Safety of Stock: WilKins, A Zurn Company: Material requirements planning

“Read the case study ‘WilKins, A Zurn Company: Material requirements planning’ and answerthe following questions:1. Evaluate the current level of safety stock.2. Calculate the safety stock for the ball valve (34-850).3. Complete the MRP table for the selected components in case Exhibit 8.4. As Gerpheide, what changes would you recommend?Prepare a short powerpoint presentation to discuss your recommendation in class.”

For the exclusive use of R. DAVIS S w906D05 WILKINS, A ZURN COMPANY: MATERIAL REQUIREMENTSPLANNING Renée Reid prepared this case under the supervision of Professor Carol Prahinski and Eric O. Olsen solely toprovide material for class discussion. The authors do not intend to illustrate either effective or ineffectivehandling of a managerial situation. The authors may have disguised certain names and other identifyinginformation to protect confidentiality.Ivey Management Services prohibits any form of reproduction, storage or transmittal without its writtenpermission. This material is not covered under authorization from CanCopy or any reproduction rightsorganization. To order copies or request permission to reproduce materials, contact Ivey Publishing, IveyManagement Services, c/o Richard Ivey School of Business, The University of Western Ontario, London,Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail .ca.Copyright © 2005, Ivey Management Services Version: (A) 2006-09-13 On the morning of Monday, August 29, 2005, Jim Gerpheide, the materialsmanager at the Wilkins plant located in Paso Robles, California, was still stunnedthat the auditors had insisted that the plant undergo a second annual physicalinventory count, after an inventory count had been completed two weekendsearlier. In addition, Chris Connors, the general manager at the plant andGerpheide’s direct supervisor, had repeatedly expressed his concern about the highinventory level. Gerpheide knew that changes were needed, and he wonderedwhat alternatives he should consider.BACKGROUND In 1971, Zurn Industries acquired Wilkins Regulator Company, which commencedoperations in 1906, and in 1998, it merged with U.S. Industries Bath & PlumbingProducts Co. (later known as Jacuzzi Brands, Inc.). Wilkins manufacturedproducts for four markets: general plumbing, agricultural irrigation, commercialbuilding and municipal water works. Wilkins used more than 14,000 differentcomponents for its production and stored them at the plant. The finished productswere stored at the plant and 52 other stocking locations.Gerpheide started employment at Wilkins in 1989. Prior to working at Wilkins, hehad earned an undergraduate degree in chemistry and a Masters in Business This document is authorized for use only by Renata Davis in Production Planning and Scheduling taught by Davisfrom January 2011 to May 2011. For the exclusive use of R. DAVISPage 2 9B06D005 Administration from California Polytechnic State University. At an entry-levelposition for a small electronics company, he commenced his career in materialsmanagement in 1978, and implemented its material requirement planning (MRP)system in 1982. Four years later, a syndicated store that sold lighting fixtureshired him to manage inventory and its MRP system. When Wilkins hiredGerpheide, he became involved with his third MRP system installation.Gerpheide’s position at Wilkins had changed over the years from negotiatingfreight contracts, shipping product, organizing the warehouse and budgeting, tocurrently managing 400 projects in Asia, where 70 per cent of his time was spentsourcing materials.The Materials Department The materials department consisted of four employees. Gerpheide, as the materialsmanager, supervised three employees and was responsible for the purchase of allparts for the manufacturing plant. The purchasing manager, Cyd Lane, reporteddirectly to Gerpheide and had been at Wilkins for 11 years. Lane directlysupervised two purchasing agents, Tammi Keyes and Vivian Matthews, and wasresponsible for the purchase of castings and screw machine products. Keyes, whohad been at Wilkins for nine years, purchased gate valves, plastic parts andsprings. Matthews, who had worked at Wilkins for eight years, was responsiblefor the purchase of fasteners (such as bolts, nuts and screws), packaging, fittings,machine shop supplies and tooling. See Exhibit 1 for the Wilkins’ plantorganization chart.THE MATERIAL REQUIREMENT PLANNING (MRP) SYSTEM In 1990, Wilkins selected Manfact as the software for its financial system.Gerpheide commented:We actually did not buy the Manfact system for the MRP system;we bought it for the financial system and it happened to offer anMRP package as part of that system. We purchased the systemwith no consideration for the MRP package.After purchasing Manfact, we noticed several major systemproblems with the MRP software, which I mentioned to thecompany who created Manfact. Amazingly, the programmers wereunaware of how