The president of Penman Corporation, John Burton, has asked you, the company’s controller, to advise him on whether Penman should develop a just-in-time (JIT) inventory system. Your research concludes that there is a high cost associated with inventory storage facilities; that inventories use a large portion of the company’s cash flow; and that because of the nature of the inventory, there is a significant amount of shrinkage. Research also shows that neither of Penman’s two competitors uses a JIT inventory system. Most of Penman’s employees are trained to do only one job and belong to a local union. The union is strong and, in the past, has opposed major production changes. The union believes major changes will result in the loss of union employees’ jobs. Your research indicates that Penman’s major production item (a fairly new product in the market) should continue to have strong sales growth.

Question

The president of Penman Corporation, John Burton, has asked you, the company’s controller, to advise him on whether Penman should develop a just-in-time (JIT) inventory system. Your research concludes that there is a high cost associated with inventory storage facilities; that inventories use a large portion of the company’s cash flow; and that because of the nature of the inventory, there is a significant amount of shrinkage. Research also shows that neither of Penman’s two competitors uses a JIT inventory system. Most of Penman’s employees are trained to do only one job and belong to a local union. The union is strong and, in the past, has opposed major production changes. The union believes major changes will result in the loss of union employees’ jobs. Your research indicates that Penman’s major production item (a fairly new product in the market) should continue to have strong sales growth.

Required:
1. Using the information provided, advise John Burton to either continue the present system or work to develop a JIT inventory system.
2. Assume John decides to develop an inventory management system. He plans to evaluate the system after one year. List at least four possible performance measures John could use to evaluate the effectiveness of the system. Describe what information these measures would provide John.

Answer 1

1. Based on the information provided, I would advise John Burton to continue with the present inventory system rather than implementing a just-in-time (JIT) inventory system at this time. Here are the reasons for this recommendation:

a) Cost associated with inventory storage facilities: The high cost associated with inventory storage facilities suggests that implementing a JIT inventory system, which aims to reduce inventory levels, may not be financially beneficial in the current situation.

b) Cash flow and shrinkage: The fact that inventories use a large portion of the company's cash flow and there is significant shrinkage implies that there are issues with inventory management. However, it does not necessarily indicate that implementing a JIT system is the best solution. Other inventory management strategies, such as improving control measures and implementing more efficient inventory tracking systems, can be explored before considering a JIT system.

c) Competitors' practices: The fact that neither of Penman's competitors uses a JIT inventory system suggests that the industry may not consider JIT as a feasible or effective approach. It is important to evaluate competitors' practices and the reasons behind their choices before making a decision.

d) Union employees and resistance to major changes: The strong union presence and the union's past opposition to major production changes should be taken into consideration. Implementing a JIT inventory system may be perceived as a major change that could potentially lead to job losses for union employees. It is crucial to assess the potential impact on employee relations and obtain buy-in from the union before proceeding with any major changes.

2. If John decides to develop an inventory management system, here are four possible performance measures he could use to evaluate the effectiveness of the system:

a) Inventory turnover ratio: This measure can help assess how efficiently Penman is managing its inventory. A higher inventory turnover ratio indicates that inventory is being sold more quickly, minimizing the amount of inventory held and potentially reducing storage costs.

b) Shrinkage rate: Tracking the shrinkage rate can provide insights into the effectiveness of inventory control measures. A lower shrinkage rate would indicate that the system is successfully preventing losses due to theft, damage, or obsolescence.

c) Cash flow improvement: Comparing the company's cash flow before and after implementing the inventory management system can help determine if any improvements have been achieved. If the system is effectively reducing the cash tied up in inventory, there should be a positive impact on cash flow.

d) Customer satisfaction metrics: Measuring customer satisfaction levels, such as through surveys or feedback, can provide insight into the impact of the inventory management system on customers. If the system is effective, it should lead to improved product availability, on-time deliveries, and overall customer satisfaction.

By analyzing these performance measures, John can evaluate the effectiveness of the inventory management system in achieving its intended goals and make any necessary adjustments or decisions based on the results.