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 a 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.

Required:

a. Inventory control.

i. Current system: Given current ordering practices, what is the total annual relevant cost of ordering and carrying inventory. (4 marks)

ii. Using Economic Order Quantity, what is the optimal order size (in kilograms) TT should use to minimize total annual order and carrying costs. (2 marks)

iii. Calculate the savings incurred in ordering using the order quantity calculated in part (ii) (2 marks)

iv.

iv. Terry informs you that the industrial engineer hired to assess TT's 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 Terry 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)

b. Proposed JIT manufacturing system.

Determine whether it is in the best interest of Thompson Trailers to install a JIT manufacturing system.

Focus on:

i. Relevant manufacturing costs/savings (exclude inventory) and the ability to show a return on the cost. (Remember to identify annual and onetime costs/savings)

ii. The advantages and disadvantages of JIT for TT

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