Master thesis “Determining the quality of the planning at Ahrend Production company Sint-Oedenrode”

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Master thesis

“Determining the quality of the planning at Ahrend

Production company Sint-Oedenrode”

Version: 1.0

Date: May 29th, 2009

Education: University of Groningen, Master of Science in Business Administration, Specialization: Operations & Supply Chain

Student: Robert Hoogesteger

Evertsmaad 13

8431 TC Oosterwolde The Netherlands

Student number: 1167200

Supervisors: Drs. C. de Snoo

Prof. dr. ir. J.C. Wortmann Company supervisor: Dhr. B. de Jager

Allround employee operations

Organization: Ahrend Production company Sint-Oedenrode Kofferen 60

5492 BP Sint-Oedenrode The Netherlands

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Management Summary

This thesis is written based on the research conducted at Ahrend Production Company Sint-Oedenrode. The overall idea at APS was that the quality of their planning was good, but there was no method to measure it. This research is conducted to design such a method. The focus in this research is on the planning activities of the departments of order planning, production planning and material supply planning. The three departments are referred to as ‘the planning triangle’, since they are the part of the operational network as described by Wijngaard et al(2006). These three departments are involved in the planning processes from acceptation of orders until the production of the orders.

The objective for this research is:

“Design a method to determine the quality of the planning within the planning triangle”

The main research question is formulated as follows:

“How can the quality of the planning within the planning triangle best be determined?” As a first step, a literature research is performed, which resulted in the following findings:

• There is not one best way to determine the quality of planning

• In this situation the most suitable way is to determine the performance of the departments according to the strategic goals

• This performance should be measured with key performance indicators • Key performance indicators should be designed according to the company’s

strategic objectives

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As a next step after the literature research, the departments within the planning triangle are analyzed. From this analysis followed that planning activities are well designed for the processing of standard orders, but in case of orders that do not meet the agreed standards the standard processes are not sufficient. In these cases, a lot of interaction between the departments is necessary. The employees have a lot of autonomy to handle these situations.

Research so far implies that the planning at APS is of good quality indeed, for as long as the orders meet the standard requirements. But since APS faces many rush orders and order changes within the delivery time, other measurement methods are required. The method described in literature requires KPI’s that are derived from the strategy. Therefore the following step is an analysis of the strategy of APS and the way the KPI’s that are used are derived from this strategy.

The outcome of this analysis is that the strategy of APS, which is almost identical to the strategy of Ahrend NV, has not been translated throughout the organization. This implies that the current KPI’s are not based on strategic goals and cannot give a proper indication of the extent to which the goals are realized.

It is important for APS to implement an organization wide strategy, to be able to determine the required performance that can be measured by KPI’s. At the moment APS has an emergent strategy, that changes its focus depending on the external situation. Based on this type of strategy, long term goals cannot be set.

As a latest step in this research, a set of KPI’s is presented, that can be used until the strategy is implemented organization wide. Targets for these KPI’s can change

depending on the strategic focus at that time. This method is not suited to measure the achievement of long term goals.

Although the literature prescribes to derive KPI’s top down from the strategy, the KPI’s in this research are designed according to the operational objectives of the emergent strategy. These are flexibility and cost, which are strongly influenced by the disturbances in the standard order procedures.

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applied for all three departments within the planning triangle, are rush orders and order changes. All departments are involved in the acceptation of these orders, although there are conflicting interests. The order planning department wants to accept rush orders and order changes to increase the service level, the production and material supply planning departments want to minimize the acceptation of rush order and order changes so the production processes will not be disturbed.

Targets for these indicators have to be set in accordance with all the departments. A maximum percentage has to be agreed on, which can change depending on the type of rush order or order change, the influence it will have on the continuity of the

production processes, and the percentage of maximum capacity that is filled already. An indicator that is applicable for both the order planning and production planning department are the orders that have to be delivered on a specific day of the week. These orders decrease the flexibility of the production planning department, because there is less free capacity to divide the orders. Therefore they would like these type of orders to be minimized. The order planning department wants to reach a certain service level by accepting these orders. This indicator does not involve the material supply planning department, because all materials that are required in a production week need to be available on the first day of that week.

Targets have to be set in accordance with both the order and production planning department. By accepting a certain percentage of the daily capacity that is reserved for orders to be delivered on specifically that day, a trade-off needs to be found. This percentage can change, depending on the percentage of the maximum capacity that is already filled for that week.

Typical indicators for the material supply planning department are inventory levels and flaws, which are required materials for the production departments that are not available in time. Both these indicators should be reduced to a minimum, inventory levels only result in high cost, and do not increase the flexibility because of the wide assortment of production parts of APS. Flaws can be caused by the acceptation of rush orders or order changes, the materials might not be available because of short delivery times.

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• On the one hand should there be a strategy implemented as soon as possible to be able to determine the performance according to the strategic goals • On the other hand should APS use the designed KPI’s described above, to be

able to determine the performance of departments within the planning triangle according to the emergent strategy

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Preface

This master thesis is written as the final part of my master study in Business Administration at the faculty of Economics and Business at the University of Groningen. The research is conducted during an internship at Ahrend Production Sint-Oedenrode. They offered me the opportunity to apply theoretical knowledge in practice. Writing this thesis required the help and influence of several people. I would like to thank Mr. B. de Jager from APS for all the time and efforts he has made to support me during this research. I also would like to thank my supervisors from the University of Groningen, Drs. C. de Snoo for his useful feedback and keeping me on track when I was starting to wander, and Prof. dr. ir. J.C. Wortmann for his extensive knowledge and useful feedback.

