Lifting Efficiency and Flexibility

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The Optimisation of the Inbound Transportation Efficiency and Flexibility at Eldon NV

Dirk Muilwijk

University of Groningen

Faculty of Management and Organization Specialization Operations and Supply Chains November 26, 2007

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Lifting Efficiency and Flexibility

The Optimisation of the Inbound Transportation Efficiency and Flexibility at Eldon NV

Author Dirk Cornelis Muilwijk

Student number 1582992

University University of Groningen (Rijksuniversiteit Groningen, RUG)

Faculty Management and Organisation

Program Master of Business Administration (MscBA) Specialisation Operations and Supply Chains

First Supervisor Dr. G.C. Ruël

Second Supervisor Prof. Dr. J. Wijngaard

Company Eldon NV

Location Drachten, the Netherlands

Company Supervisors Dhr. L. Kunst Dhr. B. Reinders

Date 26 November 2007

Place Groningen, the Netherlands

Version Final

The author is responsible for the contents of the report The copyrights of the report are with the author

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Preface

One of the most effective strategies for getting fleet users to pay attention to fleet utilisation is to quantify and publicise how much they use their vehicles and equipment.

P.T. Lauria – Effective strategies for increasing fleet utilization (2003). Before you lies the final report of my Business Administration Master study at the Rijksuniversiteit Groningen. Before attention is paid to the fleet utilisation of Eldon NV I would like to express gratitude towards the people who helped me during the project.

In the first place I thank my first supervisor at the university, Gwenny Ruël, for her perception, advice, and her persistent effort to get a clear and correct conceptual model for this thesis. At the same university I would like to thank my second supervisor, Jacob Wijngaard, for reading and commenting upon the conceptual and final version of my report.

Secondly I would like to express my thanks to the people of Eldon NV, and above all the logistics manager, Luc Kunst, and the production manager, Bertus Reinders. Next to the offered possibility to perform my research at their company, I am grateful for their time, advice and belief during the project.

Thirdly I would like to thank two logistics suppliers, being Arnoud de Boer of Jungheinrich and Jan van der Wal of Toyota Material Handling Nederland (former BT) for their advice and their help in getting benchmarks and reliable data.

Furthermore I would like to mention the proof-reading of my father and two friends, Hans Ritsema and Martijn Pronk. Thank you for your support and suggestions.

Finally, in general I would like to thank my family for their support during the complete study.

November 2007, Dirk Cornelis Muilwijk

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Management Summary

A lot of companies appear to have no clue about the efficient utilisation of their internal fleet and warehouse. Together with the often-missing overview of related costs, this leads to needless standstills and ad hoc decisions. Often inevitable consequences are problems concerning the reliability of the internal logistics process and missed opportunities as to cost efficiency.

‘Ophef’, 3rd edition 2007 (translated)1 Becoming aware of this missing overview and the opportunities concerning the inbound transportation situation at Eldon NV resulted in the need for this research. On the basis of the thesis objective, formulated underneath, the research is performed: Provide Eldon Drachten with clear steps and recommendations on how to control and optimise the efficiency and flexibility of their inbound transportation process, based on a still-to-create overview of the actual materials management situation.

A comprehensive analysis of the actual inbound transportation situation lead to the identification and classification of several problems that to some extent have an effect on the efficiency and flexibility of the inbound transportation at Eldon NV. Underneath per level the main issues are indicated.

• Company level: growing business, priority other project

• Materials management level: lack of overview, no records of utilisation • Data flow: high number of parties involved, no central data storage • Material flow: blocked aisles, bad state of floors

• Truck level: high damage risk, low utilisation.

These different problems resulted in the first recommendation to make use of an Action plan in order to tackle the subject step by step. This Action Plan can be derived from the Research model, presented in paragraph 2.5. This model indicates the topics of the main steps of the thesis: a materials management analysis, a cost analysis, and several discussion plans resulting in final recommendations. Included in the model is also the evaluation of the different steps during the complete process in order to take all elements into consideration. The installation of the recommendations addressed in the discussion plans falls outside the boundaries of this report.

In the first step, being the analysis of the materials management situation, the material and data flows are discussed, indicating the characteristics of the five halls. Next to that, two separate sub-chapters discuss the different materials and products, and the used material handling systems. In these five halls 22 trucks are used, next to numerous roller conveyors. The fleet hereby consists of trucks with diverse characteristics concerning the truck type, date of construction, and other features. The second main step analyses the total cost of owning this fleet of 22 trucks. The resulting overview addresses the direct and indirect costs of the three phases of the Total Cost of Ownership concept, being ‘acquisition’, ‘utilisation’ and ‘sales/ discard’. When looking at the sum of the three phases of the total cost of ownership concept it can be concluded that in the year 2007 €32.413 per month has been spend; on the basis of the first seven months. This is an increase of €2.562 per month when comparing this with the total inbound transportation costs of 2006 (€29.850). Main reason for this raise is the increase in the monthly acquisition costs with €3.000. Due to the renewal of part of the fleet and some truck parts, the costs caused by breakdowns and damage issues decreased with more than €1.000 per month.

