0It sounds very nice and ideal to be “Just In Time (JIT)” supplier in the B to B segment, in a manufacturing sector.
JIT has many benefits……..
To whom??
Let’s take a close look in this.
It is argued that, in the JIT Model, cost and risk of inventory is reduced. However, in order to supply the goods at right time, the supplier needs to maintain inventory at his place. This cost incurred and in turn, is added in the price.
It means, the cost is not genuinely saved, but just the place of cost is shifted to the supplier.
In order to be JIT supplier, the MSME has to incur some costs at his end. If the supplier is located little away from the buyer, he has to create a warehouse nearby the buyer. The supplier has to maintain sufficient inventory of all the variety of items supplied. The transportation cost increases, due to number of trips are increased.
For JIT, the items are supplied to the customer directly on the production line. So, the supplier quality norms are strict. The responsibility, risk and the cost of this stringent quality is shifted to the supplier.
The additional Warehousing invites cost of staff, security, wear tear, pilferage, material handling equipment, record maintenance such costs are doubled.
There is some silver lining to this cloud. The supplier gets assured business and the higher volumes. The business risk is reduced to some extent. The JIT supplier gets higher rates than others.
How to Manage the scenario is the question here. The MSME manager should ensure sufficient Profit Margin to cover all the costs and sufficient profit margin. Take care when putting escalation clause also, if any. The increase in the cost of any input should be considered while negotiating and thinking about escalation clause or price rise.
The MSME supplier can consider some points. If the supply location is nearby your factory, then the need of creating extra warehouse is eliminated. If the MSME is already reached to zero defect manufacturing by way of investment, spending etc. This means the MSME need not spend much to achieve zero defect. Also, MSME may put a condition that, the customer demand schedule must be consistent and is not altered again and again. These conditions may reduce the cost and risk. Zero defect reduces scrap and in turn the product cost. MSME needs to be competent, because, the OEM may have more than one supplier for the same component.
Inventory has more risk than carrying cost. It may so happen that, the OEM customer may decide to discontinue his finished product for business reason. In this case, the inventory held by the MSME may become obsolete. Risk of this obsolescence must be covered in the price.
The ambitious customer, when expands his business, makes the MSME also get expanded. The MSME must have sufficient power in terms of men, machines, money (3M) etc., to cope up with the business needs.
