Tom Murphy was president of a medium-size firm that manufactured mini motor homes in Tempe, Arizona. The firm had expanded from a local Midwest market to a national one, including Southern California and New England. As markets had expanded, so too had sources of supply for the company, with major suppliers located in Southern California, the Pacific Northwest, and Michigan. The decision to found the company in Tempe had been made for two reasons: Toms former associates in the industry were there, and the largest single component of the minithe truck or van chassis on which the rest of the vehicle is builtwas purchased from a local plant.

Like others in the field, Toms company actually manufactured very few of its components. Virtually the entire product was assembled from components purchased from outside vendors. There was, however, a well-defined order in which the components could most efficiently be installed in the vehicle. Recently, it had become clear to Tom that transportation and inventory costs were a relatively large portion of his component parts expenses and that they might be ripe for a substantial reduction. He had been hearing about just-in-time (JIT) systems. According to some notes he had taken at a professional meeting, the JIT production system was developed by the Toyota Motor Company more than 50 years ago. It involves an approach to inventory that, in turn, forces a complementary approach to production, quality control, supplier relations, and distributor relationships.

The major tenets of JIT can be summarized as follows:

1. Inventory in itself is wasteful and should be minimized.
2. Minimum replenishment quantity is maintained for both manufactured and purchased parts.
3. Minimum inventory of semifinished goods should be maintainedin this case, partially completed motor homes.
4. Deliveries of inputs should be frequent and small.
5. The time needed to set up production lines should be reduced to the absolute minimum.
6. Suppliers should be treated as part of the production team. This means that the vendor makes every effort to provide outstanding service and quality and that there is usually a much longer-lasting relationship with a smaller number of suppliers than is common in the United States.
7. The objective of the production system is zero defects.
8. The finished product should be delivered on a very short lead time.

To the U.S. inventory planner, vice president of logistics, and production planner, an operation run on the preceding principles raised a number of disturbing prospects. Tom Murphy was very aware of the costs that might arise if a JIT production system were to be established. From the materials management standpoint, the idea of deliberately planning many small shipments rather than a few large ones appeared to ensure higher freight bills, especially from more distant suppliers, for which freight rates would make the most difference. With regard to competition among suppliers, Tom often had the opportunity, in the volatile mini-motor-home market, to buy out parts and component supplies from manufacturers that were going out of business. Those components could be obtained at a substantial savings, with the requirement that inventory in the particular parts be temporarily increased or that purchases from existing vendors be temporarily curtailed. Perhaps the greatest question raised by JIT, however, had to do with the probability of much more erratic production as a result of tight supplies of components. Both with suppliers products and with his own, Tom operated with the (generally tacit) assumption that there would be some defective components purchased and that there would likely be something wrong with his product when it first came off the assembly line. For this reason, the Tempe minis were extensively tested (Their advertising said, We hope youll never do what we do to your Tempe mini.), as were the components prior to installation. To the extent that only a few of a particular type of component were on hand, the interruption in the production schedule would be that much greater. It might entail expensive rush orders for replacement components or equally expensive downtime for the entire plant.

Tom was also concerned about his relationship with his suppliers, as compared, say, to a large auto manufacturer. In the mini-motor-home business, generally the manufacturers are small and the component makers are large. In this situation, it was somewhat more difficult to see the idea of the supplier as a part of the production team, in the sense that the supplier would be expected to make a special effort in either quality control or delivery flexibility on behalf of one of its almost miniscule accounts. Despite these concerns, Jim was painfully aware

that he was using a public warehouse near his plant that usually contained between $500,000 and $1,000,000 in inventory, on which he paid more than 1.5 percent per month for the borrowed funds used to buy it, as well as expenses relating to the use of the warehouse itself. In addition, his firm was now producing so many different models (one with a bath, one with a shower only) and using so many different appliances (various types of radio, three varieties of refrigerator, etc.) that the costs of a safety stock for each component were going up every day.

As an aid to making his decision on whether to try a JIT orientation at his plant, Toms executive assistant, Kathy Williams, drew up a table that summarized the anticipated impacts of a JIT system (see Exhibit below). The figures are based on random samples of inventory items. The major component of any mini motor homethe chassiswould always be purchased on a one-at-a-time basis from Ford, Chevrolet, Dodge, or International. With rare exceptions, it would always be available on demand. It would be delivered through the local dealer. If the dealer did not have one in stock, one could easily be obtained from another area dealership.

This is a representative 10 percent sample of Ballengers components inventory. It covers weekly use of each item, the current lot size purchased, and so on. Before figuring the total costs under the present and JIT systems, two additional facts must be noted. First, Ballengers inventory carrying costs are assumed to be 20 percent per year on the average investment in inventory on hand, including its acquisition and transportation costs. Second, under the current system, the number of units of each type of component kept in stock is calculated as follows: For those items purchased from vendors more than 500 miles away, a safety stock representing four weeks of use is maintained. For items from vendors between 100 and 500 miles away, a safety stock representing two weeks of use is maintained. For items from closer sources, a safety stock representing one week of use is maintained. In addition to safety stocks, the average inventory of any item is the current lot size purchased, divided by 2. If you are familiar with Excel or another spreadsheet software, you might try using it here, although it is not necessary.

Note: The plant operates 52 weeks per year and produces 10 mini motor homes per week.

Questions

1. What is the total annual cost of maintaining the components inventory under the present system?
2. What would be the total annual cost of maintaining the components inventory under the JIT system (assuming no safety stocks)?
3. Should Murphy take into account any other costs or benefits from the JIT system? If so, what are they?
4. If the JIT system is adopted, are there safety stocks of any item that should be maintained? If so, which ones and how much?
5. If the JIT system is adopted, what changes, if any, should occur in the relationships between Murphys firm and his suppliers of components? Discuss.
6. Assume that Murphy has switched to the JIT system and that he receives a surprise phone call from a competitor who is going out of business. The competitor wants to sell Ballenger 7,000 dome lights of the type listed in the Exhibit. Should Murphy buy them? If so, at what price?
7. Carrying costs are 20 percent. Is there a level of carrying costs at which both Murphys present system and a JIT system have similar costs? If so, what is it?