Inventory Analysis - Sample Essay
In today’s business world, most businesses are using the inventory system called Just In Time. What does this mean? Well the Just-In-Time System or the J-I-T system is a system that orders the right quantity of goods at the correct time. As our power point presentation states in this module, “not late & not early (Just-In-Time Systems 2002).” Businesses do not keep extra inventories on hand they forecast the amount of inventory that is going to be needed for a certain period of time and only order that amount. The next batch of inventory will be delivered right before that forecasted amount is scheduled to be depleted. This system reduces waste, is simple, and cuts down on capital expenditures.
How does J-I-T minimize warehousing costs? With Just-in-Time Systems, a company can save space and simplify production schedules because items are forecasted to arrive just when they are schedule to be depleted instead of occupying space on the warehouse floor. Freeing up this space can mean a huge savings to companies. “For the average manufacturing enterprise, the materials and transportation costs account for 50-70% of revenues.
Even a small reduction in these costs can have substantial impact on profitability. According to one estimate for a company with revenues of $1 million, a Return on Investment of 5% of sales revenue, increasing profits by $15,000 would require either a 30% increase in sales revenues or a 3% reduction in materials costs. In a saturated market, it would be much easier to reduce materials costs by 3% than to increase sales revenues by 30% (Hills and Jones 1998).”
“Ford’s switch to J-I-T Systems in the early 1980s reportedly brought the firm a huge one-time savings of $3 Billion. Inventory turned over six times year, rather than five, and holding costs were reduced by 33%. Using JIT, the production process can be seen as a continuous flow. Continuous flow production processes can reduce factory floor space by 50% or more as inventory space is eliminated (Freitag and Savaglio 2005).” How does it minimize “quality problems” that can result when parts sit around for a long time?
By having a constant flow of inventory coming in and out as the company needs it you save not just warehouse space but you decrease the risk of the inventory becoming obsolete or “turning bad.” The Just-in-Time System is a good system in ideal circumstances but during a crisis it can become an obstacle. Your next question after reading the paragraph above is, “how does inventory turn bad?” Well let us look at this from a mother’s point of view. I am going to use the system of buffers and fixed order quantity. My product that I am going to use in this example is milk.
My family, 3 growing teenagers and 1 cereal loving husband, average 4 gallons of milk a week. Therefore, for the week, I will buy 6 gallons of milk for the week. I am forecasting that they will use the usual 4 gallons of milk but I want an extra 2 gallons on hand as a buffer in case they use more milk then is anticipated or the weather is bad and I can’t get to the store on Sunday. This is my fixed order quantity amount.
Well let us say that one week, I have the extra 2-gallon buffer left, but I still go out and buy the fixed order quantity of 6 gallons. Two of my children have colds and cannot drink milk. That now reduces the amount of milk I am going to use for the week down to 2 gallons. On top of the two extra gallons, I have each week, I now have 4 more extra gallons. Guess what since most of our inventory has a shelf life, as does my milk, this milk is going to go bad and curdle because there is no way that 6 gallons of milk can be used before the milk curdles especially if it my inventory is being restocked on the scheduled date.
I know this is an extreme example, but it is a good example to explain how companies can develop “quality problems” by overstocking the inventory. In the above example, I would have wasted approximately $20 of my budget, which is nowhere near, what a company would lose on inventory that can go bad. Every inventory item has a shelf life that the product is good for. Very few items do not have a shelf life.
Say Chrysler uses the fixed order amount, every 6 months order 1 million gaskets at $35 each for its automobiles, and they have a shelf life of 3 months before they have to be used or disposed of. If they only use 850,000 of these gaskets with in that 6 month time period, then they have to dispose of 150,000 gaskets and would have lost $5,250,000. With the J-I-T system, they would order the amount they needed for a fixed period and reorder just before the inventory was depleted leaving no room for buffer stock.
