SHIPPER MANUFACTURING COMPANY

Teaching Notes
Synopsis and Purpose
Shipper Manufacturing Company is a manufacturer of electrical products, laminated
materials, and specialty products. The Advanced Products Division (APD), which manufactures the
specialty products, has reformulated its corporate strategy. As a result, its manufacturing strategy
should also be revised.
In the past, APD has manufactured custom products in low volume for its customers. The
division plans to gradually add higher volume products for multiple customers. As a result, changes
will be needed in manufacturing to effectively compete in the new environment.
The purpose of the case is to expose the students to the concept of a manufacturing strategy
and the changes in manufacturing which are associated with a change in strategy. The case provides
an effective vehicle for teaching this and also for the concept of integrating all aspects of operations.
Discussion Questions
1.

What objectives should be adopted in manufacturing with respect to cost, delivery, quality,
and flexibility?

2.

How should the objectives in manufacturing be achieved though process, organization,

equipment, work force, capacity, scheduling, quality management and production and
inventory control systems?

Analysis
The impending change in business strategy implies a change in manufacturing toward higher
volume and lower cost products. Presently the products are custom-designed and costs are passed
through to the customer. In the future, the products will be producer-designed and costs will not
necessarily be passed through to the customer. Because of more intense competition, cost becomes a
more important objective, while flexibility is simultaneously reduced.
The quality objective will not necessarily be changed by the new business strategy. The
division must decide where it wants to position itself on the quality spectrum.
The delivery objective will probably be changed toward shorter lead times in order to
compete. Since the product is not custom designed, the customer may expect some products to be
held in finished goods inventory. Customers may also insist that raw materials inventory be carried
so that some products can be quickly produced.

C-1

The change in business and manufacturing strategy will cause changes in all aspects of
operations.
1.

Process/Equipment. As low cost and volume is emphasized, the production process

will probably use more automated equipment. This will accompany standardization
of the product and less flexibility for product and volume changes. As a result the
production process will become less labor intensive.
Another expected change in the process is a tendency toward line flow processes and
away from a job shop layout. Line flow will be a more efficient form of layout
because of higher volumes and increasing automation.
We can also expect the flow of control information to change as the process shifts
from make-to-order to make-to-stock. In this case the order cycle will become
separated from the inventory replenishment cycle. We might also expect a slight
movement toward more vertical integration, although the company is already
substantially vertically integrated with its own materials division.

2.

Organization. With the move toward higher volume production which is made-tostock, a production control function will be needed in manufacturing. While the
industrial group has shared services in materials management, a separate department
in APD manufacturing is needed to focus attention on the production and inventory
control task.
The APD should also consider moving quality (product) assurance under the
manufacturing department. This will provide the opportunity to make quality more
than merely "outside inspection" and to consider quality as part of the production
process.

3.

Work force. Changes in the work force will follow changes in equipment. The direct
production work force will become less highly skilled and less well paid. There will
be fewer people in the work force due to automation. As cost control becomes more
important, there will be more emphasis on production standards and labor reporting.
The work force will also probably become more alienated and dissatisfied with their
work, unless management takes positive steps to prevent these attitudes from
developing.

4.

Capacity, Scheduling and Production and Inventory Control. There will be a gradual
change in stocking policy until more raw materials and finished goods are carried in
inventory. These changes will be needed to support higher volume production and to
achieve better customer service (reduce lead times). As a result, internal changes in
production and inventory control (PIC) will occur. PIC will need to upgrade the
manual system to the new computer, and they will have to make the computer system
effective so it is not duplicated by the manual system.

C-2

As the operation becomes more line oriented and make-to-stock, it will be possible to
utilize a higher percentage of capacity. Also, scheduling will become more complex
and critical to insure a smooth flow of materials and high capacity utilization.
The production and inventory control people will probably have to gain more
professional knowledge. They can do this through training courses or through
APICS affiliation. Some outside people may be brought into production and
inventory control with the required knowledge and experience.
5.

Quality. Quality control will need to become more high-volume-production oriented

rather than job-shop or project oriented. This change may include the use of quality
control charts, more emphasis on process control and inspection, and more careful
training of employees. With high volume production, quality will need to be more
preventative rather than reactive to avoid high scrap rates or too many returns from
customers.
Some of the current team work may be lost as the organization becomes more
structured toward mass production. Therefore, it may be necessary to institute
quality teams or total quality programs to prevent deterioration of quality.

Teaching Strategy
This case can be taught in the same order as the discussion questions. It is helpful to identify
the changes that will occur in manufacturing objectives before discussing detailed changes in
manufacturing infrastructure. The changes in manufacturing should flow naturally from the changes
in objectives.
This case serves as an overview of the entire course since it touches on all aspects of
operations. It also helps emphasize the interrelationship of decision making in operations and the
overriding role of strategy and policy. It should take about 45 minutes to teach the case.

C-3

FHE, Inc.
Teaching Notes
Synopsis and Purpose
FHE is a manufacturer of pumps and related fluid-handling equipment faced with
organizational questions for management about new product development projects. There are
technical program managers in the engineering department and product managers in the marketing
department who seem to have overlapping job responsibilities. Questions are also raised about the
load on central drafting services, since as many as twenty separate projects may all be demanding the
same services at the same time. Manufacturing receives the specifications for new products only
after design has been completed, preventing the consideration of manufacturing's concerns during the
design stage. Finally, the case presents a scheduling method, using a Gantt chart, which provides the
basis for a discussion of scheduling methods and procedures.
The purpose of this case is to examine the role of departmental relationships in the new
product development process, to look at the influence that technologies such as CAD-CAM might
have, and to evaluate typical problems encountered in project management. It can be used after
reading Chapter 3 on product design, or after Chapter 14 on project management. This particular
case does not require special computational or quantitative skills.
Discussion Questions
1.

What steps should Mr. Donaldson take to improve the new-product development process at
FHE?

2.

What could be done to clarify the organizational relationship between product managers,
technical program managers, and manufacturing managers?

3.

What can be done to better manage the workload of the engineering services department?

4.

Evaluate the plans and the expected results from the new CAD-CAM system.

Analysis
As far as question 1 is concerned, Mr. Donaldson should take the following steps:
1.

Clarify the organizational relationship between the Technical Program Managers

(TPMs) and the Product Managers. It is apparent in reading the job descriptions in
Exhibits 2 and 3 that several points of conflict exist. For example, the Product
Manager is given the following responsibilities which potentially conflict with the
TPM:
I.

C.

"Monitor project activity and take action where necessary to ensure

integrity of the project."
C-4

I.

E.

"Ensure the coordination of all technical resources related to new

product development and introduction; to include engineering,
manufacturing, marketing, and service.

II.

C.

"Monitor engineering change order activity and take action where

required."

Each of these responsibilities involves some overlap with those stated in Exhibit 2 for
TPMs, especially those areas where "technical" issues are involved.
2.

Mr. Donaldson should develop a procedure to more accurately forecast load on the
engineering services department. At the present time up to twenty different projects
may require use of the engineering services department at the same time. If the load
can be forecast in advance, then steps can be taken to establish priorities, authorize
overtime, or take other measures to manage the load.

3.

Mr. Donaldson should review the project management system in use. He needs to
evaluate the cost, performance, and time results which have been achieved on past
projects. This will give him a basis for deciding whether present project management
systems are working or not.

Discussion Question 2 asks for specific actions which can be taken to clarify the
organizational relationships between product managers and TPMs. Several approaches can be taken.
Changes could be suggested in the organization chart, in job descriptions, or in "dotted-line"
reporting relationships.
The organization chart has a president in charge of marketing, engineering, and
manufacturing. Below that level these three organizations are still entirely separate. One step that
could be taken to better integrate these three parts of the organization is to put the product
managers, the TPMs, and the process design staff under a single manager who is in charge of product
development. The organization chart, in part, would then be as follows:

C-5

President

U.S.
Marketing
Manager

Market
Planning
Manager

Product
Dev
Manager

Corp Engr
& Quality
Mgr.

Product
Manage
r

TPM

Product
Manage
r

TPM

Product
Manage
r

Manufactur
ing
Manager

TPM
Process
Design

Another approach to this problem is to clarify the job descriptions in order to reduce the
apparent conflict. This will require the U.S. Marketing Manager and the Corporate Engineering and
Quality Assurance Manager to get together and hammer out an agreement on how potential conflicts
and overlap areas will be handled.
A third approach is to create product-based teams. Team members would include
representatives from all involved functional areas: Marketing, Engineering, and Manufacturing.
Team members would jointly be responsible for the development of a given new product. Such
teams could be temporary -- disband when the project is done, or permanent -- be responsible for
successive new product introductions. These teams members would report to their own functional
areas but also have a dotted-line relationship to whomever is in charge of new product development,
whether this would be the Marketing Manager or a New Product Development Manager.

C-6

Regarding question three, the Engineering Services Department has a classic problem with
support services being provided to several different projects from a single support department. One
way to solve this problem is to ask each project manager to forecast the staff hours of support
services (by type) that will be required for their projects. These forecasts should not be made too far
into the future because of schedule changes, technical uncertainties, etc. Perhaps, a one-month
forecast by week might be required from each project. The manager of the Engineering Services
Department, Al Hanson, could then add up these estimates of workload for all projects by week and
obtain a total estimate of manpower required in drafting, model shop, testing facilities and technical
documentation areas. It would then be apparent where the capacity problems occur and alternative
actions could be considered. These actions might include overtime, rescheduling projects, or
obtaining outside resources.
The new CAD-CAM system could indeed serve as a way of coordinating Marketing,
Engineering, and Manufacturing. However, such integration is not easily achieved; simply
purchasing and installing the system will not cause interfunctional coordination to occur. Upon
installation of CAD-CAM, each of the functional areas needs to integrate the system into its day-today operations before the benefits of improved coordination can be realized.
Teaching Strategy
In teaching this case, I start with the discussion questions which the students have prepared in
advance. Question 1 allows me to get the general approach for improving new product development
on the board. This approach will probably include issues from questions 2, 3, and 4 that the students
may suggest.
After listing the general approach, the discussion can be turned to specific suggestions in each
area. I generally take about ten to fifteen minutes to get the general approach defined on the board.
And, then I take an average of about ten minutes to discuss each of the suggested improvements.
The case can therefore, be discussed in about an hour with slightly more or less time possible
depending on the pace and depth of analysis chosen.
It is often advisable for the instructor to provide a wrap-up and to highlight the key points or
lessons taught in the case. Sometimes a student can also provide this wrap-up. In any case, students
need a summary to pull things together especially after a number of different issues have been raised
and discussed during the case analysis.

C-7

EASTERN GEAR, INC.

Teaching Notes
Synopsis and Purpose
Eastern Gear is a company that traditionally produced custom gears in small lots, and has
recently been given the opportunity to begin producing larger volumes of gears per order. This is a
typical small job shop which is owner operated. In addition, Eastern Gear has experienced a large
increase in sales which is causing major problems in operations. Because of the wide range of
problems presented, the case permits an overview of a job shop type of operation and practice at
looking at the entire scope of operations including objectives, capacity, production and inventory
control, organization, and quality.
The purpose of this case is to allow students to examine a complex manufacturing problem
and the associated decisions in some detail. The case illustrates how problems are interrelated and
how objectives might be clarified before decisions can be made. It also provides a fundamental
understanding of what a job shop is like and the typical problems faced in job shop management.
Discussion Questions
1.

What are the major problems being faced by Eastern Gear?

2.

What action should Mr. Rhodes take to solve his problems?

3.

How can this case be related to operations strategy and process design concepts?

Analysis
Eastern Gear is experiencing a wide range of problems including:
1.

Need for objectives in operations. It is not clear at the present time whether
operations should emphasize cost, flexibility, delivery, or quality. The desired
emphasis on these objectives needs to be clarified.

2.

Lack of an order size policy. Eastern Gear has accepted a wide range of order sizes
as shown in Exhibit 2. Furthermore, Eastern Gear's President has just decided to
accept a few larger orders. The two types of order sizes are best served by different
operations strategies and different process designs.

3.

Lack of planning for growth. It does not appear that the company has a strategy or
plan for future growth. As a result, the company could experience cash flow
problems, capacity problems and other problems associated with rapid growth.

C-8

4.

Production and inventory control. At the present time expediting seems to be the rule
rather than the exception. Twenty percent of the orders have rush tags on them.
Production processing time has increased from two to four weeks, and there does not
seem to be a production and inventory control system in place. Also, certain orders
are being handled on a rush basis and this may be disruptive to the smooth flow of
production. Finally, Joe Irvine has expressed concern about bottlenecks which are
caused by the lack of effective production and inventory control.

5.

Poor Quality. There seems to be a lack of quality control as evidenced by the six
percent return rate. Many of the returned orders seem to be missing one or more
operations.

6.

Organization chart. The present organizational structure does not have a clear
separation of functions. The Engineer is involved in shop floor supervision. The
Controller is responsible for purchasing, which is a manufacturing function. The
expediters job is defined too narrowly.

7.

Raw material inventory. Due to lack of a raw material inventory, delivery lead time is
extended by one or two weeks. Some of the high usage raw materials could be
carried in order to reduce lead time.

8.

Layout. The present layout of the shop results in irregular material flows and
excessive travel distances.

The solution to these problems is intertwined and can start in many different places. We will
discuss the possible solutions in order of the problems presented.
With regard to objectives for operations, it appears that delivery lead time is very important
for the custom gear business. However, the operations objectives for larger order sizes are not
necessarily the same; cost becomes more important in that situation.
The case refers to additional profits available from reduced delivery times. Based on Exhibit
4, the variable cost of material and labor is about 50% of total cost (assuming for the moment that
other costs are fixed or semi-fixed). If sales can be increased by $500,000 through reduced delivery
times or other means, as much as $250,000 could flow to the bottom line.
The custom gear business places more importance on delivery lead time as an objective than
on cost. The gears are used for R&D where the costs of the gears themselves are probably a small
percentage of the total customer's costs. However, the entire R&D project can be held up if the
gears are not available in time.
Quality is important, at least to the extent that it affects the functioning of the customer
product or causes a delay in schedule while repairs are being made.
Flexibility is also of great importance for Eastern Gear's customer gear business. As a result,
Engineering and Marketing should be working closely with the customers to make sure they get
what they need. Flexibility is the key to providing customer service. Generally speaking, the
importance of flexibility is decreased with larger orders.
C-9

My ranking of the objectives from most important to least important for the custom gear
business is: 1) flexibility, 2) delivery, 3) quality, and 4) cost. Larger order sizes might emphasize
quality and cost rather than flexibility and delivery.
The decision by the President of Eastern Gear to accept a few larger orders has many
implications for the manufacturing organization and its present problems. First of all, it aggravates
the problem of lengthening delivery intervals, given the present job shop environment. Secondly,
manufacturing in larger lot sizes is better accomplished using a line flow manufacturing process and
layout.
The lack of planning for growth can be solved by developing at least a one-year plan. The
plan should include market objectives, financial projections, and capacity plans, as a minimum. An
elaborate plan is not needed, but the basic issues need to be addressed. As a result of this plan, a
strategy for acquisition of space by operations should be determined.
Production and inventory control can be improved in several ways. First, a production load
or schedule should be developed and constantly kept up to date. When a new order is accepted, it
should be placed on the schedule and the delivery date promised accordingly depending on the load
on the factory at the time of order acceptance. For a company of this size, the schedule could
probably be kept on a personal computer. An elaborate system is not warranted for a small company
such as Eastern Gear.
Rush orders should be handled through the scheduling system, and not by Fred Dirkson. The
rush orders are probably causing delays in other orders, so the current rush order policy needs to be
reconsidered. A premium could be charged for rush orders to make it worthwhile to save capacity in
the schedule for these orders, or capacity could be saved for special customers simply to provide
better delivery service.
Expediting should be limited to those orders which absolutely need it. Twenty percent of the
orders with rush tags seems too high. With better scheduling, expediting might be held to a small
percent of the orders.
The poor quality should be corrected immediately, especially since 75 percent of the returns
are due to missing operations. An operations sheet should be prepared for each order. The
operations should then be checked off as the order is routed through the factory. The operations
sheet should stay with the order during production.
An inspector should be designated to check each order before it is shipped. Final inspection
should include checking the operations sheet to be sure all operations were performed. Other final
inspections should also be made as specified by the engineer. This amounts to "inspecting quality
into the product", but is probably needed until the processes can be controlled.
The company should be reorganized to clearly separate functions. Engineering should be
separated from manufacturing. With the present organization, critical engineering functions are not
being done because the engineer is busy managing manufacturing.
Expediting should be eliminated and replaced by a production and inventory control manager.
Purchasing should also be placed under manufacturing to form a materials management position
responsible for coordinating scheduling, inventory and purchasing.
C-10

Perhaps a finance function should be developed in place of the controller and marketing
should replace sales. The resulting organization chart would be as follows:
President

Marketing

Engineering

Manufacturing

Materials
Management

Finance

Foreman

This organizational structure would require hiring one additional person, a manufacturing manager.
It might also require training or replacing some of the present managers.
A small raw materials inventory could be carried at low cost. Since delivery lead time is of
the essence, some raw material inventory would probably be a good idea. Carrying three items (E,
H, J) would cover 47 percent of usage. Carrying an additional five items (A, D, G, I, and K) would
raise the coverage to 82 percent of usage. If delivery lead time is as important as the case indicates,
it might pay to carry all eight items. In this case 82 percent of usage is covered by 20 percent of the
items -- a good illustration of the ABC principle.
The layout needs to be improved by streamlining materials flows. One way to do this is to
interchange the heat treating and drilling departments. If this is done, there will be little backtracking
and a smooth flow of materials. Eastern Gear should consider incorporating a manufacturing cell
into its facility. The cell would utilize a line flow layout and would serve as a more appropriate
method for manufacturing large orders or possibly rush orders.
If the above steps are taken, delivery lead time should be reduced to its previous level of 3-4
weeks maximum and 5 days on rush orders. Returns for quality should be reduced from 6 percent to
about 1.5 percent of sales. 1988 sales should increase to at least $5.5 million and profitability should
be improved.
Teaching Strategy
I teach this case by getting a list of problems on the board such as the list given above. This
will usually take about 15-20 minutes depending on how much discussion develops.
I then ask for solutions in each of the problem areas which takes another 45 minutes or so. I
wrap up the case by emphasizing the role of objectives and tradeoff decisions in operations. I also
indicate how all the problems are interrelated and they should, therefore, not be viewed in isolation.
For many students, the case is their first exposure to a job shop or manufacturing company. They
consider Eastern Gear to be a good learning experience.
C-11

THE mi adidas MASS CUSTOMIZATION INITIATIVE

The teaching note for The mi adidas mass customization initiative can be obtained from IMD. IMD
does not permit reprinting of their teaching notes. The teaching note can be obtained by contacting
IMD at
Tel: +41-21-618-0217
Fax: +41-21-618-0707
IMD - International Institute for Management Development
Chemin de Bellerive 23, P.O. Box 915, CH-1001 Lausanne
Switzerland
www.imd.ch

The IMD Case number for mi adidas is IMD-6-0249

C-12

PLASTECH, INC.1
Teaching Note
Synopsis and Purpose
The Plastech case opens with Lincoln Smith reviewing the financial statements for fiscal years
1992 and 1993. The company has seen a dramatic fall in profits, barely breaking even in the current
year. Lincoln must determine the cause of the decline and propose a plan of action.
The case requires the student to analyze financial and operating statistics to determine what
caused the decline in profits. The detective work should show direct labor productivity falls
dramatically, which was caused by the addition of a third shift, which was required to accommodate
the additional setup time, which was caused by the greater number of customers and products, which
was caused by the change in marketing strategy. Students should conclude that the new marketing
strategy resulted in a mismatch between the product mix and the production process; the production
process was not flexible enough to successfully implement the marketing strategy. This chain of
asking why? why? why? is the challenge for the students. They will find that, based on financial
measures alone, the cause cannot be identified; they must use their understanding of operations
management and operating measures to understand the root cause of the effect on financial
statements.
Discussion Questions
1. Complete the income statement analysis that Lincoln Smith began by projecting the growth in each
expense category and computing the variance from actual. Which factors contributed to the decline
in profits?
2. What did Lincoln Smith find when he computed the direct and indirect labor productivity figures?
3. Identify and describe the root cause of the decline in operating profits. Recommend a plan of
action for PlasTech.
Analysis
Question 1.
The FY93 Pro Forma income statement with a variance analysis included is shown below.

