Just-in Time Principles, chapter 27 Comfort Space Inc. manufactures electric spa
ID: 2450878 • Letter: J
Question
Just-in Time Principles, chapter 27
Comfort Space Inc. manufactures electric space heaters. While the CEO, Toma Zulim, is visiting the production facility, the following conversation takes place with the plant manager, Raj Chandar:
Toma: As I walk around the facility, I can't help noticing all the materials inventories. What's going on?
Raj: I have found our suppliers to be very unreliable in meeting their delivery commitments. Thus, I keep a lot of materials on hand so as to not risk running out and shutting down production.
Toma: Not only do I see a lot of materials inventory, but there also seems to be a lot of finished goods inventory on hand. Why is this?
Raj: As you know, I am evaluated on maintaining a low cost per unit. The one way that I am able to reduce my unit costs is by producing as many space heaters as possible. This allows me to spread my fixed costs over a larger base. When orders are down, the excess production builds up as inventory, as we are seeing now. But don't worry -- I'm really keeping our unit costs down this way.
Toma: I'm not so sure. It seems that this inventory must cost us something.
Raj: Not really. I'll eventually use the materials and we'll eventually sell the finished goods. By keeping the plant busy, I'm using our plant assets wisely. This is reflected in the low unit costs that I'm able to maintain.
If you were Toma Zulim, how would you respond to Raj Chandar? That recommendations would you provide Raj Chandar? Cite information from Chapter 27...
Explanation / Answer
Even if the suppliers are unreliable in meeting their delivery commitments, it is not safe to hold the excess materials in hand than required. The reason is that there is a risk of loss of materials by way of theft or by any accident of fire and also there is a risk of obsolescence.
Similarly, even if the finished costs are produced in lumpsum with a view to minimize the unit cost, there can be a loss of goods which is more than the costs which are saved and at the same time there is a risk of obsolescene also.
If the lumpsum materials are purchased than required or finished goods are produced than necessary, the holding costs would also increase.
The recommendations are given below:
I would like to recommend Just in Time concept whose basic principles are:
1) Production in accorddance with the master production Schedule Orders:
The goal is to produce the goods on time and deliver the stock to customers immediately so that holding costs can be reduced
2) Production in small quantities:
Production is carried out in the number of lots to avoid planing and lead time.
3) Reduce wastes:
Wastes must be eliminated in every area of existing operations. All use of input resources should not exceed the minimum necessary to achieve the production target.
4) Improvement of production flow continuously:
The main aim is to eliminate the processes of bottlenecks and unproductive conditions that may hinder the smooth flow of production
5) Improvement of quality:
State of 'Zero Defect' can be achieved by way of total control at every stage of production
6) Reduce all forms of uncertainity:
Inventories will turn into waste if not used immediately. Hence, planning and scheduling the production must be carefully designed and controlled.
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