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|J.I.T. , M.R.P. & E.R.P. |
1. Idea of modern inventory & production management as compare to the traditional concept
Just –in-time(JIT) production (also called lean production) is a “ demand- pull” manufacturing system in which each component in a production line is produced immediately as need in which by the next step in the production line. In a JIT production line, manufacturing activity at any particular workstation is promoted by the need for that station’s output at the following station. Demand triggers each step of the production process, starting with customer demand for a finished product at the end of the process and working all the way back to the demand for direct materials at the beginning of the process. In this way, demand pulls and order through the production line.
The demand-pull features of JIT production systems, achieve close coordination among workstations. It smoothes the flow of goods, despite low quantities of inventory. JIT production systems aim to simultaneously
(1) meet customer demand in a timely way
(2) with high-quality products and
(3) at the lowest possible total cost.
Companies implementing JIT production systems manage inventories by eliminating (or least minimizing ) them. There are five main features in a JIT production system :
2. Features, benefits, Pre-requisites & Effect of JIT
Pre –requisites of JIT:
(iii) Vendor reliability (iv) Defect free materials.
(v) Good communication (vi) Preventive maintenance
(vii) Total quality control.
Desirable factor of JIT:
(iii) Employee flexibility.
Effect of using JIT (Just in Time) in Inventory Control.
JIT as a tool to improve organisation’s profitability.
JIT approach helps in the reduction of costs & /increase sale prices as follows:
i) Immediate detection of defective goods being manufactured so that early correction is ensured with least scrapping.
ii) Eliminates/ reduces WIP between machines within working cell.
iii) OH costs in the form of rentals for inventory, insurance, maintenance costs etc. are reduced.
iv) Higher product quality ensured by the JIT approach leads to higher premium in the selling price.
v) Detection of problem areas due to better production/scrap reporting/labour tracing and inventory accuracy lead to reduction in costs by improvement.
JIT system and overhead costs:
(i) Reduction in material handling, facilities and quality inspection costs;
(ii) Reduction inventory reduces storage costs.
(iii) Costs shift from overhead cost pool to direct costs when machine cells are introduced. A more reliable allocation of costs to products and therefore more accurate analysis for decision making.
(iv) With the JIT system in place, the general overhead pool can be better allocated due to availability of more information regarding the most appropriate cost drivers.
3. Back-flushing in a JIT system
Back flushing requires no data entry of any kind until a finished product is completed. At that time the total amount finished is entered into the computer system, which multiples it by all the components listed in the bill of materials for each item produced. This yields a lengthy list of components that should have been used in the production process and which is subtracted from the beginning inventory balance to arrive at the amount of inventory that should now be left of hand.
The following problems must be corrected before it will work properly:
(i) Production reporting (ii) Scrap reporting
(iii) Lot tracing (iv) inventory accuracy.
1. The Heavy Nitro Company is considering the optimal batch size for re-order of concentrated sulfuric acid. The Management Accountant has supplied the following information :
The purchase price of H2SO4 is 800 per gallon. The clerical and data processing costs are 100 per order. All the transport is done by rail. A charge of 4,000 is made each time the special line to the factory is opened. A charge of Rs.20 per gallon is also made. The company uses 40,000 gallon per year. Maintenance costs of stock are 25 per gallon per year. Interest on working capital is 14% p.a.
Each gallon requires ½ sq.ft of storage space. If warehouse space is not used, it can be rented out to Manganese Ltd. at 200 per sq.ft. p.a.. Available warehouse space is 1,000 sq. ft. The store overhead is 1,20,000 p.a. Calculate the economic re-order size. & total inventory cost.
2. The annual demand for an items of raw material is 4,000 units and the purchase price is expected to be 90 per unit. The relevant incremental cost of processing an order is 135 and the relevant cost of storage is estimated to be 12 per unit.
(a) What is the optimal order quantity & the total relevant cost (order & store) of this order quantity ?
(b) Suppose that the 135 estimated of the incremental cost of processing an order is incorrect & should have been 80. Assume that all other estimates are correct. What is the cost of this prediction error. Assuming that the solution to part (a) is implemented for one year?
(c) Assume at the start of the period that a supplier offers 4,000 units at a price of 86. The materials will be delivered immediately and placed in the stores. Assume that the incremental cost of placing this order is zero and the original estimate of 135 for placing an order for the economic batch size is correct. Should the order be accepted ?
