Thompson Trailers (TT) manufactures utility trailers for small landscaping companies to haul their equipment to residential sites. Demand for the trailers is fairly even throughout the year, as snow removal companies make use of them to haul their equipment in winter. 

The trailers are manufactured at Thompson's plant in Agassiz, BC. The company has enjoyed significant growth over its five years of operations. As such, Terry Thompson, the owner and CEO of the company would like to ensure 

the plant is operating efficiently. He has hired you, as a consultant to review the company's manufacturing and inventory practices.

 

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

Steel is the major direct material in the production of the trailers. It makes up 85% of the inventory value. Annual current requirements for steel are 182,160 kg per year.

Steel is ordered on a monthly basis from Nikolay Metals Inc.TT has a purchasing agent who contracts with TT to order in the steel. The agent, who works away from TT's 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. She charges $350 per order. This is the only order cost incurred.

 

Steel prices for the year average around $1.10 per kilogram.

Annual costs of warehouse leasing, insurance, utilities and management are $9.10 per kilogram of steel.

Terry is considering the installation of a just-in-time (JIT) manufacturing system to reduce TT's costs and be responsive to demand.He has already consulted with an industrial engineer to learn more about how to rearrange his 

shop floor and create lean manufacturing environment. Costs and resulting benefits of implementing JIT are as follows:

 

One-time cost to rearrange the shop floor to create manufacturing workstations is $475,000

Retrain existing workforce for the JIT required skills is $60,000

Anticipated defect reduction is 30%. Currently there is a cost of quality defect assessment listed as $150,000 per year.

TT manufactures its trailers using a batch process. The setup time for each of the batches will be reduced by 30% under a JIT system. 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, TT expects a return of 15% on all its investments.