Finally I would like to thank my family and friends for their support and advice during my study, and especially during the writing of this master thesis.

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Chapter 1 Introduction

This chapter begins with the research background and description in the first two sections, in the following sections the company in which the research is performed, is described. The third section describes Royal Ahrend NV. The fourth section describes Ahrend Production company Sint-Oedenrode. The chapter concludes with an overview of the planning processes at Ahrend Production Company Sint-Oedenrode.

1.1 Research background

In the past few years several projects have been conducted to analyse and improve aspects of planning and production at Ahrend Production Company Sint-Oedenrode (APS). In general, planners are satisfied about the current planning processes. Although no-one has a clear view of the overall strengths and weaknesses, they believe the output of their planning is of high quality. In reality, the quality of decisions on order acceptation, capacity use, and supplier relations can not be determined exactly.

For the last three years, and specifically in the latest months of 2008, profit margins are decreasing, this forces the management to focus more on costs than they have been doing until now. APS was in the pleasant position, that they could focus on their customer demands, profit margins where high enough to not have to worry about costs. Flexibility was deemed to be very important, to not lose a customer order. This change in situation created a demand for a critical analysis of the strategic choices that are made and the design of the planning processes and the fit between them.

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1.2 Research description

This research will focus on the quality of the planning of the departments of ordering, production planning and material supply planning. These three departments form the so-called ‘planning triangle’ within APS. The three departments within the triangle are the input for the production departments. They have to interact together to schedule all resources to be available in time. To determine the quality of the planning of these department, an appropriate quality measurement method has to be determined. If this method is not available, it has to be designed.

1.3 History of Royal Ahrend NV

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Fig 1. Organigram Royal Ahrend NV

1.4 Ahrend Production company Sint-Oedenrode

Ahrend Production company Sint-Oedenrode (APS) is one of the two Dutch production locations of Royal Ahrend N.V. At this location tables, desks and drawers are produced. The other location, in Zwanenburg, produces tabletops and chairs. In 1905 Harry van de Kamp started a blacksmith in Sint-Oedenrode. Apart from covering horses, he started to produce stoves and other steel products. In a short period of time the number of employees increased to 120. In the economic recession of 1929 van de Kamp was heading to a bankrupt, which made him decide to start the production of steel furniture. This resulted in a large order from Philips for steel cupboards. In this period, Ahrend and van de Kamp started to cooperate, the steel products produced by van de Kamp, were sold by Ahrend. In 1931 this resulted in a new company called NV Oda Staalwerk v/h H.J. v/d Kamp. In 1960 the shared interests were placed in a holding, in 1967 the Ahrend Groep BV is founded. In 1994 the name of ODA changed into Ahrend productiebedrijf Sint-Oedenrode BV, as it is still called nowadays.

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1.5 Planning processes at APS

Planning activities at Royal Ahrend are divided over the different business units. An order is placed by the customers at one of the sales centers (VKC). The sales centre places the order at the order intake department, which is a part of Ahrend Service. After acceptation the order is processed to different departments at APS. The final distribution and installation planning is then again made by the service department, after the production planning department has scheduled the order in. A schematic overview is given in the figure below (Fig 2), a more extensive description is given in chapter 4.

VKC

Order Intake

Delivery/ Assembly plan

Detail plan Distribution plan

Production Service plan

Material ordering

End customer Supplier

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Chapter 2 Research outline

In this chapter the research objective and the research questions will be described. After that, the conceptual model and the methodology of the project will be shown, and finally, the report structure will be discussed.

2.1 Research statement

The research statement consists of the research objective and the research questions.

2.1.1 Research objective

The purpose of this research is to determine the quality of the planning activities of the three departments of order planning, material supply planning and production planning at APS. From the research description the following research objective can be derived:

“Design a method to determine the quality of the planning within the planning triangle”

2.1.2 Research questions Main research question:

“How can the quality of the planning within the planning triangle best be determined?” Sub questions:

Literature review:

“What literature is available on the determination of the quality of planning of a department and between a set of departments?”

“How can a model for the determination of planning quality be applied?” Analysis Planning Triangle:

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• What are the actors?

• When do they communicate? • How do they communicate?

“What is the input and output of the departments in the Planning Triangle?” Status quo designed/actual situation:

“What is the main strategy of Ahrend NV and APS?” “What are the mission and vision of Ahrend NV and APS?”

“What is available at APS to determine the quality of planning of the planning triangle at APS?”

“What steps should be taken to implement a sustainable method for the determination of the planning quality of the planning triangle at APS?”

2.2 Research methodology

This section describes the methodology of the research. First of all the data collection methods and data sources are discussed. After that the thesis structure will be described.

2.2.1 Data collection and data sources

The data collection for this research is performed during an internship at APS. This consisted of exploration of the several departments within the organization by field research, like observing and having interviews with employees at all layers of the organization and by desk research, like the analysis of several sources of academic literature as well as internal documentation provided by APS.

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(semi-structured), this is done to avoid limitations in the answering possibilities, to give the interviewer a thorough insight in the subject.

The desk research exclusively makes use of documents, it consists, among other things, of literature study and the analysis of written documents. A distinction can be made between primary data sources, like books, magazines and reports, and secondary data sources, like reports from other research projects. Both data sources will be used during this research project. Another distinction that can be made between data sources is between internal data sources, like company documents and company specific literature, and external data sources, which are not company specific. Both data sources will be applied during this research project.

2.2.2 Thesis structure

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Chapter 3 Literature review

In this chapter the literature will be reviewed that is used for this research. An overview will be given of the research findings in the areas where this research focuses on. First, the organizational aspects on which this research is conducted will be described. Secondly, literature about determining the quality of planning is reviewed.