Adapted from Leschke, John, PlasTech, Inc - The Importance of Matching Production
Capabilities and Market Requirements, Production and Inventory Management Journal,
Third Quarter, 1995 and Darden Teaching Note UVA-OM-0794TN, 1995.

C-13

Price
Production (lbs)
Sales
Cost of Good Sold:
Non-consigned mtl
Direct labor
Indirect labor
Utilities
Depreciation
Gross Profit
Selling Expenses
General & Admin
Operating profit
Taxes
Net Profit After Taxes

Fy 93 Pro Forma2
$.85
5,069,173
%
$4,308,797 100.0
$258,276
638,289
223,643
765,476
295,000
$991,023
777,586

2,180,684
2,128,113
1,768,609
$359,505
82,318
$277,187

50.6
49.4
8.3
6.4

Variance Analysis3
(25,346)
$1,519
(153,711)
1,316
2,503
0
(208,343)
99,127

(148,373)
(173,719)
(109,216)
(282,935)
37,321
(245,704)

Price
Matls
Direct L
Indirect
Utilities
Depr
Selling E
Admin E
Tax E
Net Prof

The table shows a breakdown of the decline in profits into the component variances. The data
indicate that PlasTech might have realized a net profit of $277,187 or 6.4% of sales had the expenses
held to 1992 proportions. Clearly, the economies of scale were not achieved for the increase in
volume. The variance analysis shows that the drop in average price per pound accounted for only a
fraction of the fall in operating profit. The $.005 per pound price differential multiplied by the total
number of pounds produced in fiscal 1993 indicates that the sale price variance accounts for only
$25,346 of the decline. Since non-consigned material prices and wages did not increase, material and
indirect labor costs increased in rough proportion to sales. Less than expected utilities accounted for
several thousand dollars in additional profits. Decreases in proportion of sales going to depreciation
and general and administrative expenses contributed positively to operating profit. The two
significant negative variances were associated with selling expenses and direct labor. The
disproportionate rise in selling expenses can be explained by the greater effort needed to increase
sales volume and expand the customer base. The disproportionate increase in direct labor is less
easily explained.
Question 2.
Why was a 50% increase in direct labor needed to support a 20% increase in sales? Since
there was no change in wages it would appear, on the surface, that direct labor productivity went
down. However, the source of this decline is not found in the workers being less efficient on either
productive time or setup time; both productivity measured in terms of production rate and
productivity measured in time per setup improved in 1993. Rather, it is how management utilized the
operators time that reduced direct labor productivity.

Calculations are based on expenses increasing in proportion to production (lbs) from FY92
to FY93
3
The difference between FY93 Proforma and FY93 actual

C-14

The new marketing strategy, which increased the number of customers and total sales, also
resulted in more setups. Therefore, even though time per setup went down, the total time spent on
setup went up. In order to provide the additional labor required for these setups (and to cover the
added labor required for production), management added a third shift. For this 50% increase in labor
costs, management did not receive a corresponding 50% increase in sales, hence costs grew faster
than sales. This fact and its effect can be traced to the bottom line.
Question 3.
The problems encountered at PlasTech could have been anticipated with an understanding of a
fundamental operations management concept -- the product-process matrix. PlasTechs change in
marketing strategy moved the company significantly to the left on the product dimension, top of the
matrix, toward the lower volume and higher variety side of the matrix. The improvements in setup
time made by manufacturing moved the company slightly up on the process side of the matrix. As a
result, PlasTech moved away from a position of strategic balance between its marketing requirements
and manufacturing capabilities. The effects of such a mismatch, as shown in the case, were lower
overall productivity and lower profits.
What should PlasTech do now? There are two basic courses of action available. (1) PlasTech
can choose to move to the right on the product variety/volume dimension by working with its
customers to reduce the variety of products, consolidating orders into larger production runs, or
setting policies to discourage small orders (e.g., quantity discounts or charging a standard setup fee).
However, the success of this strategy depends on how much power PlasTech has to influence the
market or to limit the type of customers selected. (2) PlasTech can choose to mover further up the
process flexibility dimension by continuing to reduce setup times and increase production rates.
Simply adding new production capacity will not help because it adds to fixed costs while not making
the firm more efficient in its current environment.
In this case it is not clear that any one function is at fault; manufacturing has done a better job
on a number of dimensions, and marketing has been successful in maintaining revenue levels.
However, their independent successes led to a difficult period for the company. Thus top
management is ultimately responsible for ensuring marketing and manufacturing remain strategically
coordinated.
Teaching Strategy
In teaching this case I start with the variance analysis. I usually ask the students to explain why
profits have gone down. Just in case the students do not get the point that selling expenses and
direct labor have gone up dramatically, I have an overhead copy of the above table on hand to explain
the variances encountered.
You can then continue to ask the why? why? why? questions. This should lead the students
eventually to a point that the lots have gotten smaller and setup time has increased. A further why
should lead them to the product-process matrix, assuming that you have already covered Chapter 4
in the text. At this point you can have the students explain what has happened in terms of movement
off the diagonal.

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Basically, the answer to the question about a plan of action is to change either marketing, operations
or both to move back on the diagonal. If this has the effect of reducing costs without reducing sales,
profits will improve next year. Also look for suggested actions that increase revenues without
increasing costs.
This is a very good case illustrating that students must get beyond the financial numbers to
understand what marketing and operations must do to solve the problem. The product-process
matrix is nicely illustrated by this case.
It usually takes about one hour to teach this case.

C-16

SOUTHWEST AIRLINES: SINGIN THE (JET) BLUES

Southwest Airlines is a Darden case study. Darden does not permit reprinting of their teaching notes.
The teaching note, if available, can be obtained by contacting http://www.darden.virginia.edu/. Then
click on Darden publishing.
Case number: UVA-OM-1150

C-17

The Field Service Division of DMI4

Teaching Note

Synopsis and Purpose

This case was written about the field service division of one of the larger Fortune 100 company.
The case provides a good basis for discussion for several related issues including:
1.

Business process re-engineering for a service process.

2.

Use of technology (cellular phones, artificial intelligence, information technology,

etc.).

3.

Service quality related to "gaps" between expectations and delivery.

4.

Service operations strategy

Service guarantees.
Service recovery systems.
Market segmentation.

5.

Management of systems with queues.

6.

Learning organizations -- and how field service can be used to help the
organization keep its "ear to the ground" and use this information to give feedback
to R&D.

Suggested Readings
Hammer, Michael, "Reengineering Work: Don't Automate, Obliterate," Harvard Business
Review, July-August, 1990.
"The Gold Mine of Data in Customer Service," Business Week, March 21, 1994, pp. 113114.

1999 Arthur V. Hill. This case note was written by Professor Arthur V. Hill, Carlson School
of Management, University of Minnesota. The company is real, but many names and details
have been disguised to maintain anonymity for the company. Reprinted with Permission.

C-18

Answers to the discussion questions follow.

1.

Draw the process flow chart for a service call. Where are the queues and delays in
this system and what could be done to eliminate them?
There are two somewhat different processes:
a.

Customer "phone in" process.

b.

The Tech "phone in" process.

These can be drawn as a single process or as two separate processes.

There are MANY queues and delays in this system. Most students miss most of these.
The process is as follows:
Machine fails
Customer finds failure
Customer calls NSC to report failure
Queue for call takers to answer the phone
Call taker answers the phone
Call taker takes model and serial number
Call taker confirms other information (phone number address, etc.)
Call taker asks some questions to try to fix the machine over the phone
If fixed, then done.
If not fixed then make an ETA (expected time of arrival) usually about 4 hours
Say good-bye.
Send the service call electronically to regional dispatching center
Queue for the printer
Printed
Wait for dispatcher to pick up and distribute
Dispatcher puts on the dispatch board under the tech's name
Queue for tech to call in
Tech calls in
Queue for dispatcher's phone line
Dispatcher answers the phone
Tech "clears" old service calls
Dispatcher gives the tech a new service call

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Tech calls the customer and makes a new ETA (expected time of arrival)
Tech tried to repair the machine over the phone
Tech begins travel to the customer site
Tech arrives and begins repair
Tech diagnoses the problem
If parts are available, then tech fixes
If no parts, then tech "clears the calls" and orders parts from the dispatcher
Tech says good-bye to customer.
Note: When the needed parts are not available, the tech tells the dispatcher about this
when the call is cleared. The dispatcher has the parts sent via Federal Express from the
Service Parts Warehouse directly to the customer so that they would be available early the
next morning. When the parts have been sent, the computer system automatically
generates another service call for the same tech.
Be sure that the students identify ALL of the queues and the waits including those that
have the people waiting for someone to answer the phone and people waiting for the
computer.
I usually do not get too concerned about the students using particular symbols here.
It is particularly interesting from a systems design perspective to have the students identify
the information needs for each step. This case could then be tied into a information
systems design case.
2.

How might the process be re-engineered? Consider some technologies that might be
available to help here.
The means of reducing the mean queue time is to either:
a.

Reduce the variability of the arrival process or the service process.

b.

Increase the capacity (mean service rate) of the server. This is the same as saying
we need to reduce the mean service time -- which can sometimes be accomplished
by eliminating non-valued activities. We can also change the process technology to
a system that is inherently faster.

Lots of technologies might be considered.

-

Expert systems -- for diagnosis. (Also could use other advanced information
technologies such as "problem/cause" database.)

Expert systems or operations research systems -- for dispatching.

C-20

3.

Cellular phones -- for managing expectations.

Beepers -- for paging techs.

Remote RF (radio frequency) terminals -- for dispatching, clearing, parts ordering,

etc.

Satellite location systems -- to be able to know where all techs are at any point in
time. (Big brother is watching!)

How about a totally decentralized system with only an answering machine for each
tech! (No control ... loss of opportunities to learn.)

Should DMI/FSD consolidate the regional dispatch centers into one location?
Yes. Three strong reasons:
a.

If you can have the center handle a larger volume of calls the variability during the
day will be less.

b.

A centralized center will level the load during the day because it would cover 5
time zones.

c.

It will also make it easier for the company for training, application of information
systems technology, etc.

The five smaller centers could easily have one or more servers idle even when the system
has many customers waiting.
It is true that the dispatchers will be farther from the customer and therefore may not
know the customer's areas as well -- but given that the areas are already so large, the
dispatchers are already far from most of their customers.
You can still have the dispatchers assigned to a particular area of the country even though
we have only one national dispatching center.
4.

Evaluate DMI's service guarantee. How could this be improved?

The guarantee is very weak and vague. There is no consequence to the company if the
guarantee is not satisfied. (The guarantee has no "teeth" to it.) They are clearly not
satisfying the guarantee in many cases.

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They should put some teeth into the guarantee and use it for improving both marketing
and operations. I would recommend that they define the service guarantee in terms of
response time and extend the service guarantee by a full month if they are ever late on any
agreement. They should define the guaranteed response time as a function of the service
contract price -- in other words they should charge more for a shorter response time.
However, given that they are making only 80% of the service calls within the quoted time,
they will probably have to either improve their quotes or improve their performance
BEFORE they offer the service guarantee.
5.

Why does DMI/FSD need to measure field service performance? How should
performance be measured?
Performance should NOT be measured only against the arbitrary target response time.
There is no motivation to complete the service once the target has been missed.
It should be measured against customer requirements. But what are the customer's
requirements? Maybe they should do some market research to find out.
They should probably implement a carefully constructed customer satisfaction survey.
Remember that not all customers will have the same needs or expectations.
A service guarantee would help here to make the expectations more clearly defined for
everybody.

6.

What are the strategic issues for the division and the company?
a.

Density is a big issue. If they continue to lose market share, their density will
continue to decline and response time will continue to degrade and the cycle will
continue until they are out of business.

b.

Should they take on third party service -- i.e. perform service for other companies?
Can they? They seem pretty weak from a management perspective.

c.

Should they subcontract the business to a third-party service provider. They are
not well managed -- BUT they really need to keep this function in-house in order
to be a learning organization! This is one of the big points of the case! Whirlpool
in the USA learned this the hard way.

d.

Can they afford to have an "account-representative" relationship between techs and

customers in order to build customer loyalty?

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7.

How could this organization become more of a learning organization?

They MUST learn from their mistakes and from customer interaction and to feed this
information back to ...

Product development -- MTBF, new functions and features

Manufacturing -- conformance quality

Marketing -- did we sell the customer the wrong machine?

Diagnosis and repair -- problem/cause data base.

Customers -- about 4 visits per year!

The technicians see each customer machine about 4 times per year. The sales person
might not see the machine or the customer but once very 4 years!
8.

Prepare an action plan to recommend to DMI/FSD management. Be prepared to

present this to the rest of the class.
a.

Consolidate the dispatchers in Denver.

b.

Combine the call taking and dispatching jobs into one in order to reduce the
amount of information that is lost.

c.

Have "account representative" techs for all major accounts (80% of the business).

d.

Design service agreements that have guaranteed response times in them where the
customers pay for better response times. Carefully price these so that the company
increases revenues. Have some teeth in the guarantee (e.g. extended guarantee by
1 week if we are late).

e.

Stop quoting the standard response time when the call is received. Instead
promise only that a tech will call back as soon as possible and then have an internal
standard that a tech will call the customer back in 15 minutes. Or possibly promise
that the tech will call the customer back in 15-30 minutes.

f.

Use cellular phones for communications with techs. Have the techs call the
customers within 30 minutes of the time that the service call was received so that
the customer "feels" in the system. (Davis and Maggard article in Decision
Science suggests that in 2-stage service systems, the first stage wait is more
important than the second stage wait.)

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g.

Use artificial intelligence procedures to allow techs to be "trained" on more

machines.

h.

Have machines that report their own failures and allow for remote diagnostic
checking so that the tech can bring the right parts.

i.

Work harder to become a learning organization -- the real answer to this case is to
design equipment that doesn't fail. The field service people should be feeding back
information to the R&D people ... and work themselves out of a job.

Teaching Strategy
When I teach this case, I try to constantly urge students to think in terms of service and the
customer. This is done by beginning with the process flow chart and the associated analysis of
queues. The idea of service is also reinforced through the discussion of the service guarantee,
performance measurement and the service strategy.
This case can also be used to illustrate capacity decisions in the service industry. Not only
must the level of capacity be considered, but location of capacity, as well. adequate capacity is , of
course, the key to providing desired service levels.

C-24

CUSTOMER-DRIVEN LEARNING AT RADISSION HOTELS WORLDWIDE

Teaching Notes
Synopsis and Purpose
Radisson hotels is a case dealing with service quality and customer satisfaction. A central
question in the case is whether Radisson should offer a service guarantee to its customers and if so
what type of guarantee? The case presents a situation where the identity of its brand is unclear and
confused due to rapid growth and lack of focus growth at all costs. Management now wishes to
stress service quality and customer satisfaction not only through the service guarantee, but also
through employee training, employee motivation and information systems.
The objective of
Radisson is to become a customer-driven learning organization.
The purpose of this case is to address service quality improvement, service guarantees and
the role of employees and information system in achieving improved quality and customer
satisfaction. Since students may not be familiar with these concepts the case provides a context for
discussion and learning about improvement in a service environment.
Discussion Questions (taken directly from the case)
1. How should Radisson define and implement their service guarantee?
2. What role should information technology play in accelerating the drive to improve service
quality?
3. How should Radisson measure and improve customer satisfaction and employee satisfaction?
4. How should Radisson drive commitment to service quality through their franchise organization?
5. How should Radisson align the goals of the hotel management team, hotel workers, owners,
corporate management and corporate staff with their new brand strategy?

Analysis
1. How should Radisson define and implement their service guarantee?
One issue in the case is whether they should have a one-step or two-step service guarantee? A onestep guarantee is to simply pay the customer when there is a service failure. A two-step service
guarantee is we will make it right or we pay. In the two-step guarantee there is an opportunity to
correct the service failure before paying.

C-25

Discussion of this question is facilitated by recognizing that there are many types of service failures
such as:
1. Lack of towels in the room.
2. The room is not ready on time.
3. The room is too hot or too cold.
4. The guest didnt sleep well because there was a noisy all-night party next door.
The first failure might not require payment at all, the guest may simply want the missing towels
delivered on a timely basis. The second failure may be more serious, because it could disrupt the
guests plans and schedule. In this case one guest may want to be paid, another guest might want a
different room temporarily, and a third guest may not care and can come back later to check in. So,
the severity of the service failure and the guests expectations both enter into whether the hotel
should have a one-step or two-step guarantee.
Implementation of the service guarantee will require extensive employee training. The training can
be done by either Radisson personnel or outside consultants. In either case training will be needed to
explain the service guarantee to all employees. In the hotel business turnover of employees is very
high, approaching 100% per year in some cases. This will require continuous training of new
employees.
Franchisees and building investors own most of the Radisson hotels. Radisson manages these hotels
for a franchise fee. Therefore, Radisson may need to provide some type of risk coverage to get the
hotel management to accept the service guarantee. For example, Radisson could pay for the service
guarantee for the first year and the hotel management could pick up the costs in the second and
subsequent years.
2. What role should information technology play in accelerating the drive to improve service quality?
Information technology plays a very critical role. Quality measurements such as customer
satisfaction, customer complaints, and customer return visits should be taken. These measurements
should be compared across hotels in the Radisson chain and over time. The information system
should provide periodic reports to management of the various quality measures that are deemed
important.
Since they dont own most of the hotels, Radisson can be viewed as a big computer system and a
brand. The information system takes care of reservations and provides call center management. The
value that the Radisson Corporation provides to franchisees is advertising and brand awareness
together with ease of making reservations and calls via a central system.
The information system at Radisson should be designed to provide a learning loop starting with
understanding customer needs and wants, and finally monitoring behavior and adjusting as needed.
The system should also maintain a guest profile based on every touch point in the system
(marketing, dinning, guest room, key account management, etc.). The customer touch points can be
equated to customer preferences and moments of truth. The HARMONY Product Suite and
Customer KARE systems will measure local service delivery parameters and provide information to
hotel management.

