Finance

What steps might the companies take to avoid such a serious disruption caused by Just-in-Time in future? Ans. Following actions actions can be considered for avoiding such disruptions disruptions in future: a.

Rather than dock-to-line dock-to-line timing, perhaps keeping a month’s supply of parts and materials on hand makes more sense in terms of risk management. Finding suppliers in more than one region would reduce the pain if part of the globe takes a time-out. And maybe returning production to the economy that buys the output would be the smartest move of all.

b. Challenging suppliers to develop disaster plans so that they can make provisions to move to alternate sites for production, in the event that they are unable to produce product at their main plant. c.

Eliminating sole-source suppliers, and developing the capabilities of additional companies. companies. Having one supplier is probably too few, but having five suppliers is too many in terms of achieving economies of scale. One strategy would be to give 80% of the work to the primary supplier, and 20% to a secondary vendor that is located in another country. Part of contingency planning should include provisions for ramping up production of the second supplier, in the event of a calamity.

d. Analyzing where suppliers are located, and limiting the number of critical component suppliers that are geographically geographically situated in a risky area. e.

Review insurance policies and consider taking-out contingent business interruption insurance that protects against losses relating relating to the inability of suppliers to deliver. deliver. Although some of the OEM’s had this coverage, the WSJ suggested that there were so many limitations and exclusions attached to their policies that claims will probably be insignificant.

What are the arguments for and against the use of LIFO? Advantages of last-in first-out (LIFO) method:

The employment of LIFO is very common among companies worldwide because of the following benefits: a. LIFO matches most recent costs against current revenues: The LIFO method provides a better measurement of current earnings by matching most recent costs against current revenues. The LIFO helps in reducing the inventory profits by matching the most recent costs against revenues. It results in reduction of understatement of cost of goods sold (COGS) and overstatement of profit. Therefore, the quali ty and reliability of earnings are improved under LIFO.  b. Tax benefits and improvement in cash flows: The major reason of the popularity of last-in, la st-in, first-out (LIFO) inventory valuation method is its tax benefit. c. LIFO minimizes write-downs to market:

The net income of a company that uses LIFO is less likely to be affected by decline i n price in future. d. Physical flow of inventory: Physical flow of inventory corresponds to the LIFO cost flow. Disadvantages of last-in, first-out (LIFO) method:

The major drawbacks of using LIFO as inventory costing method are given below: a. Reduced earnings in inflationary times: The LIFO method reduces reported earnings during the periods of inflation. Therefore, many companies fear that an accounting change to LIFO will have a negative effect on investors and will reduce the price of company’s stock because many investors may not be able to understand the impact of LIFO and inflation on the reported earnings.  b. Understatement of inventory: Under LIFO method, the balance sheet inventory figure is usually understated because it is  based on the oldest costs. Due to understatement of inventory, the working capital position may look worse than it really is. c. Problem of LIFO liquidation: The LIFO liquidation may inflate the reported income for a given period that results in higher tax payments for the period. To avoid this problem, a company may purchase goods in large quantities with the intention to match them against revenues. Therefore, the adoption of LIFO may develop poor buying habits among companies. d. Manipulation of income: A company using last-in, first-out (LIFO) method can easily manipulate its reported earnings for a period by changing its purchase pattern at the end of t he year.

Why is inventory control important to managers such as those of Wal-Mart and Best-Buy? The importance of inventory control is listed in following points: a.  b. c. d. e.

Inventory control protects a company from fluctuations in demand of its products. It enables a company to provide better services to its customers. It keeps a smooth flow of raw-materials and aids in continuing production operations. It checks and maintains the right stock and reduces the risk of loss. It helps to minimise administrative workload, manpower requirement and even la bour cost.

f. g. h. i.  j.

It tries to protect fluctuation in output. It makes effective use of working capital by avoiding over-stocking. It helps to maintain a check on loss of materials due to carelessness stealing. It facilitates cost accounting activities. It avoids duplication in ordering of stock.