Contractors understand the attraction of the just-in-time approach to procurement, or any method of deferring the purchase of necessary suppliers until close to the time when they are needed.
For this reason, some of the methods to use are as follows: expenditure for the items procured is more directly tied to utilization, thus improving the temporal matching of cost and benefit; demand on the contractor’s material storage capacity is reduced; and where the contractor’s activity has a "production line" element to it, timely delivery means that the line will remain in continuous operation.
If the system is properly structured, inventory carrying costs are minimized.It should not be assumed, however, that it is always advantageous to defer purchasing backup supplies until demand actually arises.
Many aspects of municipal infrastructure are critical to its ability to service the needs of its residents.
Unless a sufficient inventory of backup parts are maintained to allow that infrastructure to continue in operation at all times, in the case of a municipality, it may be placed at considerable risk.
For instance, backup suppliers of such items as radio transmitters may be essential to keep the police, fire and paramedic radio systems operational at all times. More generally, most organizations seek to maintain a sufficient buffer inventory in stock as a safety measure against the risk of a shortage of critical materials.
The buffer inventory thus serves as a risk control mechanism. To a degree, it insulates the contractors and the municipality from the risk of delay in the delivery of a critical supply, due to such factors as strike, spikes in market demand and the like.
With construction companies as well as municipalities, the purchasing departments should work with the operating departments to identify the level of critical backup inventory that is required. In order to avoid running out of critical inventory, it is essential to monitor and document actual consumption over a reasonable period of time to determine what the essential stocking level of the organization is before implementing any plan to reduce inventory holdings.
It is also necessary to remember that for many types of commodity, consumption is not uniform across the year. There may be very high levels of fluctuation in usage, for instance with respect to road salt.
Since patterns of consumption may change from one year to another, the ideal level of stock holding should be determined on the basis of an average of the consumption figures from several years, adding to that average a reasonable cushion to ensure against the inevitability that need will be greater than average in at least some years.
While there is much merit in the just-in-time approach, it is necessary to use common sense when employing it.
Just-in-time procurement reduces certain costs but it may also increase other costs or give rise to additional risk.
For instance, the purchase price of snow and ice clearing materials for a municipality’s road operations may be considerably lower if that material is bought out-of-season. If the price difference is sufficient to offset the perceived gains from a just-in-time approach, then the out-of-season purchase may be the better route to go.
It is an essential requirement of the just-in-time approach to procurement that suppliers be reliable.
It cannot be used where the quality or quantity of supply is unpredictable. Lack of predictability may result from natural factors (e.g., the influence of weather) or from supplier related factors, such as the risk of labour unrest.
Suppliers who are operating at or near capacity also present a degree of risk of delinquent delivery. Materials must be perfect for their intended use and arrive just as they are needed.
When goods and services arrive late, the entire objective of just-in-time procurement is defeated.
Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com.
Recent Comments
comments for this post are closed