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3. How should Radisson measure and improve customer satisfaction and employee satisfaction?
Radisson will need to get a good response rate on customer surveys to insure that they dont have
non-respondent bias in the results. While many surveys report only a 10 to 20% response rate, this is
too low for reliable results.
Using guest comment cards alone is very unreliable since the response rate is often very low and the
sample can be extremely biased; only those who are dissatisfied complete cards. Therefore, it is best
if Radisson hires an outside firm such as Gallop to collect data on customer satisfaction.
In addition to random surveys of satisfaction, Radisson should collect all complaints from customers
even though the complaints may not be representative of the population of guests. Complaints from
customers should be handled promptly and courteously. Quick service recovery is a key to satisfying
customers. After handling the complaint to the customers satisfaction, Radisson should seek to fix
the system to prevent future failures of this type.
It is ironic that a rising level of customer complaints is not as bad as it seems. Radisson cant learn
from the customer if the customer doesnt complain about the service. So, if management wishes to
reduce complaints they will also reduce learning. At the same time, Radisson doesnt want the same
complaint for the same reason over and over again. The objective should be to reduce the same type
of repetitive complaints, not necessarily the total number of complaints.
Employee satisfaction can be improved in a number of ways. Removing obstacles that prevent
employees from serving the customer does this. Obstacles include being too busy, computer systems
that dont work, poor supervision, unclear job descriptions, etc.
Positive feedback and reinforcement for a job well done can also increase employee satisfaction.
There are a variety of perks and ways of recognizing employees.
There is an opportunity in this case to emphasize the service-profit chain. It starts with employee
satisfaction leading to customer satisfaction/loyalty and ultimately to higher profits.
The case indicates that Radisson was concentrating on franchisees as their customers, not the hotel
guests. A focus on the end customer and employees is needed to improve customer satisfaction in
the hotels.

C-27

4. How should Radisson drive commitment to service quality through their franchise organization?
They should use both the carrot and the stick approach. The carrots include:

Provide franchisees with comparisons of other hotels and best practices workshops.

Give financial incentives for superior service.

Provide management with means for improvement (e.g. measurements, consultants,

programs for improvement, etc.)

Show the connection between service quality and profit. Many franchisees may only see the
costs of improvement and not the benefits.

The stick could be removal of the franchise if quality standards are not met after some probationary
period.
5. How should Radisson align the goals of the hotel management team, hotel workers, owners,
corporate management and corporate staff with their new brand strategy?

Alignment of goals is a top management responsibility that cannot be delegated. If goals are
not aligned, top management should look in the mirror.

Communication communication communication. There is no substitute.

Use training programs and meetings to insure that goals are clearly understood.

Try to reduce employee turnover. It may take a certain amount of time to absorb goals and
fully understand them. Employee turnover destroys teamwork and goal understanding.

Benchmark the Ritz Carlton Hotels, a two-time Baldrige winner. There are a number of
videos available on the Ritz Carlton from the Baldrige Award office.

Teaching Strategy
This case can be taught in the same order as the discussion questions. It is helpful to
emphasize the service quality and the service guarantee in this case, since it is one of the central
ideas.
I like to go through the discussion questions one at a time and then tell the students what
happened in the actual situation. Here is what happened in this case5.

For more details see, Hill, Arthur, et.al., Service guarantees and strategic service quality
performance metrics at Radisson hotels worldwide, Journal of Strategic Performance
Measurement, Dec 1998, pp. 27-31.

C-28

Radisson implemented the two-step service guarantee. The guarantee read simply, Our goal at
Radisson is 100% guest satisfaction. If you are not satisfied with something, please let us know,
well make it right or you wont pay. Management felt based on focus group feedback that the
customers werent comfortable with simply getting their money back in a one-step guarantee. In
many cases what the customer wanted was a quick resolution of the problem.
They chose internal trainers to teach all of the employees the new 100% guest satisfaction program
with service guarantee. They spent over $1million the first year on training.
Radisson also agreed to pay the entire cost of invocations the first year and after that franchises
would pay for service failure. The first year cost was $10 million. But hotel utilization and customer
satisfaction went up, employee turnover went down, and profitability improved so Radisson
management felt it was money well spent.
The service guarantee was more important for the employees than the customers. This is a very
interesting point. Marketing often thinks that a service guarantee will bring in more business which it
did in this case. But, it also defined the mission of the employees as 100% customer satisfaction and
gave management a metric for service failure (the cost of invocations).
There was a discussion among management as to whether the hotels should improve quality first
before offering the service guarantee. Often improving quality first is a good course of action as the
costs of invocation can be too high. Radisson decided to implement the service guarantee as a way
of forcing better quality. They didnt want to wait to improve quality first.
Radisson hired the Gallop Corporation to do their surveys of customer satisfaction. Hiring an
outside firm was the only way to get reliable data for comparison among hotels and over time.
By implementing a service guarantee it was clear to everyone that Radisson was selling to the guests,
not to the franchisees. Service to the ultimate customer was emphasized.
A service guarantee can be a flash in the pan. Management must be careful to maintain continuity of
the service guarantee once it has been adopted. This can be done by continual training of new
employees, reporting on results achieved and benchmarking demonstrations to hotels that are failing
in using the service guarantee.
Lessons
I like to close this case with lessons that I put on the board.

Radisson is becoming a learning organization by using knowledge of the customer to improve

customer service and quality.

The case demonstrates how to structure and implement a service guarantee

The case shows that strategy must guide actions. At Radisson the strategy was 100%
customer satisfaction and the service guarantee was used to accomplish the strategy.

The service profit chain is illustrated by this case. In order to increase customer satisfaction it
is important to improve employee satisfaction. The two are linked.
C-29

Federal Express6
Teaching Note
Synopsis
The Federal Express (FedEx) case looks closely at the philosophy behind the most
successful overnight courier in North America and the quality initiatives that naturally complement
this ideology. As a result of its quality efforts, Federal Express won the Malcolm Baldrige
National Quality Award (MBNQA) in 1990. The case shows that the theme of FedExs quality
system targeted both customer satisfaction and FedExs employees. The case examines each of the
elements of the FedEx quality system and the technologies put in place in support of the customer
and employee satisfaction goals. Furthermore, the case details the measurement systems used to
track the success of these systems. The case does not pose any obvious issue questions. It looks at
the FedEx quality system at the time of the awarding of the Malcolm Baldrige Award, the
concludes with a hint at future growth for FedEx, challenging the reader to anticipate how the
quality system will have to evolve to keep FedEx on top while continuing to meet the growing
needs of both its customers and employees. The primary teaching emphasis is understanding the
design feature of the management system and evaluating how the design element interacts and
supports the FedEx philosophy.
Use of the Case and Teaching Objectives
This case is well suited for either a required course in operations and management or an
elective course on quality management, service operations, or managing organizational
improvement. It is particularly useful in introducing students to the management challenges that
might face service organizations.
The case
gives an illustration of a service company that has developed a powerful set of
supporting systems and technologies to support its overall corporate philosophy;
engages students in a critical evaluation of the overall management system of a service
organization;
provides an example of a company that requires continuous improvement of not only its
service, but also its people;

This teaching note was prepared by Laurence 0. Mueller under the supervision of
Professor Robert D. Landel,
Henry E. McWane Professor of Business Administration. Copyright 1993 by the University of
Virginia Darden
School Foundation, Charlottesville, VA. All rights reserved. Rev. 5/95. Reprinted with
Permission (UVA-OM0721 TN).

C-30

 encourages students to compare FedEx practices to those of other service companies,

emphasizing contextual differences and their influence on system evolution;
invites students to consider the future issues that will affect the evolution of FedExs
management system.
Teaching Approach
If Federal Express is the first case to be taught as part of a segment on total quality
management (TQM), the following list enumerates several class-discussion areas:
1. Present/discuss the Malcolm Baldrige Award, including the concept behind it, its judging
criteria, its goal, and the value underlying its sharing requirement. Other quality
benchmarks and awards, such as ISO 9000 and the Deming Prize, might also be
mentioned and their differences pointed out.
2. Discuss the importance of companies having a quality philosophy as part of their TQM
system. Use Federal Expresss quality philosophy as an example, studying how the
company encourages and supports 100% customer service, continuous improvement,
Q = P (quality productivity), and a people first perspective.
3. More generally, explain and consider quality-management systems, the particular elements
of total quality management, and the content of world-class quality systems, using the
slides of case Exhibits 1-8. These exhibits may be used as the basis for an
introductory/overview lecture.
If the Federal Express case succeeds several other quality-management cases, then the following
points might be more appropriate discussion topics.
1. Compare FedExs TQM system to that of other quality-management systems that the
students might have just studied. Focus closely on the comparison of corporate culture
and its role, quality philosophies, and stage of development. Cases that are particularly
good comparisons to Federal Express include Florida Power & Light and Paul Revere
Insurance (Harvard cases), as well as USPS and Telenet (Darden cases).
2. Examine the details of the Malcolm Baldrige Award criteria and how they apply to Federal
Expresss TQM system.

C-31

Questions for Discussion (These questions are somewhat different than the questions in the
text, but cover the same general topics)
The following list of assignment questions may be helpful in guiding student preparation
and structuring class discussion. Below each question are listed potential responses that could be
raised in class discussion.
1. Describe FedExs corporate philosophy and examine how FedExs systems fit in the
context of its corporate philosophy.
The core of Federal Expresss corporate philosophy is that quality = people. If Federal
Express takes care of its employees, then its employees will take care of the customers.
Federal express works to achieve 100 percent satisfaction.
The Quality Improvement Process and Quality Action Teams (QAT) were developed to
allow and encourage employees to ferret out problems and create their own solutions.
Service Quality Indicators (SQl) give employees ten measurements of service quality as
experienced by the customer. The SQl system shows a weighted, composite score of failures
to meet promises. The importance is that this information is readily available to all
employees, allowing everyone on a daily basis to see the direct effects of any changes they
make.
Customer/Supplier Alignment gives the employees of one department the ability to
improve how they are being served by another department through coordinated
communication about the most important services. This process creates an internal customer
focus in addition to the external focus.
Survey/Feedback/Action (SFA) and the guaranteed fair treatment procedure (GFTP) are
ways for employees to bring concerns to management and be guaranteed a quick response.
The SFA process keeps management on top of employee concerns and needs, thus focusing
management on taking care of employee so that they, in turn, will care for the customers.
The leadership-score link to managerial bonuses is an internal customer measurement that
relates quality to people.
Finally, LEAP, or leadership evaluation awareness process, provides employees a way to
move up within the company through their own efforts, with support of management. This is
a reward system that allows employees to see how their efforts in customer service can
propel them up the leadership path.

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2. How has FedEx used information technology to provide 100% customer service?
COSMOS (Customer, Operations, Service, Master On-line System) is a sophisticated
tracking system that allows employees to pinpoint a packages current location, estimate its
time of delivery, indicate any possible delays, and redirect the package enroute, if necessary.
DADS (Digitally Assisted Dispatch System) is an on-screen communication system that
link courier vans to COSMOS, listing pickups and deliveries and reordering them into the
most efficient schedule when additions to or removals from the schedule occur.
Powership 2 is a direct benefit to the external customer because it links them directly into
COSMOS, allowing them to call for pickups directly, track packages, and confirm
deliveries.
3. What are the key factors that have contributed to the success of FedExs qualitymanagement program?
Because employees are included in decision making from the start, they buy in to the
quality program from the start. New company, new culture.
Empowering the employees to form their own QAT and make their own solutions
reinforces the concept that management supports employees so that the employees can
better serve customers.
The constant and up-to-date communication to all employees through FedExTV provides
immediate performance measurements each day as well as competition reports, all of which
drive employees to continue to improve quality.
Guaranteeing no lay off, except under extraordinary circumstances, provides stability that
fosters the quality program.
4. What challenges does FedEx face in the future? How will its management system need to
evolve to meet these challenges?
Slowing domestic growth.
Meeting the international market and selling the FedEx way of business to businesses
overseas.
Increased flexibility to meet foreign demands.
Increased domestic opportunities as FedEx increases inventory management systems for
additional customers.

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 Cross-training employees to prepare them for the constant influx of technology that is
likely to reduce the number of handlers needed.
Conclusion
Key learning points from the case are as follows:
The road to the MBNQA winners circle has arrows pointed one way. This statement is a
response to the idea that an economic downturn may force FedEx to curtail some if its quality
programs: FedEx recognizes that investments in quality are valuable to its associates now and to
its associates and customers in the long haul.
FedEx views its job as selling service. The idea that FedEx is selling-not just providingservice shows its commitment to being the best, taking the best to the customer, and meeting the
customers needs, rather than waiting for the customer to come FedEx to provide the service.
Our people hold in their hands our customers perception of quality. This statement
shows the value FedEx places on its employees; they are its number-one resource. In addition, the
quote clearly expresses that it is not the physical apparatus nor the computer-technology systems
that convey the perception of quality to the customer, but rather the employees capable
interactions with customers.
Quality action teams organize when employees see a need to change the way they do their
jobs. This declaration indicates that the quality teams are self-forming and that empowerment is
encouraged and supported. Moreover, it an example of continuous improvement because the
impetus for change is encouraged to come from the associates themselves.
Focus, analyze, develop, execute (FADE). The problem-solving framework all associates are
trained to use is QAT. This is another tool that reinforces the continuous-improvement process.
Service Quality Indicators (SQI). The measurement system by which customer satisfaction is
measured on a broad-based level points reflect the degree of FedExs performance failure.
Internal Customer/Supplier Alignment. A process by which different departments work
together, recognizing each other as customers and making internal customer satisfaction a key to
the smoothness of internal operations.
The FedEx family. The corporate atmosphere fostered by avoiding layoffs, the GFTP
drawing leadership from within through the LEAP program, and the interactive SFA covenant
between management and employees.
COSMOS and DADS. Information technology available within the company as a resource to
associates in serving their customers.

C-34

Powership 2. An information-technology system designed particularly for customers so that they

may interact with FedEx technology and keep up with their own parcels.
Change is a matter of survival. FedEx recognizes it must adjust constantly to the
environment, anticipating both its customers and employees needs in order to stay on top.

C-35

BAYFIELD MUD COMPANY

Teaching Note
Synopsis and Purpose
Bayfield Mud Company is a manufacturer of mud treating agents used for oil and natural gas
drilling operations. The company has recently shipped several box cars of 50 pound bags of mud
treating agent which were light in weight. The customer, who received the shipments, has threatened
to find another supplier if the situation is not corrected.
Data is presented in the case from several production shifts. This data can be used to
determine the probable cause for bags which do not weigh the proper amounts.
The purpose of this case is to provide a problem in statistical quality control. Students must
apply control chart principles to find the cause of the problem and they are asked to recommend
corrective action.
Discussion Questions
1. What is your analysis of the bag weights problem?
2. What procedures would you recommend to maintain proper quality control?
Analysis
Data is provided on the Excel Spreadsheet supplied with the text. This spreadsheet contains
the data only, no formulas or analysis is provided for the student. The analysis can be done by hand,
but it is very tedious.
The first step in the analysis is to construct control charts for the three shifts. These charts
can be made for all of the data or for each of the shifts separately. Since the case indicates that the
evening and night shifts may be having more problems with bag weights, because of training and
inexperience, we will construct control charts separately for each of the three shifts.
We have constructed both average and range charts from the data. The first average chart is
developed by using the day shift averages given in the case. Three day shifts consisting of 24 data
points are given. These 24 points are averaged to obtain a grand average of 49.80. Likewise, the
evening and night shift averages are averaged to obtain grand averages of 48.94 and 48.65 as shown
in Exhibit 1. The ranges for each of the samples is also computed. These ranges are averaged by
shift to arrive at average ranges of 3.45, 4.38, and 3.36 for the day shift, evening shift, and night shift
respectively. We have now computed the center lines for each of the control charts.

C-36

The upper and lower control limits for the average and range charts are computed in the
usual fashion. Using a sample size of n = 24, the average and range chart control limits are shown on
the bottom of Exhibit 1. We can now determine how many points from the sample data are out of
control. The numbers are as follows:
Number of Points out of Control
Day Shift
Average Chart
10
Range Chart
1

Eve Shift
21
2

Night Shift
17
5

Now, we have some interesting data to examine. On the day shift, the range chart appears to be in
pretty good control (only one point is out of control in 24 points, which could happen by chance
alone). The average for the first shift is badly out or control (10 points out of 24 are out of control).
We must therefore conclude that the process is not stable for producing average bag weight on the
first shift.
The situation is even worse on the evening shift. The range chart now has two points out of
control, which is a little more questionable. The average chart is totally out of control with 21 out of
24 points out of control. On the night shift the range appears to be out of control, as well as the
average.
We also note from the data that the averages are well below 50 pounds per bag on the
evening shift and the night shift. Therefore, it looks like the bags are indeed being under filled. The
first order of business, however, is to bring the process under control. Then the average can be set to
the proper level of 50 pounds per bag.
On the day and evening shift, we can probably accept the range as being under reasonable
control and look for assignable causes which would cause the average to be out of control. The case
indicates that the bag weighing mechanism may not be checked often enough. The mechanism may
also be unreliable in weighing the bags. This mechanism may have to be repaired or replaced. In
addition, we could look more closely at training, to be sure all personal understand the weighing
procedures and are following them. Whatever, the causes of variation, they must be uncovered and
removed. Then the process will be brought under control. We can be confident of this, since the
case indicates that the process has been stable in the past.
On the night shift the problem is a little more serious. In this case we must bring the range
under control first. We need to seek causes of excessive variation. These causes may be the same as
those in the day and evening shifts, or there may be additional causes of variation. Once the range is
brought under control, then the average on the night shift should also be brought into statistical
control.
Once the causes of variation are uncovered and corrected, control charts can be used on a
routine basis for maintenance of statistical control. New data would have to be collected to establish
the average and range to use for purposes of control. It would also be best to establish a single
average and range chart that could be used for all three shifts. There is no reason that each shift
should have its own control chart for control purposes, since the same equipment and procedures are
being used.

