Case Study Eastern Gear, Inc.: Joh Shop
Eastern Gear, Inc., in Philadelphia, Pennsylvania, is a manufacturer of custom-made gears ranging In weight from a few ounces to over 50 pounds. The gears are made of different metals, depending or the customer's requirements. Over the past year, 40 different types of steel and brass alloys have been used as raw materials. See Exhibit 1 for details,
Eastern Gear sells its products primarily to engineering research and development laboratories or very small manufacturers. As a result, the number of gears in most orders is small rarely is exactly the same gear ordered more than once. The distribution of order sizes for March 2016 Is shown in Exhibit 2.
Recently, the president of Eastern Gear decided to accept a few larger orders for 100 gears or more. Although lower prices were accepted on these orders, they helped pay the overhead. It was found that the large orders caused many of the small orders to wait for a long time before being processed. As a result, some deliveries of small orders were late.
When a customer wishes to order a gear, the order is taken by James Lord, sales manager and marketing vice president. The customer specifies the type of gear desired by submitting a blueprint or sketch. The quantity of gears required and the type of material are also specified by the customer. On occasion, the customer's engineer will call up after the order has been placed and request a change in the design. In these cases, it may be necessary to stop production and wait for new raw materials or for the design to be clarified. The customer's prints submitted with the order do not always contain the tolerances or finishes required during machining. As a result, the customer is contacted directly when the information is needed.
After the order is received, one copy is sent to the production supervisor, Joe Irvine, and the second copy is sent to Sam Smith, the controller. Upon receipt of the customer's order, Smith places a purchase order for the raw materials required. These materials often take from one to two weeks to arrive, depending on the supplier and the type of material ordered.
After receiving the customer order, the supervisor reviews the order and places it on file until the raw material arrives. The customer order is then routed through the qhnn along with the materials, In the past. the production process for most gears has taken about two weeks after receipt of raw materials. Recently this production time has increased to four weeks.
Irvine expressed concern about the bottlenecks that appear in the production process. One week the bottleneck may be in one machine center, and the next week it is In another. These bottlenecks make it difficult to get the orders out on time.
EXHIBIT 2 Sales, March 2016.
Total $ Value
Order Size Number of Orders of Orders
EXHIBIT 1 Raw materials. 1 80 $ 3,200
2 53 4,250
3 69 8,163
4 32 4.800
2015 Usage 5 82 16.392
Type of Material $(000) a 47 15,987
A $ 36 ID 64 26,871
10 15 22 13,172
C 15 20 42 31,555
43 25 27 23,682
E 110 30 18 21,600
F 18 40 22 32,000
G 32 50 10 18,893
H 75 100 4 12,500
40 200 2 14.068
J 60 400 1 9,652
K 30 700 2 35.600
All Others 53 1,000 1 20;000
Total $522 578 $312,185
This case was prepared as a basis for class discussion, not to illustrate either effective or ineffective handling of an administrative situation.
101111 418 Part Seven Case Studies
PHYSICAL LAYOUT AND MATERIALS FLOW
Eastern Gear utilizes a standard job shop layout, as shown in Exhibit 3, Each work center has a common set of machines or processes. The materials flow from one work center to another, depending on the operations needed for a particular order.
A typical order will take the following path. First, the raw material, a gear blank, is sent to the milling work center. Here the teeth are cut into the edge of the gear according to the customer's specifications. Next, the gear blanks are sent to the drilling work center, where one or more holes may be drilled in the gear. The gear is then sent to a grinding center, where a finish is put on the gear teeth and the surface of the gear. Next, the gear may be sent to heat-treating If this operation is required by the customer. After the batch of gears is completed, they are inspected by the next available worker and shipped to the customer.
In Exhibit 3. note how the machines are grouped by similar type on the shop floor. For example, all drills are located together in one work center, and all milling
EXHIBIT 3 Layout, machines are in another work center. While this layout facilitates development of worker skills and training, it results in a jumbled flow of products through the shop.
There Is constant interference of the orders being processed in the shop. The typical order spends 90 percent of its time waiting in line for a machine to become available. Only 10 percent of the time is actually spent processing the order on a machine. As a result, it takes a relatively long time (four weeks) for an order to make its way through the shop.
Large and small orders are processed together. No special work flow Is utilized for different order sizes. As a matter of fact, large orders are helping to keep the shop at full capacity.
Business has been booming at Eastern Gear. For the first two years the company lost money, but over the last several months a small profit has been made. Sales are up by 100 percent in the last quarter. See Exhibit 4 for more details.
Although sales are increasing rapidly, a re-cent market survey has indicated that sales can be expanded even more in the next few years. According to the market survey, sales will be $5 million in calendar year 2016 if the current delivery lead time of five to six weeks is maintained. If total delivery lead time can be reduced to the former three to four weeks, sales could be expanded to $5.5 million instead of $5 million.
Because of increased delivery lead times, the company has recently added an expediter, Matt Williams. Each morning Williams reviews the work in progress in the shop and selects those orders that appear to be behind schedule. Each order that is behind receives a red tag, indicating that it should be treated on a rush basis. At the present time, about 20 percent of the orders have rush tags on them. Williams also spends his
Receiving and raw materials storage
Finishing and grinding center
EXHIBIT 4 Financial data.
2013 2014 2015 First Quarter, 2016
Sales 560' 1,500 3,100 1,0C
Materials 63 273 522 214
Labor 136 587 1,063 327
Overhead 70 216 412 140
Depreciation 172 398 422 150
Total manufacturing costs 441 1,474 2,419 831
Sales expenses 70 130 263 80
G & A expense 75 110 297 93
Total costs 586 1,714 2,979 1,004
Profit before tax (26) 214) 121 59
*All figures in thousands of dollars,
Eastern Gear, Inc.: Jab Shop I:11111111P I
EXHIBIT 5 Organization chart.
time looking for past-due raw materials and lost orders as well as explaining late orders to customers.
The organization chart for the company is shown in Exhibit 5. Roger Rhodes is the president and founder of Eastern Gear. He handles contacts with some of the large customers, arranges the financing needed by the company, and sits in on the weekly production meeting. During these meetings, scheduling problems, employee problems, and other production problems are discussed.
The company engineer is Sam Bartholomew. His responsibilities Include design of the company's products, procurement and maintenance of equipment, and overseeing of the supervisor, Joe Irvine. Bartholomew also attends the weekly production meetings, and he spends about 10 hours a week on the factory floor talking with individual workers.
The company is currently experiencing about a 6 percent return rate on completed orders due to poor quality. In 75 percent of the cases, the returned orders have failed to undergo one or more operations or the operations have been improperly done. For example, In one returned order, all the gears were missing a hole.
Occasionally, the company will receive rush orders from its customers. in this case, the order is referred directly to Rhodes for approval_ If the order is accepted, the raw materials are rush-ordered and received the next day, After receipt of the raw materials, the order is rushed through production in four days. This is accomplished by Fred Dirksnn, a trusted employee, who hand-carries the rush orders through all operations. About 10 percent of the orders are handled on a rush basis.
The work-force consists of 50 employees, who are highly skilled or semiskilled. The milling machine operators, for example, are highly skilled and require at least two years of vocational-technical training plus several months of on-the-job training. Within the last quarter, 10 new employees have been added to the workforce. The employees are not unionized, and good labor relations exist The workforce is managed using a family-type approach.
1. What are the major problems being faced by Eastern Gear?
2. What action should Rhodes take to solve his problems?
3. How can this case be related to operations strategy and process design concepts?