the MRP system was suppose to work. When Iquestioned them further, the company said that only two customerswere attempting to use the MRP program, one of which was us. Ihelped the programmers rewrite part of the software to correctseveral errors so that we could use the MRP system. As of thistime, we are not experiencing any problems with the MRP system. This document is authorized for use only by Renata Davis in Production Planning and Scheduling taught by Davisfrom January 2011 to May 2011. For the exclusive use of R. DAVISPage 3 9B06D005 We are actually not utilizing it to the extent that we could be usingit right now — we are using it at a basic level.The materials department was the only group at Wilkins that used the MRPsystem. Their purpose in using the MRP system was to determine the timing andquantity to purchase components needed to produce the finished goods accordingto the schedule.The MRP system was usually regenerated, or exploded, daily or weekly dependingon the number of changes entered into the system. During the annual physicalinventory count, the MRP system might not be regenerated for up to three weeks.The system changes were usually related to the receipt of raw materials, theproduction and sale of finished goods, or an update in the monthly sales forecast.Occasionally, changes were also made if new information became available, suchas inventory corrections, product design changes that required modifications to thebill of materials, revised raw material lead-times, lot size requirements from thesupplier and changes in managerial policy regarding the safety stock requirements.The system required only about two to five minutes to regenerate.At the start of each quarter, the inventory manager, Bernie Barge, created theforecast master by determining the anticipated weekly sales by product family forthe upcoming six to eight quarters. From the forecast master, Connors wouldgenerate the required production volumes for the major product families. Afterreceipt of this email, Gerpheide would update the production volumes in the MRPsystem, which would then generate a materials plan report. At the same time, theproduction department would also use Connors’ information to create a productionplan for each production cell.To update the production volumes in the MRP system, Gerpheide first had toconvert the average weekly production volumes by multiplying the number offiscal weeks in each month to determine the monthly production volumes for theproduct family. The plant used a four/four/five system representing that the firstand second month of the quarter contained four weeks whereas the third monthcontained five weeks. Gerpheide then entered the anticipated monthly productionvolumes into the MRP system.Connors updated the production volumes quarterly but sometimes sooner if therewere any significant changes, such as unexpected demand. Besides updating theMRP system, Gerpheide compared the actual production rates to the anticipatedproduction plan from Connors’ email to determine whether the materialsdepartment had enough material. Gerpheide explained:In most cases, the actual monthly volumes produced by theproduction department are the same as Connors’ productionvolumes and so the materials plan is on track with the production This document is authorized for use only by Renata Davis in Production Planning and Scheduling taught by Davisfrom January 2011 to May 2011. For the exclusive use of R. DAVISPage 4 9B06D005 plan. In some cases, it is not. We plan that we will have enoughinventory to meet Connors’ production volumes, and if there isn’tenough inventory, something is wrong. So, I’ll investigate thesituation. If my department made a mistake, we’ll try to expedite toget the materials into the plant in time for production, or if thatcan’t be done, we’ll ask the production department to delay theproduction schedule for that product. The production departmentdoes not have the same constraints as the materials department.Sometimes they will produce as much as they can as fast aspossible with no consideration as to the amount of material that isavailable.If the production department is overproducing and we have a lowlevel of raw materials, I notify Connors of the discrepancy andrequest a clarification on the true production plan. If Connorsrevises the production volumes, I would update the production planin the MRP system and try to get those materials quickly. IfConnors had not officially revised the production volumes, I wouldnot make any MRP system changes even though materialsinventory is running precariously low. Connors then follows upwith the production department to make necessary corrections in itsschedule.Prior to this process of updating the MRP system, we had somecostly delays and lots of confusion within the materials andproduction departments. Frequently, I faced dilemmas, such aswhen the materials department planned to produce 10,000 units of aparticular product for a specific month, while the