Koss Corp. makes high-quality head-phones for a variety of applications. Koss is a Milwaukee-based company but has significant manufacturing operations in China. When manufacturing operations were moved to China, CEO Michael Koss was a strong proponent of just-in-time inventory management. Although the company maintained significant orders of component parts, finished goods were produced only to satisfy customer orders. Accordingly, work in process and finished goods inventories were small. However, moving production off-shore significantly increased the complexity of the firm’s logistics. Unexpected changes in product mix and fluctuating demand for products caused the firm’s backlog of orders to rise significantly. Koss responded by scrapping the JIT production and stacking finished goods on the factory floor pending receipt of customer orders.
a. Why does globalization of a firm’s production operations increase the challenges in controlling inventories using the JIT philosophy (pull system)?
b. After scrapping JIT, Koss reported that the total investment in inventories dropped from $ 15 million to $ 8 million. How could this occur?
c. From the perspective of managing the risk of a stock outage, is Koss better off holding mostly finished goods inventory, or mostly component parts inventories? Explain.