Chrysler’s Crisis with J-I-T To me, the Just-In-Time System of inventory control seems perfect for most businesses. Let’s face it by saving money, space, and being able to more quickly change the inventory is a big benefit for any company but Chrysler found out there are some flaws with the J-I-T System. After the terrorist attacks on 9-11 some of these flaws came to light. David Hodgson’s duties at Chrysler are to make sure that the factories have the inventory they need and when they need to produce the automobiles on time. On the morning of the terrorist attacks on the World Trade Center, Mr. Hodgson’s first thought were that of disbelief and outrage but his second thoughts were of the trucks that were scheduled to deliver the inventory needed to keep the plants operating and how the terrorist attacks would affect that scheduled delivery.
With Chrysler using a J-I-T System, Mr. Hodgson knew that there was no buffer inventory to fall back upon in an emergency. The terrorist attacks that day ground planes, stilled traffic at border points and delayed all tractor-trailers from making their deliveries. Chrysler did not have the inventory to run a full operation but for a day or two. Was the cost savings of J-I-T worth this disaster to the company? Discuss J-I-T and its implications for Global Operations Management as brought out in this Chrysler experience.
Chrysler was not the only company to feel the pressure due to the 9-11 terrorist attacks. The terrorist attacks are also not the only time that nations and companies have been impacted by events. Even natural events such as earthquakes, tornadoes, and hurricanes have affected J-I-T Systems in companies. Recovery plans after a disaster can be impacted because of Just-in-Time inventory practiced by many businesses. This practice can leave the areas affected without adequate supplies, if warehouse facilities and transportation networks are damaged. If there is not enough inventories available to restore power, reconstruct roads, and repair water damage for these disaster affected areas this becomes apparent as a major flaw J-I-T System.
This can also be damaging not to just the area affected by to our global economy. In today’s world the economy is no longer just affected in one area but the repercussions are felt on a global level. If Japan were to suffer a natural disaster that stopped the production of its automobiles, the implications would be felt in the United States as well as other areas of the world. In reference to the Chrysler situation, they relied on getting parts from other countries such as Canada, and when the border patrol was increased due to the terrorists actions it made it harder, if not impossible, for the inventory that was needed to keep the plant running to reach its destination.
Today, many companies rely on the airways, railways, and highways to transport their much-needed inventory to the factories. When one of these is closed down it has a widespread impact on production and labor. When a company does not have the inventory to be able to produced a finished good, the factory has to be closed down and the workers are temporarily laid off until the inventory is replenished. This creates widespread havoc now not on just the company but the economy. We now have workers with little to no income and families in need of assistance just to be able to buy food.
Even with the Just-in-Time System having flaws, I feel that this system is the best available. I do feel that Just-in-Time w/a little buffer might be better. To always have a little extra inventory on hand in times of crisis would eliminate the time of hardships some businesses have experienced. If we kept enough inventory on hand to run a business for 3 days that would still reduce the amount of floor space but give the company an extra time buffer until to hopefully work out the barriers to receiving the anticipated inventory.
Even Chrysler felt this above practice might make business flow better. “On Tuesday night, Chrysler sent word electronically to its 150 largest suppliers to ship an extra eight to 12 hours’ worth of parts to the auto maker’s plants. That wasn’t just-in-time, but this wasn’t normal business. “If you don’t put that extra float in the system,” Mr. Hodgson recalls thinking, “you’re going to run out of parts” (Ball 2001).”
1. Ball, Jeffrey. Chrysler Averts A Parts Crisis. Wall Street Journal. September 24, 2001. Retrieved on February 23, 2007 from http://proquest.umi.com/pqdweb?index=0&did=81901100&SrchMode=1&sid=6&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1174228265&clientId=29440.
2. Freitage, Bob and Savaglio, Fred. Just-in-Time Inventory: Effects on Earthquake Recovery. Copyright 2005. Retrieved on February 28, 2007 from www.crew.org/papers/JITfinal032405.pdf.