C-37

The average control chart should have an average of 50, since we want the bags to have 50
pounds. It could also have upper and lower control limits based on the process standard deviation
which is 1.2 pounds as given in the case. For samples of 24 bags, the upper and lower control limits
for the average control chart are as follows:
Average Chart
Upper Control Limit = 50 + 3 (1.2/ 24 ) = 50.37
Lower Control Limit = 50 - 3 (1.2/ 24 ) = 49.27
Similar limits could be computed for the range chart as well. If these charts were used, then process
deviations could be detected and the short weight problem could be prevented in the future. It is also
possible to base the charts on average sample data instead of process averages.

Teaching Strategy
When teaching this case I start by asking a student to conduct a statistical analysis of the
data. Other students are then asked to comment on the analysis until several variations and
assumptions have been discussed.
When the data has been thoroughly analyzed, I then turn to a discussion of how the situation
can be corrected. Some students will miss the point that the process must first be brought under
control before statistical control charts can be used. A great deal of discussion can also be generated
about the use of control charts.
It usually takes about 45 minutes to teach this case.

C-38

EXHIBIT 1

Time

Shift

6 A.M. Day I
7
8
9
10
11
12 NOON
1 P.M.
2
Evening I
3
4
5
6
7
8
9
10
Night I
11
12 MIDNIGHT
1 A.M.
2
3
4
5
6
Day II
7
8
9
10
11
12 NOON
1 P.M.
2
Evening II
3
4
5
6
7
8
9
10
Night II
11
12 MIDNIGHT
1 A.M.
2

Average
Weight
(pounds)

Range
Smallest

49.6
50.2
50.6
50.8
49.9
50.3
48.6
49.0
49.0
49.8
50.3
51.4
51.6
51.8
51.0
50.5
49.2
49.0
48.4
47.6
47.4
48.2
48.0
48.4
48.6
50.0
49.8
50.3
50.2
50.0
50.0
50.1
49.7
48.4
47.2
46.8
46.8
50.0
47.4
47.0
47.2
48.6
49.8
49.6
50.0

48.7
49.1
49.6
50.2
49.2
48.6
46.2
46.4
46.0
48.2
49.2
50.0
49.2
50.0
48.6
49.4
46.1
46.3
45.4
44.3
44.1
45.2
45.5
47.1
47.4
49.2
49.0
49.4
49.6
49.0
48.8
49.4
48.6
47.2
45.3
44.1
41.0
46.2
44.0
44.2
46.6
47.0
48.2
48.4
49.0

C-39

Largest
Difference
50.7
2
51.2
2.1
51.4
1.8
51.8
1.6
52.3
3.1
51.7
3.1
50.4
4.2
50.0
3.6
50.6
4.6
50.8
2.6
52.7
3.5
55.3
5.3
54.7
5.5
55.6
5.6
53.2
4.6
52.4
3
50.7
4.6
50.8
4.5
50.2
4.8
49.7
5.4
49.6
5.5
49.0
3.8
49.1
3.6
49.6
2.5
52.0
4.6
52.2
3
52.4
3.4
51.7
2.3
51.8
2.2
52.3
3.3
52.4
3.6
53.6
4.2
51.0
2.4
51.7
4.5
50.9
5.6
49.0
4.9
51.2
10.2
51.7
5.5
48.7
4.7
48.9
4.7
50.2
3.6
50.0
3
50.4
2.2
51.7
3.3
52.2
3.2

Exhibit 1
continued
3
4
5
6
Day III
7
8
9
10
11
12 NOON
1 P.M.
2
Evening III
3
4
5
6
7
8
9
10
Night III
11
12 MIDNIGHT
1 A.M.
2
3
4
5

50.0
47.2
47.0
48.4
48.8
49.6
50.0
51.0
50.4
50.0
48.9
49.8
49.8
50.0
47.8
46.4
46.4
47.2
48.4
49.2
48.4
47.2
47.4
48.8
49.6
51.0
50.5
Day
Shift

49.2
46.3
44.1
45.0
44.8
48.0
48.1
48.1
49.5
48.7
47.6
48.4
48.8
49.1
45.2
44.0
44.4
46.6
47.2
48.1
47.0
46.4
46.8
47.2
49.0
50.5
50.0
Eve
Shift

50.0
50.5
49.7
49.0
49.7
51.8
52.7
55.2
54.1
50.9
51.2
51.0
50.8
50.6
51.2
49.7
50.0
48.9
49.5
50.7
50.8
49.2
49.0
51.4
50.6
51.5
51.9

0.8
4.2
5.6
4
4.9
3.8
4.6
7.1
4.6
2.2
3.6
2.6
2
1.5
6
5.7
5.6
2.3
2.3
2.6
3.8
2.8
2.2
4.2
1.6
1
1.9
Night
Shift

Grand Average
Average Range

49.80
3.45

48.94
4.38

48.65
3.36

Average Chart
Upper Control Limit
Center Line
Lower Control Limit

50.34
49.80
49.25

49.63
48.94
48.25

49.18
48.65
48.13

Range Chart
Upper Control Limit
Center Line
Lower Control Limit

5.35
3.45
1.56

6.79
4.38
1.98

5.21
3.36
1.52

C-40

Number of Points out of

Control
Average Chart
Range Chart

10
1

21
2

C-41

17
5

SIX SIGMA AT 3M, INC.

Teaching Note
Synopsis and Purpose
The purpose of this case is to expose students to the issues involved in implementing Six
Sigma in 3M, a large multinational corporation. The case tells us that the new 3M CEO and
Board of Directors have already decided to implement Six Sigma. It is just a question of how the
program will be rolled out, what challenges are being faced, and what benefits will be achieved.
The case describes some of the key features of the 3M Six Sigma program, since it is
assumed that most students are not familiar with Six Sigma. The discussion questions then focus
on understanding the potential benefits and costs to 3M, the relationship of Six Sigma to
corporate strategy, and its impact on the human resources and information systems of the
company.
Students should come away with not only an understanding of what Six Sigma is, but an
awareness of the pitfalls and the implementation problems that might be encountered. At the end
of the teaching note, we also contrast Six Sigma with the former TQM program in 3M. This
provides an interesting discussion about the key differences.
Discussion Questions
1. What will be the benefits of the Six Sigma Program and how will they be tracked and
reported?
Benefits will be increased earnings growth, improved quality, common language for suppliers to
customers, accelerated product commercialization, and leadership development for employees.
Finance people from each division will be assigned to validate projected financial results and will
be assigned to track these results when the programs are implemented. All other non-financial
benefits (customer satisfaction, customer loyalty, employee satisfaction, employee turnover,
innovation, etc.) will also be tracked by the Six Sigma organization.

C-42

2. What are the costs and risks of this program?

Costs are the outside consultant training fees for top management and master blackbelts. This
was $25,000 to $40,000/person trained. Another cost was reallocation of 2-4% of full time
resources in each functional area to become full-time blackbelts. This takes resources away from
existing activities. Total costs for the program at 3M were confidential but there were a large
number of top management folks trained at the $40,000/head rate.
Risks are spending large amounts of money and achieving marginal results from the
improvements. For example, savings might be documented on a project basis, but wont show up
on the bottom line due to overall company loss of sales or increasing costs that are not subject to
Six Sigma projects.

3. What kinds of change management skills will the organization need to implement Six Sigma?
Each manager will become a project sponsor and will be given specialized training to help manage
the change process. This will include division level operating committee members and above.
Eventually, all 3M managers will be trained as Six Sigma Green belts. The Green belt training
includes sessions on change management as part of the course.
4. How should various functional areas in the organization be included in the Six Sigma initiative
and what role should senior and middle management play in the change initiative?
All functions will be included in the Six Sigma initiative. Its important that all areas of the
company improve and get more efficient and better at meeting the needs of internal and external
customers to support the corporate goals. Legal, for example may run a project to reduce the
cycle time for filing patents or to reduce the variability in this process. HR may undertake a
process improvement related to the recruiting and selection of new employees.
Senior management should be held accountable to support the Six Sigma initiative. Executive
level blackbelts will be assigned the role of working with executives to develop Six Sigma
programs to support corporate Super Ys. Division VPs and above will each have dashboards
to monitor their critical Ys. Targets will be given from the top down and senior management
must effectively manage the change process to meet these new goals.

C-43

5. What role should Six Sigma play in corporate strategy?

Six Sigma helps the corporation define its critical business Ys from a high level strategic view.
Then these corporate Ys are fed down to the division, then to a project cluster, then to
individual projects that help all add up to achieve the corporate Y goals. 3M will still need to
have a corporate strategy that will help in complete in its various markets. Six Sigma can help
improve the process of strategy formulation, but does not dictate the strategy itself. Management
must choose the strategy and then use Six Sigma to implement it.
6. What kinds of information systems are required to support the Six Sigma initiative?
They need to develop several new databases to track projects. They also need to develop several
new systems to measure the critical Ys and produce the division level dashboards. Six Sigma is
not only changing the information system of 3M, but is used in IS projects to improve their
performance.
7. What are the human resource implications for deploying Six Sigma e.g. employee selection,
organizational structure (Green Belt, Black Belt, Master Black Belt, Champion).
This will be a fast track for developing leadership skills and selecting the best leaders for the
future. As the company begins to grow faster, more and better opportunities will exist for the
people that prefer to work for a faster more aggressive company. It is important to note, that Six
Sigma not only provides process improvement, but a common language for improvement across
all functions and a path for the high potential employees to be directly involved as improvement
specialists (Black Belts). Thus Six Sigma has a huge impact on the human resources of the
company and their deployment. It is a leadership development program.
8. What are the most effective incentives for people involved with Six Sigma projects (Black
Belts, team members, etc.)?
There is high visibility for Six Sigma projects and it provides opportunities for upper management
to view the skills of black belts and team members. If the BBs and team members perform well,
they will receive bigger raises and faster promotions.

C-44

What has happened at 3M, an update.

Where did 3M start?
They started by appointing an Executive Director level V.P. to lead the Six Sigma program for the
entire company. This person reported directly to the CEO. Then they brought in a consulting
firm to train the top-level executives and first waves of master blackbelts and blackbelts. From
there they defined the corporate super Ys of cash, growth, and productivity. These Ys were
then funneled down through the divisions and functional groups to develop projects.
While key 3M employees were initially trained by consultants, 3M quickly put together its own
internal training program to train the thousands of people in 3M. This training program was
conducted by 3M personnel and customized to 3M.
What are the timetables for transforming the 3M organization?
The goal was to have 50% of salaried people on a global basis trained by end of 2002 with 1000
projects up and running. In 2003 they wanted 100% of salaried people trained and 2000 projects
running.
How was Six Sigma different from 3Ms existing quality programs
TQM was used by many groups in 3M. TQM has most, or all, of the tools that Six Sigma has but
it differs in how the corporation ran the programs. TQM was implemented by staff quality
groups, targeting specific projects around the company. These folks were not always the most
aggressive high achievers in the company.
Six Sigma was set up by the CEO and driven by him using the new organization made up the best
people. These high achievers were selected from all functional areas and were pulled out of their
existing jobs, given intense training, and then supported by top management. These master
blackbelts and blackbelts work in each functional area along side of their fellow employees to
solve the most critical strategic issues for the corporation as they relate to each division.
Six Sigma deploys full-time people (2 to 4%) in 3M to work on projects. Process improvement
becomes an essential activity of each division in 3M, not an optional part-time effort.
3M is also tracking the savings and net income improvement from Six Sigma. This is very critical
in that the skeptics will focus on the financial results or lack thereof. Significant demonstrated
improvements in net income monitored by the finance organization help to demonstrate the worth
of the Six Sigma approach to everyone.

C-45

Teaching Strategy
In teaching this case, I start with a review of the discussion questions. After going through these
questions I find there are still many skeptics in the class about whether Six Sigma would work in
their organization and whether it is the way for everyone to proceed. I point out that Six Sigma
does not work well for all organizations. For example, if an organization is not capable of being
ISO 9000 certified, it should probably not engage in Six Sigma. Such an organization should first
get its processes defined and standardized, and people trained in the processes before attempting
to improve them. Other situations where Six Sigma should not be attempted is when the
organization is likely to be sold to another company, when there is imminent turmoil in their
markets or the possibility of bankruptcy. Six Sigma is for the stable company that already has the
basics of quality management in place and wants to move to a higher level. Finally, the CEO and
senior management must support Six Sigma and have enough time to implement the changes. If
there is lack of commitment or instability in top management, Six Sigma is likely to fail.
It is probably also important to note that the important part of Six Sigma is not the tools. Many
organizations have trained their people in the tools and still not achieved good results. A Six
Sigma program must be strategic in nature, led by the CEO, use dedicated BBs and track the
financial results to be successful. Without these organizational changes, results will be meager to
negative.
This is a very enjoyable case to teach, since students have probably heard a lot about Six Sigma
from the popular business press, but are not sure what it is or whether is should be used. Thus,
they can learn a great deal from a company that is going about implementing Six Sigma in an
aggressive manner.

C-46

FORD MOTOR COMPANY, SUPPLY CHAIN STRATEGY

The teaching note for Ford Motor Company, Supply Chain Strategy can be obtained from Harvard
Business School Publishing (HBSP). Harvard Business School does not permit reprinting of their
teaching notes. The teaching note can be obtained by calling 1-800-545-7685 or you can send an email request to custserv@hbsp.harvard.edu. They will send you the teaching note by mail. If you are
a registered faculty member with the HBSP web site (www.hbsp.harvard.edu), you can receive
immediate online access to the teaching note by using your user name and password.
Teaching Note number: 601172

C-47

MERRIWELL BAG COMPANY

Teaching Note
Synopsis and Purpose
Merriwell Bag Company manufactures and distributes stock bags to many small chain stores
scattered over a wide geographical area. Presently, due to growth in the business, forecasting
demand has become more difficult. As a result, the company would like a forecasting system
developed. Monthly data from the past five years is provided in the case.
This case presents an opportunity for the student to design a forecasting system. The case
also asks the student to describe how the system can be used and aided by managerial judgment.
Discussion Questions
1. Develop and justify a forecasting method that fulfills the company's specifications.
2. Forecast aggregate demand by month for 2005.
3. In addition to forecasting demand of larger customers and aggregate demand, how might the
accuracy of the forecast be improved?
4. What role should Ed Merriwell's "feel" of the market play in establishing new sales forecasts?
Analysis
Because of the seasonal nature of the demand facing Merriwell Bag Company, an appropriate
forecasting tool is the classical decomposition method (discussed in the supplement to Chapter 11).
The data in the case is provided on the CD-ROM that accompanies the textbook. Only the data is
provided on an Excel template. The user must enter the formulas and analysis.
Sixty months of data are provided on the template, see exhibit 1. The first step in classical
decomposition is to develop a 12-month moving average which is done in the 3rd column on the
worksheet. Then a 2-month moving average is developed in the 4th column which is centered on the
original data. The 4th column contains data which is deseasonalized, since 12 months has been used
as a base in the moving average. At this point the upward trend in the moving average in column 4 is
apparent.

C-48

In column 5 seasonal ratios are computed by dividing the sales data for each month by the
moving average in column 4. The data indicates that high seasonal demand occurs before Christmas
each year in September, October and November. Low seasonal demand occurs in the Jan, Feb and
March time frame. In column 6 average seasonal ratios are computed. These ratios are obtained by
averaging the seasonal ratios from the same month in successive years. For example, the July
seasonal ratio is obtained by averaging the July 2000, July 01, July 02, and July 03 seasonal ratios.
When the resulting twelve seasonal ratios are added the total is 11.8977. The sum of these
ratios should be 12 in accordance with the 12-month seasonal period, because the seasonal ratio is
the percentage that a particular month is above or below the average. In order to obtain a sum of 12,
the seasonal ratios are normalized in column 7. This is done by dividing each ratio by the sum
11.8977 and multiplying by 12.
A regression analysis is now run to fit a straight line through the moving average data in
column 4. The purpose of this regression is to forecast the average level into 2005 on a trend basis.
The seasonal ratios will then be applied to this trend to arrive at a forecast. In Excel a regression
function is provided. In this case we have data from period 7 through period 54. The formulas and
procedure for calculating the regression equation are given in the text. As a result of these
calculations the following equation is obtained.
Y = 5997 + 70.24 t
Where Y is the moving average and t is the time period.
To obtain the forecast of interest we calculate Y from the above equation for the twelve
months of 2005, which is t = 61 through t = 72. These Y values are multiplied by the monthly
average seasonal ratios to arrive at the forecast for each month shown in Exhibit 1. Note, that the
total of this forecast is 129,435 bales of bags for the year 2005.
In evaluating the forecast one of the questions that comes to mind is the validity of the linear
trend assumption. Note, that total demand in 2004 (113,000) was actually a little less than the total
demand for 2003 (115,000). Ed Merriwell should determine if there is some reason for this leveling
out of demand or should the historical trend be assumed to resume. If demand flattens out at
115,000 bales, our forecast for 2005 could be too high by about 15,000 bales for the year (129,435 115,000).
The seasonal ratios appear to be pretty stable from year to year. While some monthly
variation can be expected in seasonal ratios, it will probably not be as serious as the trend assumption
discussed above, because the seasonal error from month to month will tend to average out over the
course of 2005.
Whereas the above forecasting technique should be useful, Ed Merriwell's "feel" of the
market should not be discarded. Any analytical method should be augmented by personal judgment.
This judgment would prove very useful in considering mostly non-quantifiable factors that might
affect demand (state of the economy, consumer attitudes, activity of competitors, etc.) These effects
can be quantitatively introduced into the forecast by adjusting the future trend and possibly the
individual seasonal ratios.

C-49

This case can also be analyzed by using exponential smoothing with seasonal adjustments and
trend. A spreadsheet could be written using the Winter's formulas from the supplement to Chapter
11. The trend component could be derived from past data or based on judgment as to how fast
demand will grow in the future.
Teaching Strategy
This case can be taught by first developing one or more forecasting techniques. Different
forecasts can be put on the PowerPoint overhead and compared to each other. After all of the
techniques have been described one can then turn to a discussion of the intangible factors.
This case illustrates a realistic forecasting problem. The student must deal with model choice issues
and problems of model use. It usually takes about one hour to teach the case.

C-50

EXHIBIT 1

NORMALIZE
JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
JAN
FEB
MAR

00
00
00
00
00
00
00
00
00
00
00
00
01
01
01
01
01
01
01
01
01
01
01
01
02
02
02
02
02
02
02
02
02
02
02
02
03
03
03

Y(t)
SALES
2000
3000
3000
3000
4000
6000
7000
6000
10000
12000
14000
8000
3000
4000
3000
5000
5000
8000
3000
8000
12000
12000
16000
10000
2000
5000
5000
3000
4000
6000
7000
10000
15000
15000
18000
8000
5000
4000
4000

12

SEASONAL AVERAGE

PERIOD
M.A.

PERIOD
M.A.

