Question: JIT production, relevant benefits, relevant costs, ethics. Galveston Pump Corporation is considering implementing a JIT production system. The new system would reduce current average inventory levels of $2,000,000 by 75%, but it would require a much greater dependency on the company's core suppliers for on-time deliveries and high-quality inputs. The company's operations manager, Frank Griswold, is opposed to the idea of a new JIT system because he is concerned that the new system
(a) will be too costly to manage;
(b) will result in too many stockouts; and
(c) will lead to the layoff of his employees, several of whom are currently managing inventory.
He believes that these layoffs will affect the morale of his entire production department. The management accountant, Bonnie Barrett, is in favor of the new system because of its likely cost savings. Frank wants Bonnie to rework the numbers because he is concerned that top management will give more weight to financial factors and not give due consideration to nonfinancial factors such as employee morale. In addition to the reduction in inventory described previously, Bonnie has gathered the following information for the upcoming year regarding the JIT system:
- Annual insurance and warehousing costs for inventory would be reduced by 60% of current budgeted level of $350,000.
- Payroll expenses for current inventory management staff would be reduced by 15% of the budgeted total of $600,000.
- Additional annual costs for JIT system implementation and management, including personnel costs, would equal $220,000.
- The additional number of stockouts under the new JIT system is estimated to be 5% of the total number of shipments annually. Ten thousand shipments are budgeted for the upcoming year. Each stockout would result in an average additional cost of $250.
- Galveston's required rate of return on inventory investment is 10% per year.
1. From a financial perspective, should Galveston adopt the new JIT system?
2. Should Bonnie Barrett rework the numbers?
3. How should she manage Frank Griswold's concerns?