Just-In-Time Purchasing: Is It Really Strategic?
Hale Kaynak, B.S., M.B.A.
Hale Kaynak, B.S., M.B.A., Doctoral Candidate University of North Texas, Department of Management, COBA, P.O. Box 13677, Denton, TX 76203, 817/380-0750
Charles F. Bimmerle, Ph.D., C.P.M.
Charles F. Bimmerle, Ph.D., C.P.M., Associate Professor University of North Texas, Department of Management, COBA, P.O. Box 13677, Denton, TX 76203, 817/565-3145
81st Annual International Conference Proceedings - 1996 - Chicago, IL
Abstract. Both practitioner-oriented and academic literature suggest that just-in-time (JIT) purchasing as a management innovation can be adopted by organizations as a strategy to gain advantage over their competitors. Seven characteristics of JIT purchasing are identified based on a comprehensive literature review. These elements are supplier cooperation, materials quality, quantities purchased, transportation, top management support, training and employee relations. A review of benefits of JIT purchasing implies that implementation of JIT purchasing can increase firms' performance. The benefits include higher inventory turnover, increased product quality and productivity, which theoretically lead to a reduction in product costs. High product quality and reduced costs will usually result in lower prices. Lower prices will lead to increased market share and profit. Data have been collected by a mail survey from both large and small manufacturing and service organizations. The subjects of the survey are business unit chief officers or high-ranking managers. The firms and subjects are identified through a literature review, and the rosters were provided for this research by the American Society for Quality Control and the National Association of Purchasing Management. The research results are presented and discussed.
Introduction. In the late 1970s and early 1980s, previously unchallenged American industries lost substantial market share in both U.S. and world markets. To regain the competitive edge many companies have impetuously launched into productivity improvement programs (Chase and Aquilano 1992). One of these "so-called improvement programs" is just-in-time purchasing (JITP).
However, implications of JIT on strategic performance has not been explored in the literature. Adam and Swamidass (1989) point out that "manufacturing strategy literature has not formally embraced JIT for its strategic value to manufacturers" (p. 196). A study by A. S. Sohal, Ramsay, and Samson (1993) shows that the link between JIT and competitive strategy is less common than between JIT and operational tactics. The findings of their study reveal that only 17 percent of firms perceive JIT as a strategic tool to increase competitiveness whereas 44 percent think JIT is utilized to improve operations.
Studies by Ansari and Modarress (1987, 1990) show that companies having implemented JITP estimated a 43 percent increase in product quality and a 21 percent improvement in productivity. Given that approximately 50 percent of cost of goods sold consist of costs of materials, firms can utilize JITP to improve their performance. Grounded on both the theory of innovation and the relationship between innovation, strategy, and performance, this study attempts to explain the strategic value of JITP as a management innovation in different types and sizes of organizations. Furthermore, this research examines firm performance based on the theories from business strategy, marketing and operations management. Thus, the purpose of this study is to fill a void in the literature by identifying the effect of JIT purchasing on firms' performance in both large and small manufacturing and service organizations.
Characteristics of JIT Purchasing. Characteristics of JIT purchasing can be broadly categorized into two groups: external and internal. External characteristics require some changes in the way a purchasing department approaches procurement activities. Internal characteristics are those elements that require some organizational commitment.
External Characteristics of JIT Purchasing. External characteristics of JIT purchasing are
- supplier cooperation,
- purchased quantities,
- materials quality and
- transportation (Schonberger 1982; Schonberger and Gilbert 1983).
As Ansari and Modarress (1990) indicate, although purchasing activities are the same in both JIT and traditional purchasing, they differ in approach. These external characteristics will be briefly discussed as follows: 1. Supplier cooperation. In JIT purchasing, materials and parts are usually bought from a single source, as opposed to purchasing from multiple sources under traditional purchasing activities. Empirical studies consent that, with the implementation of JITP, organizations have switched to fewer sources (Billesbach, Harrison, and Croom-Morgan 1991; Dion, Blenkhorn, and Banting 1992a; Freeland 1991; O'Neal 1987).
Dealing with fewer suppliers for a particular item or items contributes to establishing a long-term, stable and satisfactory relationship between a supplier and buyer (Ansari and Modarress 1990; Schonberger 1982; Schonberger and Gilbert, 1983). In his study, O'Neal (1989) finds that almost two-thirds of the suppliers have had long-term agreements with their customers.