3.1 The operational planning triangle

This research is conducted in the departments of order planning, material supply planning and production planning at APS. These departments are analyzed according to the aspects described by Wijngaard et al. (2006).

Wijngaard et al. (2006) use the term “Operational network” to address the collaborative alliances from customer service, production planning and logistics and production control. This is the network of people involved in customer and production order processing, by dealing with the transformation of these orders and the coordinating activities that are necessary to realize everything properly. The departments on which this research focuses, is a part of this “Operational network”, their activities are related to the coordination that is necessary to realize everything properly.

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3.2 Determining the quality of planning

The efficiency and flexibility of the primary process is strongly determined by the planning. Planning is the formalization of what is intended to happen at some time in the future, to ensure that the operation’s processes run effectively and produce products and services as required by customers (Slack et al., 2004). In this research, planning is defined as the planning of customer orders on a day-level. This can be seen as the reconciliation process between the customer demand and the operations resources. In the planning hierarchy (Schönsleben, 2007), there is a distinction between long-term, medium-term and short-term planning. The planning activities that are described in this research are short-term planning activities that are involved in the execution and control of operations.

To achieve an optimal operational performance the quality of the planning is of crucial importance (Wezel and Jorna, 2006). Although organization of primary production processes get a lot of attention in literature, the way in which planning processes are, or should be organized, does not get a lot of attention. There is no one best way to measure the quality of a planning process. When the process consists of several different planning aspects it becomes even more difficult. Each separate planning part has its own specific interests that do not always meet and cooperate to achieve one single goal.

Each organization should create a quality definition based on the requirements of its customer. The definition should be a reflection of the types of tasks involved and requirements and expectations of the customers (Kazan at al, 2006). In literature, there is no unambiguous definition of ‘planning quality’. It is not clear whether it involves the planning process as a function in the organization, or involves the results, the outcomes or the plan. Neither are there keystones for insights in the factors within an organization that influence the quality of the planning, in both a positive or negative way.

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dimensions, are used by several other authors. The importance of each of these performance dimensions is indicated by the operations strategy, that has to be integrated with the behavior of the people that have to achieve the operational performance at the operational level (Wijngaard et al, 2006). The influence of these operational processes on the performance dimensions of Slack is considerable. To determine this performance, a series of steps have to be taken. The condition of generic processes can be modeled and analyzed by performance indicators. Therefore, the first of these steps is to determine what performance indicators are used. In a next step, the quality of the performance criteria needs to be determined; this is done by analyzing to what extend the criteria are derived from the strategy and how the strategy is implemented. In the following sections, literature is reviewed, that is useful to go through these steps.

3.3 Development of key performance indicators

Companies are facing a challenge to develop KPI’s that provide a holistic and balanced view of the business. Although there are hundreds of metrics, they have to make a selection of the ones that are the most meaningful. An often made mistake is that KPI’s are designed to please the wrong people (Davidson, 2006), it is critical to the design of good KPI’s to gain an understanding of the needs of a range of stakeholders, both internal and external. Once these needs are clear, the next step is to measure only the few critical things, not everything. It will often occur that a KPI will cut across two or more departments, this implies that managers might have to cooperate with each other, to achieve a common goal.

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According to Bauer it can be an approach to think of individual KPI’s not just as a singular metric, but as a balanced metric that incorporates several alternative dimensions, like business perspectives, measurement families and measurement categories. A framework can be created for building KPI’s by overlaying these various dimensions, such a framework can summarize the most critical business drivers.

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Fig.4. KPI Dimension Scheme (Bauer, 2004)

Strategy deployment involves creating goals at the top-most level and cascading them through all layers of the company. According to Vorne (2007) a good KPI should involve the entire team: top management, intermediate management and people on the shop floor.

Every company has its own ideal set of KPI’s for the plant floor. This ideal set of KPIs will be strongly aligned with the company’s strategic objectives and highly actionable by the plant floor employees.

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elements, the title, purpose, what it relates to, the target, formula, frequency, who measures, the data source, who acts on the data and what they do.

3.4 Operations strategy

Minzberg and Waters (1985) developed the definition of strategy as ‘pattern in a stream of decisions’, to operationalize the concept of strategy, namely to provide a tangible basis on which to conduct research into how it forms in organizations. They distinguish deliberate strategies, realized as intended, from emergent strategies, patterns or consistencies realized despite, or in the absence of, intentions. These two concepts, and especially their interplay, have become central themes in their research.

Slack (2004) distinguishes the operations strategy of a company according to the same concepts of deliberate and an emergent strategies, but makes an addition to the influences of resources and the market. The resource influence consists of the operations resources and processes, like transforming and transformed resources, and intangible resources like relationships, knowledge and skills (Slack, 2004). The market influence should reflect the intended market position of the organisation. Rather than to compete for the business of every possible type of customer, it is necessary to identify the most attractive parts of the market which can be served effectively. is the total of market characteristics, the influence of competitors and the performance objectives.

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3.5 Strategy implementation

The alignment of KPI’s with the strategy, mission, vision and objectives of an organization is the key to realizing bottom-line impact (Bauer 2004). Bigler (2001) states that strategy execution will emerge as one of the critical sources of sustainable advantage in the twenty-first century.

