When Joe Voon, vice president of Operations for Murphy Manufacturing, was given the CEO's directive to investigate the lean production concepts and to implement them if appropriate; he was slightly apprehensive. Everyone knew, he thought, that MRP was the best way to run a manufacturing operation, and they have been pretty successful with their MRP system. Once he read a couple of books and a magazine article or two about JIT and lean production, however, he thought maybe there was something to it and it sure seemed simple enough. Dozens of companies had reported great reductions in inventory cost and other forms of waste, and with Murphy Manufacturing having only five to six inventory turns per year, the prospect of significant inventory reductions was very appealing. Encouraged with the success stories and very mindful of the CEO's directive, Joe wasted no time. He put out the directive to all his people to implement lean production the way it was working in the book examples he had read. A few months later, however, he was beginning to wonder about the truth of the success stories in those books. The following are the complaints he was getting and the problems he was facing with the purchasing manager, Karen. Karen said: "Joe, this JIT and lean production are a disaster for us. It's only costing us a lot more money, but the suppliers are getting real angry with us. Since our raw material inventory had typically been high, you said we should order smaller quantities and have it delivered just in time for its need. Sure, that cut down on the raw material inventory, but that cost saving has been more than made up for all the increased cost. First, purchase orders are not cost free, and we're making a lot more of them. That's also taking up a lot more of our buyers' time. Then there's transportation cost. Since most transportation companies charge a lot more for less-than-full truckloads, our costs are going sky-high with more frequent deliveries of smaller loads. Combine that with expediting costs, and it gets really bad. Our schedules are changing even more frequently, and without the raw material and the production people are often asking for next-day delivery of material they need for a schedule change. We are flying more parts in, and you know how much that costs!"
Karen continued: "That's not all. Our suppliers are really wondering if we know how to run our business. We are changing that schedule to them much more frequently, and the only way they can hope to meet our needs is to keep a lot of our inventory in their finished goods. That's costing them a lot of money in inventory holding costs as well as administrative costs to manage the inventory and to process all our requests. They not only have more requests from us, but it seems like everything is a rush order. They are pressing us hard for price increases to cover their increased cost to keep us as a customer. I've held most of them off for a while but not much longer. Unfortunately, I agree with them, so it's hard for me to make any kind of logical argument to counter their requests for price increases."
This case study was adapted from pages 364-365 of Introduction to Materials Management, 7th edn, New Jersey: Prentice-Hall, Pearson Education Limited by Arnold, J.R, T, Chapman, N, S. and Clive, M,L (2012)
Describe the lean procurement practices in this case study.