Just-in-Time Purchasing

Learning Objective 4 Describe why companies are using just-in-time (JIT) purchasing

• high carrying costs, costs of quality, and shrinkage costs; low ordering costs, high-quality suppliers, and reliable supply chains

Just-in-time (JIT) purchasing is the purchase of materials (or goods) so that they are delivered just as needed for production (or sale). Consider Hewlett-Packard’s (HP’s) JIT purchasing: HP has long-term agreements with suppliers of the major components of its printers. Each supplier is required to make frequent deliveries of small orders directly to the production floor, based on the production schedules HP provides them. The suppliers work hard to keep their commitments because any failure on their part will result in HP’s assembly plant not meeting its scheduled deliveries of printers.

JIT Purchasing and EOQ Model Parameters

Suppose Glare Shade’s managers believe that the current purchasing policies might result in the carrying costs of the company’s inventories (parameter C in the EOQ model) being much greater than what they had estimated because of higher warehousing, handling, insurance, and equipment costs. Suppose they also believe that the cost of placing a purchase order (parameter P in the EOQ model) is likely to decrease because of the following:

• Glare Shade is establishing long-term purchasing agreements that define the price and quality terms it has with its suppliers over an extended period. No additional negotiations need to take place before supplies can be ordered.
• New electronic systems allow Glare Shade to place purchase orders, tally delivery records, and make payments to suppliers more cost effectively.
• Glare Shade is using purchase-order cards (similar to consumer credit cards such as VISA and MasterCard). As long as purchasing personnel stay within preset total and individual-transaction dollar limits, traditional labor-intensive procurement-approval procedures are not required.

Exhibit 21-4 tabulates the sensitivity of the EOQ (see section Relevant Costs of JIT Purchasing) to changes in carrying and ordering costs of UX1s. Exhibit 21-4 supports moving toward JIT purchasing because, as the company’s relevant carrying costs increase and relevant ordering costs per purchase order decrease, the EOQ decreases and ordering frequency increases.