The factory owner had started a successful business assembling parts for airplane manufacturers in a small California plant. To meet competition, he opened a new Arizona plant to manufacture its own parts near cheaper labor. Over time, the owner spent less time at the Arizona plant, delegating full responsibility to the factory manager. Customer complaints of late and poor quality deliveries emerged. An investigation revealed the manager had cut costs by using substandard materials, slowing productivity and increasing costs overall. The root cause was poor materials control leading to a downward quality and cost spiral.

1. OM2012
The Case of the Faltering Factory
An engineer with a flair for production management was the principal owner and founder of a company in
Los Angeles. He had a special talent for working with airplane manufacturers, taking their designs of
various small devices and subcontracting component parts, and producing them on a commercial basis.
He operated a small plant in which he assembled the parts which were entirely purchased from outside
and tested and shipped the completed assemblies.
Subsequently, to meet the competition that sprang up, he decided to manufacture his own parts, which
represented the greater part of the total value of his products. To have a favourable labour market and a
climate that was good for his type of manufacturing, he located his new plant in Arizona, several hundred
kms from Los Angeles. Not only did he set up the parts manufacturing there, he moved the testing and
assembly operations there as well. The owner, however, remained in Los Angeles, in his executive
headquarters, with a small group of sales engineers. This permitted him to maintain the same close
contact with his customers that had made him successful.
A qualified factory manager was put in charge of the new plant. During the start-up period, the owner
made several trips to the plant, keeping in touch with what was going on and providing leadership and
motivation to the local management. However, as time went on, these trips became less and less frequent
as the complexity of his personal activities made continuing presence in Los Angeles more compelling.
Accordingly, the time came when full responsibility for the factory operation had been shifted to the
manager, with the owner depending completely on the manager’s activities and results.
Soon, the owner began to hear from several of his customers that some of his prices were not competitive,
some deliveries were seriously late, and quality was not up to the expected high standard. The owner
began to develop a sense of disquietude. His uneasiness reached a point of where he procured the services
of a consulting industrial engineer.
On his introductory trip through the plant, the consultant got the impression that a rather slow working
tempo prevailed. This led him to review the payroll records. Here he learnt that for several months, the
workers’ productivity had been slipping. An investigation revealed that it was due to delays and slowing
down of the workers caused by an uneven flow of work. When this was explored more deeply, the cause
of uneven flow of work proved to be a combination of substandard materials and inadequate maintenance.
Working backwards, the consultant unearthed the root cause of this difficulty—poor control of materials.
Purchased materials were not up to original standards. At first this caused low productivity, which
increased labor costs. Then, to compensate for this, a drive towards overhead cost reduction ensued,
which included a cutback in maintenance personnel. The result only lowered productivity still more. All
this resulted in higher cost, lower capacity and poorer quality, which showed up later in customer
complaints.
A meeting of the owner, factory manager, and the consultant revealed that deterioration in purchased
materials and parts was because of a misguided program on the part of the factory manager to reduce
production costs by saving on purchases. The use of substitute materials created other cost increases that
overbalanced the slight savings on purchases.
Examine the case in terms of activities, functions and decision-making in a production system.
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