RATIOS SEASONAL SEASONAL

RATIOS
RATIOS

6500.0
6583.3
6666.7
6666.7
6833.3
6916.7
7083.3
6750.0
6916.7
7083.3
7083.3
7250.0
7416.7
7333.3
7416.7
7583.3
7416.7
7333.3
7166.7
7500.0
7666.7
7916.7
8166.7
8333.3
8166.7
8416.7
8333.3
8250.0
8166.7
8250.0
8333.3
8583.3
8916.7
9000.0

6541.7
6625.0
6666.7
6750.0
6875.0
7000.0
6916.7
6833.3
7000.0
7083.3
7166.7
7333.3
7375.0
7375.0
7500.0
7500.0
7375.0
7250.0
7333.3
7583.3
7791.7
8041.7
8250.0
8250.0
8291.7
8375.0
8291.7
8208.3
8208.3
8291.7
8458.3
8750.0
8958.3

1.0701
0.8411
0.9057
1.1645
1.5000
1.6539
1.7778
1.7299
2.0364
2.1307
1.1429
1.1889
0.4337
0.4583
0.5854
0.4805
0.4286
0.4618
0.7059
0.3781
0.6977
0.6130
1.0909
0.7969
0.4068 11.89772
1.0847
1.6000
1.6000
2.1695
1.3793
0.2727
0.6593
0.6417
0.3731
0.4848
0.7273
0.8442
1.1940
1.8090
1.8274
2.1929
0.9648
0.5911
0.4571
0.4465

C-51

0.8484
1.1745
1.6681
1.7447
2.1490
1.1991
0.4623
0.4846
0.4657
0.3814
0.6183
0.8038
SUM

APR
MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC

03
03
03
03
03
03
03
03
03
04
04
04
04
04
04
04
04
04
04
04
04

2000
5000
7000
10000
14000
16000
16000
20000
12000
5000
2000
3000
2000
7000
6000
8000
10000
20000
20000
22000
8000

EXHIBIT 1 (continued)
9083.3
9041.7
0.2212
9250.0
9166.7
0.5455
9583.3
9416.7
0.7434
9583.3
9583.3
1.0435
9416.7
9500.0
1.4737
9333.3
9375.0
1.7067
9333.3
9333.3
1.7143
9500.0
9416.7
2.1239
9416.7
9458.3
1.2687
9250.0
9333.3
0.5357
8916.7
9083.3
0.2202
9250.0
9083.3
0.3303
9583.3
9416.7
0.2124
9750.0
9666.7
0.7241
9416.7
9583.3
0.6261
9818.2
390708.3

REGRESSION COEFFICIENTS
B = 70.24578
A = 5997.260

NOTE: NORMALIZED SEASONAL RATIOS ARE CONSTRUCTED SO

THAT THE TOTAL OF THE SEASONAL RATIOS IS 12.
FORECAST BASED ON DECOMPOSITION
t
Y
SEASONAL
RATIOS FORECAST
JAN05
FEB05
MAR05
APR05
MAY05
JUN05
JUL05
AUG05
SEP05
OCT05
NOV05
DEC05

61
62
63
64
65
66
67
68
69
70
71
72

SUM

10282
10352
10423
10493
10563
10633
10704
10774
10844
10914
10985
11055

0.4623
0.4846
0.4657
0.3814
0.6183
0.8038
0.8484
1.1745
1.6681
1.7447
2.1490
1.1991

C-52

4753
5017
4854
4002
6531
8547
9081
12654
18090
19043
23606
13257
129435

LAWN KING, INC.

Teaching Note
Synopsis and Purpose
Lawn King is a manufacturer of lawn mowers facing a highly seasonal demand for its
products. At the present time the demand forecast for the coming year has just been increased. This
is causing management to evaluate the accuracy of the forecast, and to construct several different
production strategies (level, chase, second shift) for meeting demand.
The purpose of this case is to illustrate the issues typically encountered in aggregate planning.
The student is asked to make a demand forecast, to construct alternative production strategies and to
recommend a particular strategy. A substantial amount of "pencil pushing" and "computer pushing"
is required in this case to develop and evaluate the various strategies. The case illustrates the
tradeoffs involved in aggregate production planning.
Discussion Questions
1. Develop a forecast to use as a basis for aggregate production planning.
2. Develop an aggregate production plan by month for fiscal 2002. Consider the use of several
different production strategies. Which strategy do you recommend? Hint: Use of Excel will greatly
save time in making these plans.
Analysis
The first step in analysis of this case is to evaluate the demand forecast. This can be done by
calculating the actual increase in total demand over the past year. The increase from FY00 to FY01
was
84,600 / 69,500 = 1.217
The projected increase from FY01 to FY02 is
110,000 / 84,600 = 1.30
Thus a larger increase is being projected than was experienced last year.
We also observe that forecasts in the past have been very accurate (e.g. FY00 actual compared to
forecast and FY01 actual compared to forecast). But, the forecasts by model type have not been
nearly as accurate as total demand forecasts. Furthermore, the case states that demand is highly
influenced by the economy and the weather. In view of this, past forecasts have been remarkably
accurate.

C-53

For purposes of analysis we will accept the new forecast of 110,000 units. Although the
projected demand increase is larger than last year's actual increase, the forecast still appears
reasonable. It may be, however, that marketing is attempting to drive production through a higher
forecast to avoid stockouts. Therefore, we may wish to evaluate a somewhat lower forecast, as well
as the one given in the case.
It is best to evaluate the various production strategies in terms of aggregate demand.
Evaluating these strategies by model type results in a tremendous amount of detailed calculation.
To construct an aggregate plan we need to forecast aggregate demand by month. This can be
done by assuming the same monthly pattern as last year. From exhibit 4 in the case, the percentage
of annual sales by month can be calculated. These percentages are then multiplied by the total
forecast (110,000) to arrive at monthly demand forecasts. (See Exhibit 1 of the teaching note.)
Next, we must decide on the inventory level needed at the end of the year and the stockout
policy desired. The current inventory is 16,460 units. On an annual basis this inventory level
represents a turnover of
110,000 / 16,460 = 6.7
While a turnover of 6.7 might be considered good, the inventory level should ideally be compared to
the demand at the end of the year. Since the demand is seasonal, our goal should be to have 1 or 2
months of inventory at year-end as a safety stock. More inventory is not necessary, since all models
are still in production and we can respond to changing demand conditions. One month of inventory
would amount to 1216 units (the projected demand for September). Two months of inventory would
be 3698 units, the demand for September and October. By this criterion, a great deal of excess
inventory exists. Therefore, we will assume an 8/31/02 goal of 3700 units (2 months supply) of
inventory for the remainder of this analysis.
Adjusting for the inventory change, we have a production requirement of 97,240 units.
Forecast
Beginning Inventory
Ending Inventory
Production Required

110,000
-16,460
+3,700
97,240

There are many alternative strategies to consider. For the sake of simplicity we shall consider
four strategies.
1. Level production
2. Level production with overtime
3. Chase demand
4. Two shifts

C-54

The level production strategy is shown in Exhibit 1 attached. A level of 100 workers is used
for September through February. This level is then phased down to 85 and then to 49 workers at the
end of the year in order to reach an ending inventory of about 3700 units. It is not possible to use a
completely level strategy in this case without significant stockouts or a larger ending inventory than
desired. Thus an arbitrary initial level of 100 workers is selected with a reduction in work force later
in the year. Other levels could also be selected.
The second strategy, shown in Exhibit 2, is a level strategy with overtime. In this case we
choose a level of 85 regular workers through May, and then phased down to 52 workers at the end
of the year to achieve an ending inventory level of 3700 units. Overtime is used in the months of
December through May to meet the peak demands. Other profiles of level production and overtime
could be selected.
Note, the ending inventory in all strategies should be the same in order to insure a
comparable basis of costing. Students often overlook this point and, as a result, arrive at very
different cost estimates.
The third strategy is to chase demand as shown in Exhibit 3. The chase strategy matches
demand in Sept through Feb. Then a maximum of 200 workers in used in March and April while
inventory is worked off and the level of workers is phased down to chase demand and end the year
with 3700 units.
The fourth strategy is a two-shift strategy, shown in Exhibit 4. This strategy starts with a
level of 60 workers in Sept through Dec (first shift) and then doubles the level of workers to 120
(second shift) from Jan through May. The second shift is phased down to arrive at the same ending
inventory as the rest of the strategies.
In order to evaluate these four strategies we will need to make various assumptions about
costs and resources. The first assumption is the nominal production rate of a worker in a month.
Using the data from Exhibit 4 in the case, an average daily production of 373 units is computed as
the following weighted average:
24,000
35,500
31,500
19,000
420
400
350
300
373
110,000
110,000
110,000
110,000
Since there are 260 production days in a year (52 weeks x 5 days per week), the average monthly
production is 8,082 units:
260(373)
-------- = 8,082 units per month.
12

C-55

The initial variable work force level is 85 workers (excludes 10 maintenance and 5 office workers).
The production per direct (or variable) worker is therefore:
8,082
----- = 95 units per worker per month
85
The hiring cost per worker is $800 and the layoff cost is $1500 per worker as given in the case. To
calculate inventory carrying cost, we need to know the cost of producing a unit. Using labor and
material costs for FY92, we arrive at a unit cost of
$10,600,000
-----------84,450 units

= $125 per unit

This unit cost is multiplied by 2.5% a month carrying cost (30% a year) to arrive at
$3.125 per unit/month
This unit carrying cost is multiplied by the total inventory carried to arrive at the inventory carrying
cost for each month.
The direct labor cost per hour is obtained by taking the direct labor costs from the Profit and Loss
Statement (Exhibit 1 in the case) and dividing by the number of direct workers (85) times 2000 hours
per year as follows:
$2,595,000
---------85(2000)

= $15.30 per hour

The overtime rate is 150% of direct labor and thus the overtime rate is 150% times $15.30 = $23.00
per hour.
In order to calculate the costs of each strategy we use the spreadsheet for this case on the CD-ROM
supplied with the textbook (file named LAWNKING). The above cost numbers are input into the
spreadsheet for all of the strategies. Then each strategy is evaluated, one at a time, as shown in
Exhibits 1 to 4.
The result of these cost evaluations is as follows:
Strategy 1: Level
Strategy 2: Level with Overtime
Strategy 3: Chase
Strategy 4: Two Shift

$3,414,411
$3,360,109
$3,425,407
$3,290,880

As noted above, the Two-Shift Strategy has the lowest cost, by about $70,000 per year, over the
Level with Overtime Strategy. The two-shift strategy is the cheapest, because overtime is more
expensive and it is relatively expensive to hire and layoff workers. In a sense the two-shift strategy
does the best job of fitting the demand profile by using regular workers.
C-56

The two-shift strategy not only offers cost advantages, but more flexibility and less inventory risk
than the level strategy. The two-shift strategy is therefore preferred to the level strategy, provided
employees can be found to work a second shift for only part of the year.
While the use of level strategy with overtime is more attractive than a pure level strategy, the
flexibility to meet further demand increases is gone once overtime is built into the aggregate plan.
Especially in view of the fact that a large amount of overtime is needed in strategy 2.
The two-shift strategy is also preferred to the chase strategy because it not only costs less but
requires less personnel turmoil. Hiring and layoff is only done once for the two-shift strategy rather
than frequently throughout the year. The chase strategy also implies that the production line can be
easily speeded up and slowed down, while the two shift strategy provides for a constant line speed.
I think the above arguments provide a compelling case for the two-shift strategy. Lively arguments
can be constructed, however, because the company can "squeak by" without using a second shift.
Also, the two-shift strategy might not be entirely obvious to some students as an option that should
be evaluated.
Teaching Strategy
This case can be taught using the same order of discussion as the above analysis: forecast,
alternative strategies, costing, recommendation. The case will take one hour or more to teach
depending on how much analysis is put on the board and how much discussion is encouraged.
This case provides practice in formulating and evaluating aggregate production strategies.
Management is facing a dilemma because the sales manager has pushed the forecast a little beyond a
one-shift operation, unless large amounts of overtime or hiring and layoff are used. The demand here
is also very seasonal so flexibility in addition to cost is an important issue in production planning.
There is also the question of how much inventory to carry at the end of the year.
When assigning the case, the students should be warned not to engage in excessive number
crunching. Students can easily become bogged down in developing one schedule after another, while
not reaching a sound conclusion.

C-57

EXHIBIT 1 (LEVEL STRATEGY)

FILENAME: LAWNKING

NAME: KEY
*
SECTION: *
DATE:
03-Apr

BASIC INPUT DATA

=
MONTHLY PROD. RATE (UNITS/WORKER/MONTH):
BEGINNING INVENTORY (UNITS):
BEGINNING NUMBER OF
WORKERS:
HIRING COST PER WORKER:
LAYOFF COST PER WORKER:
INVENTORY HOLDING COST ($ PER UNIT PER MONTH):
INVENTORY SHORTAGE COST (COST/UNIT SHORT) :
REGULAR HOURLY WAGE RATE:
OVERTIME HOURLY WAGE RATE:
HOURS/MONTH:

MONTH

SEPT.
-

OCT.
-

95 UNITS
16460 UNITS
85 WORKERS
$800
$1,500
$3.13
$0.00
$15.30
$23.00
160

NOV.
-

DEC.
-

Sales Forecast:
1,216
2,482
4,677
5,970
Units Produced:
9500
9500
9500
9500
Ending Inventory:
24744
31762
36585
40115
Number of Workers:
100
100
100
100
Overtime Percent:
0%
0%
0%
0%
Total Equivalent
number of workers:
100
100
100
100
(# workers + O.T.)
Reg. Labor Costs: $244,800 $244,800 $244,800 $244,800
O.T. Labor Costs:
$0
$0
$0
$0
Change in # workers
from last month:
15
0
0
0
Hiring Cost: $12,000
$0
$0
$0
Layoff Cost:
$0
$0
$0
$0
End-Inv. Hold. Cost: $77,325
$99,256 $114,328 $125,359
End-Inv. Short. Cost:
$0
$0
$0
$0
MONTHLY TOTAL COST: $334,125 $344,056 $359,128 $370,159

C-58

JAN.
6,950
9500
42665
100
0%
100
$244,800
$0
0
$0
$0
$133,328
$0
$378,128

EXHIBIT 1 (continued)
FEB.
-

MAR.
-

10,877
9500
41288
100
0%
100

APR.
-

23,185
8075
26178
85
0%
85

MAY
-

24,642
8075
9611
85
0%
85

JUNE
-

15,743
8075
1943
85
0%
85

JULY
-

6,598
5700
1045
60
0%
60

AUG.
-

4,299
5700
2446
60
0%
60

3,352
4655
3749
49
0%
49

$244,800 $208,080 $208,080 $208,080 $146,880 $146,880 $119,952

$0
$0
$0
$0
$0
$0
$0
0
-15
0
0
-25
0
-11
$0
$0
$0
$0
$0
$0
$0
$0
$22,500
$0
$0
$37,500
$0
$16,500
$129,025
$81,806
$30,034
$6,072
$3,266
$7,644
$11,716
$0
$0
$0
$0
$0
$0
$0
$373,825 $312,386 $238,114 $214,152 $187,646 $154,524 $148,168
STRATEGY DESCRIPTION & ASSUMPTIONS
============== ====== ======
=======
===
===
LEVEL STRATEGY
THIS IS A CLASSICAL LEVEL STRATEGY WITH A REDUCTION IN THE LEVEL
TOWARD THE END OF THE PLANNING PERIOD IN ORDER TO ARRIVE AT AN
ENDING INVENTORY OF 3700 UNITS. THE INITIAL WORK FORCE IS
ARBITRARILY SELECTED TO BE 100 WORKERS.
$3,414,411 TOTAL COST OF THIS STRATEGY

C-59

EXHIBIT 2 (OVERTIME)
MONTHS:
SEPT.
OCT.
NOV.
DEC.
Sales Forecast:
1,216
2,482
4,677
5,970
Units Produced:
8075
8075
8075
9206
Ending Inventory:
23319
28912
32310
35546
Number of Workers:
85
85
85
85
Overtime Percent:
0%
0%
0%
14%
Total Equivalent
number of workers:
85
85
85
96.9
(# workers + O.T.)
Reg. Labor Costs: $208,080 $208,080 $208,080 $208,080
O.T. Labor Costs:
$0
$0
$0
$43,792
Change in # workers
from last month:
0
0
0
0
Hiring Cost:
$0
$0
$0
$0
Layoff Cost:
$0
$0
$0
$0
End-Inv. Hold. Cost: $72,872
$90,350 $100,969 $111,080
End-Inv. Short. Cost:
$0
$0
$0
$0
MONTHLY TOTAL COST: $280,952 $298,430 $309,049 $362,952
FEB.
-

MAR.
-

10,877
9206
36130
85
14%

23,185
9206
22150
85
14%

96.9

0
$0
$0
$112,905
$0

JUNE
-

JULY
-

15,743
9206
176
85
14%

96.9
$208,080
$43,792
0
$0
$0
$118,128
$0
$370,000
AUG.

