A3 - A proposed model of JIT purchasing in an integrated steel plant

Int. J. Production Economics 59 (1999) 179—187

A proposed model of JIT purchasing in an integrated steel plant

R.N. Roy*, K.K. Guin

Industrial Engineering & Management Department, Indian Institute of Technology, Kharagpur 721302, India

Abstract

Just-in-time (JIT) till recently has been more confined to manufacturing sectors. But the recent literature is full ofarticles on JIT in purchasing and service sectors [Ansari and Modarress, Potential benefits of JIT purchasing for USmanufacturers, Production and Inventory Management Journal 28 (2) (1987) 30—35; Ansari and Modarress, JITpurchasing as a quality and productivity centre, International Journal of Production Research 26 (1) (1988) 19—26;Schonberger and Ansari, Just in time purchasing can improve quality, Journal of Purchasing and Materials Management20 (1) (1984) 2—7 [1—3]] in Japanese and western countries. Somehow, this idea has not percolated down to thedeveloping world where many manufacturers are still suffering from “not invented here” kind of syndrome. They havetheir mind set about the old system of purchasing and manufacturing and any thing new finds a lot of resistance in gettingabsorbed in their rigid concept. In this article an effort has been made to work out a conceptual model for the JITapplication in the purchase section of an integrated steel plant in India. The following issues have been considered: (a)Identification and classification of materials and vendors which can be brought under JIT network. (b) Suggestinga freight consolidation model (FCM) to collect the items from the vendors. ( 1999 Elsevier Science B.V. All rightsreserved.

Keywords: Logistics; JIT; Purchase; Quality; Sourcing

*Corresponding author. Tel.: #91 657 408 106; fax: #91657 407 598.

1. Introduction

JIT in purchasing broadly means frequent order-ing and frequent deliveries of materials in smallerlots from preferably local, and quality certified sup-pliers to the point of their consumption at the timeof usage in right quantity and quality.

Purchase section has been selected to lead theJIT implementation because it is the first line of

defence of a plant as far as quality and timelysupply of items are concerned. JIT purchase is notabout reducing inventories. In fact, inventory re-duction is perhaps the most visible result that JITbrings about. JIT in reality is a philosophy of sup-ply chain excellence.

1.1. Description of the problem

The study has been carried out in an integratedsteel plant in India. It has a capacity to produce3million ton of steel per year. It also produceslong and flat products like: hot rolled coils, wire

0925-5273/99/$ - see front matter ( 1999 Elsevier Science B.V. All rights reserved.PII: S 0 9 2 5 - 5 2 7 3 ( 9 8 ) 0 0 0 9 9 - 1

Fig. 1. Materials classification for JIT-purchasing in steel plant.

products, plates, sheets, etc. In addition to the ma-jor bulk raw materials used (viz., iron ore, coke, andfluxes, etc.), there are about 80 000 different types ofdiscrete items in the inventory which are main-tained by a system of central and sub-stores. Atpresent all these items are supplied by both thelocal and remote suppliers in various lots to thestores. The term “local supplier” means the onelocated within the radius of 30 kms from the plant.The aim of the plant, however, has been to developthe sources of supply in its close vicinity. The total

number of vendors at present is about 3500 whichincludes about 100 local vendors.

The demand of the items is both regular andirregular. The items have either single or multiple-sourcing. Some of the vendors are quality certifiedbut most of them are not certified (see Fig. 1).Materials worth Rs. 12 000 millions (US $300million) are purchased every year which excludesthe bulk items.

The items supplied by the vendors are centrallyreceived, inspected, documented and stored in

R.N. Roy, K.K. Guin/Int. J. Production Economics 59 (1999) 179—187180

Table 1ABC classification

Division Class Percent Criteria No. ofitems!

09 A 10% ACV'$2446 1600B 20% $412(ACV($2446 3200C 70% ACV($412 76 000

!1 US$"Rs. 36.00.

several wards of the central stores and sub-stores.After that the document called goods receipt note(GRN) is prepared to enable the payment. The timetaken for GRN has been reduced from 30—16 days.However, there is a great scope for further improve-ment. If the materials are found unsuitable, they arereturned to the vendors at their cost. This processtakes a week or more.

Awareness level about JIT is confined to the topand the middle management and is practically nilwith the operators at the shop floor level. Noawareness programme about JIT benefits exists forthe suppliers and purchase staff.

