Case Study – THE BIG “O” COMPANY

The Big “O” Company manufactures large hydraulic units. One of the most difficult items to manufacture is the hydraulic cylinder. The cylinder housing is fabricated from a malleable iron casting. The housing is machined to close tolerances, and the slightest discrepancy in either material or machining means a total loss. Machine cycle time on a typical housing is approximately sixteen hours. For several years, castings had been purchased from the Macon Foundries in Georgia.
Macon had been a Big “O” supplier for many years, and during that time it produced thousands of castings at acceptable quality levels. Eight months ago, however, when its founder and president, George Chapel, died, Macon announced that it was discontinuing foundry operations. The supply department at Big “O” undertook a search for new sources. At first, few suppliers could be found who were either capable or willing to meet the exacting specifications and tolerances required. Ultimately, however, three foundries were selected and invited to submit bids on 4,000 castings.
The low bidder, at $76. 17 a unit, was the Barry Foundry of Muncie, Indiana. Barry was a small concern with a good reputation for doing quality work and fulfilling every delivery promise. Barry was given a purchase order for the full 4,000 units, with the stipulation that Big “O” approve the first 100 units. Within two weeks the first 100 castings were received. They were subjected to initial inspection and then dispatched to the floor for machining. In the words of the shop foreman, “They machined like butter. Barry was told to proceed with the entire order and a four-month delivery schedule. It was about this time that problems began to develop in the shop. Some hard castings had damaged both grinding wheels and cutting tools. Also, cracks from casting porosity appeared on newly machined surfaces and slots. Although these conditions were not present in all castings, they occurred in a sufficient number to warrant action. It was determined that quality standards tighter than those of the existing supply management standard would be required.

All suppliers were to be notified immediately. Accordingly, the supply manager contacted Barry and told the supplier to stop production of castings to the old standard, advising that new specifications were now being developed and would be issued within the next two days. To the supply manager’s shock, he learned that Barry had completed all 4,000 castings. Having had approval on the first 100 units, Barry established production on a continuous-line basis and turned out castings at a fast, steady rate.
Because the order called for deliveries to extend over the next four months, Barry was holding the castings and shipping them in accordance with the schedule. To meet the new supply management standard, it was obvious that Barry would have to either scrap all the old castings and produce new ones, or undergo an expensive process of re-annealing.

What are Barry’s legal obligations in this matter?
Comment on the fact that Barry had already produced the full-order quantity of 4,000 well in advance of actual delivery requirements.
What does the supply manager do now?