According to Johnson(2004), 66% of corporate strategy is never implemented. According to the literature reviewed in the previous sections, this implicates, that for these companies, the performance cannot be determined correctly. The following sections therefore describe literature that focuses on strategy implementation and some barriers that are often faced. If employees lack knowledge about the company’s strategy, it is unlikely that proper implementation will occur, which in turn leads to poor performance. A reason for the low success rate is the lack of an integrated viewpoint (Beer and Eisenstat, 2000). Too many managers are made believe that a well conceived strategy communicated to the organization equals implementation (Beer and Eisenstat, 2000). One of the primary issues for the failures in execution is the lack of a broad conceptual model (Golden Pryor et al, 2007). Although there are many systems available to organizations for strategy formulation, there are relatively few such guides to effectively implement strategy (Aaltonen and Ikavalko, 2002; Braganza and Korac-Kakabadse,2000). Many scholars regret the lack of attention given to strategic implementation (Aaltonen and Ikavalko,2002), because without coherent, aligned implementation even the most superior strategy is useless.

Crittenden and Crittenden (2008) think of strategy implementation as a critical cornerstone and ally in the building of a capable organization. The use of the appropriate levers will be crucial in the development of that organization. They have defined 8 levers that can be divided in two groups. One is based on structures, the other on managerial skills.

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through the structure, with managerial skills as key indicators of the successful or unsuccessful accomplishment of the implementation effort.

The structural levers are:

Actions: Fostering cross-functional integration and company collaboration. Successful strategy implementation requires the input and cooperation of all players within a company, regardless whether the decision has to be taken on the level of corporate strategy, business strategy or functional strategy.

Programs: Instilling organizational learning and continuous improvement practices.

Florida and Goodnight (2005) suggest that a company’s most important asset are the creative thinkers in the firm, its creative capital.

Systems: Installing strategic support systems.

Ross and Weill (2002) suggest that companies that manage their information technology investments successfully will generate 40% higher returns than their competitors.

Policies: Establishing strategy supportive policies.

Strategy supportive policies envelop a collective pattern of day-to-day decisions and actions.

The managerial skills levers are:

Interacting: Exercising of strategic leadership

Key responsibilities of leaders include direction, protection, orientation, managing conflicts, and shaping norms (Heifetz and Laurie, 2001).

Allocating: Understanding when and where to allocate resources

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identifies resources such as physical capital, human capital, and organizational capital.

Monitoring: Tying rewards to achievement

Good work should be rewarded, bad work should be penalized, and executive pay should depend on the entire corporation’s return on equity, which encourages team building (Byrnes, 2006)

Organizing: Strategic shaping of corporate culture

Chatman and Cha (2003) suggest that culture relates strongly to strategic implementation. While an organizational culture is unique to each company, shaping corporate culture requires clearness in content, consistency in nature, and comprehensiveness in coverage. Schein (1996) proposes that there are three different types of cultures in an organization, the internal culture that is based on operational success, engineering culture that drives the core technologies, and executive culture that engages the CEO and immediate subordinates.

They do not suggest that all these eight levers are necessary for a successful strategy implementation, but the identification of the levers allows companies to identify strong and weak points that could impact the implementation process.

3.6 A conceptual model of strategy implementation

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(figure 3. The 5 P’s Paradigm

From Pryor, White and Toombs 1998)

Purpose, these are the elements that constitute the strategic intention of the organization.

Principles, these internal structures are the guiding philosophies, assumptions, or attitudes about how an organization should operate and conduct business. Processes, these external structures involve the physical steps or stages by

which inputs are transformed into outputs.

People, these include employees, customers, suppliers, and others. They are the process owners who perform work that is consistent with the principles and processes of an organization to achieve its purpose.

Performance, these are the metrics, measurements, and expected results that indicate the status of the organization and are used as criteria for strategic control, and ultimately decision making.

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3.7 Barriers to strategy implementation

Beer and Eisenstat (2000) describe mutually reinforcing barriers that block strategy implementation and organizational learning.

Top-down or laissez-faire senior management style Unclear strategy and conflicting priorities

An ineffective senior management team Poor vertical communication

Poor coordination across functions, businesses or borders Inadequate down-the-line leadership skills and development

Each of these barriers individually is troubling, but if they interact, they become a vicious circle from which it is difficult to escape. To explain their interaction, Beer and Eisenstat (2000) group them into three groups: Quality of direction, quality of learning and quality of implementation.

3.8 Summary

This chapter gives an overview of the literature available on the determining of the quality of a planning process. It is a bottom-up description of the design and

implementation of a planning quality measurement method. After a clarification of the choice for the focus on the three departments in the first section, the second section describes earlier research to determine one best way for planning quality

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defined formula and source of data, is designed by Neely et al. (2007). The latest sections in this chapter focus on different types of strategy, and the importance of strategy execution within companies. Because it appears that in most of the

companies the corporate strategy has not been implemented right, or not at all, the last sections of this chapter focus on the implementation of a strategy. This is done by the framework of Crittenden and Crittenden (2008), and the strategy

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Chapter 4 Analysis planning triangle

The quality of the planning can be determined according to the performance of the planning departments. The performance and the influencing factors can best be determined by analyzing the departments according to the aspects described by Wijngaard et al.(2006), as described in section 3.1. From each of the departments of the planning triangle the actors, their activities, the input and output, the information systems, goals and performance and bottlenecks will be analyzed. By means of this analysis, answers to the sub questions about the communication and input and output of the department as stated in chapter 2 will be given.

4.1 The actors and activities

This section deals with the roles and behavior of the members of the departments. The behavior of actors within the departments is formalized in the planning and control framework, although there are fundamental and practical boundaries on the completeness of behavior formalization. Well educated, trained and motivated employees are crucial to avoid and eliminate the shortcomings of the formal organization and the improvement of production processes and the products. At the departments within the planning triangle, processes are triggered by a customer order. In every department different aspects of the orders are filtered and processed further.