The plant has made reasonable progress in com-puterisation of its stores. However, manual recordshave not been fully dispensed with. Documentsrelated to each transaction like issue, receipt, returnstore, inter-store transfer, purchase requisition andpurchase order etc., are fed into the computer.Periodic stock status reports, purchase requisitions,enquiries and purchase orders are generated by thecomputer.

1.1.1. Materials classification (existing)From the selective control point of view all the

items in the store are classified in groups like: ABC,FSN, VED.

(i) ABC grouping is based on annual consump-tion value (ACV). A-class consists of items withhigh values (in terms of rupees or dollars), B-classconsists of items with moderate values, whereas theC-class has the items with low values. A-class itemsare given maximum attention to control the cost.ABC classification of materials in brief is repres-ented in Table 1.

(ii) FSN grouping is based on the movement ofmaterials or their rates of consumption. FSNstands for Fast, Slow, and the Non-moving items. Anitem is said to have made one move if it is issued tothe user department at least once or more thanonce in a month. According to this rule if thematerial has made 12 moves in the last 24 monthsthen it is a fast moving item or else it is slowmoving. If the material has not moved at all in fiveyears then it is treated as a non-moving item. Max-imum attention is paid to the fast moving items andthe least to the non-moving items. If the movementof material per month is denoted by », then for

F-type: »'12,

S-type: »(12,

N-type: »"0 in last 5 years.

(iii) »ED grouping is based on the criticality ofthe item. VED stands for vital, essential and desir-able. Maximum control is exercised on the vital fewthan on the trivial many.

(iv) Special items: These items are treated differ-ently for the purpose of replenishments and controlbecause of their peculiar nature. They are furthersubdivided as: insurance spares, bulk and canaliseditems, and imported spares.

(a) Insurance spares: These are very slow movingitems which may not be required at all duringthe entire life cycle of an equipment but theirstock-out may lead to huge loss of revenue.About 1300 such items are identified and main-tained [4]. Approximately, 30% of equipmentspares which were purchased along with themain equipment have never been drawn fromthe stores.

(b) Bulk and canalised items: These items are con-sumed in bulk and their supply is regulatedthrough Government agencies. Some of themare: high speed diesel, lubricants, wire ropes,cables etc.

(c) Imported spares: A large number of spares haveto be imported, mainly from the USA, Ger-many, the UK, and Japan. The procurementpolicies of such items are designed to take careof the long and uncertain lead time in theirprocurement.

R.N. Roy, K.K. Guin/Int. J. Production Economics 59 (1999) 179—187 181

2. Essential requirements of JIT purchase

f Demand of items should be repetitive and theirdelivery schedule should be stable.

f Advance information about the material require-ment schedule is provided to the suppliers.

f Suppliers should be quality certified so that theitems supplied by them need not be checked atthe buyer’s place.

f Long term contract and mutually beneficial rela-tionship between the suppliers and the buyer isessential.

f Single sourcing per item is preferred.

2.1. JIT requirements and the hurdles in JITpurchase

Looking at the JIT requirements and the situ-ation in the plant under study, we find the followingdeviations due to internal and external factors:

The demands of bulk raw materials used in steelproduction are stable, repetitive and predictable.However, the demand patterns for most of thediscrete items are stochastic. They are not repetitivein most of the cases. Only a small percentage ofsuch items have quality certified suppliers. Hence,these items are not easily amenable to JIT mode ofsupply.

The delivery of items can be delayed by externalfactors like: a traffic jam on the road and the riverbridges which connect the suppliers to the buyer.This can be a potential bottleneck in the supplychain specially during the day time but the problemof traffic jam is less during the night. Delay can alsobe caused by the problems at the supplier’s plant,breakdown of vehicles in-transit, strikes proces-sions of a different nature (religious and political),rainy season, poor roads, and slow traffic.

2.2. The way out

The author feels that some amount of safetystock, violating the true spirit of JIT, can absorbthe unforeseen delays in supply. Religious proces-sions can be predicted from the calendar of festivalsand strikes are generally restored to by political

parties only after prior notification to the peopleand the local administration, hence these are deter-ministic and, therefore, the shipments can be res-cheduled as per the situation. Only lightning orwild cat strikes can cause delivery problems.

3. Proposed conceptual model of the JIT inpurchase

Since the consumption patterns for most of thediscrete items of the plant are not stable, we cannotimplement JIT mode of supply in all the discreteitems. From JIT point of view all the discrete itemsand the vendors supplying them can be defined asdiscussed below.

