The Morrison Company | 4564

Morrison fabricated inlays with two fully automated RFID inlay assembly systems. Inlay
production was rarely the system bottleneck. Setup required a specially trained operator to handle
the ICs. Inlays used a variety of ICs, delicate silicon wafers typically priced at between 2.9 cents and
4 cents each depending on their size and purchase volumes. The placement of the IC and antenna
each required precision. For instance, the tag would be likely to fail if contact between the IC and
antennae were off by as little as one millimeter.

Tag assembly was an automated process that involved mounting the inlay between two pieces of
material known as a backing and a facing. Adhesive was applied to the backing, which when peeled
away from the inlay allowed the label to be affixed to an item. The facing protected the antenna and
IC from damage caused by scratches, heat, moisture, and other environmental factors. The company
used 10 large, sophisticated machines to assemble the rolls of finished labels at a rate of up to 20,000
units per hour. Each required two operators to complete setups and to monitor performance tests.

Four of the tag assembly machines had printing capability that enabled personalization. This step
created an identity for each tag by printing bar codes and other information on the surface of the
label. The machine could also print additional security features such as invisible ink markings. More
than 70% of retail product orders included personalization, compared to fewer than 15% of
pharmaceutical product orders.

Production employees were responsible for quality assurance at each step of the manufacturing
process. Receivers inspected all production supplies upon arrival and followed procedures to replace
any broken or missing parts. The inlay sub-assembly and tag assembly steps included testing to
verify that each product performed to specification. Materials handlers transported carts containing
work-in-process from one activity area to the next and maintained the integrity of the separate
orders. From conversations during her initial factory tour, Breen sensed a strong commitment to
quality among the workers.

Production Planning and Control

Two production and inventory control managers, one purchasing manager, and one quality
assurance manager reported to the Director of Operations, who in turn reported to CEO Jason
Robbins. A Materials Resource Planning (MRP) system and a separate web-based order management
system informed the management team’s decisions and actions. Transactions with vendors took place
electronically, and established customers placed orders online. Robbins had considered investing in
an Enterprise Resource Planning (ERP) system when launching the company, but determined that the
implementation costs outweighed the benefits. During her initial tour of the production floor, Breen
noted the absence of computer terminals and observed production lists with hand-written changes
posted near each machine.

Marc Siegel, the production manager for the retail line, explained to Breen how he and Al
Robinson, who was responsible for the pharmaceutical line, established monthly production
estimates (Exhibit 3).

We start with the marketing department’s sales forecasts. Based on inventory projections
and our knowledge of what is needed to produce each product, we determine the parts and
labor required to meet the monthly targets. Then we both independently develop production
plans for our respective product groups. Finally, we take into account the demand from known
orders to create the master production schedule based on one eight-hour shift five days per
week.

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 4564 | The Morrison Company

In response to Breen’s question about inventory policies, Siegel noted that the company aimed to
keep its finished goods inventory as low as possible because of the risk of product obsolescence, the
high cost of inventory, and space limitations within the facility. Breen knew that many of the retail
products were made to order to accommodate customization requests, but a core set of standard
products sold well. The vast majority of pharmaceutical products were built to stock.

Next, purchasing director Amanda Cooper described how her department procured
approximately 240 distinct standard parts and supplies. As the group entered the raw materials
storage area, Cooper pointed out that of these, 165 parts and supplies represented 80% of the total
outlay for purchases. Roughly less than 30% were common to both retail and pharmaceutical
products. Variation in the packaging of different types of pharmaceutical products called for special
materials. For instance, bottles, vials, and syringes required small, rigid disk-shaped tags, while
blister packs and other multiple dose packages needed somewhat larger, flexible tags.

Anticipating Breen’s next question, Cooper noted how, as a matter of policy, the company sought
at least three vendors to supply each component. In early 2011, however, only about 40% of the parts
were available from three or more sources. Another 30% were available from two sources. The
remaining 30%, including six of the most popular ICs, had only one source. The company placed
orders bi-weekly based on a five-month planning cycle with the expectation that goods would arrive
no more than two days before they were needed. Even though this practice built in significant lead
time, vendors were not always able to supply 100% of the orders on time.

Day-to-Day Operations Management

Having heard about the operations planning and inventory management processes, Breen was
eager to learn how her managers made decisions on a day-to-day basis and asked, “What’s a typical
day like on the production floor?” Robinson responded:

It all begins with the master production schedule. At the end of each day, Marc and I get
together to determine the next day’s production. When necessary, we consult with the
marketing department so we can be sure to prioritize pending orders. Then we both assign
workloads for each of the inlay and assembly machines. We divide the inlay sub-assembly
work into equal-sized batches to accommodate machine requirements. In order to minimize
setups, the tag assembly batch sizes depend on order size.

