Technix Assembly Co. maintains WIP inventory at each of 40 work stations. The average size of inventory at each station is 200 units. The physical flow of all WIP is first in, first out. Based on recent experience, 1,400 processing flaws are expected to arise this year. Three-fourths of all flaws are discovered immediately by the operator at the faulty station; the other one-fourth of these flaws cause a defect to enter 20% of the units produced. Defective units enter WIP between stations and are discovered by the next station's operator. Every processing flaw is corrected as soon as it is discovered. The average variable cost of a unit in WIP is $400, and the average loss from a defect is $60 per unit per defect. The annual cost of carrying WIP is 30% of the cost of the inventory.
Management is committed to reducing the number of units held at every work station by 40%. The rate of final output will be unchanged and no other changes will be made in the system.
Required:
(1) Using only the information given, calculate the expected annual savings.
(2) In addition to the savings calculated in requirement 1, what other savings should be considered in evaluating the decision to reduce WIP levels?
(3) What costs and other negative factors should be compared with the savings in evaluating the decision to reduce WIP levels?