Supplier evaluation is also different under JIT purchasing from evaluation under traditional purchasing. JIT purchasing emphasizes supplier evaluation based on product quality, delivery performance and price. Supplying defective items is not tolerated. In fact, Billesbach et al. (1991) find that a majority of respondents have evaluated their suppliers based on delivery reliability and quality conformance.
Under JIT purchasing, achieving product quality through a long-term contract at a fair price receives the highest priority. The findings of a study reveal that both U.S. and U.K. companies have placed high priority on quality and delivery in negotiation practices. However, they also rated response flexibility and competitive price reasonably high (Billesbach et al. 1991).
In summary, in terms of suppliers, JIT purchasing differs from traditional purchasing in terms of the number of suppliers, the selection and evaluation of suppliers, and the negotiating and bidding process. Thus, suppliers have a considerable effect on the implementation of successful JIT purchasing (Fawcett and Birou 1993).
2. Purchased quantities. In JIT organizations, products are produced in small lot sizes when needed, and in turn, materials and parts are frequently delivered in small lots (Chapman and Carter 1990). Furthermore, most importantly, lots must be delivered in exact quantities, neither more nor less (Ansari and Modarress 1990; Freeland 1991; Lee and Ansari 1985; Schonberger 1982; Schonberger and Gilbert 1983; Willis and Huston 1990). Several empirical studies find support for the increase in delivery frequency under JIT purchasing.
In his study, O'Neal (1987) finds that, under the JIT system, the average monthly frequency of deliveries increases to 6.9 from 2.8 under traditional purchasing. The study by Dion, Banting, Picard, and Blenkhorn (1992b) produces the following results pertaining to purchased quantities:
- 200 percent increase in number of deliveries
- 50 percent decrease in order lead times
- 50 percent reduction in order size
3. Materials quality. When materials and parts are purchased in small lots and exact quantities, clearly, their quality receives more importance since defective materials and parts cause interruptions in production. Furthermore, the first step of producing quality products is the utilization of the correct quality materials. As a result, supplied materials must have the correct quality attributes (Grieco and Gozzo 1985; Hall 1983; Willis and Huston 1990). Counting and inspection of received materials and parts are reduced or eliminated under JIT purchasing (Ansari and Modarress 1990).
The findings of a study by Freeland (1991) indicate that the selection of both suppliers and materials is based on quality. Also, the findings propose that good quality of materials is necessary in order to implement JIT purchasing. In one study regarding JIT purchasing, 33 percent of buyers reported higher quality in JIT purchased parts (Dion et al. 1992b). The results of the same study show the following changes related to purchased parts quality:
- 40 percent decrease in damaged purchased materials
- 20 percent decrease in buyer complaints about purchased materials
4. Transportation. Under JIT purchasing, agreements define delivery dates or times according to the buyer's schedule, as opposed to shipping dates and times based on the supplier's schedule under traditional purchasing (Ansari and Modarress 1990; Schonberger 1982; Schonberger and Gilbert 1983). Furthermore, JIT purchasing involves both inbound and outbound freight, stressing on-time delivery, whereas traditional purchasing emphasizes outbound freight, stressing low freight cost (Ansari and Modarress 1990). O'Neal (1987) suggests that JIT purchasing requires faster, more responsive modes of transportation than traditional purchasing because of frequent deliveries in small lots. His study indicates that, under JIT, companies switched to motor freight and private carriers from rail transportation and common carriers.
Internal Characteristics of JIT Purchasing
Some internal critical factors are required in the implementation of JIT purchasing, as well as in the implementation of JIT production (Ahmed, Tunc, and Montagno 1991; Ansari 1986; Ansari and Modarress 1986, 1990; Hay 1989, 1990a, 1990b, 1990c; Im and Lee 1989; Lee and Ebrahimpour 1984). These essential elements include the following:
- Top management commitment. Top management should make JIT purchasing a priority for the whole organization and clearly communicate this commitment to the employees. The necessary resources for the implementation of JIT purchasing should be provided by leaders. Moreover, upper management should demonstrate leadership in order to provide positive involvement of other functions (Ahmed et al. 1991; Ansari and Modarress 1986; Hay 1990a; Im and Lee 1989; Lee and Ebrahimpour 1984). In their survey, Fawcett and Birou (1993) find that companies which successfully implement JIT purchasing activities provide support at different levels of management.
