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JIT production, relevant benefits, relevant costs, ethics.

Parson Container Corporation is


considering implementing a JIT production system. The new system would reduce current
average inventory levels of $2,000,000 by 75%, but would require a much greater dependency
on the companys core suppliers for on-time deliveries and high quality inputs. The companys
operations manager, Jim Ingram, is opposed to the idea of a new JIT system. He is concerned
that the new system will be too costly to manage; will result in too many stockouts; and 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 plant controller,
Sue Winston is in favor of the new system, due to the likely cost savings. Jim wants Sue 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, Sue 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. 10,000 shipments are budgeted for the upcoming year. Each
stockout would result in an average additional cost of $250.
Parsons required rate of return on inventory investment is 10% per year.
Required
1. From a financial perspective should Parson adopt the new JIT system?
2. Should Sue Winston rework the numbers?
3. How should she manage Jim Ingrams concerns?