Final answer:
Just In Time (JIT) purchasing significantly reduces order costs by minimizing the need to maintain large inventories, thus reducing carrying costs. It also shortens lead time by enforcing quality control measures and maintaining a close geographic proximity of suppliers to manufacturing plants. However, the adoption of JIT can impact wages and labor relations negatively, as competition for lower costs may lead to non-unionized labor seeking.
Step-by-step explanation:
Just In Time (JIT) purchasing is a strategy that affects order costs and lead time in the supply chain, primarily through its focus on efficiency and reducing waste. Its inception can be traced back to Japanese car manufactures in the 1980s, such as Honda, which implemented JIT to deliver car parts daily to their main assembly plants instead of storing them in warehouses. This minimized the need for warehousing jobs and reduced the cost associated with storing inventory.
The impact on order costs is significant because companies no longer need to maintain large inventories on hand, which reduces carrying costs such as storage, insurance, and taxes. Instead, materials are purchased and received to align closely with production schedules, which minimizes the amount of capital tied up in inventory. Additionally, with JIT, purchasing is done in smaller, more frequent orders, which can decrease order costs due to better matching of supply with actual demand.
Regarding lead time, JIT aims to streamline and expedite the flow of materials from suppliers to the assembly line. By having suppliers located within a day's drive of the manufacturing plant and implementing rigorous quality control measures, any issues with defective parts become apparent swiftly, allowing for immediate correction and prevention of delays. This geographical proximity and partnership ethos also foster a collaborative environment where suppliers compete to provide the best value, resulting in improved efficiency and reduced lead times.
Nevertheless, JIT can exert downward pressure on wages and benefits in the supply chain, as suppliers compete to offer lower costs, including seeking non-union labor. While this can be seen as an advantage for the manufacturer in terms of cost savings, it may undermine the gains made by union workers and could impact the long-term stability and morale of the workforce.
Overall, JIT purchasing plays a key role in enhancing the efficiency of the supply chain. By reducing order costs and lead time, it allows businesses to operate more flexibly and with greater financial agility. However, its impact on labor relations should be taken into account, as should the challenges of implementing such a system, where a disruption in the supply chain can halt production altogether because of the low levels of inventory kept on hand.