Blades R Us—Comprehensive Case

(Prepared by Edward P. Kiernan and Abigail Olken, Lehigh University)

Blades R Us is a growing manufacturing firm that produces high-pressure turbine blades.

The company supplies these to airline companies as replacement parts for use in large commercial jet engines. The high-pressure turbine is the segment of the engine that undergoes the most stress and heat. This requires that these parts be replaced frequently, so Blades R Us operates a relatively large firm with constant demand for its products. It operates out of Philadelphia, Pennsylvania, with a workforce of approximately 1,000 employees. Its annual output is based on demand, yet at full capacity, it has the ability to produce 100,000 blades a year. The company’s largest suppliers are casting houses, which take a rough shape of the final product to very demanding specifications given by Blades. Blades R Us then does the final detail work to bring it to FAA regulations.

The general business environment of Blades R Us is one in which it sees expansion in its future. This is because of the recent boom in the commercial airline industry. In addition, with the recent attention to airline safety and the discovery of bogus parts used in engines, the airlines will be doing better checks and needing to replace parts more frequently to ensure safety.

Blades R Us has been around for some time, and therefore has no computer-operated accounting systems. Some of the problems the company faces include

(a) lack of inventory control;

(b) keeping track of items in production or production that was completed in one day;

(c) a need for trends and tracking of the largest customers so that future demand might be more accurate;

(d) supervisory issues dealing with theft of parts, near substandard parts, and hiding of scrap; and

(e) large inventories on hand of both FG and RM.

Procurement Procedures The company reviewed the records associated with the RM inventory files. Mr. Sampson, the inventory manager, was in charge of this procedure. Once he finished his manual review of the inventory, he issued two purchase requisitions.

He kept one of the purchase requisitions in the inventory department, filing it in a cabinet. He sent the second purchase requisition to the purchasing department.

Ms. Connolly in the purchasing department would take the requisition and complete a purchase order in triplicate. One copy was sent to the supplier, the second was filed in the purchases department filing cabinet, and the third was sent back to Mr. Sampson in the inventory, department. Mr. Sampson would use this PO to update his inventory records so he knew exactly how much inventory was on hand at all times. Once the inventory was updated, the PO was put in the filing cabinet in the inventory department with the original purchase requisition.

The supplier would receive the PO and send the requested blades, including a packing slip with the shipment. At the same time shipment was made, the supplier would also send an invoice to the AP department.

In receiving, Mr. Hiro simply used the packing slip that was included with the goods to make three copies of the receiving report.

The first copy was sent to the purchasing department, where it was filed. The second copy was sent to accounts payable (AP), and Mr. Hiro filed the third copy in the filing cabinet.

The AP department would file the receiving report until the invoice from the supplier arrived. Then Mr. Maldonado would check both the receiving report and invoice to make sure everything sent was actually received. Mr.

Maldonado would then hand off the documents to Mr. Bailey so that he could do the appropriate posting and filing of the checked documents. Mr. Bailey would post the changes to the voucher register and purchases journal, sending a journal voucher to the GL department after the purchases journal was updated.

Mr. Bailey would then put the receiving report and invoice in the appropriate file. Also in AP, Mr. Dresden would scan the records to see when it was time to write checks to the different vendors. Whenever a due date arrived, Mr. Dresden would write a check in two copies.

The first copy would be filed in the cabinet, and the other would be sent to the appropriate vendor. Then Mr. Dresden would update the AP subsidiary ledger and send an account summary to the GL department.

The GL department was a tight ship.

Mr. Callahan would receive the account summary and journal voucher and then post the necessary changes to the GL. After posting, the documents were filed in the GL department.

Conversion Cycle Procedures The conversion cycle at Blades R Us begins with the production planning and control department receiving the inventory levels from the FG warehouse. If the number of a given part in the FG warehouse is below the set minimum, then production for the part is to be run. The production planning and control department gathers the BOM and the route sheet for that part and makes up the production schedule and work orders. A copy of the work order, route sheet, BOM, and production schedule is filed at the production planning and control department. A copy of the production schedule, work order, and BOM is sent to the work centers.

Once the work centers receive the paperwork from the production planning and control department, production is initiated. The work order is sent to the FG warehouse, and the production schedule and route sheet are filed. Time cards are filled, out and given to the payroll department. Materials requisition forms are filled out in order to attain the necessary materials—one is filed, and the other is sent to the inventory control department.

When inventory control receives the materials requisition, they send the desired material to the work center, update the inventory records, and then file the material requisition.

The inventory control department makes the decision to buy RM based on a predetermined minimum of parts in inventory and a set order number. The inventory records are periodically reviewed, and when the number of a part in inventory falls below the set minimum, a purchase requisition is completed. One copy is sent to the purchasing department and the other is filed. The purchasing department sends inventory control a purchase order, which it then uses to update its inventory records. The purchase order is then filed.

Blades R Us has made the decision to try to become a world-class company. It realizes that it will have to make many fundamental changes to achieve this goal. One of the first steps that they have decided to take is to implement an MRP system. They feel this will help them to keep better track of their inventories, WIP, and customer demands and trends. They also realize that there are many weaknesses in the other pieces of their conversion cycles, and they would like to take steps in improving those as well.

Required:

a. Create a data flow diagram of the current system.

b. Create a document flowchart of the existing system.

c. Analyze the internal control weaknesses in the system. Model your response according to the six categories of physical control activities specified in SAS 78.

d. Prepare a system flowchart of a redesigned computer-based system that resolves the control weaknesses you identified.