- Training. Most importantly, purchasing people must be trained in the JIT philosophy. Also, purchasing people should be trained in the necessary statistical tools, such as statistical process control (SPC), in order to understand the variation in incoming materials. Furthermore, training support in JIT purchasing and quality management should be provided to suppliers (Ahmed et al. 1991; Ansari 1986; Ansari and Modarress 1986; Im and Lee 1989; Lee and Ebrahimpour 1984). Utilizing teamwork from both parties in reducing the common causes of variability in materials and parts can improve quality (Harrison and Voss 1990). In one study, respondents report that the lack of training and education of suppliers has been a major impediment in the implementation of JIT purchasing (Freeland 1991).
- Teamwork. Acquisition teams should be established, which may include purchasing, material control, process/design engineering and production representation. This interaction provides the conditions necessary to solve supplier quality problems and facilitates communication within the entire organization (Giunipero and Keiser 1987; Hall 1983). These teams can be utilized in the selection of new suppliers (Burt 1989).
Strategic Value of JITP as a Management Innovation. Although there is a vast array of literature on innovation, it is hard to find agreement on the definition of innovation. In this study, the definition of innovation is the one adopted by Damanpour and Evan (1984): "the implementation of an internally generated or a borrowed idea -- whether pertaining to a product, device, system, process, policy, program, or service -- that was new to the organization at the time of adoption" (p. 393).
Schroeder, Scudder, and Elm (1989) discuss the effects of innovations assisting in the achievement of significant improvements in organizations' cost, delivery and quality goals. In their study, the researchers present a list of innovation definitions generated by managers. One of these definitions includes changing the relationships with internal and external groups in order to reach goals of the operation in the present and/or the future in a better way, such as supplier relationships with JIT.
The literature on strategy types (e.g., Hofer and Schendel 1978; Miller and Roth 1994; Porter 1980; Richardson, Taylor, and Gordon 1985) reveals that the purpose of adopting specific strategies is to increase market share and performance by either reducing costs or by differentiating products. By adopting a JIT purchasing system as a strategy, firms can both reduce their costs and differentiate their products. As discussed later, benefits of JIT purchasing indicate that firms realize enhanced product quality and reduced costs as a result of the implementation of JIT purchasing techniques (e.g., Ansari and Modarress 1990). O'Neal (1989) suggests that automotive original equipment manufacturers' (OEM) final assemblers have served as the innovators in developing and implementing JIT systems. With the JIT management system as a major strategy element, the Automotive Industry Action Group played the role of a facilitator in increasing the productivity of the industry.
Pearson and Gritzmacher (1990)suggest that the purchasing department can serve as a profit-generating center rather than cost cutting mechanism. Purchasing costs consist of 50 percent or more of a firm's total revenue in many manufacturing industries. With an increasing concern on product quality in today's highly competitive environment, a company can gain competitive advantage by utilizing the purchasing department's knowledge of supplier networks. Implementation of the JIT concept brings such an opportunity to purchasing departments in firms.
According to a study by Dion et al. (1992a) although there is not any perceived increase in profit from the products produced with JIT materials, 37 percent of firms reported an increase in their sales as a result of JIT purchasing (Dion et al. 1992a). In their study, Fawcett and Birou (1993) find that improvement in the overall competitive position of the firm was the most positive effect of JIT purchasing.
The benefits of JIT purchasing can be classified into two groups: (1) direct and (2) indirect (Ansari and Modarress 1987; Ansari and Modarress 1990; Gilbert 1990; Hahn, Pinto, and Bragg 1983; Manoochehri 1984; Schonberger 1982; Schonberger and Gilbert 1983). The most important direct benefits include:
- Increase in purchase material turnover,
- Increase in ability to meet delivery promises,
- Reduction in delivery lead time, and
- Reduction in scrap cost.
The direct benefits of JIT purchasing lead to its indirect benefits. The most important indirect benefits are:
- Achievement in encouraging suppliers to meet quality requirements,
- Improved product quality, and
- Increased productivity.