4.1.1 The actors

At the ordering department there are 24 employees that process the orders from the sales centers. Beneath the head of the customer services there is a head of the department. Customer orders are divided in three groups, north, south and international. Each group has a team leader and five account coordinators. And there is a team to coordinate the special orders, that consists of a team leader, five designers and two administrative employees.

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Production planning at APS can be divided in two levels. On the higher level of production capacity planning there is one employee who divided the weekly production capacity over the days of the week. On the lower level of production scheduling the daily production orders are scheduled. This is done by three employees, who all plan their own production department. These departments are metal, finishing and assembly. Although four employees are involved in the production planning on different levels, this research will focus on the higher level production planning, which is done by one employee.

4.1.2 The activities

4.1.2.1 The activities of the ordering department

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Other activities of the ordering department are the acceptation of complaints. All complaints have to be handled and finished to customer satisfaction within 15 workdays according to the service level agreements. These orders always have a priority and material supply has to be consulted to check whether the requested materials are available in time. Other types of orders with a certain kind of rush are mock ups, these are orders from customers who want to have a setup on sight before they place a larger order. Therefore these orders have to be of an outstanding quality and are handled with special care. Order changes, complaints and test installations are priority activities.

The planning of orders has to deal with two characteristic features of planning and control (Schönsleben 2007). The quantitative flexibility of capacity along the time axis, and the flexibility of order due date. At APS the capacity is set in advance, there is not much flexibility. Because a high service level and delivery reliability rate are required, there is no flexibility of the order due date. These are the characteristics of the order oriented finite loading, as many orders as possible are executed on time with low levels of goods in process.

4.1.2.2 The activities of the material supply department

At the material supply department the material resources are ordered at the suppliers for the orders that are released by the ordering department. These materials that have to be ordered are generated as a list from Baan. The materials have to be selected by supplier and an order form has to be send. The supplier sends a confirmation if all materials can be delivered in time. For the backorders, also notifications are send. Other activities of the department are the management of the warehouse. All ordered materials are received in the warehouse. To achieve some efficiency, the employees have the authority to bundle orders to gain quantity discount. Another activity of the employees is the reviewing of the supplier performance. Every supplier has to reach a service level that is agreed.

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reducing setup times, queue times, and lot sizes; and to incrementally revise the operations themselves (Schönsleben 2007).

4.1.2.3 The activities of the production planning department

The capacity that is planned by the ordering department has to be planned in detail by the production planning department. All orders are planned on the Monday by the ordering department, because of material availability. At the production planning department orders are divided over the days of the week. The initial planning is done by computer, capacity around large orders is filled by smaller orders. Only exceptions, like orders that have to be delivered on a specific date are manually planned on that date, all foreign orders are initially planned on the Monday and Tuesday to simplify transport, and orders in the same region are planned on the same day as much as possible. All orders are planned based on assembly hours, the ordering department plans according to the maximum available number of hours per week. But because there is not a strict mix of hours per order, there can be differences between the actual hours of the metal department and the finishing department.

The production planning has to deal with the same characteristics as at the ordering department. An inflexible order due date and low capacity flexibility, are both characteristics of an order oriented finite loading technique. Literature assumes that the planning is done by means of a computerized algorithm (Schönsleben 2007). At APS planning activities are mainly done by computer, the exceptions are planned by hand.

4.2 Input - output

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The Material Supply department receives the materials to order from the orders released by the ordering department. Once the orders are placed at the suppliers, they receive a confirmation. The output are the purchase orders to the suppliers. The input of the production planning department are the planned orders for a week. All orders, except the orders that have to be delivered on a specific day, are planned in on the first day of the week. The output of the production planning department is the same list of orders, except that these orders are specified to the day of the week they have to be finished.

In case of situations that do not comply to the standard procedures, and consultation between the departments is required, there is other input and output between the departments. Most often in these situations the output is a request from the order planning department to the material supply and production planning to agree on the acceptation of a rush order or an order change. These requests are emails with order details, mostly the final decision is made during a phone call. Request for rush orders from the production departments are also often placed by email or telephone at the material supply department.

4.3 Information systems

After describing when departments communicate with each other in section 4.1, this section will focus on the information systems used for interdepartmental communication.

4.3.1 Systems used per department

Orders arrive at the ordering department overnight in the Baan system, this system filters the orders that do not comply with the delivery standards. These orders are processed by the employees, after consulting with the material supply and production planning department, the order is entered into the Baan system with the agreed production date.

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The base for all information at the production planning is the Baan system, reports are created by Crystal reports and self-designed Access applications. The definite order planning is entered in the Baan system. The following departments of metal and finishing planning can print reports from the Baan system with crystal reports and access applications.

4.3.2 Level of integration

The orders that arrive at the ordering department are processed further automatically by the Baan system, when they comply to the requirements. If there are problems with delivery times and the orders are processed manually, they are imported in Baan. Once the orders are processed by Baan the materials that have to be ordered are derived from Baan by Crystal Reports. The material supply department has to transform the Crystal reports into order forms.

The rough order planning from the ordering department has to be derived from the Baan system by means of Crystal reports. This has to be done manually, for more detailed information a self designed access application can be used to get a specification of the hours per production department per order.

4.3.3 Transaction processing

The idea of the application of an ERP system is to integrate information, and allow everyone involved in the flow of goods to make decisions based on the latest and best information from everyone else, as well upstream as downstream (Davenport and Brooks, 2004). The costs of internal transactions decrease by using an ERP system, and cross functional management is made possible in a large scale. A lack of information integration causes the hand-offs from one department to the other to be far from smooth.

