Question 1: Looking at the table below for the Johnson Company, what is the total annual cost of maintaining the components inventory under the present systems versus the total annual costs of maintaining the components inventory under the JIT system (assuming no safety stock)? What are the advantages and disadvantages of the Johnsons using a JIT system?
Johnson’s inventory carrying costs are 20% per year on the average investment in inventory on hand including 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 the vendors more than 400 miles away, a safety stock representing four weeks of use is maintained. For items from vendors between 100 and 400 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.