productiondepartment planned to make 12,000. When the productiondepartment ran out of materials, I had to figure out how to getenough components to meet the production department’srequirements, or how to convince them to modify their productionschedule based on the amount of materials available.INVENTORY SYSTEM Wilkins used a periodic review system for inventory control. All finished goodshipments, materials receipts and production quantities were periodically updatedin the inventory records.Wilkins used backflushing to update the inventory records. Backflushing wasdescribed as the update of the component inventory balances when the finished This document is authorized for use only by Renata Davis in Production Planning and Scheduling taught by Davisfrom January 2011 to May 2011. For the exclusive use of R. DAVISPage 5 9B06D005 goods are received into stock.1 At Wilkins, the backflush method relied on datafrom the production activity report of the previous day’s production to determinethe quantities of raw materials used. Gerpheide commented about this approach:It [the back flush method] works fine if everyone remembers toreport his or her production activity. People are motivated to reporttheir output because we use piece-rate bonus incentives. However,sometimes the production isn’t reported or there were componentchanges that were not adequately communicated on the productionreports. We relieve inventory based on what we say we’ve built,not on what we actually produced. That can cause us problems.We have also been experiencing some problems since the bill ofmaterials is not always correct or the production department hasmistakenly used the wrong part number, which may happen sincesome of our parts can be interchanged. It is a never-ending battlebecause we continue to have new products that are designed andcustomers who request some customization. Eventually it alwaysgets fixed because we wonder why the materials run out. After welook at the bill of material, we realize the mistake — we have usedthe wrong part number or the bill of material is incorrect.The current inventory system is not completely accurate and itneeds to be 100 per cent accurate in order for the MRP system towork correctly.THE GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The Generally Accepted Accounting Principles (GAAP) required Wilkins to haveestablished inventory controls.The GAAP and the Security ExchangeCommission (SEC) required that each facility conduct a physical inventory onceper year in the last quarter of the fiscal year. At Wilkins, since the fiscal year endson September 30, the physical inventory process began on July 28 when Wilkins’in-house auditors counted the inventory. External auditors visited the plant duringthe year to ensure that Wilkins was following the proper accounting principles.During the past year, Wilkins had six different groups of auditors, both internaland external, visit the plant.The Sarbanes-Oxley Act (SOX), which was passed by the U.S. legislature in July2002, was generally considered the most significant piece of legislation to changefinancial disclosure, corporate governance and public accounting practice since the 1 T.E. Vollmann, William L. Berry, D. Clay Whybark, and F. Robert Jacobs, Manufacturing, Planning andControl Systems, 5th ed., Irwin/McGraw-Hill, 2005, p.304. This document is authorized for use only by Renata Davis in Production Planning and Scheduling taught by Davisfrom January 2011 to May 2011. For the exclusive use of R. DAVISPage 6 9B06D005 early 1930s when U.S. securities laws were passed.2 As a result of this Act,Wilkins and other American public companies (including wholly ownedsubsidiaries), private companies that were preparing their initial public offeringand non-American companies that performed business in the United States wererequired to reveal their internal financial auditing controls to the Securities andExchange Commission (SEC) annually.3Gerpheide remarked on the physical inventory count:Ten years ago, we had about half of the current level of inventory.It would take us five days of counting with 30 to 40 peopleinvolved. Now, with about twice the inventory, we can completethe counts in about one-and-a-half to two days.To help make the physical count go more smoothly, we pre-countthe materials to speed up the process. These items are stored in abox and we will put a “do not move, do not touch” tag on the box.We use the same system at our other stocking locations.THE INVENTORY MANAGER Although Wilkins followed the accounting principals and standards, the plantcontinued to experience problems with the accuracy of inventory records.Gerpheide commented:I spend most of my time putting out fires. Eighty per cent of theparts have good inventory accuracy while the remaining 20 per centare problematic. Inventory inaccuracy causes so many problemsthat ripple through the plant and it seems like every single errorends up coming back to haunt our sales/marketing manager, RickFields or