THE BIG D COMPANY
The Big D Company of Dallas, Texas, was a family-owned, conservatively managed company. For over forty years the company enjoyed slow, steady growth in reaching its current employment level of just over 200. All expansions were financed entirely out of earnings. As the company grew, its operating procedures were periodically reexamined and modified to cope with the complex problems that accompany growth. The company developed, manufactured, and sold metering and flow control devices used in the chemical industry. Recently, as a result of declining profits, management was considering the advisability of installing a more formal system for controlling its cost of materials.
The company's product line contained about forty items, ranging in size from gauges and simple fittings to large flow meters weighing up to 150 pounds. Most of these were made in a number of different models and sizes, so that the total number of separate products was about 300. About half were standard models whose design had not changed greatly in the last ten years; others were subject to considerable technological change; a few involved special features for different customers, sometimes being made of special alloys to resist corrosive action of certain chemicals. Some of the more complex items were supplied with or without certain fittings and refinements. The company's position in the industry depended on its ability to keep ahead of its competitors in design, quality of product, customer service, and price-roughly in that order. It was the responsibility of the supply manager to obtain the castings, materials, and parts indicated. Castings were purchased in the exact quantity required for the manufacturing order. For the most part, the same was true as to bar stock, plate, and similar materials. On the highly standard material sizes, more than enough for one order might be purchased, and in most cases full lengths would be ordered, rather than the exact fraction required. On odd sizes of expensive alloys, the exact amount would be purchased even down to the inch. Standard nuts, bolts, studs, pipe fittings, and similar items were usually bought in standard commercial lot quantities, but even here the quantities did not greatly exceed immediate requirements, and frequently even these items were bought by the piece. Molded plastics and special fittings or stampings were sometimes bought in excess of immediate needs, especially when costs of small lot procurement were prohibitive. The supply manager did not alter the quantities shown on the make-and-buy sheet without discussion with the superintendent.
When materials began to come in, they were checked off the make-and-buy sheet and taken to the storeroom, to the production floor, or, if they were finished parts, to assembly. Little attempt was made to schedule work to the shop, and the machine shop foreman was free to work on any manufacturing orders on which materials had been received. It was up to him to keep his staff and machines busy and to meet the estimated completion dates. As parts were completed, they moved on to assembly, where they were placed in the tote box with other parts accumulated against that order. When all parts were completed, assembly could take place. Finished units were placed in stock in the shipping room or were shipped out immediately against orders.
Completion of the lot was not posted to the sales and production record until the entire lot was finished. Inasmuch as some units were often assembled well in advance of the completion of the entire lot, the sales and production record frequently indicated earliest delivery as some time in the future when, in fact, completed units were in storage on the shipping room shelves. In this way sales had been lost to competitors who quoted earlier deliveries. Other sales had been lost because in setting estimated completion dates the superintendent usually allowed himself more time than was necessary for ordering, machining, and assembly.
The company had no formal inventory control system. No record was kept of raw materials, purchased parts, or manufactured parts on hand. An informal tabulation of finished goods, the sales and production record, was maintained for each item. This showed the balance on hand, the amount currently being manufactured, orders received, customers' names, and dates of shipments made. It also showed the minimum stock balance and the standard manufacturing quantity. These had been determined at a top management level, taking into consideration past sales of the item, the time required for a production run, manufacturing economies, potential obsolescence, storage space available, and the financial resources of the company. In the last year, the minimum stock balance and the manufacturing quantity on most items had been revised upward because of a substantial increase in volume, delivery delays, and more frequent manufacturing runs. The company felt that about three to four runs per year was about right for each item. A typical manufacturing run required about nine to twelve weeks, most of which was consumed in obtaining castings. Actual processing in the plant required two to four weeks. Recently, it was found that jobs were frequently sold before completion and a second lot started before the first lot was finished. Currently, about fifty to sixty shop orders were initiated each month.
As customer orders were received, they were posted to the sales and production record. When such orders reduced the balance on hand and in process to the predetermined minimum, a notice of depletions was prepared, showing the balance on hand and the standard manufacturing quantity. This notice was sent to the plant superintendent. Big D did not have a formal production planning and inventory control activity. The plant superintendent, in determining the exact quantity to manufacture, was guided by the previously set quantities but consulted informally with the engineer, development, sales, and finance departments before each run. He then made out a make-and-buy sheet showing for the item in question the various parts required, the shop print numbers, the materials from which the parts were made, the quantity of each part required per completed unit, and the estimated completion date.
The make-and-buy sheet was forwarded to the assembly foreman, who checked off for each part the quantity of that part which had been accumulated from overruns on previous orders. No records were kept on such accumulated parts. The parts were stored in bins in the assembly department, and those counted out against the make-and-buy sheet were separated in a tote box against the time when that order would be assembled. The make-and-buy sheet was returned to the plant superintendent, who edited it to determine whether certain parts should be made or ordered in larger quantity than required for that particular order. Where parts were interchangeable, he might also consolidate them with other orders. The plant superintendent was familiar with the manufacturing process and setups involved, knew the price breaks on materials, and had a general knowledge of probable future demand. Before forwarding the make-and-buy sheet to the supply manager, the superintendent entered an estimated completion date, which in turn was posted to the sales and production record.
The plant superintendent's secretary performed the traffic function. Three young employees who were more or less under the control of the superintendent performed receiving and warehousing. Normally, when an incoming shipment arrived, the foreman would oversee its receipt. Supply reported to the plant superintendent. Certain executives felt that the company should establish a more systematic control over raw material, manufactured and finished parts, and finished goods inventories. They pointed to the orders lost, the waste of buying and producing in small quantities, delays in production and assembly occasioned by absence of materials and parts, and losses by misplacement, breakage, and pilferage. These concerned officials also felt that Big D might be able to make significant savings through a systematic control of surplus and salvage. Two of the officials expressed concern over the amount of money spent on transportation. No survey had been made to evaluate potential savings in these areas since no records were kept. Inventory losses could not be measured. Pilferage was probably negligible, because the only items having real intrinsic value (thermometers and similar components) were kept in a locked cabinet by the assembly foreman. Transportation costs were estimated to be 12 percent of the cost of purchased material.
Those who opposed changing the inventory control procedure pointed out the risks of obsolescence in any inventory accumulation, and, more importantly, the amount of funds that might be tied up in inventory and the space that would be necessary if substantial stocks of materials, parts, or finished assemblies were to be built up. They resisted the introduction of changes in the areas of production planning and control, receiving, warehousing, and traffic. They also pointed out that other uses of company buildings, equipment, research, and development would yield greater returns.
1. What specific action should the company take in the area of inventory control? Support your proposal with an analysis of its strengths and weaknesses.
2. What is your reaction to the argument of those who oppose tighter controls?
3. How would your recommendation in answering question 1 differ if this company were making a single product?
4. How does the inventory control problem change as the company's overall volume of business increases?
5. Do you think that Big D could benefit from the establishment of a supply chain management department? If so, what functions should it include?
Reprinted by permission of Prentice Hall, Inc., from Selected Case Problems in Industrial Management, 2d ed., by Holden, Shallenberger, and Diehm.