Chapter 5 Internet Exercise
The Impact of JIT on Inventory Management Ratios at Rubbermaid
Manufacturing firms have traditionally purchased and stored ample supplies of raw
materials to support the production of finished goods. A large supply of inventory
minimizes the possibility that production will be interrupted due to raw material
shortages. Large inventories act as a "buffer" to carry a manufacturing company through
difficult times when inventory is unavailable or difficult to get. There are several
situations where firms might want to play it safe and stockpile large supplies of raw
materials. Labor strikes directed at suppliers can interrupt supplies of raw materials.
Similarly, labor strikes affecting shipping and logistics may interrupt transportation
channels. Natural disasters and political unrest occurring in supplying countries may also
cause volatile raw material prices and irregular availability.
However, there are also many reasons why manufacturing firms would want to
minimize all inventories, whether raw materials, work in process inventory or finished
goods. First and foremost, it is expensive. The more inventory a company has, the higher
its holding costs. More facilities are needed to store and safeguard inventories, and more
insurance is needed to minimize losses from theft or damage. Large amounts of
inventory also tie up huge amounts of cash. These are funds that could have other more
productive uses. Finally, a company that holds a large amount of inventory runs the risk
of loss due to deterioration or obsolescence. As products change in our fast paced global
economy, it is both expensive and risky to stockpile large amounts of inventory.
That's why the current trend in manufacturing is to reduce inventories, keep them as low
as possible, and cycle them through the production process as quickly as possible. The
faster a company can move inventories through the production process to customers, the
more potential there is for profits. This is the essence of Just-In-Time (JIT) inventory
systems.
Rubbermaid is in the process of converting its operations to "lean" manufacturing and is
incorporating many JIT concepts. Rubbermaid manufactures a wide range of household
products for consumer use. Go visit Rubbermaid. You will find several indicators that
Rubbermaid is making a transition to JIT inventory systems. You will also see that as the
company makes this transition, the change is having an impact on the company's
inventory management ratios.
When you arrive at Rubbermaid's website, check out the site map and then find out
more about Rubbermaid by clicking on the "More About Rubbermaid" button. You will
find out what products Rubbermaid manufactures, and in what countries the company
operates. Also view the company's philosophy, management principles, and mission
statement. You will get an idea of what management's attitude is about production and
management of inventories. Once you have learned "More About Rubbermaid", then
examine the 1997 and 1996 Annual Reports. As you conduct your investigation, you
should search for answers to the following questions:
1.What are the three leading brands of Rubbermaid products and what kind of
products does each brand name produce? Give some examples. (Hint: Check "Pace
Setting
Innovation" in the 1997 Annual Report menu for examples.)
Answer:
1.Rubbermaid (Commercial Products and Home Products) -- manufactures
containers and equipment for food service, health care, maintenance, and industrial use.
Plastic trash cans, water bottles, doghouses, plastic food containers.
2.Little Tikes -- manufactures toys for preschoolers and educational toys.
3.Graco -- manufactures infant products and early childhood. Infant car seats,
infant swings.
2.Approximately how many products does Rubbermaid produce? What was
Rubbermaid's first household product?
Answer:
Rubbermaid produces about 4,000 products. Its first product was introduced in 1934.
It was a rubber dustpan.
3.Read management philosophy and management principles. What is
Rubbermaid's philosophy toward its suppliers? How do Rubbermaid's policies
toward suppliers link to the Just-In-Time principles identified above?
Answer:
Rubbermaid's stated policy toward its suppliers is as follows:
1.To strive to foster mutually beneficial long term strategic partnerships.
2.To strive to consider all their value attributes, not just price.
3.To utilize suppliers capabilities to improve the total value chain.
4.To be objective and ethical in all business dealings.
Rubbermaid's policies toward suppliers are in keeping with JIT principles. The
policy emphasizes long term relationships with suppliers and management recognizes
that the extra value provided by suppliers will not necessarily be the cheapest.
4.What are Rubbermaid's "Technological Objectives"? How do you think this
applies to making a transition to a JIT system? Give some examples.
