Page 83 - Budgeting for Managers

Budgeting for Managers
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JIT Jitters
This story is embarrassing, so I won’t name the company
where it happened.A major TV manufacturer built a plant
to produce TV tubes.They put the TV tube plant right across the
street from the TV manufacturing plant to save shipping costs.The TV
tube plant started with sand and produced finished TV tubes.To
reduce costs further, they planned to use JIT and had very little ware-
house space.
Due to computer system and management problems, they did a
poor job managing inventory.They made too many TV tubes and had
to rent a warehouse half a mile away to store them. Now, every TV
tube had to be moved half a mile to storage and then half a mile back
to the plant across the street.
To make it worse, it seems they couldn’t keep track of their prod-
uct.While I was doing a training class at the plant, someone ran in to
deliver the bad news that they’d just found another 10,000 TV tubes in
the warehouse. (Having extra inventory is bad in JIT; you’re paying for
storage space and doing a poor job scheduling production.)
inventory, which is different from the inventory of finished goods
used in Table 4-1.)
Why do we repeat three rows from Table 4-1? In this simple
example, we didn’t need to. But if we set up an assembly line in
several stages, then we might need those extra lines. Suppose
that we assemble CPUs from components, instead of buying
them. We might end the year with 5,000 assembled CPUs in
inventory. Since these are not finished goods (fully assembled
computers), we call them our “in-progress inventory.” We would
place them on the “in-progress inventory” line and subtract
them from the total we need to produce.
The result is the “direct materials to be purchased” line,
which that tells us how many of each item we need to order.
Once we know that quantity, we’re ready to negotiate with our
suppliers. When we negotiate, we have two goals: to keep the
price as low as possible and to try to get a commitment for as
long as possible that the price won’t go up. In our budgetary
assumptions, we should note if these per-unit costs are based
on committed contracts, estimates, or a combination of the two.