Original Date: 11/13/1995
Revision Date: 01/18/2007
Best Practice : Rate Based Purchasing
JLG has adopted a rate-based purchasing concept that has dramatically improved the company's ability to quickly adapt its product mix and quantity in response to market changes. Prior to 1992 when the system was established, JLG maintained inventories of most of the materials required for product manufacturing, necessitating a large investment in inventory and substantial storage space. Order processing was expensive and time consuming. Production planning was inflexible because of long lead times and the need to buy in large lots to take advantage of lower prices and favorable shipping rates. As part of the conversion to rate-based purchasing, JLG focused on reducing its supplier base using a formal supplier qualification process and by developing partnerships with its major suppliers.
The system is a pipeline through which purchased materials continuously flow (Figure 2-6). Materials from a specified vendor for each item move into the materials pipeline. Quantities are communicated through moving forecasts to each vendor who release material frequently in small quantities to feed the JIT requirements of JLG's production lines. JLG has contracted for its own express trucking services to pick up and transport the pipeline materials from vendors throughout the country. These tightly scheduled and coordinated runs give the company precise control over the flow of incoming material.
Pipeline quantities are regulated based on usage data generated by JLG's MRP system. Quantities result from the usage and replenishment time, and are specified in pipeline quantities for material on hand at JLG, finished material at the supplier's plant, and in-process material at the supplier's plant. A 52-week rolling schedule is generated by the computer and automatically FAXed to each vendor every two weeks. Releases are automatically FAXed weekly for material to be picked up on the weekly run. The materials are picked up as scheduled and delivered directly to the assembly line.
Vendor performance in meeting schedules and delivery requirements is closely tracked, as well as the performance of the trucking contractor. This information is included in quarterly supplier report cards that communicate supplier delivery and quality performance.
Currently JLG has 106 major suppliers on rate-based purchasing. Over 75% of the dollar value of purchased materials are rate based, and the company is extending the concept from production materials and parts to service parts as well. Typically, bread and butter components are expected to have long-term ongoing requirements and are thoroughly proven for their applications and for which requirements can be forecast. The supplier must be reliable with a good business relationship and a willingness to partner with JLG. Whenever possible, JLG prefers a single source for component families.
Rate-based purchasing has produced tremendous benefits for both JLG and its suppliers. JLG has reduced its inventory by more than $12M over the past three years while experiencing nearly a five-fold increase in production rates, resulting in less material handling and damage, more flexibility, and shorter response time. Annually negotiated contracts for pipeline quantities have lowered purchase commitments. Clerical work is greatly reduced by the automated computer-to-FAX ordering method. A representative example of realized savings is a diesel engine purchased from a vendor in Germany that was shipped to the plant in large lots and warehoused. In 1992, JLG maintained an average of 24 of these engines on hand. Today with four engines on hand, JLG has realized a savings of $54K in inventory cost. The company saves almost $28K annually in costs for carrying, material handling, clerical transactions, and damage just for this one item. Suppliers have also benefitted from rate-based purchasing in reduced inventory, better forward planning, fewer major schedule changes, less paperwork and administration, smoother business relationships, and lower costs of doing business with JLG.
Figure 2-6. Purchased Materials Pipeline
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