As she listened, Breen began to consider the amount of variability the production system needed
to accommodate. “I would expect that you draw up the schedule for standard products with a high
degree of confidence that no adjustments would be needed,” she said. “But to what extent do the
customized products introduce uncertainty?” Siegel explained:

Some types of customization add no extra processing time because they involve simply
picking selected parts. Certain combinations of non-standard features, however, can increase
our total processing times. That’s because operating times can increase, additional operations
may be necessary, and sometimes we need to adjust a machine to produce at a slower rate to
maintain quality.

As the production managers continued to describe the typical day, Breen heard several things that
troubled her. Workers received their assignment at the start of each shift. Supervisors sometimes
found it difficult to specify a task assignment for a worker, especially if a parts shortage or other
factor disrupted the production schedule. Throughout the day, managers and employees coordinated

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 The Morrison Company | 4564

the production flow throughout the plant to maximize machine utilization and to accommodate
unexpected deviations from the schedule.

As the tour came to an end, Breen asked for information about the operators she had observed
throughout the plant. Hector Gonzalez, the director of quality assurance, explained that production
employees earned an hourly wage that was based on their skill level. The highest pay rate belonged
to the three electrical technicians responsible for maintaining and repairing the plant’s equipment
and machines. Based on factors including attendance record, effort, and attitude, workers could
receive development opportunities that would qualify them to advance to a higher pay rate.
Approximately half of the production team had the skills and training to perform any operation in
the plant.

Trouble on the Production Floor

Reflecting on all she had heard and observed, Breen’s biggest concerns were the seemingly
ineffective production controls and the inefficiencies caused by supply shortages. The latter were
especially a problem with ICs. A lengthy economic recession had kept chip makers from upgrading
their equipment, so they were unprepared when the economy improved and demand for chips
increased. Due to the resulting microchip shortages, Morrison delivered orders as late as 10 weeks
beyond the originally scheduled date.

The incidence of stock outs discovered during parts picking had more than tripled in the past six
months. Many times a stock out meant that some orders could only be partially completed. Such
orders remained as work-in-process inventory on the factory floor, though due to space constraints
some were moved on to the packing area. Work-in-process inventories also built up when inlay sub-
assembly slowed due to mechanical problems or when defects required rework. Similarly,
bottlenecks commonly occurred during personalization, which negatively affected the subsequent
packaging operation.

The company had long prided itself for a return rate consistently at or below 1%. Yet for the first
time in its history, during the previous year Morrison had begun experiencing customer returns in
excess of 3% of shipments. Most of these involved errors in the content of deliveries rather than
malfunctioning tags. Average available machine time per day reached an all-time low, and one of the
production managers voiced concerns about problems with the reliability of one of the tag assembly
machines.

Breen knew that to compete effectively in the face of growing demand, especially for the
pharmaceutical line, the company’s capacity would need to increase. Additional machines were not
an option; there was simply no space for them. Adding a second shift was a possibility, but it would
likely require higher pay to attract skilled electrical technicians to work the less-desirable evening
hours.

In a short time, the Morrison Company had become an important player in the RFID smart tag
marketplace. If recent weeks were any indication, the company was on a downward trajectory unless
it could identify the source of its production difficulties and implement changes that would better
position it to succeed. Returning to her office, Breen began to think about her next steps. She
identified several issues that could be addressed in the short term to reduce costs and improve the
plant’s performance. Beyond these adjustments, she also realized that Morrison’s dire situation might
require more fundamental changes that would necessitate longer-term investments in the company’s
operational capabilities.

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Exhibit 1 The Morrison Company, Annual Income Statement (2010)

Revenue
Pharmaceutical Line $ 36,199,296
Retail Line $ 18,072,512
$ 54,271,808
Total Revenue
COGS
Pharmaceutical Line $ 21,865,627
Retail Line $ 13,580,185
$ 35,445,812
Total COGS
$ 18,825,996
Gross Margin
Operating Expenses
GS&A $ 7,562,000
$ 4,800,000
Research & Development
$ 12,362,000
Total Operating Expenses
$ 6,463,996
EBITDA

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 4564 -9-

Exhibit 2 RFID Tags and Reader

Figure 1: Composition of an RFID Label Figure 2: RFID Labels (i.e., Smart Tags)

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Source: http://www.schreiner-logidata.com/3/about-schreiner-logidata/rfid-technology/ Source: http://www.barcoding.com/rfid/kit-rfid-eval-lab.shtml

This document is authorized for use only in Prof. Rajeev A's PRM41/Term II/Operations Management at Institute of Rural Management Anand (IRMA) from Oct 2020 to Apr 2021.