Question

Horngren's cost accounting, 16th edition

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 manufacturing is a manufacturing process that involves ordering and receiving inventory for production and customer sales only as it is needed to produce goods, and not before.

Thus, this increaes operational efficiency.

But to correctly implement JIT the following implementations are necessary:

1. Problems may arise due to gaps between the communication facilities with the suppliers and hence having a robust supplier who is readily available is a must. The company must check that the vendors can process your orders on a timely basis, have capacity to take on orders with short notice, and hold a reliable history of fulfilling requests.
2. Implement an ERP ( enterprise resouerce system) and Barcode scanning to have a correct count of the inventory at hand and make correct demand and supply forcasts.
3. Be transparent with the customers about the lead time it will take inorder to deliver the product so that they do not have any false expectations.
4. Proper training of employees is needed so that they can act within the lean resources and the deadlines.

Thus the company must immediately resolve the following:

1. Find a new supplier to replace the supplier gone bankcrupt.
2. Find a way to optimize floor plan to hold raw materials seperately and have finished goods stored seperately.
3. Set up time for the machines should be 2 days and hence the company may consider not switching off the machines if there is a net profit due to the reduction in manufacturing cost and lead time at the expense of increase in power usage.

The custom orders for rugs and standard order of rugs do involve the same processes and operations

The only difference would be that the custom order would require a different size and maybe design requirement.

Thus, since the raw material and inputs are same, the company can consider going for a same production line.

So with relatively small change in the amount of material and labour inputs, the customized product can be manufactured and hence, custom orders can be produced in the same manufacturing line.