ABC Inc. manufactures olive oil. The company is considering implementation of the Just-in-Time purchasing system for olives, the main raw material. Currently the company is evaluating two suppliers, PQR Co. -the current supplier, and XYZ Co.

The following data regarding costs and benefits of implementation of the JIT system are available:

Purchase from PQR Co.:

PQR selling price per ton of olives is $1,470. Average inventory would decline by 70% from the current level of $800,000. Insurance, space, and materials handling costs will be $75,000 instead of current cost of $160,000 annually. Rework costs (additional refining), will decline by 25% from the current level of $60,000. PQR offers the JIT inventory handling system, integrated to the PQR Co.'s ERP system for $600,000, with the license duration of five years.

Purchase from XYZ Co.:

XYZ selling price per ton of olives is $1,700, because the company claims superior quality of olives. Average inventory would decline by 90% from the current level of $800,000, because of limitations in XYZ's supplying capacities.Insurance, space, and materials handling costs will decline by 65% from the current level of $120,000 annually. Due to the high quality of lumber, the inspection cost will decline by $130,000 from the current level of $270,000, and rework costs will be $16,800 in comparison to the current level of $56,000. Also, ABC will be able to raise the price of the oil produced from $2,200 per one ton to $2,440. XYZ also offers the JIT inventory handling system, integrated to the company's ERP system for $600,000, with the license duration of five years.

ABC needs 20,000 tons of olives per year and produces 18,000 tons of olive oil. ABC can earn 16% investing cash to deposits or 12% investing to Treasury bonds. The inflation rate is projected to be 4%. Tax rate is 10%.

Required:

1.What would be your recommendation regarding implementation of the JIT inventory system by the ABC Inc.? Please, support your answer with calculations and analysis.

2.What challenges and limitations you faced while analyzing the case? Explain how you overcome those challenges and limitations.