6,598
7125
703
75
0%

4,299
5700
2104
60
0%

3,352
4940
3692
52
0%

96.9

96.9

75

60

52

$208,080 $208,080
$43,792
$43,792

$208,080
$43,792

$183,600
$0

$146,880
$0

$127,296
$0

0
$0
$0
$550
$0

-10
$0
$15,000
$2,197
$0

-15
$0
$22,500
$6,575
$0

-8
$0
$12,000
$11,538
$0

0
$0
$0
$69,219
$0
-

$364,777

MAY
-

24,642
9206
6714
85
14%

96.9

$208,080
$43,792

APR.
-

JAN.
6,950
9206
37801
85
14%

0
$0
$0
$20,980
$0
-

$321,091

$272,852

$252,422

$200,797

$175,955

$150,834

STRATEGY DESCRIPTION & ASSUMPTIONS

LEVEL WITH OVERTIME
THIS IS A LEVEL STRATEGY WITH OVERTIME USED TO AVOID STOCKOUTS.
SOME WORKERS ARE LAID OFF AT THE END OF THE PLANNING PERIOD TO
ACHIEVE AN ENDING INVENTORY OF 3700 UNITS.
$3,360,109 TOTAL COST OF THIS STRATEGY

C-60

EXHIBIT 3 (CHASE STRATEGY)

SEPT.
OCT.
NOV.
1,216
2,482
4,677
1235
2470
4655
16479
16467
16445
13
26
49
0%
0%
0%

DEC.
JAN.
Sales Forecast:
5,970
6,950
Units Produced:
5985
6935
Ending Inventory:
16460
16445
Number of Workers:
63
73
Overtime Percent:
0%
0%
Total Equivalent
number of workers:
13
26
49
63
73
(# workers + O.T.)
Reg. Labor Costs: $31,824
$63,648 $119,952 $154,224 $178,704
O.T. Labor Costs:
$0
$0
$0
$0
$0
Change in # workers
from last month:
-72
13
23
14
10
Hiring Cost:
$0
$10,400
$18,400
$11,200
$8,000
Layoff Cost: $108,000
$0
$0
$0
$0
End-Inv. Hold. Cost: $51,497
$51,459
$51,391
$51,438
$51,391
End-Inv. Short. Cost:
$0
$0
$0
$0
$0
MONTHLY TOTAL COST: $191,321 $125,507 $189,743 $216,862 $238,095
FEB.
-

MAR.
-

10,877
10830
16398
114
0%
114

APR.
-

23,185
19000
12213
200
0%

24,642
19000
6571
200
0%

15,743
13300
4128
140
0%
140

JULY
-

AUG.
-

6,598
6650
4180
70
0%

4,299
3800
3681
40
0%

3,352
3325
3654
35
0%

40

35

$279,072 $489,600 $489,600 $342,720 $171,360

$0
$0
$0
$0
$0

$97,920
$0

$85,680
$0

86
$68,800
$0
$38,166
$0

200

JUNE
-

70

41
$32,800
$0
$51,244
$0

200

MAY
-

0
$0
$0
$20,534
$0

-60
-70
-30
-5
$0
$0
$0
$0
$90,000 $105,000
$45,000
$7,500
$12,900
$13,063
$11,503
$11,419
$0
$0
$0
$0
$363,116 $596,566 $510,134 $445,620 $289,423 $154,423 $104,599
STRATEGY DESCRIPTION & ASSUMPTIONS
CHASE STRATEGY
THIS IS A CLASSIC CHASE STRATEGY. MAXIMUM WORK FORCE IS LIMITED
ARBITRARILY TO 200 WORKERS WHICH REDUCES THE INVENTORY IN PEAK
PERIODS TO ACHIEVE AN ENDING INVENTORY OF 3700 UNITS.
$3,425,407 TOTAL COST OF THIS STRATEGY

C-61

EXHIBIT 4 (TWO-SHIFT STRATEGY)

SEPT.
-

OCT.
-

NOV.
-

DEC.
-

JAN.
-

Sales Forecast:
1,216
2,482
4,677
5,970
6,950
Units Produced:
5700
5700
5700
5700
11400
Ending Inventory:
20944
24162
25185
24915
29365
Number of Workers:
60
60
60
60
120
Overtime Percent:
0%
0%
0%
0%
0%
Total Equivalent
number of workers:
60
60
60
60
120
(# workers + O.T.)
Reg. Labor Costs: $146,880 $146,880 $146,880 $146,880 $293,760
O.T. Labor Costs:
$0
$0
$0
$0
$0
Change in # workers
from last month:
-25
0
0
0
60
Hiring Cost:
$0
$0
$0
$0
$48,000
Layoff Cost: $37,500
$0
$0
$0
$0
End-Inv. Hold. Cost: $65,450
$75,506
$78,703
$77,859
$91,766
End-Inv. Short. Cost:
$0
$0
$0
$0
$0
MONTHLY TOTAL COST: $249,830 $222,386 $225,583 $224,739 $433,526
FEB.
-

MAR.
-

10,877
11400
29888
120
0%
120

APR.
-

23,185
11400
18103
120
0%
120

MAY
-

24,642
11400
4861
120
0%
120

JUNE
-

JULY
-

15,743
11400
518
120
0%

6,598
8550
2470
90
0%

120

90

AUG.
-

4,299
4750
2921
50
0%
50

3,352
4180
3749
44
0%
44

$293,760 $293,760 $293,760 $293,760 $220,320 $122,400 $107,712

$0
$0
$0
$0
$0
$0
$0
0
$0
$0
$93,400
$0

0
$0
$0
$56,572
$0

0
$0
$0
$15,191
$0

0
$0
$0
$1,619
$0

-30
$0
$45,000
$7,719
$0

-40
$0
$60,000
$9,128
$0

-6
$0
$9,000
$11,716
$0

$387,160 $350,332 $308,951 $295,379 $273,039 $191,528 $128,428

STRATEGY DESCRIPTION & ASSUMPTIONS
A TWO-SHIFT STRATEGY IS USED TO CLOSELY MATCH DEMAND. THE FIRST
SHIFT PROVIDES A TOTAL OF 120 WORKERS. SOME WORKERS ARE LAID-OFF
AT THE END OF THE PLANNING PERIOD TO ARRIVE AT 3700 UNITS IN
INVENTORY.
$3,290,880 TOTAL COST OF THIS STRATEGY

C-62

WORLD INDUSTRIAL ABRASIVES DIVISION

Teaching Note
Synopsis and Purpose
World Industrial Abrasives is a manufacturer of abrasive materials used to make sandpaper
and other abrasive products. The case presents a scheduling problem for machines used to crush
abrasive material from large chunks into smaller pieces. The resulting pieces are used on sandpaper
and other abrasive products. At the present time the crushing machines are scheduled by hand and
the case asks for development of an automated algorithm to assist the scheduler.
The purpose of this case is to provide a vehicle for the design of a scheduling system.
Several different approaches to the scheduling system design are considered and a preferred
approach selected.
Discussion Questions
1.

Develop a detailed flow chart that replicates the manual method currently used by the
scheduler.

2.

Evaluate the advisability of using linear programming, simulation, heuristic rules, or the
present scheduling method to solve this problem.

3.

Develop a conceptual model to solve this problem.

computational algorithm you would use.

Specify the inputs, outputs, and

Analysis
In response to the first question, a flow chart is shown in Exhibit 1. The MRP requirements
and the yield table are inputs to the scheduling method. The scheduler then selects an input quantity
of mineral and a particular set of crushing and screening operations. Multiplying the input quantity
by the yields for this particular set of operations results in the output of crushed minerals. These
outputs are compared to the requirements to determine whether the requirements are met or whether
the input weight or crushing and screening operations should be changed. This process of calculation
is continued until the requirements are met or until no more time is available for calculation. If the
time limit is reached, the best approximate solution is selected based on those crushing and screening
combinations which have been examined. Altogether, there are 19 x 19 x 4 = 1444 possible
combinations of crushing and screening operations.
Linear programming cannot be used to solve this problem since discrete crushing and
screening operations must be selected. However, an integer programming formulation can be
developed as follows:

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Let Xi =

1 if crushing and screening operations i is selected

0 otherwise i = 1, . . ., 1444
Aij = yield of mineral of size j from operation i
Rj = requirement of mineral of size j (lbs)
W = total input of raw mineral in lbs.

The requirements for mineral can be either exceeded or not met. Thus
we have:
n

WA X U S R
ij

i 1

Where:
Uj = amount under the requirement
Sj = amount over the requirement
In this formulation Uj is a slack variable and S j is a surplus variable. If U j is
positive, then additional material will have to be purchased from outside. If S j
is positive, then surplus material will have to be stored and possible recrushed
to use it later.
There are three costs to be considered:
1.
2.
3.
Let

Recrushing
Purchasing outside mineral
Storage

dj = unit cost of recrushing

bj = unit cost premium of purchasing outside materials
cj = unit cost of storage

Then we wish to minimize

cost =

b U d c S
j

Subject to:

WA X U S R
ij

j = 1, . . , N

Xi = {0,1}, Uj 0, Sj 0
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This is a nonlinear mixed integer programming problem. We can

remove the nonlinearity by assuming a value for W and solving the resulting
problem. As a first approximation we can select W = Rj . Then smaller and
larger values of W can also be used. Each time we select a different value of
W, a new integer programming problem must be solved.
The problem can also be solved by simulation. In this case, the simulation amounts to an
automation of the Flow Chart shown in Exhibit 1. A combination of crushing and screening
operations is selected along with an input weight, and the process output is calculated. After 1444
iterations, all combinations can be evaluated for a particular input weight and a particular week.
Since the calculations are quite simple, these combinations can be quickly evaluated and the results
can be ranked by any criteria desired. The total cost can be calculated as shown above or other
criteria can also be used.
The scheduling problem can also be solved by heuristics. For example, if more than 50,000
lbs of #10 grit are required, use primary crush #16. If less than 50,000 lbs are required use primary
crush #14. Heuristics of this type could be developed by the scheduler based on past experience and
rules of thumb which have worked in practice. Heuristics can be used alone to solve the problem or
in connection with simulation to reduce the number of options which must be evaluated.
In this problem, simulation offers a great deal of appeal because the options can be easily
enumerated and a variety of different objective functions and constraints can be included. The integer
programming problem may be difficult to solve with available codes and offers less flexibility in
formulation. Heuristics are probably not needed in this case, unless they are used to simplify the
simulation model.
Teaching Strategy
This case can be taught by asking a student to describe the present scheduling system. A
flowchart of the type shown in Exhibit 1 can be put on the board. Once agreement is reached on
how the present system operates, a model can then be constructed.
Depending on the class background you may want to discuss math programming approaches
to this problem or limit the discussion to simulation or heuristics approaches. The case provides a
good opportunity to contrast and compare several different analytic approaches to the same problem.
It also illustrates that the designer should begin with a sound understanding of the present system
before designing a new scheduling system.

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EXHIBIT 1
Present Scheduling Method

Yield Tables
MRP Requirements
by type for 8 weeks

Assumed Mineral
Input and
Crushing
and Screening
Options

Mineral
Produced

Are
Reqm
tsmet
?

Yes

Stop

No

Change
Assumptions

Is time
No
available
to
reassess

Yes

Pick the best

approximate
solution

Stop

C-66

CONSOLIDATED ELECTRIC
Teaching Notes
Synopsis and Purpose
Consolidated Electric is a wholesale distributor of electrical products primarily to electrical
contractors. The company wants to design a system for inventory management of the 20,000 lineitems carried in stock. A description is given in the case of the business environment and the current
inventory control system in use.
The purpose of this case is to expose students to many of the issues encountered in inventory
system design. These issues include: forecasting, replenishment decision rules, error control,
multiple item interactions, ABC analysis, and top management control. The case also asks the
student to describe how the system they design will help improve inventory management in the
company.
Discussion Questions
1.

Design an inventory control system for this business.

2.

Describe how the system you have designed will help the company meet customer service
and cost objectives.

Analysis
One issue that needs to be considered during inventory system design is whether the system
will utilize periodic or continuous review. Periodic review should be used in order to take advantage
of purchase discounts and shipping economies. With periodic review, different items from the same
supplier can be consolidated into a single order/single shipment. Since most product lines are
reviewed on a weekly basis, this practice should be continued for control and shipping purposes,
unless a bi-weekly cycle becomes an obvious choice.
Items should be consolidated by line for ordering purposes. Thus, an entire line must be
reviewed before ordering decisions are made. The case indicates there are about 200 different lines
to consider on a weekly basis.
An inventory control system is shown in Exhibit 1. The forecasting model receives actual
demand and produces a forecast for each item on a weekly basis. The forecast should extend
through the ordering lead time for each item.
The order module accepts the forecast along with management inputs for service level and
costs. As a result, orders are calculated for each line and aggregate control information is fed back to
management prior to order placement. Orders are then placed, shipments occur from the vendor,
and disbursements are made to customers.

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Before designing the forecasting module we should examine the data in Appendix 1 of the
case. A frequency distribution of the individual customer demands for seven months is shown in
Exhibit 2. The distribution indicates there are two types of customers, those who order a small
number of units and those who place very large orders. It would be very expensive to carry safety
stock for the few customers who order 50, 60, 65 or 100 units. Further examination of Appendix 1
indicates that the same customer has ordered the 65 units on each of the four occasions and 100 units
on one occasion. A second customer has ordered 60 units on one date and 50 units on another. If
these demands occur on a predictable or known basis, perhaps they can be scheduled in advance with
the two customers and therefore be excluded from inventory uncertainty.
The demand data also indicates that the distribution is highly non-normal. Nevertheless, the
demand over lead time may approach a normal distribution, particularly when the large orders are
excluded. The lead time in this case is about 10 to 15 days (see Appendix 1).
A forecasting system that will react to different types of demand distributions is needed.
Exponential smoothing or other techniques should be used to forecast demand and both small item
demand (Poisson) and normal distributions should be included. The forecasting model should also
handle seasonal demand and it should provide error tracking of forecasts. When a forecast is not
tracking with actual data, an exception notice should be given to the user. The forecasting system
should also detect outliers in demand when they occur and notify the user. Finally, the forecasting
system should forecast lead-time and MAD or standard deviation, as well as demand.
The ordering module should calculate EOQ and the reorder point for each item. The EOQ
formula given in Exhibit 1 of the case can be used, but the reorder point from Exhibit 1 should not be
used. That reorder point is not related to service level or to statistical considerations.
The reorder point for normal demand should be:
R = (L + P) + Z L P
where:

R
= reorder point
L+P
= lead time + review period
(L + P) = forecast demand over L + P periods
Z
= safety factor

= single period standard deviation of demand

This formula assumes a constant lead time. If lead time varies, the formula can be appropriately
modified. In this case P = 1 week.
Reorder points should also be incorporated in the module for small demand items. In this
case the appropriate Poisson probability tables should be included. Finally, the module should have
an option to use any demand distribution supplied by the user.

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Orders for each item in a line should be calculated without considering price discounts or
shipment costs. After calculating all orders in the line, the total order size and weight should be
accumulated. If these amounts are not sufficient to obtain a discount, an economic analysis should be
made of increased order size. Each order should be increased by the percentage needed to reach the
discount level or levels. The total cost (of ordering + carrying + purchasing + freight) should then be
compared for the EOQ and each discount level using the line as a whole. This is preferable to the
line-point procedure suggested in Exhibit 1.
After calculating the orders required for each product line, the system should supply
aggregate control information for management prior to the order placement. This information should
include, for example, total dollars ordered, total inventory levels projected, earn and turn ratios, and
service levels. The aggregate information should allow management to decide whether to release the
orders in total or not.
In terms of implementation it is clear that the ABC principle applies. The A items should,
perhaps, be put on the system first and monitored more carefully than B or C items. Also simple
reorder rules and forecasts might be used for B or C items to reduce computations.
The proposed inventory control system will help the company meet customer service and
cost objectives in several ways:
1.

The system relates inventory to customer service objectives. Precise service goals
can be stated and reorder points set to achieve those goals.

2.

The system relates inventory to costs and demand forecasts. It allows management
to minimize costs subject to the service goals set while reacting to forecasted
demand.

3.

The proposed system should save time on the part of the buyers and management.
The role of the buyer will also be changed to one of a systems manager and exception
handler rather than dealing with routine orders.

4.

The system will provide more uniform decision making across product lines and
across buyers. The company will be less vulnerable to turnover of buyers.

5.

The system should reduce inventory required for the same service level or
alternatively it should provide more service for the same inventory level. As a result,
profits should be improved.

Teaching Strategy
When teaching this case, I usually ask a student to describe the system he or she has
designed. I then ask several other students to describe their systems. This leads to a discussion of
good or bad features in each of the proposed systems.
After these features are described, I ask how the system will help improve inventory
management at Consolidated Electric. This leads to a discussion of the costs and benefits of an
inventory control system. In some cases questions of implementation and computerization are also
raised.
C-69

The case should take about one hour to teach. Many of the important points in management
of independent demand inventory systems can be taught by means of this case.
EXHIBIT 1
Inventory System
Forecasting

Module

Customer
Service Goals
and Costs
Order
Module
Aggregate Control
Info for Top
Management

Purchase Orders

Vendor

Inventory
Shipmen
ts

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Demand
Orders

Sales

EXHIBIT 2
Demand Distribution

25

Num ber of Orders

20

15
Series1
10

0
1

11

16

21

26

31

36

41

46

51

56

Order Size

C-71

61

66

71

76

81

86

91

96

SOUTHERN TORO DISTRIBUTOR, INC.

Teaching Notes
Synopsis
This case describes a conversation between Joe Melaney, the owner of the Toro
distributorship in Galveston, Texas, and his son, Joe Jr. The immediate subject of the conversation is
to decide on the spring season order for the entire irrigation line. In the course of the conversation,
other issues emerge, ranging from the proper inventory level for specific parts to the future
ownership of the distributorship.
Purpose
This case can be used at two levels. At the first level, the case is an exercise in the
development of an effective system for managing independent demand inventory, taking into account
the particular problems faced by a distributorship. At the second level, the case can be used to
demonstrate the importance of inventory management as a policy variable. Since Southern Toro is a
distributorship, profitability depends heavily on inventory management.
Discussion Questions
1.

What would you recommend that Joe Jr. do, assuming he takes control of Southern Toro?

2.

Evaluate the importance of inventory and inventory management of Southern Toro

Distributorship, both for irrigation products and spare parts. Should the inventory be cut
back?

3.

Evaluate the current inventory management system at Southern Toro.

management system would you recommend?

What inventory

Analysis
Joe Jr.'s course of action if he takes control of Southern Toro certainly depends on a financial
analysis of the company. Exhibit TN-1 shows some of the common financial ratios for the fiscal
years 2000, 2001 and 2002.
Southern Toro Distributorship has been steadily increasing in net worth over these years but
the return on invested capital has been low. Furthermore, the future outlook is potentially disturbing.
As Exhibit TN-1 shows, the distributorship is highly leveraged, with a sharp increase in 2002. This
will increase the cost of any future financing. Liquidity is decreasing, particularly quick liquidity,
suggesting that the company may be forced to seek additional financing unless other action is taken.
The company's activity is decreasing also; this is particularly noticeable in inventory turnover. As
might be expected, the ROA of the distributorship, never very high, has been steadily declining over
the last three years.
C-72

The return may be improved with better management, but will probably never become
extremely high. It is for Joe Jr. to decide whether or not the return can be enough to satisfy him.
However, based on the above analysis, it appears that the distributorship is likely to encounter
difficulties if present trends are allowed to continue. Since the sale of irrigation equipment is heavily
dependent on the weather, the company must plan to be flexible to accommodate irregular sales
patterns. Liquidity, particularly quick liquidity, must be re-established and maintained to ensure
Southern Toro's ability to pay off its short-term obligations without relying on the sales of
inventories.
Future plans for Southern Toro must be based on good inventory management. The majority
of Southern Toro's assets are in inventory, yet inventory levels do not reflect sales levels. From FY
2000 to 2001, sales declined 10.3% while ending inventory was reduced only 3.2%. Between FY
2001 and 2002, sales increased 20%, but ending inventory increased by 67%. This was an increase
of $400,000 in ending inventory. It was necessary to increase notes payable by $371,000 to finance
this increase. Inventories need to be reduced to improve the turnover ratio and to increase liquidity
once again.
A rough idea of the amount of inventory required to support this business can be calculated
by using the relationship:
average inventory = Q/2 + safety stock
where Q is the order size
In this case the order size (Q) will be four months of sales, since orders are placed three times a year.
The average inventory will therefore be 2 months + safety stock. If there is no safety stock, the
inventory will turn 12/2 = 6 times per year. Safety stock will merely reduce this turn rate. For
example, one month of safety stock results in 4 turns.
Since the current turns are 4.0, it is clear that it will be difficult to reduce inventories while
meeting current demand, lead time, and safety stock assumptions -- the most critical constraint being
the supply lead time imposed by Toro. The Southern Toro Distributorship must seek to reduce this
supply lead time or seek additional sources of funds, preferably from Toro in the form of notes or
accounts payable to support larger inventories. Assuming this can be done, we turn to the next
problem of designing an inventory control system.
The new inventory computer system does not appear to be successful. The system was
installed in October of 2001. In FY 2002, an abnormally dry year, the company "stocked out of most
goods" yet had ending inventories of $1,000,000 in June of 2002.