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http://www.ophef.nl/index.php?page=XArchief & http://www.ophef.nl/images/Adv%20Quickscan.pdf Ma

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As part of the utilisation phase the actual load is compared to the theoretical capacity. With the help of a measurement tool, all movements have been measured. This resulted in an average percentage of almost 52% the rental truck was logged in during the nine-day test period in the finished products warehouses. As this percentage still includes the time the truck is standing still between the different handlings the average utilisation percentage for the complete fleet is about 30%. Founded on the improved overview of the inbound transportation situation and costs the last main step concentrates on the discussion of recommendation plans in the areas of Damage prevention/ control, Lean Manufacturing & Optimal order picking, Fleet/ vehicle rightsizing, and Service logistics suppliers.

The first area, bringing up the prevention and control of damage, proposes solutions for the drivers and trucks as well as the work space. Solutions for the work space entail the levelling of the floors and the improvement of safety and visibility, next to an optimal solution for the arrangement of one or more charge locations. The other recommendations aim at truck ergonomics, regular inspections, training, the use of limited truck access and fixed drivers.

The second area of the final discussion plan deals with the focus on lean manufacturing and optimal order picking. The lean approach in this report comes down to the removal of most of the pallet racks on the production floor. Instead of this additional storage the material flow is based on the demand of a particular production tool, leading to a reduction in the use of internal transport. On the other hand, the optimal order picking solution, next to the minimisation of blocked aisles, focuses on the picking of combined orders instead of the single-order picking method.

The third recommendation area, addressing the right size and characteristics of the internal fleet, primarily aims at the reduction of the number of trucks from 22 to17. Most important adjustment to accomplish this step is the discard or sales of 13 trucks of the fleet. Subsequently it is recommended to increase the fleet with 8 new and qualified trucks, including two order pickers; a truck type not yet used at Eldon NV. Finally, the last area of recommendations tackles the efficiency and flexibility of the service provided by the different logistics suppliers. The two explained recommendations aim at the reduction of the number suppliers involved from nine to one or two, and the selection of an all-in-one inbound transportation package. This package includes the acquisition of trucks and batteries, maintenance and inspection, insurance, and if available driver trainings and the installation of load stations.

In order to make optimal use of these recommendations also an effective internal data flow is needed. This implies the selection of a central contact and data storage point for the entire inbound transportation process of the company. On the basis of good communication between the contact point, the drivers, and the logistics and production manager (in case when not selected as contact point) the situation can be controlled in a better way.

Finally, when looking at the effects of the recommendations it is estimated that Eldon NV will have initial project costs of between €12.000 and €42.000, depending on the type of loading station. Part of this amount can be covered by the estimated residual value of between €15.000 and €20.000 for the 13 trucks.

The approximate full service operational lease costs will be between €6.000 and €8.000 per month. This amount includes maintenance and inspection costs, leading to the almost complete elimination of this expense (except for own risk and mistreatment). In the author’s eyes, a goal of Eldon NV should be to raise the utilisation level to above 50% during the first year, when making use of the renewed inbound transportation situation.

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1. Introduction – Eldon NV

This chapter shortly introduces the company at which the research is performed, Eldon N.V. In the first place a look will be taken at the past and present situation of the whole group. Hereafter the focus will be on Eldon Drachten, as this is the branch where all data will be obtained and subsequently solutions will be aimed at.

1.1 History of the Group

The Eldon Group finds its origin in the Swedish village Nässjö. In 1922 the young couple Karin and Josef Johansson founded their own company "Elektro Ljus & Kraft". Their main target: aiding the people in the area of Nässjö with electrical installations. The first 25 years Elektro Ljus & Kraft was steadily growing. In the early forties one of their inventions, a junction box for electrical ovens, gave the key for the future course of the company. In the following years production became more important and electricians took over the installation activities.

The success of the junction box in the early forties was followed by new products, named ‘Eldon’, which is Swedish for electrical equipment. After the introduction of the first production facility in 1948 that term was chosen to be the international company name: AB Eldon-Verken. Due to the focus on expansion Eldon relocated its plant in Spain and moreover in 1963 it took over their competitor Elektriska AB John Osterman. The take over resulted in an almost complete monopoly of the Swedish market regarding the production of fuse panels, meter cupboards, etc.

In 1967 the Eldon-Osterman companies were united in the general name Eldon AB. Driving force behind this fusion was Gunnar Randholm, son of the founders who had changed his surname to Randholm. He broadened Eldon's horizon to far outside the Swedish borders and remodelled the company into the strategically diversified company, as it is known to date.

The mid-sixties showed a serious expansion to the foreign market. Several daughter-companies were established within Europe to sell the Eldon-products, which resulted in gaining a market sector in various countries. In the seventies Eldon had conquered a firm part of the European market and started a production unit in Belgium and the Netherlands.

In 1986 the international sales results were, for the first time, higher than the Swedish, while only in 1992 the amount of foreign employees passed the 50% mark. In order to save the company from bankruptcy, in 1999 Eldon AB was acquired by EQT Partners AB. An important investment plan was put into action with the aim to modernize the manufacturing units with highly automated production equipment. Despite all investments in 2003 another reorganization was needed to get the company on the right track. After these years of trouble and negative results in 2005 the company resumed to make profits.

