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Working Capital ManagementWorking capital managementInventory ManagementJust-In-Time
This question is part of a case study — click to read the full scenario(Case 16)

Section B - Case 1: VerdiGrow

Scenario: VerdiGrow is an agricultural technology firm facing cash flow issues due to seasonal demand. The company currently has the following working capital metrics:

  • Receivables days: 65 days
  • Payables days: 40 days
  • Inventory days: 55 days

VerdiGrow's main supplier is offering an early settlement discount of 2% if invoices are paid within 10 days, rather than the current 60 days taken by VerdiGrow. Assume a 365-day year.

Question:
What is VerdiGrow's current cash operating cycle?

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ACCA · Question 18 · Working Capital Management

Section B - Case 1: VerdiGrow

Scenario: VerdiGrow is an agricultural technology firm facing cash flow issues due to seasonal demand. The company currently has the following working capital metrics:

  • Receivables days: 65 days
  • Payables days: 40 days
  • Inventory days: 55 days

VerdiGrow is considering implementing a Just-In-Time (JIT) inventory system to reduce its inventory days.

Question:
Which TWO of the following are likely consequences of successfully implementing a JIT system for VerdiGrow?

Answer options:

A.

A reduction in inventory holding costs.

B.

An increase in the cash operating cycle.

C.

An increased reliance on the reliability of suppliers.

D.

A decrease in the number of orders placed with suppliers.

How to approach this question

Consider the mechanics of Just-In-Time: holding almost zero inventory and ordering only when needed for immediate production.

Full Answer

Just-In-Time (JIT) inventory management aims to hold zero or near-zero inventory. This directly reduces holding costs (storage, insurance, tied-up capital). However, because there is no buffer stock, the company becomes highly dependent on suppliers delivering exactly on time and with perfect quality.

Common mistakes

Assuming JIT decreases ordering costs. JIT actually increases ordering costs because orders are placed much more frequently.
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