Reference no: EM132256967
Merdeka manufactures and distributes seven (7) premium gas grill BBQ models for the Canadian market. Its manufacturing facility is in Winnipeg Manitoba. The gas grills are distributed through four (4) Merdeka distributors (Toronto, Vancouver, Calgary and Halifax) and can also be purchased on line with the customer paying freight. The gas grills are assembled from 30 separate components; ranging from relatively expensive bowls, lids and burners (unit costs exceeding $50.00 per unit) to low-unit-cost items (less than $10.00 each), such as grill clips and screws. Exhibit #1 references the common components for all seven (7) gas grill models.
The low-unit-cost components can be purchased from a variety of local industrial supply companies while the higher cost components are sourced from numerous North American sources.
As the Purchasing Department is pressured to continue delivering cost saving opportunities, when a purchase order for higher cost components is required, suppliers are issued RFQs. Suppliers with the lowest quoted price are awarded the purchase order. Because of this process, numerous suppliers are used for each component, suppler lead times vary, significant safety stocks are maintained and supplier delivery performances vary.
Merdeka schedules the production of gas grills by using a Materials Requirement Planning (MRP) software package. This MRP package is instrumental at supporting Merdeka’s purchasing, sales and inventory functions.
All data relating to inventory components, bills of material (BOM), supply lead times and the Master Production Schedule (MPS) have been processed into MRP. All data entry is processed by hired part-time staff. Shop floor lead hands process all inventory & production transactions into MRP at the end of each work shift. The Purchasing staff processes purchase orders for inventories recognized by MRP to be in short supply.
Production and distribution operations shut down yearly for three (3) days to count the physical inventories. Merdeka’s inventory record accuracy averages 79.0% (gross accuracy). At the completion of the annual physical count, the actual counts are processed into MRP. No time is invested at researching root causes to inventory discrepancies. The on-going uncertainty of inventory data integrity results in the purchasing staff increasing purchased quantities, sometimes as much as 20% to mitigate risk of not satisfying the customer delivery requests on account of stock-outs. Merdeka’s on time delivery performance has averaged 81% to 84% for the past 3 years while component inventory turns have steadily declined; from 9.1 turns three (3) years ago to 4.6 turns this past year. Merdeka policy on stocking finished gas grills is to maintain one (1) week forecasted sales. Merdeka’s sales forecasts results from studying previous sales performances as well as researching competitors (ie. Home Depot, BBQ Wholesale, Lowes and other retailers) stocking quantities and lead times.
Merdeka recognizes the need to improve its delivery performance as customers are complaining and the market competitiveness is exploding. The market’s delivery expectation is 100% as gas grills are considered ‘off the shelf products’ as well as seasonal (May to October).
Increased competition has forced Merdeka to review its operations for overall improvements. Improving levels of customer service while reducing inventory investments are deemed mandatory.
EXHIBIT #1 (Common Components)
Item No. Unit Value ($) Annual Usage (Units)
1013 68.13 105
2691 1.54 4,368
2862 9.67 298
3846 3.77 3,067
4456 53.43 564
5066 2.43 1,264
6392 6.12 1,994
6547 2.80 2,476
7675 7.65 656
8725 99.84 297
(SOURCE: this case was written by Brent Snider and Jaydeep Balakrishnan of the Haskayne School of Business at the University of Calgary. It is based on a real situation)
ASSIGNMENT:
What are the primary issues at Merdeka? Why are these the issues?