Question

JIT production, relevant benefits, relevant costs. The Champion Hardware Company manufactures specialty brass door handles at its Lynchburg plant Champion is considering implementing a JIT production system. The following are the estimated costs and benefits of JIT production.

a. Annual additional tooling costs would be $100,000.

b. Average inventory would decline by 80% from the current level of $1,000,000.

c. Insurance, space, materials-handling and setup costs, which currently total $300,000 annually, would decline by 25%.

d. The emphasis on quality inherent in JIT production would reduce rework costs by 30%. Champion currently incurs $200,000 in annual rework costs.

e. Improved product quality under JIT production would enable Champion to raise the price of its product by $4 per unit Champion sells 40,000 units each year.

Champion’s required rate of return on inventory investment is 15% per year

1. Calculate the net benefit or cost to Champion if it adopts JIT production at the Lynchburg plant.

2. What non-financial and qualitative factors should Champion consider when making the decision to adopt JIT production?

3. Suppose Champion implements JIT production at its Lynchburg plant Give examples of performance measures Champion could use to evaluate and control JIT production. What would be the benefit of Champion implementing an enterprise resource planning (ERP) system?

Answer 1

JIT production, relevant benefits, relevant costs

1.         

Solution Exhibit 20-22 presents the annual net benefit of $315,000 to Champion Hardware Company of implementing a JIT production system. 

2.         

Other non-financial and qualitative factors that Champion should consider in deciding whether it should implement a JIT system include:

a.   The possibility of developing and implementing a detailed system for integrating the sequential operations of the manufacturing process. Direct materials must arrive when needed for each subassembly so that the production process functions smoothly.

b.   The ability to design products that use standardized parts and reduce manufacturing time.

c.   The ease of obtaining reliable vendors who can deliver quality direct materials on time with minimum lead time.

d.   Willingness of suppliers to deliver smaller and more frequent orders.

e.   The confidence of being able to deliver quality products on time. Failure to do so would result in customer dissatisfaction.

f.    The skill levels of workers to perform multiple tasks such as minor repairs, maintenance, quality testing and inspection.

 

3.         

Personal observation by production line workers and managers is more effective in JIT plants than in traditional plants. A JIT plant’s production process layout is streamlined. Operations are not obscured by piles of inventory or rework. As a result, such plants are easier to evaluate by personal observation than cluttered plants where the flow of production is not logically laid out.

Besides personal observation, nonfinancial performance measures are the dominant methods of control. Nonfinancial performance measures provide most timely and easy to understand measures of plant performance. Examples of nonfinancial performance measures of time, inventory, and quality include:

 

• Manufacturing lead time
• Units produced per hour
• Machine setup time ÷ manufacturing time
• Number of defective units ÷ number of units completed

 

In addition to personal observation and nonfinancial performance measures, financial performance measures are also used. Examples of financial performance measures include:

 

• Cost of rework
• Ordering costs
• Stockout costs
• Inventory turnover (cost of goods sold  average inventory)

 

The success of a JIT system depends on the speed of information flows from customers to manufacturers to suppliers. The Enterprise Resource Planning (ERP) system has a single database, and gives lower-level managers, workers, customers, and suppliers access to operating information. This benefit, accompanied by tight coordination across business functions, enables the ERP system to rapidly transmit information in response to changes in supply and demand so that manufacturing and distribution plans may be revised accordingly.

The success of a JIT system depends on the speed of information flows from customers to manufacturers to suppliers. The Enterprise Resource Planning (ERP) system has a single database, and gives lower-level managers, workers, customers, and suppliers access to operating information. This benefit, accompanied by tight coordination across business functions, enables the ERP system to rapidly transmit information in response to changes in supply and demand so that manufacturing and distribution plans may be revised accordingly.