Read the following case study and answer the five questions at the end.
THE PRIVILEGED FLY
You are a privileged fly: You are allowed to be on the wall of a corporate boardroom during a high-powered discussion. The corporation is an engineering firm whose sales total approximately $140 million a year. Up to now, things appear to have been going well. Production does an efficient job, and inventories have been reduced. But danger signs are cropping up. Although no orders have been lost as yet, several shipments have missed their deadlines. Customers are beginning to complain. In addition, transportation costs on incoming and outbound freight shipments are mushrooming. It is 9 a.m., and several people are nervously sitting at the conference table. A stern-looking individual enters.
The Cast
Production manager: Heinrich Holtz, former blue-collar worker. Loves his machines and hates to see them idle. But beneath his "good for the corporation" exterior lies the soul of a power maniac who seeks control over traffic and purchasing.
Marketing manager: Harold Levi, a stereotype. Is afraid of losing sales because of late deliveries. Generally, echoes presidential statements. Appears ready to support Heinrich Holtz's power play.
President: Joe Gish, old-line type. Extremely successful. Has just attended a National Industrial Conference Board (NICB) seminar and is throwing a lot of new buzz words and thoughts around. From his subordinates' point of view, he is dangerous.
Traffic manager: Harold Tracks, another old-liner, but much less successful. Not good at verbalizing, except to quote percentage increases. His freight bills are going up, and he is being made to look bad by comparison.
Purchasing manager: Joan Glass, much younger than her associates. Does her best. Understands President Gish's words and tries to put some of them into action. Extremely inventory conscious.
Director of finance: Sol Stein, dedicated to cost reduction.
Action
(This is what the privileged fly observes and hears)
President Gish brings the meeting to order. "Look at these air freight bills! Here's one for $955-more than the damn part is worth! I know, I checked! These things are murdering us. You must realize that in our business today, transportation has great cost-cutting potential!"
Traffi manager Tracks responds, "I know that freight bills have risen 30 percent in the last six months, but what can I do? Miss Glass here is cutting inventories so hard that she never has anything in stock. Her short lead times force me to use air freight. And the way she spreads small orders, I almost never find a way to consolidate them to get volume rates. And I'm having the same problems with outgoing shipments. I'm caught in a two-bladed buzz saw!"
Purchasing manager Joan Glass interrupts to say, "Harold, we're operating on low inventories because we save money doing it. Many times air freight is the only way I can be sure of getting what I need on time."
Production manager Holtz comments, "And when I need something, I need it. Take spares. This 'downtime' is an awfully expensive proposition, and we all know it. Further, by the time Miss Glass here gets me needed production materials, we are so late that the only way to meet delivery dates is with overtime and the use of air freight."
Marketing manager Levi joins in, "Whatever the trouble, it seems there must be a way to get an efficient pipeline. If Heinrich is late, then I'm late. We're losing our image as a reliable supplier. Soon, we'll be losing sales!"
Traffic manager Tracks defends himself by saying, "I don't want to seem bitter, but it looks like I'm getting the short end of the stick."
President Gish interrupts to say, "No more excuses. I want action! Costs must come down."
Purchasing manager Glass defends herself by saying, "The lead-time problem goes right back through production and eventually to Harold's sales forecasts. I need earlier information."
Marketing manager Levi says, "I have to promise prompt delivery. We all know that the problem is at the other end."
Prduction manager Holtz suggests, "Like I've been saying for a long time, we should combine purchasing and traffic and get them closer to production."
At this point, purchasing manager Glass sounds frustrated when she says, "Heinrich, we're right back where we started. We need lower freight costs, but at the same time we must keep inventory down."
Director of finance Stein says, "Inventory carrying cost is over 30 percent a year. I think that Joan has done a great job. But I do agree with Mr. Gish that transportation costs are way over budget.
President Gish concludes the meeting by saying, "Heinrich's idea is a possibility. We could create a supply chain management reporting structure. I understand it's the coming thing. I'll give each of you one week to put all your ideas on paper. Be prepared to deliver your reports at our next meeting. I want us out of this fix...and soon!"
1. Discuss the basic inventory problem confronting this firm.
2. Air freight bills keep growing both in numbers and in total dollar value of freight transported. What are the factors that have contributed to the development of this situation? Do they reflect efficient or inefficient management of purchasing, inventories, and production in firms such as this one? Discuss.
3. What would be the benefits of a supply chain management structure for this company?
4. Should Glass build up her inventories?