(d) Present a performance report for the purchasing officer, assuming that the budget was based on the information presented in (a) and the purchasing officer accepted the special order outlined in (c).
3. The stock control policy is that each stock items will order twice a year. The materials manager, however, wishes to introduce a policy in which for each item of stock, reorder levels and EOQ is calculated. For one of the item X, the following information is available :
Forecast annual demand 3,600 units
Cost / unit 100
Cost of placing an order 40
Stock holding cost 20% of average stock value
Lead time 1 month
It is estimated by the materials manager that for item X, a buffer stock of additional 200 units should be provided to cover fluctuations in demand. If the new policy is adopted, calculate for stock items X :
(i) the reorder level that should be set by the materials manager ;
(ii) the anticipated reduction in the value of the average stock ;
(iii) the anticipated reduction in total inventory cost in the first and subsequent years.
4. A company is considering the possibility of purchasing from a supplier a component it now makes. The supplier will provide the components in the necessary quantities at a unit price of Rs. 9. Transportation and storage costs would be negligible.
The company produces the component from a single raw material in economic lots of 2,000 units at a cost of 2 p.u. Average annual demand is 20,000 units. The annual holding cost is 0.25 p.u. & the buffer stock level is set at 400 units. Direct labour costs for the component are Rs. 6 per unit, fixed manufacturing overhead is charged at a rate of 3 per unit based on a normal activity of 20,000 units. The company also hires the machine on which the components are produced at a rate of 200 per month. Should the company make the component?
5. A firm is engaged in the manufacture of two products ‘A’ and ‘B’. Product A used one unit of component ‘P’ and two units of ‘Q’. Product B uses two units of component ‘P’, one unit ‘Q’ and two units ‘R’. Component ‘R’ which is assembled in the factory uses one unit of component ‘Q’. Components ‘P’ and ‘Q’ are purchased from the market. The firm has prepared the following forecast of sales and inventory for the next year.
Products A B
Sales Units 8,000 15,000
Inventories: At the end Units 1,000 2,000
At the beginning Units 3,000 5,000
The firm at present orders its inventory of components ‘P’ and ‘Q’ in quantities equivalent to 3 months consumption. The following data relating to the two Components:
Price per unit 2.00 0.80
Order placing costs per order 15.00 15.00
Carrying costs p.a. 20% 20%
a) Prepare a budget of production and requirements of components for the next year.
b) Find the economic order quantity.
c) Based on the economic order quantity , calculate the savings arising from switching over to the new ordering system both in terms of cost and working capital.
6. X Video Company sells package of blank video tapes to its customer. It purchases video tapes from Y Tape Company @ 140 a packet. Y Tape Company pays all freight to X video Company. No incoming inspection is necessary because Y tape Company has a superb reputation for delivery quality merchandise. Annual demand of X Video Co. is 13,000 packages. X Video Co. requires 15% annual return on investment. The purchase order lead-time is two weeks. The purchase order is passed through Internet and its costs 2 per order. The relevant insurance, material handling etc. 3.10 per package per year.
X Video Co. has to decide whether or not to shift JIT purchasing. Y tape Company agrees to deliver 100 packages of video tapes 130 times per year (5 times every two weeks) instead of existing delivery system 1,000 packages 13 times a year with additional amount of 0.02 per package. X video Co. incurs no stock out under its current purchasing policy. It is estimated X Video Co. incurs stock out cost on 50 videotape packages under a JIT purchasing policy. In the event of a stock out X Video Co. has to rush order tape packages which costs 4 per package. Comment whether X Video Company to implement JIT purchasing system.
Z Co. also supply video tapes in 50 units per order. It agrees to supply @ 136 per packages under JIT delivery system. If video tape purchased from Z Co., relevant carrying cost would be 3 per package against 3.10 in case of purchasing from Y tape Co. However Z Co. doesn’t enjoy so sterling reputation for quality. X Video Co. anticipates following negative aspects of purchasing tapes from Z Co.
-- To incur additional inspection cost of 5 paise per package.
-- Average stock out of 360 tapes packages per year would occur, largely resulting from late deliveries. Z Co. cannot rush order at short notice. X Video Co. anticipates lost contribution margin per package of 8 from stock out.
-- Customer would likely return 2% of all packages due to poor quality of the tape and to handle this return a additional cost of 25 per package.
Comment whether X Video Co. places order to Z co.
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