Purchasing and Financing 2024

production line close. Similarly, a retailer or wholesaler can lose sales quickly if popular
products are not on the shelf.
On the other hand, keeping too much inventory is expensive. Firms now pay more
attention to inventory costs - and look to their suppliers for help in controlling them. This
often means that a supplier must be able to provide just-in-time (JIT) delivery - reliably
getting products there just before the customer needs them.
Just-in-time relationships between buyers and sellers require a lot of coordination and
may increase the supplier's costs. Most buyers realize they can't just push costs back onto
their suppliers without giving them something in return. Often what they give is a longerterm
contract that shares both the costs and benefits of the working partnership.
A key advantage of JIT for business customers is that it reduces their physical distribution
(PD) costs - especially storing and handling costs. However, if the customer doesn't have
any backup inventory, there's no "security blanket" if something goes wrong.
If a supplier's delivery truck gets stuck in traffic, if there's an error in what's shipped, or if
there are any quality problems when the products arrive, the customer's business stops.
Thus, a JIT system requires that a supplier have extremely high-quality control in
production and in every PD activity, including its PD service.
To control the risk of transportation problems, JIT suppliers often locate their facilities
close to important customers. Trucks may make smaller and more frequent deliveries -
perhaps even several times a day. As this suggests, a JIT system usually requires a supplier
to be able to respond to very short order lead-times.
The JIT system shifts greater responsibility for PD activities backward in the channel - to
suppliers. If the supplier can be more efficient than the customer could be in controlling
PD costs - and still provide the customer with the service level required - this approach
can work well for everyone in the channel. However, it should be clear that JIT is not
always the lowest cost - or best - approach. It may be better for a supplier to produce and
ship in larger, more economical quantities - if the savings offset the distribution system's
total inventory and handling costs.
The just-in-time approach focuses attention on the need to coordinate the PD system
throughout the channel. It also highlights the value of close working relationships and
effective communication. Whether or not a firm uses the JIT approach, good information
is often the key to coordinating PD activities.
12