Pattys Pots (PP) manufactures large plastic pots for nurseries to grow large tropical plants for hotels and offices. Demand for the pots is fairly even throughout the year.

The pots are manufactured at PPs plant in Chilliwack, BC. The company has enjoyed significant growth over its five years of operations. As such, Patty Wong, the owner, and CEO of the company would like to ensure the plant is operating efficiently. She has hired you, as a consultant to review the companys manufacturing and inventory practices.

To assist with your analysis, Patty asked her cost accountant to summarize some of the key financial figures relating to inventory:

• Plastic pellets are the major direct material in the production of the pots. It makes up 85% of the inventory value. Annual current requirements for plastic pellets are 182,160 kg per year.
• Plastic pellets are ordered monthly from Nikolay Plastics Inc. PP has a purchasing agent who contracts with PP to order in the plastic. The agent, who works away from PPs office, writes up the order on a paper document, faxes it to the supplier and follows up via phone to ensure the order is filled. He charges $380 per order. This is the only order cost incurred.
• Plastic pellet prices for the year average around $1.20 per kilogram.
• Annual costs of warehouse leasing, insurance, utilities and management are $8.80 per kilogram of plastic pellets.

Patty is considering the installation of a just-in-time (JIT) manufacturing system to reduce PPs costs and be responsive to demand. She has already consulted with an industrial engineer to learn more about how to rearrange her shop floor and create a lean manufacturing environment. Costs and resulting benefits of implementing JIT are as follows:

• The one-time cost to rearrange the shop floor to create manufacturing workstations is $475,000
• Retrain the existing workforce for the JIT required skills is $60,000
• Anticipated defect reduction is 40%. Currently there is a cost of quality defect assessment listed as $150,000 per year.
• PP manufactures its pots using a batch process. The setup time for each of the batches will be reduced by 40% under a JIT system. The current annual setup costs are $350,000.
• A 16% premium on production supplies will be charged as supplies will be delivered on a more frequent schedule. Currently production supplies are $520,000 per year.

Overall, PP expects a return of 15% on all its investments.

(Required begins on the next page)

Required:

1. Inventory control.
   1. Current system: Given current ordering practices, what is the total annual relevant cost of ordering and carrying an inventory. (4 marks)
   2. Using Economic Order Quantity, what is the optimal order size (in kilograms) PP should use to minimize total annual order and carrying costs. (2 marks)
   3. Calculate the savings incurred in order using the order quantity calculated in part (ii) (2 marks)

4. Patty informs you that the industrial engineer, hired to assess PPs manufacturing system, suggested that total inventory carrying costs can be reduced by 50% if inventory is ordered in quantities of 1,380 kilograms. Explain to Patty the effect this will have on total inventory costs (carrying and ordering) and provide a potential solution to reduce total inventory costs. (Calculations are not necessary). (3 marks)

2. Proposed JIT manufacturing system. Determine whether it is in the best interest of Pattys Pots to install a JIT manufacturing system. Focus on:
   1. Relevant manufacturing costs/savings (exclude inventory) and the ability to show a return on the cost. (Remember to identify annual and one-time costs/savings)
   2. The advantages and disadvantages of JIT for PP

Show all calculations and provide a response to Patty which includes pertinent figures from your calculations. (5 marks)