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Baan again to make it available for metal and finishing planning. Material supply uses the information to place orders at the suppliers. The ERP system at APS contains all data that has to be derived manually by means of a Crystal reports report or an Access application report.

4.3.4 Decision support

Supply chain management problems are mostly not that rigid and well defined that they can be delegated entirely to computers (Simchi-Levi et al. 2003). Although human characteristics like flexibility, intuition, and wisdom are essential to manage the systems effectively, there a many aspects of these systems that can only be analyzed and understood effectively with the help of a computer. This type of assistance is provided by decision support systems. These systems store relevant information, process it and present it in such a way as to be appropriate to the decision being made (Slack, 2004). It supports managers by helping them to understand the nature of decisions and their consequences, although it does not make the decision itself. A decision support system consists of three major components: The input databases and parameters, the analytical tools, and the presentation mechanism.

For all departments throughout APS, the input databases and parameters are in the Baan system. As soon as the customer order arrives at APS in a night batch from Triton, de order data is converted to Baan databases. Although several programs are used to generate reports like Crystal Reports and self-developed access-applications, the input is data from the Baan system.

At the ordering department the analytical tools are the reports with order details. On these reports the order data that do not comply to the standard agreements are printed in bold.

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implies strategic and tactical decision making. The material supply department focuses on operational activities only. The strategic and tactical decisions are made at the purchase department. The purchasing department makes up the contracts with the suppliers, in which the prices and delivery times are agreed. Since the tasks of the material supply department are all operational, there are not many decisions to make. Reports with materials to order are generated, and orders are placed according to these reports. There is no decision support system used, because there are no decisions to make.

The production planner generates reports from Baan, with all orders that have to be scheduled in during a week. A first step in the scheduling is made by the system. The next step is to reschedule the orders that have to be delivered on a specific day. Because this disturbs the total schedule, some orders have to be rescheduled to equally balance the load of the departments over the week. In these reports the system already suggests which orders could be best rescheduled to create the most desirable results. This system does not consider the small orders to fill up minor capacities. Often the planner neglects the advice of the system and makes his own optimal planning.

4.4 Goals and performance 4.4.1 Objectives

The objectives of the departments within the planning triangle can best be defined according to the performance objectives from Slack (2004), as described in section 3.2. From the employees’ point of view, the most important objectives for each of the departments are:

Ordering:

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• Dependability, orders can only be accepted if all resources appear to be available in time, so the customer can depend the order to be delivered in time.

• Flexibility, order changes and rush orders have to be planned in between the regular orders.

Material Supply:

• Dependability, materials have to be available in time to be able to start production.

• Speed, because of many exceptions from standard orders, many materials have to be delivered within agreed delivery time with supplier

• Flexibility, order changes and rush orders require materials to be available Production planning:

• Quality, the planning of orders has to be equally divided over the days of the week

• Flexibility, rush order have to be planned in after the initial planning is finished

In the following chapter, there will be analysis what key performance indicators are analyzed to measure to what extend these objectives are achieved. According to the literature described in the previous chapter, the objectives should be derived from the strategy, and the key performance indicators to measure them, should be designed according to the strategy.

4.4.2 Conflicting interests

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conflicting criteria in making decisions, which can result in solutions that are less than the optimum for the overall chain.

Production companies are increasingly confronted with higher market demands in terms of flexibility and delivery reliability and are therefore, forced to place a high priority on being customer oriented (Welker and de Vries, 2005). As a consequence, companies must focus on producing and delivering products that meet the exact requirements of customers as quickly as possible. At the same time, however, companies need to remain efficient as well.

To find a good balance between the internal and external objectives, the ordering process plays an important role. This department is the barrier between the sales centre and the production departments. Although the ordering department agrees that the standard rules that are set have to be obeyed, it also wants to satisfy the customer demands by increasing delivery times, while the material supply planning department wants the standard delivery time to be maintained to be able to have the requested materials available in time, and the production planning department wants to plan the orders according to a standard workload per day, in case of rush orders this load is often exceeded.

4.5 Problems

This section describes problems within and between the departments within the planning triangle. These problems can be a barrier for the cooperation between the departments, which will have an effect on the quality of their planning.

4.5.1 Within departments

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throughout the entire week it is easier to plan a routing and the mechanics have their activities more equally divided over the week.

At the material supply department employees have their own working methods. Over the years they have got used to these methods although they might not be the most efficient. Another point of interest is the inventory management, some decisions regarding the level of inventory have to be analyzed critically.

4.5.2 Between departments

To increase the service level, delivery times have to be shortened. It appears that delivery times can be reduced if materials are available sooner. The minimum delivery time of APS is 4 weeks, three weeks before delivery the production planning is made, this implies that materials have to be ordered before the production of the order is planned. The actual departmental planning of the orders is done one week in advance of delivery. Order changes and rush orders can be relatively easy scheduled in until this moment. A condition for achievability of these orders are the availability of materials. Therefore the material supply planning has a crucial role in increasing the service level.

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problems in planning. The transport of orders is combined within a region, to minimize the total distance to drive.

Problems in production are often caused by materials that are not available in time, sometimes a notification has been received from the material supply department. Reasons for these shortages can be a failure in the ordering (wrong materials ordered) or a supplier that does not deliver according to the agreements.

4.6 Summary

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Chapter 5 Performance measurement

After analyzing the processes at the departments and the influences the employees have on the performance in the previous chapter, this chapter will focus on the desired performance as it is described in the mission and vision of Royal Ahrend NV and APS, and the performance measurement methods that are applied at APS. The sub questions with respect to the status quo/actual situation will be answered in this chapter.

