1.The just-in-time inventory system is designed to reduce the inventory period.
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Question
1.The just-in-time inventory system is designed to reduce the inventory period. In essence, companies pay their suppliers to carry the inventory for them. Reducing the inventory period reduces the operating cycle and thus the cash cycle. This reduces the need for financing.
Consider what type of cost is being minimized and what costs are likely to increase. Please, explain. Are JIT inventory policies appropriate for all industries?
2.One option a firm usually has with any excess cash is to pay its suppliers more quickly. What are the advantages and disadvantages of this use of excess cash?
Another option available to the firm would be to reduce the firm's outstanding debt. What are the advantages and disadvantages of this use of excess cash?
Explanation / Answer
Question 1.
Following costs are minimized in JIT:
Just in time system is a manufacturing system which intend to reduce inventory holding. This can be applied to every industry if certain conditions are satisfactory.
Question 2.
Holding cash have holding cost. So, when huge amount of excess cash is in hand, it increases holding cost. It is better to use such cash in profitabe way. On the other hand, Cash is required to satisfy transaction, like payment of salary and wages, purchase of goods or materials, etc. for this cash need to hold. If the firm maintains too small a cash balance it may run out of cash. If so, it must sell marketable securities or borrow. Selling marketable securities and borrowing involve trading costs.
Firms that are in cash oriented businesses fast food restaurants, discount retailers will require more cash for operations than firms that operate in credit oriented businesses. This may also increases cash cycle. On the other hand, Excessive use of credit facilities means firms will hold more cash which lead to increase holding cost of cash and cash cycle.
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