIZED
PURCHASING ETHICS IN PURCHASING

JIT: INTRODUCTION, CHARACTERISTICS OF JIT, KEY

PROCESSES TO ELIMINATE WASTE, IMPLEMENTATION OF JIT,
PRE-REQUISITES FOR IMPLEMENTATION, JIT INVENTORY AND
SUPPLY CHAINS
 Procurement
■ First phase of material management.
■ Activity concerns with purchasing material and supplies consumed
during the production.
■ In other words, procurement means purchasing of materials, parts
and components to produce desired goods and services in
organization.
■ The main objective procurement is to purchase correct equipment,
materials, parts, components, and supplies in the right quantity of
right quality from right origin (i.e. either from external sources or
from other departments) at right time and cost.
■ Procurement System can be centralized and decentralized.
 Objectives of Procurement
1. Goods value:
– An effective procurement ensures competitive price through acquisition of
quality raw materials, parts and components at low costs.
2. Reliable Schedules:
– A good purchasing system ensures timely delivery of materials, parts and
components for production to meet delivery schedule of customers’ orders.
3. Minimized Investment:
– An effective purchasing function minimizes all those costs related to price
of materials, ordering costs, carrying cost and stock out costs.
4. Effective Administration:
– An efficient administration ensures materials at low costs in coordination
with other functions and maintaining good correlation with suppliers.
Procurement Process/Purchasing Cycle
Maintenance Need
of Vendors Recognition

Maintenance Selection of
of Records Supplier

Payment of Placing
Invoice Order

Receiving
and Follow up
Inspection
 Centralized vs decentralized purchasing
1. Centralized purchasing
– Centralized purchasing means that purchasing is handled by one special
department.
– Centralized purchasing may be able to obtain lower prices than
decentralized units if the higher volume created by combining orders
enables it to take advantage of quantity discounts offered on large orders.
– Centralized purchasing may also be able to obtain better service and
closer attention from suppliers.
– In addition, centralized purchasing often enables companies to assign
certain categories of items to specialists, who tend to be more efficient
because they are able to concentrate their efforts on relatively few items
instead of spreading themselves across many items.
2. Decentralized purchasing
– Decentralized purchasing means that individual departments or separate locations
handle their own purchasing requirements.
– Decentralized purchasing has the advantage of awareness of differing “local”
needs and being better able to respond to those needs.
– Decentralized purchasing usually can offer quicker response than centralized
purchasing.
– Where locations are widely scattered, decentralized purchasing may be able to save
on transportation costs by buying locally, which has the added attraction of creating
goodwill in the community.
Some organizations manage to take advantage of both centralization and
decentralization by permitting individual units to handle certain items while
centralizing purchases of other items.
For example, small orders and rush orders may be handled locally or by departments,
while centralized purchases would be used for high-volume, high-value items for which
discounts are applicable or specialists can provide better service than local buyers or
departments.
 Ethics in Purchasing
■ Ethical behavior is important in all aspects of business.
■ This is certainly true in purchasing, where the temptations for unethical behavior
can be enormous.
■ Buyers often hold great power, and salespeople are often eager to make a sale.
■ Unless both parties act in an ethical manner, the potential for abuse is very real.
■ Furthermore, with increased globalization, the challenges are particularly great
because a behavior regarded as customary in one country might be regarded as
unethical in another country.
■ The National Association of Purchasing Management has established a set of
guidelines for ethical behavior.
■ As you read through the list, you get insight into the scope of ethics issues in
purchasing.
 Just In Time (JIT)
■ Management philosophy and not a technique.
■ A management strategy that aligns raw material orders from
suppliers directly with production schedules.
■ Companies employ this strategy to increase efficiency and
decrease waste by receiving goods only as they are needed in the
production process, thereby reducing inventory costs.
■ The just in time inventory supply system is a shift away from other
"just-in-case (JIC)" strategies, in which producers hold large
inventories to have enough product to absorb maximum market
demand.
■ One example of a just in time (JIT) system would be a car
manufacturer that operates with very low inventory levels, relying
on its supply chain to deliver the parts it needs to build cars.
■ The parts needed to manufacture the cars do not arrive before or
after they are needed; instead, they arrive just as they are needed.
■ In JIT, Production runs remain short, which means manufacturers
can move from one type of product to another very easily.
■ This method reduces costs by eliminating warehouse storage needs.
■ Companies also spend less money on raw materials because they
buy just enough resources to make just the ordered products and no
more.
■ The disadvantages of just-in-time inventories involve
disruptions in the supply chain.
■ If a supplier of raw materials has a breakdown and cannot
deliver the goods on time, one supplier can shut down the
entire production process.
■ A sudden order for goods that surpasses expectations may
delay delivery of finished products to clients.
■ This method requires that producers are able to accurately
forecast demand.
 Elimination of Waste (7 wastes)
In Japan, waste means anything other than minimum amount of materials, parts, and
workers which absolutely essential to production.
Shigeo Shingo, a recognized JIT authority and Toyota Motor Company identifies seven
wastes as being continuous improvement in production processes. They are as follows:
1. Waste of overproduction- involves excessive use of manufacturing resources.
2. Waste of waiting- requires space and adds no value.
3. Waste of transportation-increases handling and work in process inventory.
4. Waste of processing itself -makes unnecessary production set ups and scrap.
5. Waste of stocks - requires additional carrying costs and investment in working capital.
6. Waste of motion - reduces productivity and increases scrap and work in process
inventory.
7. Waste of making defective- requires rework cost and possible loss of sales.
 Elements of JIT
■ Eliminating 7 types of wastes
■ Reduced lot size (manufacture and purchase)
■ Reduced lead time (production and delivery)
■ Preventive maintenance
■ Flexible workforce
■ Supply quality assurance
■ Zero defect quality program
■ Continuous improvement
■ Good house-keeping (5S)
■ Heijunka - Leveled production or uniform plant loading - Load balancing for smooth flow of products
through the factory.
■ Kanban translated as “signboard” or “visible record” – A simple tool to pull products and components
through the process using visual signals (Kanban box or Kanban cards)to control the movement of
materials between work centers.
■ Jidoka – Use of automation
■ Andon (Trouble lights) – a light signal (a mistake proofing device) to initiate corrective action.
Figure: Four building Blocks for eliminating wastes in JIT or Lean system
 Extras

(Slides after “Extras” are supplementary content)

 5’s
■ 5S is a workplace organization method that uses a list of
five Japanese words: Seiri, Seiton, Seiso, Seiketsu, and Shitsuke.
■ These have been translated as "Sort", "Set In Order", "Shine",
"Standardize" and "Sustain".
■ The list describes how to organize a work space for efficiency and
effectiveness by identifying and storing the items used,
maintaining the area and items, and sustaining the new order.
■ The decision-making process usually comes from a dialogue
about standardization, which builds understanding among
employees of how they should do the work.