Lacy Products is a regional firm that operates a manufacturing plant. Raw materials are purchased and stored until their introduction into the manufacturing process. On completion, finished products are stored in the company's warehouse, awaiting final sale.
A recent study indicated that Lacy's annual cost of carrying inventory is more than 25% of the average inventory investment. Management believes that inventory carrying costs might be an excellent target for cost reductions and proposes two strategies: first, not requesting raw materials from suppliers until near the time needed in the manufacturing process, and second, transferring the finished goods to customers immediately following completion.
Required:
Identify and discuss the circumstances necessary to make such a proposal feasible with respect to
(1) Raw materials inventory and
(2) Finished goods inventory.