A model of supplier responses to just-in-time delivery requirements

When buyers provide incentives for suppliers to deliver just-in-time, suppl iers can respond by choosing to hold additional inventory, reducing the var iance of flow time to facilitate just-in-time production, or both. A model characterizing the supplier's optimal response to incentives for JIT delive ry is presented. The model shows a situation where the optimal action of th e supplier is to hold more inventory. When incentives for on-time delivery are increased, the supplier responds by decreasing the variance of flow tim e and by increasing the lead time allowance. However, the lead time allowan ce increases more quickly than the variance is reduced, resulting. in a net increase in the amount of inventory that must be held by the supplier. The result is that inventory is pushed upstream. This paper does not suggest t hat inventory is always pushed upstream in JIT purchasing. Rather, it provi des a counter-example to those who presume that holding more inventory is a lways a non-optimal response to buyer's requests for JIT delivery.