Question

Chapter 20 Inventory management, Just -in-time, and simplified costing methods

This is all the information I have

As a new senior accountant of Troy Rugs Inc. an exotic rug manufacturer, you have taken on the new responsibility of lean accounting within the company. During your monthly analysis, you outline many areas that the company does not possess to adopt a lean accounting system. You have observed that setup times take a week versus two days as they should. You noticed that the lot in which the raw materials are stored shares 75% of the lot in which rugs are wrapped and prepared for shipping which extends the time needed to fulfill an order an additional four days. Overall the layout of the facility is not as functional as the materials used to produce the rugs are on the same floor in inventory as rugs that have been produced and there is no one process to separate the two or overlook certain rug inventory due to materials being placed in the wrong area of the warehouse. You also have a memo from the CEO stating that one of the company’s largest suppliers of thread has gone bankrupt and there is no backup supplier. This ultimately is the reason no custom orders will be approved for at least the next three months.

Questions:

1. What suggestions do you have for implementing JIT at Troy Rugs?

2. Should custom orders and standard orders be produced on the same line? (Hint: Do they require the same type of operation?)

Answer 1

Just in time is an inventory management system which strives to align the raw material procurement from the suppliers in direct relation to the production requirements. In other words inventory (whether raw material or finished goods) are not held by the organisation and the whole of the process from the time an order is received unil the product is delivered is streamlined to ensure minimal inventory holding and maximum capacity utilisation of the facility.

The advantage includes minimising waste, increasing efficiency etc however it also might lead to high reliance on suppliers, minimal tolerance for errors etc.

Answer 1

In the case of Troy Rugs Inc. the system of Just in Time may be implemented after making the following changes within the organisation -

1. Redesign of layout of facility to ensure that the manufacturing process is organized into cross functional work groups or cells. This would ensure proper workflow and minimise chances of confusion / overlooking / errors.
2. With the implementation of JIT inventory system, there would be release of additional spaces in the layout of the facility which were previously held to stock up inventory. This means more space to desgin the facility ergonomically. Product oriented layout is suggested which would mean less time involved in movement of rugs. This would reduce the time taken for completing orders.
3. Maintain diversity within suppliers to ensure that the production process is not solely dependent on a single supplier. Search and maintain variety of reliable suppliers.
4. Install a system preventive maintenance of the machines which would play a proactive role in prevention of machinery breakdown and any consequent delay in production.
5. Improve the handling of material within the facility. Focus on value addition to the product at each stage of manufacturing process and eliminate all other steps which previosly led to waste of time and resources and material.
6. Have a quality control system to ensure that each person in stage of manufacturing process is responsible for the quality of their own produced output. This leads to chances of rework to be minimised and high degree of quality output.

Answer 2

Custom orders and Standard orders differ in the respect that standard orders have no deviation in the set manufacturing process while the custom order might add on to the process as customer seeks more customisation within his product. Ideally it is suggested that both of them be produced on different lines so that one line may be solely focused on standard orders while custom orders may be produced on another line employing better skilled people to derive maximum output.

In the case of Troy Rugs Inc. since the co is unable to take any custom order for the next three months, after implementation of the JIT inventory system and clearing of the existing inventory, a separate custom line is suggested to be made. However this is based on the assumption that there is a high degree of customisation in producing the rugs and there is considerable deviation from the standard process.

However if the customisation happens at the stage after the production of standard rugs, a separate line is not suitable and instead an additional workspace maybe designed within the layout after the standard process to just undertake the custom work.