EverFit Inc. manufactures commercial grade fitness equipment used in spas and health clubs. The firm produces complex resistance exercise machines designed to strengthen specific muscles. EverFit’s engineering department designs the equipment and then contracts with metal working shops to produce parts to their specifications. The parts are inventoried at EverFit’s factory and assembled for shipment to customers. The $250,000 parts inventory is financed with short-term debt at 6% interest. Shrinkage and obsolescence cost about 1%, while taxes and insurance run about $10,000 per year.
EverFit has discussed a just in time (JIT) system with its suppliers all of which are located within 50 miles. The suppliers are small firms that depend on EverFit’s business, and are willing to try to deliver parts in accordance with its production schedule.
However, EverFit’s CFO is concerned that although their intentions are good, the suppliers won’t be able to manage their operations precisely enough to consistently meet customer JIT requirements. Further, he thinks that when a JIT delivery is missed, it will generally be a day and a half before it is finally received. During that time the assembly staff of 25 people will be idle. Each assembly worker earns about $30 per hour and must be paid for eight hours a day whether working or not.
a. If the measure of the system is saving money, how many JIT failures can the system tolerate and still break even?
b. Comment on the advisability of the JIT idea based on your answer to part a.
c. What qualitative factors might also be concerns?
d. Suggest a way to test the system before making a final decision.