3.1. JIT material classification

JIT-items consist of items: with stable and repeti-tive demands, which have very high-consumptionand high-criticality value. For the plant understudy, the A-class, Fast moving, and Vital itemsbelong to JIT type of materials.

3.2. Non-JI¹ items are those which do not fulfil theabove JI¹ definition

With these criteria in mind we classify the entireitems of the plant into JIT (F, A, AF, AV, and AVFtypes) and non-JIT categories (see Table 2). It isseen from the Table that about 7% of the totalitems fall into the JIT category of materials. Theyconstitute about 4.5% in terms of annual consump-tions value.

3.3. JIT vendor classification

As per our definition “A JIT vendor is one who isquality certified, has a proven record of reliabilityand punctuality in supply of items, is willing toparticipate and co-operate in the JIT mode of sup-ply, and has proper training and understanding ofthe JIT philosophy”. Vendors who do not satisfythis definition are called non-JIT vendors.


Table 2Material classification for JIT

JIT items Type Quantity % of totalitems

ACV inmillion (Rs.)

% ofACV

F 2766 3.46 153.67 1.28A 1671 2.08 254.96 2.12AF 873 1.09 120.90 1.01AV 62 0.08 7.53 0.06AVF 02 0.00 0.39 0.00Subtotal JIT 5364 6.70 537.44 4.48

Non-JIT items Non-JIT items 74 636 93.30 11462.55 95.52Total items JIT#Non-JIT 80 000 100.00 12000.00 100.00

Table 3Number of vendors per item

No. ofvendorsper item

1 2 3 4 5 6 7 8

% of items 56.25 17.50 16.25 2.5 2.5 2.5 1.25 1.25

Table 4Trends of vendor base

Vendor base during past 4 yr

Year Total numberof vendors

% reduction invendor base

1993 18 000 01994 12 000 33.331995 5000 72.221996 3500 80.50

Table 5Annual demand of JIT items

Item 1 2 3 4 5 6 7 8 9 10Demand ofitems peryear (’00)

120 200 80 18 90 160 8 1 9 10

With these criteria in mind, it is difficult to findJIT vendors in India. Most of the vendors areneither quality certified nor trained in JIT philos-ophy. However, some vendors have a longtermrelationship with the buyer in the form of an annualrate contract (ARC). The vendor base and the num-ber of sources per item for the plant under study isshown in Tables 3 and 4, respectively. From thetable of vendors supplying 80 items on ARC basis itis found that 56.25% of items have a single supplier.Similartly, 17.5% of the items have two suppliersper item, 16.25% of the items have three suppliers,2.5% of the items have four suppliers, and so on(see Tables 4 and 5).

3.4. How to collect and transport the JIT items to thebuyer economically?

Once we have identified the JIT items and JITvendors, the next logical step is to work out thelogistics to collect and transport these items fromthe vendors to the buyer. Presently, the vendorssend their items in full trucks to save the cost oftransportation, even when the items are not neededin that large quantity. In JIT environment, thevendors are required to supply the items in smallerlots with a greater frequency. Sometimes the itemsmight have to be supplied in less than truck load(LTL). This causes an increase in the transport costand thus motivates the vendors to hold backthe shipment till it becomes a full truck load(FTL). These problems can, however, be mini-mised by using the concept of freight consolidation

policy (FCP). Consolidation of inbound freightinvolves grouping of shipments from different sup-pliers to form a single large shipment at the consoli-dation centre (CC) before shipping them to the finaldestination(s).


Table 7Demand of items on daily basis and their weights

Items Demand ¼i

qi¼

i&q

i¼

i(kg) (kg) (kg)

Items/yr Items/m Items/d(q

i)

(1) (2) (3) (4) (5) (6) (7)

1 12 000 1000 34 15 510 5102 20 000 1667 56 15 840 13503 8000 667 23 10 230 15804 18 000 1500 50 10 500 20805 9000 750 25 10 250 23306 16 000 1333 45 08 360 26907 8000 667 23 08 184 28748 1500 125 05 05 25 28999 900 75 03 05 15 2914

10 1000 83 03 02 06 2920

Table 6Capacity of various trucks and their cost per trip

K Capacity of truckC

K(ton)

Cost of the kth type oftruck per trip (Rs.)

