Exploring alternative purchasing strategies: just-in-time or just enough?

INTRODUCTION Effective purchasing strategy can contribute significantly to the success of most modern organizations. Surveys of U.S. manufacturing firms indicate that purchased materials account for an average of 57 percent of the sales dollar, while total labor costs {wages, salaries, and fringe benefits) consist of only one third of the purchase percentage (U.S. Bureau of Census 1989). Therefore, purchasing dollars must be managed strategically in order to improve the financial position of organizations (Reck and Long 1988). It is also well understood that the overall quality and service capabilities of any manufacturing firm are heavily influenced by the performance of its suppliers. Research suggests that 50 percent of a company's quality non-conformances are caused by defective purchased materials (Leenders and Fearon 1993). Recognizing the importance of the purchasing functions and their overall effect on a firm's financial and quality performance, organizations are expanding the role of purchasing in the corporate strategic planning process (Fearon 1988). Several strategic decisions under the discretion of purchasing managers in a manufacturing environment have been identified in the literature. Each of these decisions has the potential to influence a firm's competitive position (Waller 1993). The most frequently cited of these decisions are (1) the number of suppliers of critical components to use, (2) length and type of contract to use with suppliers, if any, (3) frequency with which to share production scheduling or forecasting information, (4) criteria to be used in selecting suppliers, and (5) the frequency of deliveries of critical components. These five purchasing decisions are strategic in the sense that they have long-term consequences, pertain to the mutual sharing of critical information, and result in the selection and dismissal of suppliers. Reducing the number of suppliers of critical components has a long-term consequence because it can often take months or even years for new suppliers to be able to produce highly specialized, critical components. This can be due to the need for specialized manufacturing equipment or due to the capacity constraints of the supplier. A long-term contract has long-term consequences by definition. Frequent sharing of demand information with a supplier may eventually entail investment in EDI technology. The criteria that are used to select suppliers will have consequences for as long as those suppliers are used. Finally, moving toward more frequent deliveries may involve a change in the mode of transportation, additional investment in materials handling equipment, and changes in the receiving and inventory procedures--collectively implying long-term decisions. These five decisions are discussed in the literature within the context of two general purchasing strategies: just-in-time purchasing (JITP) using cooperative buyer-supplier partnerships, and traditional purchasing (TP) in an open bargaining environment (Waller 1993). With respect to the five strategic purchasing decision variables, JITP vis-a-vis TP involves: using fewer suppliers for a given component (Ansari and Modarress 1988), longer term contracts with suppliers (Perry 1988), frequent sharing of production schedule information (Trelevan and Schweikhart 1988), using many criteria--not just price--for selecting suppliers (Ansari and Modarress 1988), and taking frequent deliveries of components (Perry 1988). Crosby (1984), Russell (1985), and Stundza (1984) suggested that U.S. manufacturing firms were moving away from open market supplier transactions toward closer buyer-supplier relations. Spekman (1988) described these emerging relationships as "alliances," Johnston and Lawrence (1988) as "partnerships," while Heide and John (1990) contrasted them with the more traditional "arm's length" type of interaction. A strategic partnership between a purchasing firm and a supplier has been defined as "a mutual, ongoing relationship involving a commitment over an extended period of time, and a sharing of information and the risks and rewards of the relationship" (Ellram 1990). …