The quality of their planning can be determined as their overall performance and their performance as individual departments. According to Davidson (2006), KPI’s to measure the performance can be derived from the strategy, from which the mission and vision are derived. These are translated into objectives that are translated into KPI’s. To find out whether the performance measurement tools at APS stroke with the strategy, the aspects Davidson describes will be analyzed. The first step is to analyze the strategy. As a part of Ahrend NV, it can be expected that the strategy of APS is derived and strongly related to the strategy of Ahrend NV.

5.1 Ahrend NV

5.1.1 Strategy of Ahrend

Ahrend has made up a long term strategy. This strategy for the following years is described in a long term plan. For the years 2007-2010 the mission and vision are described, as well as the long term strategy and the financial goals.

An important development in the international office furniture market is the rise of number of large organizations who desire worldwide delivery of furniture and related products and services. Ahrend has several ‘global accounts’ that want to be delivered worldwide.

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A third market characteristic is that office furnishers are strongly influenced by global economic conditions.

To be able to respond to these market characteristics, Ahrend has defined five spearheads for her strategy.

1. Internationalization

Ahrend wants to expand her activities to other parts of the world because of a number of factors, including the growing international interest in functional, timeless Dutch design. Because of this international expansion an increasing percentage of the turnover is realized beyond the Dutch borders.

Priorities for 2008 are to intensify the contacts with partners and dealers in all countries where Ahrend is active. Ahrend keeps searching for local partners with a strong distribution infrastructure and good knowledge of the local markets, language and culture. With these partners, Ahrend can corporate to offer Ahrend products aimed at the upper middle and top segments of the market.

2. Targeting specific market segments

Ahrend achieved further growth in her market share in 2007 through a disciplined approach to certain well defined high opportunity market segments such as commercial, government, education and healthcare. Ahrend shares with her customers in the creative thought process that translates segment requirements into office interiors that enhances job satisfaction and productivity. Ahrend can select the right conceptual approach of analysis of core activities, processes and corporate culture that leads to innovative furnishing advice tailored to the customer’s needs, starting out from the customer’s wishes. Direct marketing and internet applications are playing a role of increasing importance in making contact with small and medium enterprises in particular.

3. Ahrend Facility Care

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increases by prolonging the life of the furniture, cutting customer’s costs and offering a one-stop shop for interior products and services.

4. Socially responsible sustainability

Ahrend’s ambition is to be the European leader in corporate social responsibility in her brand of industry. Ahrend has been working hard to develop an integral approach to sustainability in a business context, during recent years. Every business process has to be analyzed to determine its contribution to the so called three P’s of corporate social responsibility; People, planet and profit.

5. Improving the flexibility of the cost structure

The market Ahrend operates in knows many fluctuations. Production needs to be able to adapt to fluctuations in the market-requirements, without the problems with the high structural cost during down-turns in the cycle. Cost structure is made as flexible as possible by working with skilled temporary staff and by outsourcing certain activities. This allows a cut in labor, assembly and transport costs.

5.1.2 Mission

The strategy is translated into a mission and a vision for Ahrend NV.

Ahrend intends to become an international top player for the working environment. They want to find a balance between advisory, full service and furniture that combine high-quality and timeless design with functionality, ergonomics and quality. By listening carefully to the customers and constantly learning they want to develop themselves to experts of the working environment. This will enable them to find out what organizations and employees need in order to perform successfully, now and in the future. By offering a set of bright furnishing advices and office furniture, the required working environment will be realized. They can take over all concerns from the customers in business, education, healthcare and government.

Ahrend has defined this mission as follows:

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5.1.3 Vision

The vision of Ahrend NV is based on ongoing change.

The market Ahrend is engaged to, is constantly moving. Organizations in these environments have to adapt continuously to be able to focus on the changing customer requirements. Flexibility is of crucial importance for organizations to survive.

To achieve a certain level of flexibility, employees are an important link. People need to feel comfortable at their work to function effective and optimal. A good working environment creates the conditions for the employees to stimulate and inspire each other. Inspiration provides energy to perform in an optimal way.

Every organization has its own culture, structure, procedures, routines, and rules that constantly have to be adapted to the changing customer requirements.

Ahrend listens to these requirements, and contemplates these developments and challenges of their customers. Focus is on work processes within the organization and space required for growth. This gives the opportunity to offer durable solutions for office environments.

Goal of offering these solutions is to make the customers comfortable, so they can focus on their core business. This requires a strong individual, customer oriented approach. Ahrend employees are the most important ambassadors of this approach and philosophy.

A good work environment requires a focus on as well headlines as details. Everything has to be adjusted to the requirements of organizations and their employees to make the job as pleasant and efficient as possible.

5.2 APS

5.2.1 Strategy of APS

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5.2.2 Mission

The mission of APS is derived from the mission of Ahrend,

“APS’s intention is to be able to fulfill the intentions of Ahrend NV as much as possible.”

APS’s mission is directly derived from the mission of Ahrend, with the difference that APS specifically focuses on customer satisfaction. This customer satisfaction is to be achieved by providing products and services to these customers, that meet the requirements.

APS intends to become expert in customer satisfaction, as well for products as services, by listening carefully to the end customers, and by constantly learning. This will enable them to find out what they need as organization and employees in order to perform successfully, now and in the future.

5.2.3 Vision

APS almost has the same vision as Ahrend NV, they only have extended it.

The market in which Ahrend operates is constantly evolving. Organizations must continually adapt in order to satisfy the changing needs of their customers; flexibility is of vital importance.

APS has summarized this vision. “To think like the customer”

Extensions to the vision of Ahrend NV are that competition from all over the world is rapidly growing, and turnkey solutions are becoming of greater importance.

