Just-in-time systems, ethics.
Anna de Noailles, the plant manager at Electro-Sons, calls Pauline Eluard, the plant controller, into her office. She had just finished reviewing Eluard's report on the financial benefits from implementing JIT. The report described the following annual benefits and costs.
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First year after implementation
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Subsequent years
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Annual expected benefits from: Lower investment in stocks
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€290 000
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€350 000
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Reductions in set-up costs
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110 000
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150 000
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Reduction in costs of waste, spoilage and rework
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200 000
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250 000
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Operating profit from higher sales as a result of responding faster to customers
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180 000
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300 000
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Annual expected costs of implementing JIT
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950 000
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750 000
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'We have been working on getting organised for JIT for almost a year now. Some of the financial benefits you have calculated seem optimistic to me. I don't think we are quite there yet, but if you continue to use the financial numbers you have, we would be forced to implement JIT sooner than we should. Please look over the numbers and see what you can do. I think some of the numbers are rather soft anyway. I also understand that plant prof- itability might take a hit in the year JIT is first implemented. I retire next year and I don't want to go out with a losing record.' Eluard is quite certain that her numbers are correct. She is also aware that Noailles would lose most of her performance bonuses if plant earn- ings decrease next year. It does not seem fair to her that Noailles should be penalised in the short term for what is in the long-run interest of the company.
Required
1. On the basis of Eluard's report, calculate the effect of JIT implementation on plant profitability in the first year after implementation and in subsequent years. On the basis of Eluard's report, should Electro-Sons implement JIT?
2. Is Noailles correct in characterising some of the financial benefits as 'soft'? Which items do you think she is referring to? If the benefits you identify as 'soft' are not realised, should Electro-Sons implement JIT?
3. Is Noailles being unfairly penalised if she implements JIT? What should Noailles do? What should Eluard do?