Modelling just-in-time purchasing in the ready mixed concrete industry

Abstract

Materials can be purchased either in the Just-In-Time (JIT) purchasing approach or Economic Order Quantity (EOQ) (non-JIT) approach. The successful implementation of JIT purchasing in various industries prompted companies that are still using the EOQ approach to ponder whether they should switch to the JIT purchasing approach for managing their inventories. The JIT purchasing approach can induce inventory physical plant space reduction. Hence, the existing EOQ-JIT cost indifference point models conclude that the JIT purchasing approach is always preferred to the EOQ approach, provided that the JIT purchasing approach can capitalize on physical plant space reduction. The EOQ-JIT cost indifference point is the level of demand at which the costs of the two material purchasing approaches are the same. This study investigated the implementation status of JIT techniques in the RMC industries in Chongqing, China and Singapore through surveys. The surveys covered all the registered members of the Chongqing Concrete Association in China and the Ready Mixed Concrete Association of Singapore. The surveys found that both the EOQ approach and the JIT purchasing approach were adopted by companies to manage raw material procurement in the RMC industry. It is evident that the currently available EOQ-JIT cost indifference point models cannot clearly explain the raw material purchasing approaches adopted in the RMC industries. In addition, it was found that the existing EOQ-JIT cost indifference point models did not empirically study the capability of an inventory facility to hold the EOQ-JIT cost indifference pointa??s amount of inventory. Furthermore, some important cost components under the inventory management systems were also ignored in these models. These costs include, but not limited to, the out-of-stock costs and the impact of inventory policy on product quality, and production flexibility. This study develops the ultimate EOQ-JIT cost indifference point models and the JIT Purchasing Threshold Value (JPTV) models. This study suggests that the advantages of JIT purchasing may have been overstated in theory, especially when firms are purchasing to meet high and consistent levels of demand and the JIT operation could capitalize inventory physical plant space reduction. The ultimate EOQ-JIT cost indifference points theoretically examine the capability of an inventory facility to hold the EOQ-JIT cost indifference pointa??s amount of inventory. The JPTV models account for those cost components that were ignored by previous researchers. The JPTV models suggest that although JIT purchasing may be widely adopted in managing material procurement, this approach may not be cost effective when the additional costs resulting from the JIT purchasing approach is high and when the annual demand is extremely low or high. This is evident even when the JIT operation can capitalize on physical plant space reduction. The surveys and case studies conducted in the RMC industries in Chongqing and Singapore empirically supported this proposition.