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Chapter 20: Problem 8

"JIT purchasing has many benefits but also some risks." Do you agree? Explain briefly.

Short Answer

Expert verified
In summary, JIT purchasing is a management strategy that aims to increase efficiency and reduce costs by acquiring resources only when needed in the production process. While it offers benefits such as cost reduction, improved cash flow, better supplier relationships, and increased efficiency, it also poses some risks including increased stockout risk, vulnerability to price fluctuations, dependency on suppliers, and limited scalability. The suitability of JIT purchasing for a business depends on its operational circumstances and ability to manage potential risks.

Step by step solution

01

Introduction to JIT Purchasing

JIT purchasing is a management strategy that aims to increase efficiency and reduce costs by acquiring resources, such as raw materials or components, only when they are needed in the production process. This minimizes inventory levels and allows a company to better manage its resources.
02

Benefits of JIT Purchasing

There are several advantages of implementing JIT purchasing in a business: 1. Cost Reduction: By purchasing materials only when needed, businesses can reduce inventory holding costs, such as storage costs and insurance fees. 2. Improved Cash Flow: Less inventory means that businesses have less money tied up in unsold goods, improving their cash flow. 3. Better Supplier Relationships: JIT purchasing encourages businesses to build strong relationships with reliable suppliers to ensure that materials are delivered on time. 4. Increased Efficiency: JIT purchasing emphasizes on continuous improvement and elimination of waste, ultimately resulting in increased efficiency within the production process.
03

Risks of JIT Purchasing

Despite its benefits, JIT purchasing also has some risks: 1. Increased Risk of Stockouts: Heavy reliance on timely deliveries can lead to stockouts if there are any delays or disruption in the supply chain. 2. Vulnerability to Price Fluctuations: With less inventory, businesses may be less protected from sudden price increases for raw materials or components. 3. Dependency on Suppliers: JIT purchasing requires strong relationships with suppliers, which might result in a high level of dependency and less flexibility in case of supplier issues or disruptions. 4. Limited Scalability: JIT purchasing might not be suitable for businesses that experience high variability in demand, as the production process relies on materials being available at the right time to meet sudden spikes in demand. So yes, JIT purchasing offers many benefits but also carries some risks. The effectiveness of JIT purchasing for a specific business will depend on its operational circumstances and its ability to manage the potential risks.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Cost Reduction
Cost reduction is a major advantage of Just-In-Time (JIT) purchasing. This strategy significantly decreases inventory holding costs, which include expenses like storage and insurance fees. By ordering materials only when they are immediately needed, businesses can cut down on waste and minimize overstocking.
This lean approach not only trims down unnecessary expenses but also helps streamline overall operational costs.
  • Less money tied up in unsold inventory
  • Decrease in warehousing expenses
  • Reduction in insurance costs
In a nutshell, JIT purchasing aligns with cost-saving techniques and fosters a more budget-conscious operational model.
Improved Cash Flow
Improving cash flow is another key benefit of JIT purchasing. By reducing the amount of capital tied up in inventory, businesses are able to keep cash reserves available for other critical operations or investments. This creates a healthier financial situation where cash is more readily accessible.
With fewer restrictions on cash availability, organizations can improve their financial flexibility.
  • Increased liquidity
  • Better financial planning
  • More opportunities for reinvestment
Ultimately, JIT purchasing allows businesses to optimize their cash management strategies.
Supply Chain Management
Effective supply chain management is crucial in the JIT purchasing framework. Managed well, it ensures materials and products are received in perfect time for production, reducing idle resources and supporting a smooth workflow.
Building reliable vendor relationships is a vital component of this strategy, fostering timely deliveries and seamless communication.
  • Streamlined logistics and procurement
  • Improved vendor reliability
  • Enhanced transparency and trust with suppliers
A well-managed supply chain synchronizes all components, improving overall operational efficiency.
Inventory Management
Inventory management plays a central role in JIT purchasing. With this strategy, companies operate with minimal stock levels, ordering materials only when necessary to meet demand. This approach minimizes wastage, reduces storage requirements, and allows for more efficient use of space and resources.
Balancing inventory to match production needs is key; too little stock can risk stockouts while too much nullifies the benefits of JIT purchasing.
  • Reduced excess inventory
  • Optimized storage space utilization
  • Responsive to actual demand
JIT purchasing enhances inventory management by aligning inventory levels with real-time production requirements, making businesses agile and adaptable.

