CASE STUDY 1: The RealcoBreadmaster

Two years ago, Johnny Chang's company, Realco, introduced a new breadmaker, which, due to its competitive pricing and features, was a big success across the United States. While delighted to have the business, Johnny felt uneasy about the lack of formal planning surrounding the product. He found himself constantly wondering, "Do we have enough breadmakers to meet the orders we've already accepted? Even if we do, will we have enough to meet expected future demands? Should I be doing something right now to plan for all this?"

To get a handle on the situation, Johnny decided to talk to various folks in the organization. He started with his inventory manager and found out that inventory at the end of last week was 7,000 units. Johnny thought this was awfully high.

Johnny also knew that production had been completing 40,000 breadmakers every other week for the last year. In fact, another batch was due this week. The production numbers were based on the assumption that demand was roughly 20,000 breadmakers a week. In over a year, no one had questioned whether the forecast or production levels should be readjusted.

Johnny then paid a visit on his marketing manager to see what current orders looked like. "No problem," said Jack Jones, "I have the numbers right here."

WEEK PROMISED SHIPMENTS
1 23,500
2 23,000
3 21,500
4 15,050
5 13,600
6 11,500
7 5,400
8 1,800

Johnny looked at the numbers for a moment and then asked, "When a customer calls up, how do you know if you can meet his order?" "Easy," said Jack. "We've found from experience that nearly all orders can be filled within two weeks, so we promise them three weeks. That gives us a cushion, just in case. Now look at weeks 1 and 2. The numbers look a little high, but between inventory and the additional 40,000 units coming in this week, there shouldn't be a problem."

Questions

1. Develop a master production schedule for the breadmaker. What do the projected ending inventory and available-to-promise numbers look like? Has Realco overpromised? In your view, should Realco update either the forecast or the production numbers?

2. Comment on Jack's approach to order promising. What are the advantages? The disadvantages? How would formal master scheduling improve this process? What organizational changes would be required?

3. Following up on Question 2, which do you think is worse: refusing a customer's order up front because you don't have the units available or accepting the order and then failing to deliver? What are the implications for master scheduling?

4. Suppose Realco produces 20,000 breadmakers every week rather than 40,000 every other week. According to the master schedule record, what impact would this have on average inventory levels?

CASE STUDY 2: Supply-Chain Challenges in Post-Earthquake Japan

Japanese automakers have long been known for the quality of their products, and especially for the efficiency of their streamlined manufacturing and supply processes. Thus, few people could have predicted how severely the destructive earthquake and tsunami that struck Japan in March 2011 would disrupt the country's entire auto industry. Matters were further complicated by the damage the quake and floodwaters caused to one of Japan's nuclear power plants, interrupting power supplies around the country and creating a dangerous radiation zone for miles around the plant.

Following the quake and ensuing floods, most automotive factories in Japan were closed for at least several weeks, bringing to a halt about 13% of worldwide auto production. Toyota, Honda, and Mazda shut down many of their parts and manufacturing plants in Japan, and Toyota also announced plans to suspend production in at least one North American plant because of parts shortages. The company said it would make plant improvements and run training programs in its other U.S. facilities while the assembly lines were idle or run operations on a part-time basis to conserve its parts inventory. Honda, Nissan, and Subaru also reduced their North American output as they anticipated and tried to deal with expected parts shortages.

The disaster zone in Kesennuma, Miyagi prefecture, 100 days after a massive 9.0-magnitude earthquake and tsunami devastated the northeastern coast of Japan.

Since one of the guiding principles of Lean production is to keep parts inventories as low as possible, it wasn't long before these shortages occurred. "The supply chain in the automotive industry is so fragile," said one legal advisor to the global auto industry. "It's based on just-in-time principles, where you don't have a lot of inventories built up, so you leave yourself without much margin for error when a supply interruption happens."

Industry observers predicted that about half of Japan's auto capacity would remain closed for at least eight weeks after the disaster, which would eventually put about one-third of worldwide production in jeopardy, as the effects of parts shortages made themselves increasingly felt in manufacturing facilities far from Japan. One auto industry research firm predicted that about five million cars that the industry had expected to sell in 2011 would never be made.

By spring and summer 2011, in fact, U.S. auto dealers were reporting what one called "a lot of emptiness" in their showrooms. Many logged dwindling sales as supplies fell to as little as one-fifth their normal levels, and popular cars such as the Honda Civic and Accord went out of stock. Without new cars to sell, even trade-in sales were slowing. Honda posted a 27% decline in sales for August 2011, and Toyota anticipated a dramatic 31% profit decline for the year. Although the Japanese auto industry worked hard to quickly return to full capacity, output was still not fully restored some six months after the disaster. The disaster's long-lasting ripple effects thus motivated industry executives to consider some changes in their vaunted manufacturing and supply operations. Traditionally, Toyota had used a single source for many parts that were common to more than one of its car models. Although the company locally sources about 85% to 90% of parts and materials needed for its North American manufacturing operations, a strategy that should make it less vulnerable to supply interruptions in Japan, it actually builds a larger proportion of its vehicles in Japan than do the other automakers, so the 2011 disaster was a serious blow.

In response to these problems, Toyota's management began work to "foolproof" the supply chain so that it could recover from major interruptions in as little as two weeks. The plan had three parts. First, Toyota would increase standardization of auto parts so all Japanese carmakers could share the supply. These parts would be made in several locations to ensure uninterrupted supply. Next, the company asked its upstream suppliers of highly specialized parts, or parts that are sourced from only one location, to hold larger inventories than they had been carrying, as and opened up new options for manufacturing such parts to reduce its dependence on single sources. Finally, and perhaps most ambitiously, Toyota took steps to make each of its global regions independent of the others in terms of parts supply, so supply chain disruptions in one area will not spill over into the operations of any other areas.

Questions

1. What are some of the advantages of the supply chain used in the Japanese auto industry before the March 2011 earthquake and tsunami? What were some of its disadvantages?

2. Is Toyota's plan for a "foolproof" supply chain consistent with the Lean production philosophy? Explain.

3. Can you think of any additional ways Toyota (and its competitors in the Japanese auto industry) can improve upon the company's plan to create a "foolproof" supply chain?

4. What impact do you think Toyota's plan will have on the way it handles relationship management in its supply chain?