1 0.5 752 1.0 1503 2.0 2254 3.0 2755 5.0 3006 10.0 4807 15.0 6208 20.0 7609 40.0 1220

The objective of FCP is (a) to convert the LTL ofshipments into FTL, and (b) to reduce the transportcost due to the frequent deliveries in JIT supply.This will be beneficial to both the vendors and thebuyer. The vendors will save on the cost of trans-portation, whereas the buyer will save on storageand multiple handling costs.

In Section 4 we propose some algorithms forfreight consolidation which can be used in anyprocess industry including the steel plant understudy.

4. Algorithm for consolidation

Freight consolidation can be done on the basis ofthe following factors: (i) space needed by differentcomponents and subassemblies (if the space takenby different components is less, then large numberof components from more number of vendors canbe consolidated on the same trip but if the spaceneeded is more, then even a single or a few compo-nents can be enough for the entire truck), (ii) near-ness or the proximity of suppliers, (iii) deliveryschedule and the need of the components at thebuyers’ place, and (iv) the capacity of the vehicle.

NotationsD

idemand of the ith item per year.

¼i

weight per unit of the ith item (kg).qi

quantity to be picked up per day for the ithitem.

Ck

capacity of the kth type of truck used todeliver the items to the plant.

nk

no. of trucks of kth type needed for deliver-ing the item.

Si

space occupied by the ith item on the truck.Sk

space available on the kth type truck.C

5cost of transportation with FCM.

CT

cost of transportation without FCM.C

*cost of inventory carrying with FCM.

CI

cost of inventory carrying without FCM (Itmay be noted that C

*"C

Ifor all the items.

C*/

cost of inventory carrying for n days of con-solidation either with FCM or without FCM[¼

n~1#¼

n~2#¼

n~3#2#¼

1]C

),

where C)"Cost of inventory/ton/day"

Rs.100/ton/day.TC

1(C

5#C

*)"total cost involved in transport-

ing and delivery of items with FCM.TC

2(C

T#C

*)"total cost involved in transport-

ing and delivery of items without FCM.

We propose an algorithm to effect the FCP. Thisconsists of solving this problem:

(a) Calculate qi, q

i¼

iand +q

i¼

ifor all the JIT

items i (i"1, 2,2, n).(b) Select a K type truck with the load-carrying

capacity of Ck.

(c) Compute +q*¼

i/C

kto find the number of

trucks of kth type (nk) needed to deliver the load.


Table 8Calculation for different days of consolidation

Load for 1 day demand of buyer Load for 2 days demand of buyer

Load Truck C5

C*

TC1

Load Truck C5

C*

TC1

(kg) (t) (Rs.) (Rs.) (Rs.) (kg) (t) (Rs.) (Rs.) (Rs.)

510 1 150 0 900 1020 2 225 292 1492840 1 150 1680 2 225230 0.5 75 460 0.5 75500 0.5 75 1000 1 150250 0.5 75 500 0.5 75360 0.5 75 720 1 150184 0.5 75 368 0.5 7525 0.5 75 50 0.5 7515 0.5 75 30 0.5 7506 0.5 75 12 0.5 75

2920 900 0 900 5840 12 000 292 1492

Load for 3 days demand of buyer

Load(kg)

Truckcapacity(t)

C5

(Rs.)C

*(Rs.)

TC1

(Rs.)

1530 2 225 1168 27932520 3 275690 1 150

1500 2 225750 1 150

1080 2 225552 2 22575 0.5 7545 0.5 7518 0.5 75

8760 1625 1168 2793

(d) If nk

is less than 0.75, then the trip is notfeasible. But, if n

kis equal to or greater than

0.75 or its multiple, then the trip is feasible.(e) For a given load to be delivered, select from the

feasible trucks the one which has the least costof delivery.

(f ) Load the truck with last in first out (LIFO)concept in mind to facilitate unloading at vari-ous destination(s) at the plant.

We have to use the algorithm within the follow-ing constraints:

+Si)n

kSk

(space constraint), (i)

+qi¼

i)n

kck

(load carrying capacity constraint).(ii)

Illustrative example:The demand pattern for the JIT items used in the

steel plant under study and the capacity of differenttypes of trucks used to collect and deliver theseitems are given in Tables 5 and 6, respectively. Thecost per trip for different types of trucks is alsogiven in Table 6.

