Total Corporation is considering implementing a JTT production system. The new s
ID: 2452054 • Letter: T
Question
Total Corporation is considering implementing a JTT production system. The new system would reduce current average inventory levels of $2,000,000 by 75% but would require a greater dependency on the company's core suppliers for on-time deliveries and high-quality inputs. The company's operations manager, John Chan, is opposed to the idea of anew JTT system. He is concerned that the new system will be too costly to manage, will result in too many stock outs, and will lead to the layoff of his employees, several of whom are currently managing inventory. He believes that these layoffs will affect the morale of his entire production department. The plant controller, Stephen Li, is in favour of the new system, due to the likely cost savings. John wants Stephen to rework the numbers because he is concerned that top management will give more weight to financial factors and not give due consideration to nonfinancial factors such as employee morale. In addition to the reduction in inventory described previously, Stephen has gathered the following information for the upcoming year regarding the J]T system: Annual insurance and warehousing costs for inventory would be reduced by 60% of the current budgeted level of $350,000. payrol 1 expenses f or current inventory m management staff would be reduced by 15% of the budgeted total of $600,000.Explanation / Answer
a Calculation of total savings in JIT system. Particulars Current budgeted level Reduction in amount Current inventory level 2000000 Therefore, savings in working capital ($2,000,000*75%) 1500000 Interest saved on the above 150000 Annual insurance and warehousing cost ($350000*60%) 350000 210000 Payroll expenses 600000 90000 Total savings 450000 Calculation of total costs for implementation of JIT system. Additional cost for JIT system inventory 220000 220000 Budgeted shipments for next year 10000 Estimated stock outs in JIT system in percentage 5% Estimated stock outs in JIT system in units 500 Average additional cost for each stock outs 250 Total average additional cost for entire stock outs 125000 Current level of inventory 2000000 345000 Net benefit in implementation of JIT system 105000 Therefore, it is advisable to implement JIT system, considering the net benefit of $105,000 b Based on the above analysis, it is more beneficial to the management in financial perspective, however it was against to the non financial factors. Therefore, as per the John Chan's requirement it is advisable to Stephen Li to rework the numbers. c Stephen Li can manage the John Chan's concern through: Through reducing the estimated percentages of savings in inventory levels and savings in payroll costs.