Case Study #7

MURPHY MANUFACTURING

When Joe Vollbrach, vice president of operations for Murphy Manufacturing, was

given the CEO’s directive to investigate the lean production concepts and to implement

them if appropriate, he was slightly apprehensive. Everyone knew, he thought,

that MRP was the best way to run a manufacturing operation, and they had been

pretty successful with their MRP system. Once he read a couple of books and a magazine

article or two about JIT and lean production, however, he thought maybe there

was something to it and it sure seemed simple enough. Dozens of companies had

reported great reductions in inventory cost and other forms of waste, and with

Murphy Manufacturing having only five to six inventory turns per year, the prospect

of significant inventory reductions was very appealing.

Encouraged with the success stories and very mindful of the CEO directive, Joe

wasted no time. He put out the directive to all his people to implement lean production

the way it was working in the book examples he had read. A few months later,

however, he was beginning to wonder about the truth of the success stories in those

books. The following are some of the examples of the complaints he was getting and

the problems he was facing.

KAREN, THE PURCHASING MANAGER: “Joe, this JIT and lean production are a disaster for us.

It’s not only costing us a lot more money, but the suppliers are getting real angry with us.

Since our raw material inventory had typically been high, you said we should order

smaller quantities and have it delivered just in time for its need. Sure, that cut down on

the raw material inventory, but that cost saving has been more than made up for with all

the increased cost. First, purchase orders are not cost free, and we’re making a lot more

of them. That’s also taking up a lot more of our buyer’s time. Then there’s the transportation

cost. Since most of the trucking companies charge a lot more for less-than-full

truckloads, our costs are going sky-high with more frequent deliveries of smaller loads.

Combine that with expediting costs, and it gets really bad. Our schedules are changing

even more frequently, and without the raw material the production people are often asking

for next-day delivery of material they need for a schedule change. We’re flying more

parts in, and you know how much that costs!

That’s not all. Our suppliers are really wondering if we know how to run our business.

We’re changing that schedule to them much more frequently, and the only way they

can hope to meet our needs is to keep a lot of our inventory in their finished goods. That’s

costing them a lot of money in inventory holding costs as well as administrative costs to

manage the inventory and to process all our requests. They not only have more requests

from us, but it seems like everything is a rush order. They’re pressing us hard for price

increases to cover their increased cost to keep us as a customer. I’ve held most of them off

for a while but not much longer. Unfortunately, I agree with them, so it’s hard for me to

make any kind of logical argument to counter their requests for price increases.”

OSCAR, SUPERVISOR OF SHIPPING/RECEIVING: “If you’re going to keep this up I have to ask for

two more truck bays and about four more receiving clerks. There’s a lot more trucks

making a lot more deliveries. We can’t schedule perfectly when a truck will show up, so

many times during the day there are several trucks waiting for an open truck bay

Production people are screaming at us because they see a certain truck and they know aAlmost as soon as Marsha left, Valorie (the sales manager) came in. Joe braced

himself for more of a headache even before she spoke. The expression on her face

foreshadowed what she had on her mind:

“Joe, my job is to make sales and keep the customers happy. The sales have been going

fine, but our delivery stinks. Our on-time delivery record has fallen from 95% to less

than 50% in the past six months. Some of our customers are threatening to leave us, and

some are pushing for price cuts. According to them, our delivery record is so poor they

feel compelled to keep more of our inventory in their raw material stores to account for

their lack of faith in our delivery promises. They say that since it’s our fault they have

increased raw material inventory costs, we should compensate them with a price cut. It’s

pretty hard to argue with their logic. I’m sure we would do the same with our suppliers if

they treated us the way we’ve been treating our customers lately.

We all know our customers have to sometimes change orders to reflect what their

own customers want. Now, however, the changes are becoming more frequent and radical.

It seems since we are so poor in delivery they order more in advance from us to

buffer the time for our late deliveries. Ordering further into the future gives them a lot

less certainty of what they really need, so naturally they have to change once they do

know. I may have to get another order-entry clerk to deal with all the changes, and if I do

you better believe I’ll let everyone know the extra expense is your fault!

The bottom line here is simple, Joe. You’ve got to get after your people to improve

the delivery drastically or we may be in big trouble, and soon.”

After Valorie left Joe’s secretary came in with a rush memo from the CEO:

“I just got the preliminary financial report for the last quarter, and for the first time in

over five years we show a loss—and it’s a big one. That details show sales goals have basically

been met. The loss comes from a very large increase in expenses in virtually every

area in operations except a modest decrease in inventory cost. I’m calling an emergency

staff meeting for two o’clock today. Please be ready to explain the situation completely.”

As Joe shut his door to insulate himself from the complaints and to prepare for

the meeting, he began to wonder if some of the people who claimed that JIT and lean

production were a culturally based system impossible to implement outside of Japan

were correct. He knew most of the problems were related to his attempt to implement

the new system. What, he wondered, went wrong, and what should he do about

it? These were certainly two critical questions that would be major parts of the

two o’clock meeting, and he needed good and complete answers. The CEO was reasonable

and could deal with the fact that mistakes might have been made, but

she would expect a detailed analysis and complete action plan to get things back on

track. The aspirin was definitely wearing off, and it was less than an hour ago that he

took them!

Assignment

Prepare a complete and comprehensive report for Joe to use for his two o’clock meeting.

This should include both the analysis of what went wrong and why, as well as a

comprehensive and time-phased plan to implement lean production the correct way.

If you do not think lean production is appropriate, explain why in detail and develop

a comprehensive alternative plan.