The President of P Corporaion, John Doe, has asked you, the company's controller, to advise him on whether P Corporation should develop a just-in-time(JIT) inventory system. Your research concludes that there is a high cost associated with inventory storage facilities; that inventories use a large portion of the company's cash flow; and that because of the nature of the inventory, there is a significant amount of shrinkage. Research also shows that neither of P corporation's two compeptiters uses a JIT inventory system. Most of P Corporation's employees are trained to do only one job and belong to a local union. The union believes that major changes will result in the loss of unoin employees' jobs. Your research indicates that P corporation's major production item (a fairly new product in the market) should continue to have strong sales growth.

1.) Using the information provided, advise John to either continue the present system or work to develop a JIT inventory system.

2.) Assume john decides to develop an inventory management system. He plans to evaluate the system after one year. List four possible perfformance measures john could use to evaluate the effectiveness of the system. Describe what information these measurs would provide John.

JIT Inventory The president of Penman Corporation, John Burton, has asked you, the company’s controller, to advise him on whether Penman should develop a just-in-time (JIT) inventory system. Your research concludes that there is a high cost associated with inventory storage facilities; that inventories use a large portion of the company’s cash flow; and that because of the nature of the inventory, there is a significant amount of shrinkage. Research also shows that neither of Penman’s two competitors uses a JIT inventory system. Most of Penman’s employees are trained to do only one job and belong to a local union. The union is strong and, in the past, has opposed major production changes. The union believes major changes will result in the loss of union employees’ jobs. Your research indicates that Penman’s major production item (a fairly new product in the market) should continue to have strong sales growth.

Required:

1. Using the information provided, advise John Burton to either continue the present system or work to develop a JIT inventory system.

2. Assume John decides to develop an inventory management system. He plans to evaluate the system after one year. List at least four possible performance measures John could use to evaluate the effectiveness of the system. Describe what information these measures would provide John.

RECOMMENDATIONS


John Burton should not continue the present system as the organization is suffering losses due to inefficient inventory management. It should work to develop a JIT inventory system.
JIT is a philosophy of continuous improvement in which non-value-adding activities (or wastes) are identified and JIT is not about automation. JIT eliminates waste by providing the environment to perfect and simplify the processes. JIT is a collection of techniques used to improve operations. It can also be a new production system that is used to produce goods or services.
According to Wikipedia, Just in Time (JIT) is an inventory strategy implemented to improve the return on investment of a business by reducing in-process inventory and its associated costs. Companies such a Fleetwood RV’s, Toyota and Harley-Davison have seen a tremendous improvement of their products with the implementation of just-in-time inventory programs .The purpose of the JIT method is to reduce cost and time allowing inventory purchased or delivered to spend less time in production or storage. In the peer review, Does Manufacturing Need to Make JIT Delivery Work? The author Seyed-Mahomand Aghazadeh list five steps to transmit JIT:
1. Awareness Revolution- abolishing old concepts and adopting new one
2. Concepts for workplace improvement-sorting, orderliness, cleanliness, cleanup
in addition, discipline
1. Flow Manufacturing- is production of a single piece of product at given time.
2. Standard Operations- producing quality safely and less expensively through efficient rules and method of people
3. Multi-Process Handling- one worker is responsible for several processes in a work cell.
The main objectives of JIT in purchasing inventory are address in the article Implementing JIT Purchasing: Does the Level of Technical Complexity in the Production Process Make a Difference? Author Hale Kaynak lists three characteristics.
➢ Supplier Quality Management-comprised of supplier-buyer cooperation and improved quality of supplied materials.
➢ Quantities Delivered-requires frequents and timely delivery of supplied materials in small lots and exact quantities.
➢ Transportation-inventory based on delivery dates or times on the buyer’s schedule rather than the supplier’s schedule.









2. Assume John decides to develop an inventory management system. He plans to evaluate the system after one year. List at least four possible performance measures John could use to evaluate the effectiveness of the system. Describe what information these measures would provide John

INVENTORY TURNOVER RATIO

The best run companies will minimize their investment in inventory. One ratio that is often used to monitor inventory is the Inventory Turnover Ratio. These ratio shows the number of times that a firm's inventory balance was turned ("sold") during a year.
It is calculated by dividing cost of sales by the average inventory level:
Inventory Turnover Ratio = Cost of Goods Sold/Average Inventory
A higher ratio indicates efficient management of inventory. A declining turnover rate might indicate poor management, slow moving goods, or a worsening economy.

Setting level for stock outs and quantity to be ordered
Specify guidelines for setting the reorder method an other purchasing parameters to maximize inventory turns and minimize stockouts:

1. Minimum/Maximum quantities
2. Economic order quantities
3. Order up to a specific stock level
4. Safety stock quantities
5. Preseason buys
Economic Order Quantity is the amount of orders that minimizes total variable costs required to order and hold inventory.

If actual quantity ordered is different than EOQ is an indication of inefficient inventory management.






Target Inventory investment

To calculate your target inventory investment, we use a variation of the formula used to calculate inventory turnover:
Target Inventory Investment = Projected Annual Cost of Goods Sold from Stock Sales/
Target Inventory Turnover

Thus if actual inventory investment is less than it indicates that the efficiency in investment.

Holding period of inventory
It is calculated = 365/Inventory turnover ratio
If holding period is less than the expected holding period then it indicates efficient inventory management.






Reference:
Aghazadeh, S. (2004). Does Manufacturing Need to Make JIT Delivery Work? Management Research News, 27(1), 27-42. Retrieved July 29, 2005, from Proquest database.
Banas, B. (2005, May). How do supplier define quality? Railway Age, 204, Iss 5; pg 12.

Retrieved Jul 31, 2005, from http://proquest.umi.com/pdqweb.

Diekmeyer, P. (2002). Canada's 50 best. National Post, Retrieved Jul 29, 2005, from

ProQuest Login

Gray, A. (2005, June 20). Exploring product life cycle. Fairfield County Business

Journal, 4. Retrieved July 28, 2005, from ProQuest Login.

Kaynak, H. (2005). Implementing JIT Purchasing: Does the Level of Technical Complexity in the Production Process Make a Difference? Journal of Managerial Issues, 17(1), 76-100. Retrieved July 29, 2005, from Proquest database.
Winmoore (2005). Process and Methodology. Retrieved July 28, 2005 from Proquest Database.