me.Three and a half years ago, Rick and I decided that we needed tohire someone to focus on the inventory issues. We proposed toChris that we get an inventory manager for several reasons.We had the finished good inventory available in the U.S., but itwasn’t in the right place. For example, there were finished goodslocated at a stocking location that had never previously sold thatproduct before. The sales force had an incentive to hold onto anyfinished good inventory that they could get because they werecommissioned based on sales and they were not penalized for2 http:// October, 2005..3http:// accessed October 2005. This document is authorized for use only by Renata Davis in Production Planning and Scheduling taught by Davisfrom January 2011 to May 2011. For the exclusive use of R. DAVISPage 7 9B06D005 holding extra inventory. We needed an inventory manager todetermine where the finished goods inventory should be stored.The inventory manager should decide how to stratify the country sothat we can have inventory in the right location or very nearby sothat if an order comes in we can meet a short lead-time.A second major concern was that our inventory inaccuracy caused arippling effect throughout the plant, our customers and oursuppliers. We were, and still are, spending too much timecorrecting errors or trying to expedite materials because of theerrors.After about three-and-a-half years of asking for an inventorymanager, Chris promoted Bernie to the position. In most plants, theinventory manager would report to the materials manager, alongwith the purchasing, logistics, transportation and other functions.However, at our plant, Bernie reports directly to Chris.This job hasn’t been here before and there is no real job description.Bernie needs to respond like water — addressing all of the issuesthat don’t have enough inventory and flooding the holes by givingit attention.Rick and I hadn’t realized this at the time, but another reason forcreating the inventory manager position was to have a front-personto handle all of the complaints. It is really nice not to be involvedas heavily in fighting the fires.Barge provided some details about the inventory inaccuracy:There are dozen of reasons for the discrepancies and we’ve goneover them again and again in our meetings. One reason for thediscrepancies is the timing of transactions; we don’t enter the datainto the computer until that night or the next morning. Anotherreason is a modification on the products; the product wasredesigned but the bill of materials system wasn’t updated or thecustomer requested a customized product and we didn’t notice itwhen we entered the production. In addition, we might use thewrong components. I’ve seen the production guys use the wrongcomponents simply because they couldn’t find the right ones to use.Sometimes we don’t input the transactions for the rightcomponents, such as with data entry errors. Finally, we have somepart commonality, using the same part in multiple finished goods;part commonality creates some confusion in the real quantity ofparts needed by production. This document is authorized for use only by Renata Davis in Production Planning and Scheduling taught by Davisfrom January 2011 to May 2011. For the exclusive use of R. DAVISPage 8 9B06D005 Because of our inaccuracy, we had to have a second inventorycount. We’ve been doing the inventory count the same wayforever. Perhaps SOX has caused the auditors to be pickier. Withthe second physical inventory audit, the external auditors randomlyselected items to test-count. We did four test-counts for each item.There were many teams because the inventory process had to becompleted as quickly as possible. As it was, it still took two fulldays to count everything in the plant. The procedure used in theinventory process had teams conducting the initial count. Then, anin-house auditor verified the teams’ counts.THE 720 PRODUCT The 720, a backflow preventer in the pressure vacuum breaker (PVB) valvefamily, was one of many standard products at Wilkins. The PVB was installed inpotable water lines to protect the quality of water. The device would stop the flowof substances or the reverse flow of water into the potable water distributionsystem. Gerpheide considered it a popular and reliable product in a verycompetitive market, and that Wilkins had produced and sold it for more than 25years. The 720 was available in six different models based on the dimensions ofthe in-feed pipes, ranging from the ½- to 2-inch diameter. A diagram of the 720,its dimensions and weights are shown in Exhibit 2. The installation diagram ofthe PVB is shown in Exhibit 3.The 34-720 was a PVB valve with a ¾-inch diameter in-feed pipe. The assemblyprocess of the 34-720 was as follows: three bolts were placed into the canopy,which was then connected to the bonnet, plastic washer and o-ring. Once theseparts were connected, the subassembly was then joined to the poppet assembly(load nut, load washer, upper disc and poppet) and