Question
3 Company information
Coruisk is a clothing manufacturer in Teeland which produces a range of dresses which it sells to Ericht. The range of dresses are the only products which Coruisk produces and Ericht is its only customer.
Ericht is a well-known retailer in Teeland. Ericht has recently been affected by changes in consumer purchasing preferences to buying clothes online and, as a result, is keen to reduce its inventory holding as a way of reducing its costs. Ericht is also finding that it has an excess of goods which it has to discount as consumer tastes appear to change more quickly than in the past.
Current purchasing policy
Coruisk currently obtains its raw material from four suppliers. Each of these suppliers operates differently in terms of the processes and procedures which they adopt in trading with Coruisk. Coruisk has been agreeable to this, as the quality of the raw material supplied has generally been acceptable.

More recently, however, Coruisk has found reason to question the accuracy and quality of the raw material delivered from one supplier. Additionally, another supplier now only despatches material to Coruisk in full-load quantities as it wishes to optimise the use of its delivery vehicles.
Current production methods
The performance metric at Coruisk for production efficiency is the number of dresses produced per period. Coruisk’s method of production is to produce individual dresses in long production runs which has helped in maximising output.
Staff working in the production department have their bonus based on this metric. Goods which have not been produced to the required standard have traditionally been rejected at the end of the production process. Coruisk’s production control manager has indicated to you that the current production methods have been successful, as the company only has 5% of its goods returned from Ericht due to poor quality.

JIT and costs of quality
Ericht would like to move to a just-in-time （JIT） system of purchasing its goods from Coruisk. The board of Coruisk has asked you for help, as a management consultant, to advise it as to how the company may have to change its approach to the areas of purchasing and production to prepare itself for producing to JIT principles.
The chief executive officer （CEO） does not believe that the company will encounter any problems in adapting to Ericht’s requirements and has told you: ‘we have very good quality control practices and procedures in place and are confident that we are consistently supplying goods which are required at an acceptable price and at high quality. Our practice of testing goods at the final stage of production, and before they leave the factory, supports this.’
Coruisk’s CEO has also made available to you a list of costs which she believes address all relevant costs of quality.
These costs are detailed in Appendix 1. The headings for a cost of quality report are also supplied in this appendix. She indicated that some of these costs have never been measured before and have been given financial values to help you give advice. She also told you that Coruisk’s current revenue is $4·5 million.

Required:
It is now 1 September 20X5.
（a） Assess the changes which Coruisk will have to make in the areas of purchasing and production in order to supply goods to Ericht on a JIT basis. （13 marks）
（b） Prepare a cost of quality report for Coruisk based on the information in Appendix 1 and comment on potential quality cost changes in light of the proposed move to JIT. （12 marks）
（25 marks）

Appendix 1
CEO’s estimates of quality related costs

Cost of quality report headings
Costs of conformance:
Prevention costs
Appraisal costs
Costs of non-conformance:
Internal failure costs
External failure costs
* The foregone contribution from lost sales is an estimate made by the CEO of potential sales lost to Ericht due to problems related to production and delivery experienced by Coruisk.

Mind set

Answer
3 （a） Just-in-time （JIT） is defined as a system which has the objective of producing or procuring products as they are required and not for inventory purposes. Coruisk is being asked to produce to JIT principles, the basis of which is where production is driven by demand for the finished product. Each part of the production process is therefore determined only by what is required for the next stage of production.
Currently, it is clear that Coruisk is not ready to produce to the JIT principles which Ericht is requesting and that Coruisk needs to make fundamental changes to its operations to be able to do so. These changes address the following areas:
Purchasing
Coruisk has too many suppliers at present. Adhering to JIT production principles involves reducing suppliers to a minimum and establishing strong relationships with them, based on flexibility and understanding of each other’s needs.
Coruisk’s four main suppliers are too many to develop this type of close relationship with, especially since these suppliers operate to different working practices. The effect of this, from a JIT production perspective, would be that Coruisk would require to undertake discussions with each supplier about the fundamental changes which would be required for the supply of goods in a JIT production environment.

Coruisk would not have the time to do this with all four suppliers nor would the supply of goods from four companies be desirable. Coruisk should choose two of the companies it feels it has the strongest relationship with and initiate discussions with them around its needs when producing to JIT principles.
When producing to JIT principles, suppliers will effectively be an extension of Coruisk’s own business. As such, Coruisk must be aware of and must understand how changes in suppliers’ operations will affect Coruisk’s own operations. It is clear that Coruisk does not currently have this level of relationship. The supplier who is seeking to optimise the cost of its delivery vehicles, for example, is undertaking practices which are very much opposed to the type of practices which Coruisk will need when it is producing to JIT principles.
JIT only produces goods when needed by the next stage in the process （the ‘kanban’ principle） and Coruisk would need its supplier to understand this and be willing to supply it with goods accordingly. This would clearly be impossible for a supplying company which is insistent on supplying full-load quantities only.

Coruisk must also ensure that the raw material it receives is defect free, unlike the goods which are received currently from one supplier. Having the wrong quantity of material or material which is sub-standard, is unacceptable if Coruisk is producing to JIT principles as such problems will mean an inevitable delay in supplying goods to Ericht. Coruisk will therefore need to spend time in defining and agreeing requirements with suppliers to clarify requirements in terms of both quality and quantity and may need to also develop improvement teams with their suppliers to ensure that the raw material it receives is reliable.
Coruisk will most likely need to undertake official supplier assessments as part of this as such assessments and on-going reviews are a vital part of ensuring the quality of the raw material in a JIT production system.

Production
The manner in which Coruisk produces its goods will need to change significantly. Efficiency can no longer be measured by volume of output. Ericht will seek supply of goods as and when required in order to avoid obsolete inventory and Coruisk must adapt to this. The concept of producing as much as possible is one which Coruisk may struggle to abolish.
It is clearly embedded in the culture of the organisation with its importance confirmed by the awarding of a bonus based on the quantity of goods produced. Presumably this bonus has been awarded without taking account of any goods which have been rejected and it is possible that the current system is encouraging production to be undertaken quickly with rejected goods seen as an acceptable part of the production process.
Producing to JIT principles would demand a fundamental rethink at Coruisk in terms of the way production runs are determined. Of most significance, initially, is that such runs would be shorter as all parts of the production process should match the rate at which Ericht is demanding the final product.

For example, Coruisk can no longer focus on producing large runs of one dress. Necessary changes here may involve the development of machine cells. Such cells are composed of groups of team members to facilitate operations by eliminating setup and unneeded costs between operations. Cells might be designed for a specific process or part of a product. In Coruisk’s case, this may mean workers being grouped together by the dress they are producing at that time rather than as part of a long production run.
Enhancing worker flexibility, and developing their skillset in several areas of the operation, may be the best way to react to this new environment where demand is much more unpredictable. This may also involve changing the layout of the factory to try to ensure production is as flexible as possible.
Coruisk cannot supply faulty goods to Ericht and the previous belief that a 5% rejection rate was acceptable practice must be replaced by an understanding of the zero defects philosophy. This will require more fundamental change as quality of the finished good will need to be assured throughout the production process and not simply inspected at the end. This will most likely involve an initial discussion with Ericht as to the quality level it is seeking and, potentially, a redesign of the current processes and systems to which Coruisk is operating.

For example, prevention and appraisal costs would be expected to increase as Coruisk would have to establish both goods inwards testing procedures and testing procedures for work in progress. There would also be a need for Coruisk to develop a culture where workers are flexible in terms of their capabilities and trained much more in identifying defective products （and ensuring they do not progress further on the production line） than in ensuring the maximum quantity of output is produced.