C-73

The software package, as described, is completely unsuited to Southern Toro's situation. The
following points should be raised:
(1)

Southern Toro has three preset ordering and delivery times each year. A reorder point
for each item is therefore inappropriate.

(2)

Southern Toro must order at the set times sufficient inventory to last until the next
period's delivery. An EOQ is irrelevant.

(3)

Demand for irrigation equipment is seasonal. A forecast of usage based on average

monthly demand is insufficient.

(4)

Large turf orders, from golf courses and other commercial installations, cause
irregular demand "peaks". A mechanical forecast of the affected products is
inappropriate.

Development of an appropriate inventory system for Southern Toro must begin by examining
the specific circumstances. There are three separate ordering cycles each year. Although the periods
and lead times are irregular, sufficient inventory must be ordered to cover the order period plus the
lead time. Based on Exhibit 6 of the case, the following coverage times can be determined:
Order Placement

Coverage Until

Order Period
Plus Lead Time

Oct. 15 - Oct. 30

May and June

7 - 8 months

Feb. 15 - Feb. 30

August and Sept.

6 - 7 months

June 15 - June 30

December and Jan.

6 - 7 months

For the approaching October order, demand must be forecast for the period until May and
June, when February's orders will be received. It may be appropriate to adjust the forecast based on
weather predictions for the period. The forecasts for individual items, where larger orders are
expected, may be adjusted manually.
An ABC analysis is needed to center attention on crucial inventory items. Exhibit TN-2
shows such an analysis for the irrigation products. The exhibit also shows the current inventory as a
percentage of FY 2002 sales. As can be seen, the products are unequally stocked with stocks
ranging from 9% to 80% of sales. In general, the A and B items are less heavily stocked than the C
items. This suggests that the inventory investment is overly weighted with C items and that the
inventory turns, with the resulting risk of stock out, primarily come from A and B items. This is
borne out by the case, where concern is shown for possible overstock of a Monitor Controller, a C
item, and possible understock of a B item valve.

C-74

Although an exact inventory system cannot be suggested, a new software package should be
developed which is carefully tailored for Southern Toro. The software package should be used to
automatically manage C items, both products and spare parts. A items, and to some extent B items,
should be carefully monitored and the computerized system adjusted based on experience and
knowledge.
The new system should be based on the following principles:
1.

A forecast for each item should be produced from analysis of past data. One of
several different models could be used provided that seasonal factors and trends are
included in the model. For A items, and possibly some of the critical B or C items,
the forecast should be carefully examined and adjusted, based on marketing
information available. The average demand and standard deviation should be
forecasted through the lead time plus review period.

2.

A service level should be established for A, B, and C items. Based on the service
level, forecasted average demand and standard deviation, a target inventory level can
then be established for each item.

3.

Order sizes should be determined to bring the inventory up to the desired target
levels.

4.

The order sizes should be converted to dollars and the resulting inventory levels
projected on a monthly basis into the future. The total purchasing dollars required
and the future projected inventory levels should be examined for business feasibility
on a total dollar basis. If these expenditures and inventory levels cannot be financed
or are considered excessive, then service levels should be revised or other
assumptions modified (lead time) to achieve the total aggregate financial levels
desired.

If this system is followed, it may be possible to bring the inventory levels into overall
conformance with business goals. At this point it will become apparent how inventory levels can be
reduced, liquidity improved, and return on capital invested increased. If the desired service levels are
ultimately incompatible with investment and sales goals, then perhaps Joe Jr. should consider looking
for other business opportunities.

C-75

EXHIBIT TN-1
FINANCIAL RATIOS
Ratio

2000

2001

2002

4.87

3.54

2.26

Liquidity:
Current:

.88

current assets
current liabilities

Quick:

current - inventory

2.14

1.82

current liabilities

Leverage:
Debt to equity

.49

.59

.98

Activity:

days

Inventory turnover:
Cost of Goods Sold
average inventory

4.5

4.4

4.0

Day's Receivables:

44 days

62 days

3.33

2.83

54

A/R x 365
sales
Total asset turnover
sales
average assets

2.8

Profitability:
Return on Assets (ROA)
net profit
total assets

.03

Return on net worth

net profit
net worth

.03

.05

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.02

.04

.05

EXHIBIT TN-2
AN ABC ANALYSIS
Product Description
Inventory

FY 2002
FY 2002
$ Sales

Item
% Sales

% Sales in
Class

Free Controllers
Series 150 - 4 + 8

15

80

Custom Controllers
Series 123 - 8 + 11

12

67

58

Monitor Controllers
Series 176 - 11 + 23

26

3/4" + 1" Valve

Glove/angle in-line

78

59

1-1/2" + 2" Valve

Glove/angle in-line

62

10

Brass Valve
Glove/angel in-line

57

Pop-up Bodies

77

26

570 Series Nozzles

68

20

Stream Rotors
Series 300

144

15

Rain Pro
Series 320

26

46

Gear Driven Rotary

Series 600

22

45

Gear Driven Rotary

Series 620

39

54

Gear Driven Rotary

Series 640

194

20

42

Gear Driven Rotary

Series 670
TOTALS

180
$950

20

19
100%

C-77

TOYSPLUS, INC.
Teaching Note
Synopsis and Purpose
ToysPlus is a small company in the toy industry. They control the
manufacturing of toys by using an MRP System. Management wants to
improve service levels and inventory turns by doing a better job of planning
and scheduling production. The case provides data on three toys which are
manufactured including the forecasts, costs, bill of materials, and planning
factors for these toys.
The purpose of this case is to illustrate the principles of scheduling with
an MRP system.
A spreadsheet is provided on the CD-ROM which
accompanies the text to provide the MRP logic. The student inputs forecasts,
costs and a master schedule. The spreadsheet then performs detailed parts
explosions. The student must analyze the resulting schedules and re-plan
until an acceptable MRP plan is obtained. Some organizational issues are also
presented in the case which are encountered in using a formal MRP system.
Discussion Questions
1. Calculate economic order quantities for each of the three types of toys. The
EOQ formula is recommended from the supplement to Chapter 15 that
considers uniform lot delivery of toys.
2. Prepare a master production schedule for the next 6 weeks using the EOQ's
calculated in Question 1 and a work force of 10 employees. What inventory
turnover ratio is achieved by this master schedule? How does this turnover
compare with past levels and with management's goals?
3. Prepare a parts explosion to support the master schedule.
should be ordered each week?

What parts

4. What should Andrea Meline do in order to meet the inventory and service
goals stated by management?
5. How should Andrea deal with the organization issues presented in this case?
Analysis
The analysis of this case will be described using the Excel Worksheet
provided with the text. This analysis can be done by hand, but it is quite
tedious.
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The first thing the students should do is to input the forecasts into the
worksheet. The forecasts given in the case can be used directly, as shown in
Exhibit 1. There is some question whether the forecasts coming from
marketing are accurate.
Andrea Meline usually adjusts the marketing
forecasts, but we have no way of making any adjustments in this particular
situation.

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From the forecasts for each of the three toys, the spreadsheet will
calculate average weekly demand. These figures are used for EOQ and runout
calculations. The next step is to calculate the EOQ's for each of the toys.
These are calculated by entering the weekly toy production rates and the unit
costs given in the case, see Exhibit 1.
Next, the setup cost must be provided to the spreadsheet which is
calculated as follows: Each final assembly setup requires 1 hour of time by 10
direct labor people. The shop rate for direct labor is $6 per hour for wages,
33% for fringes and $6 per hour for overhead or a total of $14 per hour. There
is some question whether overhead should be counted or not, but we have
included it here, assuming that it is variable overhead. The cost of setting up
the final assembly line is therefore $140 (10 hours at $14 per hour). Each
final assembly setup also induces orders to be placed for components using a
lot-for-lot procedure. As a matter of fact, 4 orders for components will be
placed for each final assembly setup, since each toy has four components. At
$25 per order, this is an additional $100 for component orders. The total cost
of setup is therefore $240.
The carrying cost is given in the case as 25% per year. After entering
carrying cost, the program will calculate the EOQ's for the three toys using the
uniform lot delivery EOQ given in the supplement to Chapter 15. The program
then asks for the beginning inventory level input for use later in the analysis.
The next step is to do master scheduling for each toy for each week.
This is done by first finding the smallest runout time which happens to occur
for robots (runout time is just the inventory level divided by demand and is
interpreted as the length of time the present inventory will last until we run
out of stock). Robots are thus scheduled first with an EOQ of 4643 units.
Only 2267 units can be scheduled in the first week and stay within the
capacity constraint of 350 hours (each robot takes .15 assembly hours). Only
2333 units of robots can be scheduled in week 2 within the capacity constraint
of 350 hours and the balance of the EOQ for robots (43 units) is scheduled for
the third week. The product with the next lowest runout time, as shown by
the spreadsheet, is toy autos. We can produce 3340 of these toy autos in
week 3 within the capacity constraint of 350 hours (this includes 10 hours lost
to the changeover). Then 3500 autos can be produced in week 4 and the
balance of the EOQ for autos is produced in week 5. Next, toy trucks have the
lowest runout time, and we schedule the balance of the capacity for toy trucks
in week 5. This procedure is continued for week 6 to complete the master
schedule.
The program then computes projected inventories and inventory
turnover. Note, the turnover is only 13.4 which does not meet managements
objective of 15 turns. This indicates that we should revise the master
schedule to reduce capacity and thus inventory. We will do this later, but first
we wish to check the feasibility of the master schedule with respect to
component parts.
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This is done by entering the safety stock levels which are desired into
the spreadsheet. Beginning inventories, parts/unit and lead times are already
shown in the spreadsheet. The case indicates that one week of safety stock is
carried for each of the components to cover late deliveries from suppliers.
The usage for each of the three toys is multiplied by the number of parts per
toy in order to arrive at the safety stock figures shown in Exhibit 1.

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Each component part is now exploded in the bill of materials, twelve

parts in all. However, the amounts due to be delivered in Exhibit 4 of the case
must be entered first in order to get the correct answers. These on-order
amounts are 800 units of part number 615 due on 10/3 and 1200 units of part
number 621 due on 10/10.
As a result of these inputs, the planned order releases for each of the
twelve parts is given in Exhibit 1. Note, that some of the planned orders may
be past due. This is indicated by looking at the net requirements and seeing if
they are reflected in planned orders. For example, part #523 has a net
requirement of 2115 units on Oct 10 which is not translated into a planned
order release. Therefore, we will not have enough of part #523 to support the
master schedule. In the case of part number 525 all of the net requirements
have been translated into planned order releases, so we will have enough of
these parts. This process of examination is continued and indicates the
following components are short of parts to support the master schedule #730,
#732, #734, and #736. This situation must be relieved by revising the
master schedule to "live" within the available parts.
The new master schedule is shown in Exhibit 2. This master schedule
reflects the available components and is reduced in capacity toward the end
of the six-week period in order to achieve 15 turns. This master schedule is
constructed by using all of the available parts, including the safety stock, but
no more in scheduling each toy. For example, starting with robots which has
the lowest runout time, we can schedule 1600 robots based on the availability
of components. The constraining component in this case is robot bodies which
take two weeks to get. The next lowest runout time is autos, and we can
schedule 2450 autos before we run out of parts (900 in week 1 and 1550 in
week 2).
This constraint of 2450 is based on the 9800 wheels which are used at the
rate of 4 per auto and it takes 2 weeks to get more. This process is continued
until there is sufficient lead time to schedule an EOQ of each toy.
Note, that capacity is reduced to 315 hours in week 3 and then to 280
hours for the remainder of the schedule. These numbers were selected by
trial-and-error in order to increase inventory turns. However, this capacity
plan is not entirely satisfactory, because we should have enough capacity at
the end of the planning horizon to sustain the schedule. The required capacity
in week 6 can be computed as follows: 1500(.1) + 300(.2) + 600(.15) = 300
hours. At the end of the horizon we have only 280 hours of capacity, so
perhaps we should cut capacity sooner, but not as deeply.
Review of the parts explosion in Exhibit 2 shows that the plan is feasible
and all net requirements are met with planned order releases or safety stock.
This plan also meets management's requirement for 15 turns. We have no
way of estimating the service level provided without knowing more about the
standard deviation of forecast errors.

C-82

So far, we have answered the first 4 case discussion questions.

Question 5 asks how Andrea should deal with the organization issues
presented in this case. I think that the essence of the answer to this question
is that she needs cooperation from all of the departments to develop and
implement her production plans. Marketing should be held accountable for
the accuracy of its forecasts. Andrea should not adjust the forecasts that
marketing gives her without negotiating changes with marketing. Purchasing
should buy what is ordered by production. When everyone is working to the
same production plan, improved results will be achieved. This is easier said
than done, but cooperation among functions is the essence to achieving good
results from a formal production planning system.
One way to help achieve the level of cooperation needed is to have all
Department Heads and the General Manager meet each week to review and
approve the final production plans developed. This meeting will help insure
that everyone has agreed to the same set of numbers and assumptions. The
company must also reward a cooperative team approach and management
must not override the formal system with edicts. Discipline to live by the
agreed plan is needed by everyone.
Teaching Strategy
In teaching this case I start by asking a student to give me the master
schedule for the next six weeks. After writing this schedule on the board, I ask
the student to explain how the numbers were derived. Other students will
then propose alternative master schedules and different sets of assumptions.
For example, some of the master schedules provided by students may be
infeasible with regard to available component parts, and other master
schedules may not provide the required 15 inventory turns. These points can
be brought out by the instructor as the discussion proceeds.
One of the other pitfalls in this case is the setup cost. Some students
may not include the ordering costs for components along with the final
assembly line setup costs. Students may also forget to include safety stock in
their calculations or they may calculate it incorrectly. There are many
numbers in this case and one false input changes the answer.
This case provides an excellent vehicle for explaining the concepts of
production planning. The case illustrates rough-cut capacity planning which is
done at the master schedule level, by the 350 hour limit. We do not, however,
have detailed capacity planning, because no work center data is incorporated
in the case. EOQ calculations, the handling of safety stock, restrictions from
component parts, and leveling the master schedule can all be illustrated. The
disk provides a useful vehicle to relieve the students of the drudgery of
calculations. It also guides them through the calculations which are needed.
It will take about one hour to teach the case.

C-83

Exhibit 1
MASTER SCHEDULE FORECAST INPUT
----SEP26
----1100
TOY AUTO
500
TOY TRUCK
700
TOY ROBOT
-----TOTAL UNITS
2300

TOY AUTO
TOY TRUCK
TOY ROBOT

OCT3
----1150
450
650
-----2250

OCT10
----1200
400
650
-----2250

OCT17
----1300
350
625
-----2275

OCT24
----1400
300
625
-----2325

AVERAGE WEEKLY DEMAND (CALCULATED)

1275
383
642

MASTER SCHEDULE
EOQ CALCULATIONS
-----------WEEKLY DEMAND RATE
PRODUCTION RATE PER WEEK
UNIT COST

AUTO
----1275
3500
3.2

SETUP COST
CARRYING COST(% Per Year)

TRUCK
----383
1750
6.5

ROBOT
----642
2333
4.1

240
25%

ECONOMIC ORDER QUANTITY

7910

2746

4643

BEGINNING INVENTORY LEVEL INPUT

4000

2000

1500

C-84

OCT31
----1500
300
600
-----2400

MASTER SCHEDULE (INPUT PLANNED QUANTITY FOR EACH WEEK)

TOY AUTO
TOY TRUCK
TOY ROBOT
TOTAL UNITS
TOTAL LABOR HOURS

PLANNED PRODUCTION (WEEK BEGINNING)

SEP26
OCT3
OCT10
OCT17
OCT24
--------------------0
0
3340
3500
1070
0
0
0
0
1170
2267
2333
43
0
0
-------------------------2267
2333
3383
3500
2240
350
350
350
350
351

CALCULATED RUN-OUT TIMES (WEEKS)

EOQ

TOY AUTO
TOY TRUCK
TOY ROBOT

7910
2746
4643

TOY AUTO
TOY TRUCK
TOY ROBOT
TOTAL UNITS

9.6
12.4
9.6

OCT31
----350
1576
0
-----1926
350

PROJECTED INVENTORIES OF FINISHED GOODS

SEP26
OCT3
OCT10
OCT17
OCT24
OCT31
------------------------2900
1750
3890
6090
5760
4610
1500
1050
650
300
1170
2446
3067
4750
4143
3518
2893
2293
------------------------------7467
7550
8683
9908
9823
9349

FINISHED GOODS INVENTORY ANALYSIS:

AVERAGE WEEKLY USAGE IN $
AVERAGE WEEKLY INVENTORY IN $
FINISHED GOODS TURNOVER RATIO

C-85

$10,929
$42,557
13.4

COMPONENT PART INPUTS

COMPENENT PART

BEGINNINGG PARTS
INVENTORYY \UNIT

523 CAR BODY

525 AUTO WHEELS
529 AUTO SIDE WINDOWS
531 AUTO WINDSHIELD
615 TRUCK CAB
617 TRUCK DUAL WHEELS
619 TRUCK SINGLE WHEELS
621 TRUCK TRAILER
730 ROBOT BODY
732 ROBOT ARMS
734 ROBOT LEGS
736 ROBOT HEAD

2500
9800
4300
2620
1200
9900
2500
4600
1600
3500
4020
2150

C-86

1
4
2
1
1
8
2
1
1
2
2
1

LEAD
TIME
3
2
1
2
3
2
2
4
2
2
1
2

SAFETY
STOCK
1275
5100
2550
1275
383
3064
726
383
642
1284
1284
642

COMPONENT PARTS EXPLOSION

WEEK BEGINNING
OCT3
OCT10 OCT 17

SEP 26

523GROSS REQUIREMENTS
SCHEDULED RECEIPTS
PROJ. ON HAND INV.
NET REQUIREMENTS
PLAN. ORDER RELEASES
525GROSS REQUIREMENTS
SCHEDULED RECEIPTS
PROJ. ON HAND INV.
NET REQUIREMENTS
PLAN. ORDER RELEASES
529GROSS REQUIREMENTS
SCHEDULED RECEIPTS
ON HAND INVENTORY
NET REQUIREMENTS
PLAN. ORDER RELEASES
531GROSS REQUIREMENTS
SCHEDULED RECEIPTS
PROJ. ON HAND INV.
NET REQUIREMENTS
PLAN. ORDER RELEASES
615GROSS REQUIREMENTS
SCHEDULED RECEIPTS
PROJ. ON HAND INV.
NET REQUIREMENTS
PLAN. ORDER RELEASES
617GROSS REQUIREMENTS
SCHEDULED RECEIPTS
ON HAND INVENTORY
NET REQUIREMENTS
PLAN. ORDER RELEASES
619GROSS REQUIREMENTS
SCHEDULED RECEIPTS
PROJ. ON HAND INV.
NET REQUIREMENTS
PLAN. ORDER RELEASES
-