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Innovation activities involve both products and services, by means of the development/leverage of products based in market need and Ahrend design and the development of production/assembly solutions with a high degree of added value. The main operations activities of Ahrend are the production and assembly of products with a high degree of flexibility and speed.

The customer support activities are the delivery and installation of products and services based on a high level of customer satisfaction.

For the year 2010 APS has set several goals. After a decrease in the last years, turnover should increase to XXX million Euros, the EBIT should be about XXX million Euros. Employee satisfaction should increase and new MVO projects (environmental responsible activities) should have started.

5.3 Summary

From the strategy, mission and vision of as well Ahrend NV and APS follows that there is a focus on quality and flexibility. In the following sections the performance measurement criteria of the departments in the planning triangle will be analyzed. The focus on quality and flexibility should come back in the performance measurements. During this research many events have taken place on a global scale, that have also affected Ahrend NV and APS. Because of increasing economic uncertainties, Ahrend NV and APS have seen their number of orders decrease. A special focus is now on cost reduction, on every level of the organization.

5.4 Performance measurement per department

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According to Neely (1993), the measurement of performance is the process of quantifying action, where measurement means the process of quantification and the performance of the operation is assumed to derive from actions taken by its management. An important definition of performance is here the degree to which an operation fulfills the five performance objectives at any point in time, in order to satisfy its customers.

Academics and practitioners agree that the design of performance measurement systems appropriate for modern manufacturing systems is a topic of increasing concern(Neely,1997). Skinner (1974) amongst others, complaints that the tendency within many companies is to evaluate manufacturing primarily on the basis of cost and efficiency. Kaplan and Norton (1992) argue that this problem can be overcome if a firm adopts a balanced scorecard. This scorecard not only focuses on the financial perspective, but also on the internal business, customer, and innovation and learning perspective.

A good set of indicators has to meet a set of requirements:

Validity. It needs to have sufficient connection to the targets of the process. Enough sensitivity in case of fluctuations.

Enough specificity. Defined explicitly.

Enough measured variables over a period of time that have to be available quickly.

Efficient and inexpensive to measure. Enough influence by organization Accepted and carried by employees.

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5.4.1 Ordering

Performance of the ordering department is measured by the percentage of orders that meet specific criteria. Their main activity is the acceptation of orders, by specifying the criteria an order meets, the performance of the employees can be measured.

The Key performance indicators defined for the ordering department are: • Number of orders that have to be delivered on a specific day. • Number of rush orders.

• Profit margins on special work. • Service level agreement. • Customer complaints. 5.4.2 Production planning

The main task of the production planning department is planning the orders in a way that the production is occupied in a constant way and delivery criteria of the customers are met.

Performance measurement of the Production planning department is based on the flattening and smoothing of the planning over the days of the week.

Targets for the Production planning are not given, main concern is to schedule the customer orders in a continuous way.

5.4.3 Material supply planning

The performance of the material supply planning depends for an important part on the inventory management. The regular orders can be delivered because of strict ABCD classification management.

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The key performance indicators are: • Delivery dependability

• Backlog

• Inventory dependability department • Inventory quantity purchase parts • Inventory with high risk of unsalability • Illness

• Percentage of purchase parts that are taken of the distribution route

Although the parameters have been created recently, it appears that there is no structural attention and maintenance for these key performance indicators.

A Key performance indicator that is used and managed on a more regular base is the Supplier control system. For this Key performance indicator, several aspects of the supplier relation and performance are monitored. The supplier control system is useful to determine the dependability of the material supply department performance in an indirect way.

Targets for the Material supply planning are not defined. The number of backlogs should be minimized.

5.4.4 Performance measurement between departments

Between the departments of the planning triangle, performance is measured, by determining the quality of the output that functions as an input for the following department.

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As a performance measurement between the ordering and the production planning department, the number of orders that have to be delivered on a specific day in the delivery week is used. These orders make the planning of orders for the production planning more difficult.

5.4.5 Summary

Analysis of the key performance indicators and interviews with the group leaders of the departments of the planning triangle have pointed out that the strategy of APS has not been translated into specific objectives for the departments. This implies that the KPI’s that are determined for the departments do not have the goal to determine to what extend the objectives are realized.

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Chapter 6 Design of key performance indicators

6.1 Deliberate and emergent strategy

The strategy of an organization consists of several elements. The most important element of the strategy of an organization is the top-down implementation of the mission, vision and goals of the management. These three elements are translated into a corporate and a business strategy.

In the previous chapter, the corporate strategy, which is the strategy of Ahrend N.V., and the official business strategy, which is the strategy of APS that is derived from the corporate strategy, were described. The business strategy is officially focused on quality and flexibility. Customer satisfaction has the highest priority. In practice, changes in the environmental situations of APS force the management to frequently revise the strategy. Recently, the initial strategic focus on flexibility and quality, changed to a focus on costs. It appeared that the top-down strategy at APS has not been clearly defined and communicated throughout the organization.

Beside this deliberate strategy, the operations strategy of an organization is influenced by an emergent strategy. This bottom-up strategy, that is realized despite, or in the absence of intentions (Mintzberg and Waters, 1985), is the emergent sense of what the strategy should be, based on operational experience. This operational experience has a market influence and a resource influence.

The existence of an emergent strategy can be very useful to translate the mission, vision and goals of the management into clear operational goals, but for the long term management of an organization, a deliberate strategy is required.

Minzberg et al. (1998) argue that deliberate strategy is associated with managerial control and is aimed at ‘ensuring that managerial intentions are realized in action’, while emergent strategy emphasizes ‘coming to understand through the taking of actions what those intentions should be in the first place’.