Based on the literature review up to this point, the relationship
between JITP and the performance of firms are summarized in the research model
as shown in Figure 1. Based on this model, we suggest that the greater the
extent to which companies implement JITP techniques, the higher is the
(Figure 1 is not available in this text-only version.)
The theoretical foundation of this study and previous research findings indicate that the effects of JITP strategy on performance may differ across four moderating variables: Industry type, firm size, firm type (the type of organization refers to service and manufacturing organizations) and duration of JIT purchasing practices. The following paragraph provides some examples of the effects of moderating variables.
Fawcett and Birou (1993) identify electronics, machinery, metals and transportation industries as main users of JIT purchasing practices. Some studies document that JIT delivery is considered to be a difficult element of JIT management to implement in small manufacturing firms because these companies may have limited resources (Finch 1986; Finch and Cox 1986). Empirical research in the implementation of JIT delivery in small firms reveals mixed results. Although, in theory, JIT purchasing seems to be advantageous for small businesses and there is some evidence of assistance from large buyers to small companies in its implementation (Sadhwani, Sarhan, and Camp 1987), a survey conducted by Industry Week reveals that some of the small companies complain of swallowing inventories to supply JIT companies (Sheridon 1989). Chase and Aquilano (1992) stress the fact that, although service companies have not concentrated on supplier cooperation for materials because the service costs mostly consist of labor, some service companies such as fast food restaurants can benefit from implementing JIT purchasing. A study by Freeland (1991) classifies organizations based on the benefits realized as 'High-JIT Purchasing Benefits Organizations' and 'Low-JIT Benefits Organizations'. Further analysis reveals that 'High-JIT Purchasing Benefits Organizations' had started to implement JIT in purchasing an average of 33 months before receiving the survey, whereas 'Low-JIT Purchasing Benefits' organizations had begun to institute JIT purchasing, on average, only 24 months before. Freeland (1991) concludes that "the longer JIT purchasing has been in place, the greater the reported overall benefits" (p. 44).
Research Design and Methodology: The research questions of this study lend themselves to cross-sectional mail survey methodology on business units. Because this study examines the relationship between JIT purchasing and firm performance, the target population was U.S. firms which implement JITP techniques. The subjects of the survey are business unit chief officers or managers, with such titles as president and executive vice president, because only these high-ranking respondents would possess the three types of knowledge required for this study. The firms and subjects were identified through a literature review, and the rosters provided to this research by both the American Society for Quality Control (ASQC) and the National Association Purchasing Management (NAPM). An instrument was developed based on an extensive literature review and was pilot tested at a joint meeting of the NAPM and the American Production and Inventory Control Society (APICS).
Target respondents received the questionnaires according to the Total Design Methodology suggested by Dillman. The Total Design Methodology suggests a four-step procedure for mail surveys to achieve a higher response rate. First, the questionnaire is sent to respondents with a cover letter which describes the research project and its purpose, and assures the confidentiality of the replies. The second step requires sending a postcard one week after the initial mailing as a reminder to the nonrespondents. Three weeks after the initial mailing, a follow-up letter with another copy of the questionnaire is sent to subjects who have not responded. Seven weeks after the initial mailing, if a sufficient response rate has not been achieved, a second follow-up letter with the questionnaire is sent to nonrespondents.
A questionnaire, including a cover letter and a postage-paid return envelope, was sent to 1884 subjects in the beginning of March, 1995. The breakdown of subjects according to membership is as follows: 1180 ASQC members and 704 NAPM members. Due to the sufficient response rate following the second and third steps of the Total Design Methodology, the fourth step was not pursued. Some of the respondents who did not receive the initial questionnaire called to request a copy of the questionnaire upon receiving the postcard. Depending upon their choice, a copy of the questionnaire was mailed or faxed to them. A total of 382 survey replies were received, which equals a 20.3% response rate. Of all respondents, 25.3% are ASQC members and 11.80% NAPM members. Approximately 60% of the responses were received after the initial mailing and postcards. To encourage response (Dillman 1978), it is made known that a copy of the aggregated survey results, with a profile of the individual companies, is to be sent to the respondents at their request at the end of the study.
Note: This paper provides partial development of the presentation to be made at the International Conference of the National Association of Purchasing Management, 1996. Additional research design and methodology issues, research results and their implications to practitioners will be discussed during the presentation. Citations are available from the authors upon request.