Exercise 1 15A Using JIT to minimize holding costs
Cedric Pet Supplies purchases its inventory from a variety of suppliers, some of which require a six week lead time before delivering the goods. To ensure that she has a sufficient supply of goods on hand, Ms. Keiser, the owner, must maintain a large supply of inventory. The cost of this inventory averages $40,000. She usually finances the purchase of inventory and pays a 10 percent annual finance charge. Ms. Keiser’s accountant has suggested that she establish a relationship with a single large distributor who can satisfy all of her orders within a two week time period. Given this quick turnaround time, she will be able to reduce her average inventory balance to $10,000. Ms. Keiser also believes that she could save $6,000 per year by reducing phone bills, insurance, and warehouse rental space costs associated with ordering and maintaining the larger level of inventory.
Required
- Is the new inventory system available to Ms. Keiser a pure or approximate just in time system?
- Based on the information provided, how much of Ms. Keiser’s inventory holding cost could be eliminated by taking the accountant’s advice?