Solution. The Table 5 shows the number of itemsrequired to be collected from different depots. Ina JIT system the need for these items will be fixedfor at least a month. So, this collection schedule can


Table 9Total cost by different types of truck with and without FCM

Day Load (kg) Optimal truckcombination (t)

C5

CT

Ci

TC1

TC2

% Saving incost (Rs.)

1 2920 3 275 900 0 275 900 69.42 5840 5#1 450 1200 292 742 1492 50.263 8760 10 480 1700 876 1356 2576 47.364 11680 15 620 1700 1752 2372 3452 31.285 14600 15 620 1900 2920 3540 4820 26.556 17520 20 760 2125 4380 5140 6505 20.987 20440 20#1 910 2225 6132 7042 8357 15.738 23360 20#3#1 1185 2255 8176 9361 10 431 10.259 26280 40 1220 2380 10 512 11732 12 892 8.99

10 29200 40 1220 2455 13 140 14360 15 595 7.91

be provided to the logistics control department andto the vendors to be followed for the entire month.Table 7 shows the demand of items per day and theother details.The procedure of filling up differentcolumns of the tables can be explained as follows:

From column 6 of Table 7 we have the totaldemand of items (i"1, 2,2, 10) for one day interms of load. The total load per day (after consoli-dation) when all the items are needed by the buyeris 2920kg. This can be transported by a 3 t capacitytruck or by a combination of 2 t and 1 t trucks.Looking at the cost of transportation from Table 6the two options give the costs equal to Rs. 275 andRs. 375. Thus, the truck with 3 t capacity has beenselected for transporting the load of 2920kg for thefirst day of demand of all the items.

If the suppliers decide to deliver these items indi-vidually (i.e. without consolidation) then they willhave to send each item in a separate vehicle (thechoice of vehicle and the cost of transportation willvary depending on the load of individual item) andthe total cost in doing so for the first day is Rs. 900.Thus, there is a saving of Rs. 625 on the first day ofsupply due to FCM [see Table 8 for sample calcu-lation].

If the suppliers want to deliver the items afterevery two days then the best choice of trucks for theload 5840 kg (for two days of load of 10 items afterconsolidation) will be 5 and 1 t and the total costwill be equal to Rs. 450. On the other hand, if theloads are not consolidated and sent to the buyerafter every two days by individual vehicle, then the

cost will be Rs. 1200 (see Table 8). This will givea saving of Rs. 750. The same logic is followed forthe rest of the days.

It should be noted, however, that when the sup-pliers decide to deliver the items not on daily basisbut on every two days basis then the buyer willhave to incur the cost of storage for the additionalitems for one day. Therefore, the total cost of sup-ply of items will be the sum of transportation costand the storage cost whether with FCM or withoutFCM. We call these two costs as TC

1and TC

2,

respectively. The same is true for other days ofconsolidation (i.e., for three days, four days, and soon). The savings in cost will be the difference of TC

1and TC

2.

Table 9 shows the savings in the cost of trans-portation when different capacity trucks are used tocollect and deliver the items.

5. Conclusions

(a) It is seen from Table 2 that about 7% of the80 000 items fall in JIT items category. Thecorresponding cost of these items is Rs.537million.

(b) It is seen from Table 9 that the savings in thetotal cost due to consolidation of freight variesfrom 69.40 to 7.91% for one and ten days ofsupply at a time. The decrease in saving is dueto the increase in inventory carrying cost as thenumber of consolidation days increases. Thus,


the study suggests that JIT delivery will givethe maximum saving in total cost as comparedto the larger lot size.

(c) It is also obvious that the cost of transporta-tion and cost of inventory increase with theincrease in the number of consolidation days,however the latter increases faster than theformer which explains why the saving de-creases as the interval of deliveries is increased.

References

[1] A. Ansari, B. Modarress, Potential benefits of JIT purchas-ing for US manufacturers, Production and Inventory Man-agement Journal 28 (2) (1987) 30—35.

[2] A. Ansari, B. Modarress, JIT purchasing as a quality andproductivity centre, International Journal of ProductionResearch 26 (1) (1988) 19—26.

[3] R. Schonberger, A. Ansari, Just in time purchasing canimprove quality, Journal of Purchasing and Materials Man-agement 20 (1) (1984) 2—7.

[4] U. Bahadur, Inventory control of large scale purchase ofmaterials in a steel plant, Ph.D. Thesis, IIT, Kharagpur.


A3 - A proposed model of JIT purchasing in an integrated steel plant

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