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Most popular questions from this chapter

JIT production, relevant benefits, relevant costs. The knot manufactures men's neckwear at is Spartanburg plant. The Knot is considering implementing a JIT production system. The following are the estimated costs and benefits of JIT production: a. Annual additional tooling costs \(\$ 25,000\) annually b. Average inventory would decline by \(80 \%\) from the current level of \(\$ 1,000,000\) c. I Insurance, space, materials-handling, and setup costs, which currently total \(\$ 400,000\) annually, would decline by \(20 \%\) d. The emphasis on quality inherent in JIT production would reduce rework costs by \(25 \%\). The Knot cur renty incurs \$160,000 in annnual rework costs e. Improved product quality under JIT production would enable The Knot to raise the price of its product by S2 per unit The Knot sells 100,000 units each year The Knot's required rate of return on inventory investmentis \(15 \%\) per year 1\. Calculatet the net benefit or cost to The Knotifit adopts JIT production at the Spartanburg plantt 2\. What nonfinancial and qualitative factors should The Knot consider when making the decisision to adopt JIT production? 3\. Suppose The Knot implements JIT production at its Spartanburg plant. Give examples of performance measures The Knot could uss to evaluate and control JIT production. What would be the benefit of The Knot implementing an enterprise resource planning (ERP' system?

Backflush costing, two trigger points, materials purchase and sale (continuation of \(20-27\) ). Assume the same facts as in Exercise \(20-27\), except that Grand Devices now uses a backflush costing system with the following two trigger points for making entries in the accounting system: \(\cdot\) Purchase of direct materials \(\cdot\) Sale of finished goods The Inventory Control account will include direct materials purchased but not yet in production, materials in work in process, and materials in finished goods but not sold. No conversion costs are inventoried. Any under- or overallocated conversion costs are written off monthly to cost of Goods Sold. 1\. Prepare summary journal entries for August, including the disposition of under- or overallocated conversion costs. 2\. Post the entries in requirement 1 to \(T\) -accounts for Inventory Control, Conversion costs Control, Conversion costs Allocated, and cost of Goods Sold

JIT purchasing, relevant benefits, relevant costs. (CMA, adapted) The Gibson Corporation is a manufacturing company that uses automatic stamping machines to manufacture garage doors from rolled sheets of raw steel. Gibson's inventory of raw steel averages \(\$ 600,000\). Juan Sanchez, president of Gibson, and Jane Anderson, Gibson's controller, are concerned about the costs of carrying inventory. The steel supplier is willing to supply steel in smaller lots at no additional charge. Anderson identifies the following effects of adopting a JIT inventory program to virtually eliminate steel inventory: " Without scheduling any overtime, lost sales due to stockouts would increase by 700 units per year. How ever, by incurring overtime premiums of \(\$ 90,000\) per year, the increase in lost sales could be reduced to 300 units per year. This would be the maximum amount of overime that would be feasible for Gibson. " Two warehouses currentty used for rolled steel storage would no longer be needed. Gibson rents one warehouse from another company under a cancelable leasing arrangement at an annual cost of s80,000. The other warehouse is owned by Gibson and contains 20,000 square feet. Three-fourths of the space in the owned warehouse could be rented for \(\$ 250\) per square foot per year. Insurance and property tax costs totaling \(\$ 16,000\) per year would be eliminated. Gibson's required rate of return on investment is \(15 \%\) per year. Gibson's budgeted income statement for the year ending December \(31,2017,\) (in thousands) is: 1\. Calculate the estimated dollar savings (loss) for the Gibson Corporation that would result in 2017 from the adoption of JIT purchasing. 2\. Identify and explain other factors that Gibson should consider before deciding whether to adopt JIT purchasing.

Backflush costing and JIT production. The Acton Corporation manufactures electrical meters. For August, there were no beginning inventories of direct materials and no beginning or ending work in process. Acton uses a JIT production system and backflush costing with three trigger points for making entries in the accounting system: Purchase of direct materials Completion of good finished units of product Sale of finished goods Acton's August standard cost per meter is direct materials, \(\$ 24,\) and conversion cost, \(\$ 18 .\) Acton has no direct materials variances. The following data apply to August manufacturing: 1\. Prepare summary journal entries for August (without disposing of under- or overallocated conversion costs). Acton has no direct materials variances. 2\. Post the entries in requirement 1 to \(T\) -accounts for Materials and In- Process Inventory Control, Finished Goods Control, Conversion costs Control, Conversion costs Allocated, and cost of Goods Sold.

Name six cost categories that are important in managing goods for sale in a retail company.
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