spring. The next step consistedof attaching these parts to the spider assembly, which consisted of a screw, lowerdisc, guide spider and nut. This subassembly was then connected to the body.Previously, the body had undergone machining and was attached to two test cocksand two ball valves. These components are listed and diagramed in Exhibit 4.Wilkins sold a 720 repair kit directly to customers. Due to extreme weatherconditions, the PVB occasionally failed to function properly. Some contractorspreferred to service the 720 product instead of replacing the PVB. Thecomponents of 720 repair kit are listed in Exhibit 5. Gerpheide planned to sell400 to 500 720 repair kits per month and kept a safety stock of 400 units on hand.He could make the product within five business days. The sales forecast for the34-720 and the 720 repair kit are shown in Exhibit 6. This document is authorized for use only by Renata Davis in Production Planning and Scheduling taught by Davisfrom January 2011 to May 2011. For the exclusive use of R. DAVISPage 9 9B06D005 MRP SYSTEM INPUTS The primary purpose of the MRP system was to develop a detailed time-phasedplan for when to place purchasing orders for raw materials and to determine howmuch material to order. To operate effectively, the system required information onthe purchasing and materials inventory policies associated with each component,the bill of materials and the demand requirements for finished goods andcomponent. The following are some MRP inputs, specifically focused on the 34720.Bill of Materials The bill of materials (BOM) lists each of the components required to make thefinished good, the required quantity of each component and the sequencedependence associated with the parent-component relationships, where level 0represents the finished good. Wilkins’ BOM for the 34-720 PVB is shown inExhibit 4.Production Schedule The MRP system required the production schedule for all products. For theproducts that were sold directly to customers, Gerpheide’s calculation of thescheduled monthly production volumes was input into the system as the grossrequirements. The forecasted demand in Exhibit 6 was used for the productionschedule in the MRP planning inquiry.According to Gerpheide, the calculation of the gross requirements could becomerather complex. Some components were used in a variety of products, which wascalled part commonality. Other raw material components might also be soldindependently as replacement parts, such as the 34-850, a ¾-inch ball valve. Thecalculation of the gross requirements needed to ensure that the requirements for alldemand were included. Exhibit 7 shows the gross requirements for severalselected 34-720 components. (Note that the gross requirements in Exhibit 7excluded the 34-720 and RK1-720 demand).Scheduled Receipt Scheduled receipts represented orders that had been placed with the supplier orproduction that had been scheduled but the product had not yet been received orcompleted. The materials department had placed several orders with its suppliers,and these scheduled orders were called scheduled receipts in the MRP system.The scheduled receipts for the ½-inch plastic washer, 721A-12, was 55,000 unitsin September. The scheduled receipts for the instruction sheet, IS720, were 49,500 This document is authorized for use only by Renata Davis in Production Planning and Scheduling taught by Davisfrom January 2011 to May 2011. For the exclusive use of R. DAVISPage 10 9B06D005 units for September; 49,500 units for October; 54,900 units for November; 9,000units December and 12,600 units for January.On-Hand Inventory The on-hand inventory for 34-720 components was higher than normal because thePVB sales to the agricultural irrigation market were hampered due to the long andwet winter of 2004. The inventory for several 34-720 components on September5, 2005 is shown in Exhibit 8.Planning Lead Times The expected lead time for each of the 34-720 components is shown in Exhibit 4.For items produced at the Wilkins plant, the expected lead times were themanufacturing lead times, which included processing time, setup time, transit timeand wait time. For the purchased items, the lead times varied predominantly dueto the distance that the material had to travel to reach the Paso Robles plant. Somecomponents were domestically sourced from California, Illinois, Wisconsin andMassachusetts. Other components were internationally sourced from Taiwan andChina. Gerpheide explained:If we were to order valves from our supplier, for instance, we couldexpect that the supplier would have some backlog or materials leadtime and may not be able to schedule our product immediately in itsplant. Once the supplier has processed our order, it would takethem approximately four weeks to schedule the production and thenanother four weeks to produce the product. For domesticcomponents, we would receive the components in about eightweeks from the time we placed t…

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