Tuppyware Berhad is considering implementing a JIT production system. Tupperware assumes that the JIT would reduce current average inventory levels of RM2,500,000 by 70%. However, it would require a much greater dependency on the company's core suppliers for high-quality inputs and on-time deliveries.
The company's operations manager, Veer, opposed to the idea. He is concerned that the new system will lead to negative impacts regarding a cost of management, stockouts, and downsizing of employees (several of whom are currently managing inventory). The employees' layoffs will affect the morale of his entire production department.
On the other hand, the plant controller, Aida, is in favour of the new system due to the likely cost savings. Veer wants Aida to rework the numbers because he is concerned that the top management will give more weight to financial factors but not to non-financial factors such as employee morale. Aida has gathered the following information for the upcoming year regarding the JIT system:
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Items
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Current budgeted
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JIT
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Annual insurance and warehousing
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RM300,000
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Would be reduced by 55%
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Payroll expenses for management staff
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RM600,000
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Would be reduced by 15%
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Additional annual costs for JIT system implementation and management
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-
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RM200,000
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Number of stockouts
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-
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5% of total shipments (annually)
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10,000 shipments are budgeted for the upcoming year. Each stock-out would result in an average additional cost of RM250.
Tuppyware's required rate of return on inventory investment is 10% per year.
You are required to:
Write a suggestion report using above information and other relevant points concerning the development of JIT inventory system. Should the firm adopt the JIT inventory system? Relate your discussion with the costs and benefits of adopting JIT, performance measures use to assess the effectiveness of the system, cost associated with inventory, the important of controlling turnover and the impact of inventory management on profitability. Compare and contrast your decision with other inventory systems. Critically discuss if your decision adheres to IMA's Standards of Ethical Professional Practice. Critically discuss possible recommendations that you can put forward to the management to address Veer's concerns.
Please support your arguments with relevant and valid sources from academic journal articles.