Answer:
Rubbermaid's technological objective is "to utilize basic and applied research and
technological capabilities of supplier partners." Rubbermaid needs suppliers that are
technologically capable of delivering inventory in the proper quantity and condition
at the right time. Those suppliers that use technologies such as Electronic Data
Interchange, Enterprise Resource Planning and other sophisticated systems to
communicate interactively with Rubbermaid about its materials requirements will be the
highest valued suppliers.
5.Refer to the 1997 Annual Report and go to the "Year in Review" section. What
things has Rubbermaid done in 1997 to further the transition to JIT?
Answer:
Rubbermaid reduced its supplier base from 9,000 suppliers to 2,000 suppliers. This is
in keeping with the JIT principle of having fewer more reliable suppliers. In terms of
logistics the company is moving to a "pull" schedule, whereby manufacturing is initiated
on a customer order. There is less warehouse space required for inventory. Rubbermaid
vacated 4.6 million square feet of warehouse space, a direct result of reducing its
inventories. The company also formed "strategic alliances with suppliers" which means
the company formed long term relationships with its suppliers. Finally, management
claims that inventory turns increased 33% over the past three years. This would imply
that inventory was cycling through the production process faster than previously.
6.Now go to the 1996 Annual Report and read the "Operating Review". What
does management say that Rubbermaid was able to accomplish in 1996 to further
their goal of a transition to a JIT inventory system?
Answer:
Management makes several claims. Production time was shortened 30%. The
company was able to cut scrap and waste by 15% (no defects policy). Work in Process
inventories decreased by 20%. Management also claims that they were able to eliminate
50% of their warehouse space.
7.What kind of inventory does Rubbermaid have? What method does
Rubbermaid use for valuing inventory? Have inventory costs increased or decreased
from 1996 to 1997? (Hint: Read the "Consolidated Notes to the Financial
Statements".)
Answer:
Rubbermaid carries Raw Material Inventory, Work in Process Inventory, and
Finished Goods Inventory, as disclosed in the notes to the financial statements. The
company uses the LIFO method for valuing approximately 78% of its inventory. It uses
FIFO for the remaining 22%. In all categories inventory costs have decreased from 1996
to 1997.
8.How does management explain why Cost of Goods Sold as a percentage of sales
was higher than in the previous year? (Hint: Go to "Operating Review".)
Answer:
The company had higher plastic resin costs. Prices of plastic resin, one of its
principal raw materials, rose. Also selling prices decreased. Thus, gross margin decreased
and CGS as a percentage of sales increased.
9.What was the inventory turnover for 1997 and 1996?
Answer:
1997:
Cost of Goods Sold / Average Inventory = 1,748,424 / [(276,811 + 250,597)/2]
= 1,748,424 / 263,704 = 6.63 times
1996:
Cost of Goods Sold / Average Inventory = 1,649,520 / [(251,723 + 276,811)/2]
= 1,649,520 / 264,267 = 6.24 times
10.What is the Days in Inventory for 1997 and 1996?
Answer:
1997: 365/6.63 = 55 days
1996: 365/ = 58 days
11.Given these results does it appear that Rubbermaid’s transition to JIT is
yielding favorable results?
Answer:
Yes. Inventory Turnover is increasing, and the Number of Days in Inventory is
decreasing. These are both favorable results.
12.What are some of the limitations of this analysis?
Answer:
1.The ratios may be somewhat distorted due to the volatility of plastic resin prices.
Management states that cost of goods sold as a percentage of sales is higher due to
higher resin prices. A higher Cost of Goods Sold will yield a higher Inventory
Turnover. Therefore, this higher inventory turnover may not necessarily mean that more
volume is cycling through the production process faster and more efficiently.
2.In times of inflation, the LIFO method of valuing inventory will yield a higher
Inventory Turnover ratio than the FIFO method.
3.Management makes claims about reducing inventories by 20%. This may be true
for a certain type of inventory, but we do not have detailed information about individual
inventories to substantiate this.
4.The financial ratios themselves do support a conclusion that inventory is being
managed more efficiently. However, a deeper analysis with more detailed information
(which is unavailable to us) would be necessary to determine the validity of that
conclusion.
The purpose of this exercise is to have students identify items in an annual report that
refer to JIT concepts. The exercise also examines the relative success or failure of
implementing
JIT as reflected in inventory management financial ratios. The site offers a great deal of
information about Rubbermaid and its products, and makes several references to JIT
concepts at different locations.