0
0
2500
0
3500
0
0
9800
0
8660
0
0
4300
0
0
0
0
2620
0
1995
0
0
1200
0
0
0
0
9900
0
0
0
0
2500
0
0
-

0
0
2500
0
1070
0
0
9800
0
14000
0
0
4300
0
4930
0
0
2620
0
3500
0
800
2000
0
0
0
0
9900
0
0
0
0
2500
0
0
-

C-87

3340
0
1275
2115
350
13360
0
5100
8660
4280
6680
0
2550
4930
7000
3340
0
1275
1995
1070
0
0
2000
0
1129
0
0
9900
0
2524
0
0
2500
0
566
-

3500
0
1275
3500
0
14000
0
5100
14000
1400
7000
0
2550
7000
2140
3500
0
1275
3500
350
0
0
2000
0
0
0
0
9900
0
12608
0
0
2500
0
3152
-

OCT 24
1070
0
1275
1070
0
4280
0
5100
4280
0
2140
0
2550
2140
700
1070
0
1275
1070
0
1170
0
830
0
0
9360
0
3064
2524
0
2340
0
726
566
0
-

OCT 31
350
0
1275
350
0
1400
0
5100
1400
0
700
0
2550
700
0
350
0
1275
350
0
1576
0
383
1129
0
12608
0
3064
12608
0
3152
0
726
3152
0

621GROSS REQUIREMENTS
SCHEDULED RECEIPTS
ON HAND INVENTORY
NET REQUIREMENTS
PLAN. ORDER RELEASES
730GROSS REQUIREMENTS
SCHEDULED RECEIPTS
ON HAND INVENTORY
NET REQUIREMENTS
PLAN. ORDER RELEASES
732GROSS REQUIREMENTS
SCHEDULED RECEIPTS
PROJ. ON HAND INV.
NET REQUIREMENTS
PLAN. ORDER RELEASES
734GROSS REQUIREMENTS
SCHEDULED RECEIPTS
ON HAND INVENTORY
NET REQUIREMENTS
PLAN. ORDER RELEASES
736GROSS REQUIREMENTS
SCHEDULED RECEIPTS
ON HAND INVENTORY
NET REQUIREMENTS
PLAN. ORDER RELEASES
-

0
0
4600
0
0
2267
0
642
1309
43
4534
0
1284
2318
86
4534
0
1284
1798
4666
2267
0
642
759
43
-

0
0
4600
0
0
2333
0
642
2333
0
4666
0
1284
4666
0
4666
0
1284
4666
86
2333
0
642
2333
0
-

C-88

0
1200
5800
0
0
43
0
642
43
0
86
0
1284
86
0
86
0
1284
86
0
43
0
642
43
0
-

0
0
5800
0
0
0
0
642
0
0
0
0
1284
0
0
0
0
1284
0
0
0
0
642
0
0
-

1170
0
4630
0
0
0
0
642
0
0
0
0
1284
0
0
0
0
1284
0
0
0
0
642
0
0
-

1576
0
3054
0
0
0
0
642
0
0
0
0
1284
0
0
0
0
1284
0
0
0
0
642
0
0

Exhibit 2
MASTER SCHEDULE FORECAST INPUT
----SEP26
----1100
TOY AUTO
500
TOY TRUCK
700
TOY ROBOT
-----TOTAL UNITS
2300

TOY AUTO
TOY TRUCK
TOY ROBOT

OCT3
----1150
450
650
-----2250

OCT10
----1200
400
650
-----2250

OCT17
----1300
350
625
-----2275

OCT24
----1400
300
625
-----2325

AVERAGE WEEKLY DEMAND (CALCULATED)

1275
383
642

MASTER SCHEDULE
EOQ CALCULATIONS
-----------WEEKLY DEMAND RATE
PRODUCTION RATE PER WEEK
UNIT COST

AUTO
----1275
3500
3.2

SETUP COST
CARRYING COST(% Per Year)

TRUCK
----383
1750
6.5

ROBOT
----642
2333
4.1

240
25%

ECONOMIC ORDER QUANTITY

7910

2746

4643

BEGINNING INVENTORY LEVEL INPUT

4000

2000

1500

C-89

OCT31
----1500
300
600
-----2400

MASTER SCHEDULE (INPUT PLANNED QUANTITY FOR EACH WEEK)

-PLANNED PRODUCTION (WEEK BEGINNING)
SEP26
OCT3
OCT10
OCT17
OCT24
--------------------900
1550
0
0
0
TOY AUTO
0
925
1576
245
0
TOY TRUCK
1600
0
0
1470
1867
TOY ROBOT
-------------------------TOTAL UNITS
2500
2475
1576
1715
1867
TOTAL LABOR HOURS
350
350
315
280
280

CALCULATED RUN-OUT TIMES (WEEKS)

TOY AUTO
5.6
TOY TRUCK
12.4
TOY ROBOT
12.1

TOY AUTO
TOY TRUCK
TOY ROBOT
TOTAL UNITS

OCT31
----740
0
1306
-----2046
280

EOQ
7910
2746
4643

PROJECTED INVENTORIES OF FINISHED GOODS

SEP26
OCT3
OCT10
OCT17
OCT24
OCT31
------------------------3800
4200
3000
1700
300
-460
1500
1975
3151
3046
2746
2446
2400
1750
1100
1945
3187
3893
------------------------------7700
7925
7251
6691
6233
5879

FINISHED GOODS INVENTORY ANALYSIS:

AVERAGE WEEKLY USAGE IN $
AVERAGE WEEKLY INVENTORY IN $
FINISHED GOODS TURNOVER RATIO

C-90

$10,929
$37,101
15.3

COMPONENT PART INPUTS

COMPENENT PART
523 CAR BODY
525 AUTO WHEELS
529 AUTO SIDE WINDOWS
531 AUTO WINDSHIELD
615 TRUCK CAB
617 TRUCK DUAL WHEELS
619 TRUCK SINGLE WHEELS
621 TRUCK TRAILER
730 ROBOT BODY
732 ROBOT ARMS
734 ROBOT LEGS
736 ROBOT HEAD

BEGINNINGG PARTS
INVENTORYY \UNIT
2500
1
9800
4
4300
2
2620
1
1200
1
9900
8
2500
2
4600
1
1600
1
3500
2
4020
2
2150
1

LEAD
TIME
3
2
1
2
3
2
2
4
2
2
1
2

SAFETY
STOCK
1275
5100
2550
1275
383
3064
726
383
642
1284
1284
642

COMPONENT PARTS EXPLOSION

523GROSS REQUIREMENTS
SCHEDULED RECEIPTS
PROJ. ON HAND INV.
NET REQUIREMENTS
PLAN. ORDER RELEASES
525GROSS REQUIREMENTS
SCHEDULED RECEIPTS
PROJ. ON HAND INV.
NET REQUIREMENTS
PLAN. ORDER RELEASES
529GROSS REQUIREMENTS
SCHEDULED RECEIPTS
ON HAND INVENTORY
NET REQUIREMENTS
PLAN. ORDER RELEASES
531GROSS REQUIREMENTS
SCHEDULED RECEIPTS
PROJ. ON HAND INV.
NET REQUIREMENTS
PLAN. ORDER RELEASES
-

SEP 26
900
0
1600
0
0
3600
0
6200
0
0
1800
0
2550
50
3100
900
0
1720
0
0
-

C-91

WEEK BEGINNING
OCT10 OCT 17 OCT 24 OCT 31
1550
0
0
0
740
0
0
0
0
0
1275
1275
1275
1275
1275
1225
0
0
0
740
0
740
0
0
0
6200
0
0
0
2960
0
0
0
0
0
5100
5100
5100
5100
5100
5100
0
0
0
2960
0
0
2960
0
0
3100
0
0
0
1480
0
0
0
0
0
2550
2550
2550
2550
2550
3100
0
0
0
1480
0
0
0
1480
0
1550
0
0
0
740
0
0
0
0
0
1275
1275
1275
1275
1275
1105
0
0
0
740
0
0
740
0
0
-

OCT3

615GROSS REQUIREMENTS
0
0
SCHEDULED RECEIPTS
PROJ. ON HAND INV.
1200
NET REQUIREMENTS
0
PLAN. ORDER RELEASES
245
617GROSS REQUIREMENTS
0
0
SCHEDULED RECEIPTS
ON HAND INVENTORY
9900
NET REQUIREMENTS
0
PLAN. ORDER RELEASES 12608
619GROSS REQUIREMENTS
0
0
SCHEDULED RECEIPTS
PROJ. ON HAND INV.
2500
NET REQUIREMENTS
0
PLAN. ORDER RELEASES
3152
-

925
800
1075
0
0
7400
0
3064
564
1960
1850
0
726
76
490
-

1576
0
383
884
0
12608
0
3064
12608
0
3152
0
726
3152
0
-

245
0
383
245
0
1960
0
3064
1960
0
490
0
726
490
0
-

0
0
383
0
0
0
0
3064
0
0
0
0
726
0
0
-

621GROSS REQUIREMENTS
0
0
SCHEDULED RECEIPTS
ON HAND INVENTORY
4600
NET REQUIREMENTS
0
PLAN. ORDER RELEASES
0
1600
730GROSS REQUIREMENTS
0
SCHEDULED RECEIPTS
ON HAND INVENTORY
642
NET REQUIREMENTS
642
PLAN. ORDER RELEASES
0
3200
732GROSS REQUIREMENTS
0
SCHEDULED RECEIPTS
PROJ. ON HAND INV.
1284
NET REQUIREMENTS
984
PLAN. ORDER RELEASES
0
-

925
0
3675
0
0
0
0
642
0
1470
0
0
1284
0
2940
-

1576
1200
3299
0
0
0
0
642
0
1867
0
0
1284
0
3734
-

245
0
3054
0
0
1470
0
642
1470
1306
2940
0
1284
2940
2612
-

0
0
3054
0
0
1867
0
642
1867
0
3734
0
1284
3734
0
-

C-92

0
0
383
0
0
0
0
3064
0
0
0
0
726
0
0
0
0
3054
0
0
1306
0
642
1306
0
2612
0
1284
2612
0

3200
734GROSS REQUIREMENTS
0
SCHEDULED RECEIPTS
ON HAND INVENTORY
1284
NET REQUIREMENTS
464
PLAN. ORDER RELEASES
0
1600
736GROSS REQUIREMENTS
0
SCHEDULED RECEIPTS
ON HAND INVENTORY
642
NET REQUIREMENTS
92
PLAN. ORDER RELEASES
0
-

C-93

0
0
1284
0
0
0
0
642
0
1470
-

0
0
1284
0
2940
0
0
642
0
1867
-

2940
0
1284
2940
3734
1470
0
642
1470
1306
-

3734
0
1284
3734
2612
1867
0
642
1867
0
-

2612
0
1284
2612
0
1306
0
642
1306
0

U.S. STROLLER
Teaching Note
Synopsis and Purpose
U.S. Stroller is a manufacturer and distributor of a line of baby strollers. The company
makes three types of strollers in a typical batch production system. Recently, profits are down and
competition is entering the market that the company dominates. Proposals have been made to go to
a JIT production system or to a Cell approach for production. Students are asked to analyze these
proposals and come up with a recommendation.
The purpose of this case is to show how a batch system can be dramatically improved by JIT
or Cellular concepts. The case clearly describes the changes that must be made in the production
system to achieve the benefits desired. This amounts to a complete change in layout of the
production floor and a substantial overhaul of the MRP system. The case nicely ties together some
of the material from the text on JIT, GT, EOQ and MRP. The case also requires the student to
estimate cost and benefits of these types of proposals and to identify negative effects of JIT and GT.
Discussion Questions
1. Evaluate the current situation facing U.S. Stroller.
2. Discuss the pros and cons of the options presented in the case.
3. What will be the impact of these options on the MRP system currently in use?
4. What option do you recommend and why?
Analysis
Question 1. U.S. Stroller must do something quickly. Profits have eroded. They are not
losing money yet, but financial results are poor based on percent of sales and return on equity. Also,
Japanese competition is coming. Even though U.S. Stroller still commands the dominant share of the
market, they are vulnerable on both quality and cost grounds. The Japanese are following a typical
Japanese strategy by entering the market with a high quality stroller on the low end of the market.
The Japanese can be expected to come after U.S. Stroller directly after gaining a foothold in the
market.
U.S. Stroller cannot delay making improvements, until after they have lost market share.
They must improve now in order to preempt the competition and to improve profits in the face of
probable price erosion. There should be a sense of urgency in making drastic improvements in order
to protect their market share. Some changes should be made, assuming U.S. Stroller wants to
survive in the long-run.

C-94

Question 2. The Pro's and Con's of each alternative will be analyzed.

Option 1: JIT. This option proposes putting in three final assembly lines and dedicating various
pieces of equipment to each of the three stroller models. A JIT pull system will be put in place, setup
times will be reduced, and smaller lot sizes will be used.
Pro's
Option 1 reduces inventories by the following amounts
Change
Finished Goods from 80 days to 22 days6
Work in Process from 4 weeks to 2 weeks
Raw Materials from 12 weeks to 2 weeks

Inventory Savings
$765,000 to $210,000
$322,000 to $161,000
$337,000 to $56,000

The Savings in inventory will improve the balance sheet and return on investment. In addition the
annual savings will be 25% of the inventory reduction or a total savings of $249,000.
In addition to the above savings, U.S. Stroller will achieve a shorter response time for
customer orders. Customers will be able to order with a 2 week lead time instead of a 4 week lead
time. While U.S. Stroller has been supplying the customers from its finished goods warehouses, the
shorter lead time will provide advantages for promotions, special orders or other customer changes.
Option 1 will also improve quality through faster correction of problems in the plant. This
will not only result in less rework and scrap, but will result in a better product being delivered to the
customer. If the cost of quality, for example, is 30% of sales at U.S. Stroller and is reduced to 20%
of sales, a savings of $456,000 per year will be realized. Thus, the quality savings could be even
greater than the inventory savings. Of course, quality can be improved without JIT, but the two
approaches reinforce each other.
Con's
Option 1 will cost $200,000 to implement in new assembly equipment, plus a large amount of
time and other costs (including training, lost production time during changeover, management time,
etc). Nevertheless, these costs could be paid off in one or two years depending on what savings are
assumed for quality improvement, and inventory reduction.
The effort in implementing Option 1 should not be underestimated. Top management will
have to be involved, everyone will have to be retrained, a lot of changes will be needed in procedures
and systems by all departments. If this is not done with a careful and dedicated approach, a con
could be failure to achieve the promised benefits of this option or failure of the effort.

The case says finished goods will be 15 to 30 days which is an average of 22 days.

C-95

Another con is the loss of flexibility in option 2. Since equipment and final assembly lines are
dedicated, changes in final demand cannot be easily handled. You cannot simply shift over from one
product to another. One part of the plant could be put on overtime, while another part is idle, unless
you have very high worker cross training. A second shift may even be needed in one part of the plant
while other workers are on one shift. This can cause problems with the work force and is a result of
the loss of flexibility.
Option 2 Cellular Approach: This option involves setting up a separate cell for each of the three
products. Some additional equipment must be purchased because of the indivisibilitys of equipment
and people must be dedicated to each of the product lines.
Pro's
The Pro's are the same as option one except things are carried one step further. Assuming all
inventories can be reduced to 1 week, this option will reduce finished goods inventory from
$210,000 to $67,000; work-in-process inventory from $161,000 to $80,000; and raw materials from
$56,000 to $28,000. The annual savings of these reductions is an additional $62,000.
Option 2 will also improve quality even further because of quick visual feedback and cell
stoppage when there is a problem. Further savings of as much as $450,000 per year can be realized
if the Cost of Quality is reduced from 20% to 10%. The response time (lead time) of this option will
be reduced to one week and could be even shorter if suppliers are located close by.
Con's
This option will cost more ($150,000 for additional equipment over option 1) plus other
costs of moving equipment, training, etc. Nevertheless, this option would probably be attractive as
an investment proposition because of relatively short payback.
The cellular approach results in even less production flexibility, because workers and
equipment are totally dedicated. Thus the company must have confidence that demands will not
fluctuate too wildly from week to week. The case indicates that weekly demand fluctuates 25% from
averages. This amount of demand change could certainly be absorbed by safety stock. But the
presence of safety stock introduces more costs into the system.
Question 3: What will be the impact of these options on the MRP system currently in use?
The MRP system will have to be dramatically changed. In both options a pull system will be used, so
that MRP cannot be used to control the shop floor. The most that MRP could be used for is for
"Major Event Planning". In this case orders would be launched for Major Events such as changes in
demand or product changes. MRP can be useful as a planning tool, but not for control of the actual
production process itself.
Major event planning implies a skeleton (Type I) MRP system. The master schedule for a
few weeks in advance (say 2 to 4 weeks) would be exploded through the bill of materials and
planning orders would then be given to work center supervisors and suppliers for planning purposes
only. The actual order to produce will come from the Kanban Pull system that is dependent on what
is happening on the shop floor.
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MRP could be scrapped altogether, especially if U.S. Stroller believes that schedule changes
will be minimal. If approximately the same amount is produced from week to week and there are
few engineering change orders, there is really no need for MRP. Any changes can be "manually"
exploded and advance notices sent to suppliers and work centers, especially for the simple product
line at U.S. Stroller.
Question 4.
I recommend that the company proceed with Option 1 and then move to Option 2, if demand
and product changes are relatively stable. It appears in this case that Option 1 can be financially
justified and that substantial benefits will flow to the company in profits, balance sheet improvements,
and in holding market share. After implementing option 1, they will have time to evaluate whether a
further move to option 2 is also desirable.
Teaching Strategy
When I teach this case, I follow the questions in the book. This provides a framework for
analyzing and discussing the case. I ask a student to start by summarizing the current situation that
U.S. Stroller is facing in the market place. Then I lead the discussion toward evaluating the pro's and
con's of each of the options. An interesting discussion can be held on the usefulness of MRP in this
situation. Some students are surprised to learn that MRP may no longer be needed.
I use this case to illustrate how JIT and GT can be evaluated. Along the way the students
also gain a better understanding of how a traditional batch oriented company can make the changes
needed to move to JIT or cells. The case requires the students to think in depth about the pro's and
con's of these approaches - not only the pro's.

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