978-0077835439 Eastern Gear Case

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EASTERN GEAR, INC.: Job Shop

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.

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.

EASTERN GEAR, INC.: Job Shop

Teaching Notes

5. Poor Quality. There seems to be a lack of quality control as evidenced by the six

6. Organization chart. The present organizational structure does not have a clear

7. Raw material inventory. Due to lack of a raw material inventory, delivery 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.

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,

EASTERN GEAR, INC.: Job Shop

Teaching Notes

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.

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.

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:

EASTERN GEAR, INC.: Job Shop

Teaching Notes

President

Marketing Engineering Manufacturing Finance

Materials Foreman

Management

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

about 1.5 percent of sales. 2016 sales should increase to at least $5.5 million and profitability

should be improved.

Teaching Strategy