1.2 Present Situation

Nowadays the core business of Eldon is developing, manufacturing and selling enclosures and electrical distribution systems, which includes products like enclosures, switchgear, electronic and electrical distribution systems.

The products are manufactured at four plants in four countries (England, Holland, Romania and Spain), with each plant responsible for a specific product area.

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Next to that the Eldon Group has 8 Sales Companies and registered agents all over the world, adding up to about 430 people Employed.

The mission of the Group is the following:

To achieve profitable growth by becoming the preferred supplier for Panel Builders, Installers, OEMs, Distributors and End Users in our targeted markets, by being the easiest supplier to do business with.

This is done by constantly researching, developing, improving and renewing all products and processes in order to meet the specific customers' requirements, thereby focusing on high quality, 'easy to use', product solutions.

1.3 Eldon Drachten

When Eldon started its expansion plan, Drachten was selected to be the first out-of-Sweden factory. Since then, Eldon has invested continuously and today Drachten is the centre for manufacturing the complete range of our First Class floor-standing enclosure MULTI-FLEX® (220 – 240 enclosures a day). Since the introduction of the ERP system, Movex, the branch functions as a central store and distribution centre of the Group. From here the standard products can be delivered to the Netherlands, Belgium (NL) and Germany within 24 hours. Belgium (FR), Luxemburg, France and Denmark can be reached within two days.

Table I – Company figures 2006

Turnover 2006 €30M

Annual Production Output (Units) 49673

FTEs 131

With an expected growth of the turnover to 36,5M and the annual production output to 51000 units the company will be growing significantly this year. These increasing results have lead to a considerable growth in the number of employees, which is conform to the trend in the logistics departments throughout the Netherlands2. Furthermore the establishment of the new production facility in Romania can be seen as a reaction to further growth.

As to competition, Eldon can be seen as the second major player (12%) in a market dominated by Rittal (52%). With a focus on further growth in the upcoming years, next to delivering high quality products, amongst other aspects, delivery reliability and the minimization of (preventable) cost are of essential importance.3 A study focused on the efficiency and flexibility of inbound transportation hereby can be seen as a major step towards this company goal.

Figure I – Eldon and the Competition

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21% of the companies need more logistics employees in 2007 (LLS 2006)

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Eldon Drachten - Sales Presentation January 2007 Intr

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2. Research Design

After the general introduction of the present situation, this chapter deals with Eldon Drachten as problem owner. In six paragraphs the design of this research will be presented, starting with the Motive that initiated the process. The Problem Analysis, Objective and Research Questions will further define the problem area and the direction of this thesis. The Research Model and Data Collection eventually indicate the way in which the research will be performed.

2.1 Research Motive Eldon NV

Based on the idea of the continuous improvements discussed in the Sales Presentation January 2007, one of the goals of the Logistics Department of Eldon Drachten this year will be to look at internal transportation costs and damage. This topic, broached by the Logistics Manager, resulted from a feeling that maintenance frequency and cost were getting too high. The high number of damage issues and the lateness in ascertaining truck and battery problems are seen as the main reasons for this problem. The lack of an overview and measurements to prove this feeling, next to the wish for one addressing point in the company, resulted in the need for a student to look at the inbound transportation process at Eldon NV.

2.2 Problem Analysis

In this paragraph will be clarified how the motive of Eldon Drachten will result in a researchable topic. In the first place the problem owner of this research will be introduced. Subsequently, on the basis of a diagnosis of the actual company and materials management situation, the reasons for this particular research will be stressed, resulting in the chosen direction of this research. Finally, conditions the research needs to comply with will be pointed out.

This research will be performed for Eldon Drachten. Due to the fact that the management and use of the inbound transportation is to a large extent scattered over the Logistics and Production Department the research has more than one problem owner. In this case the problem owners are the Logistics Manager and the Production Manager at Eldon Drachten. A third party greatly affected by this research will be the administration office of the company.

Based on the research motive introduced by these problem owners, an analysis of the inbound transportation process has been performed, in order to ascertain the need for a research and to identify the major causes of this problem. The use of several interviews, questionnaires and own observations has resulted in the model shown in figure II on the next page.

The model should be read from bottom to top, as shown by the arrow in the centre. This implies that the problems in the lower levels can be seen as the causes for the problems that are more inbound transportation-specific, in the top levels. The use of financial leases, for example, is mainly caused by the red figures before the start of the recent business growth. In the different levels the most significant problems are shown in a bold and blue-lined box.

The first level, named the ‘company level’ covers, in the first place, the priority of the core process and other projects. Principally, due to the growing business in recent years, inbound transportation has not been in the picture. Two other problems that have to be taken into account are the departmental focus and the high number of job movements during the last years; two factors, above all, complicating communication. These four problems are the basis for the more specific issues in the levels above.

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The second and third level, part of ‘materials management level’, discuss the problems concerning the inbound transportation data and material flow. Central in these two levels are the lack of overview and missing control, and the fact that no utilisation and damage data is recorded. Directly linked to these points are the lack of an action plan and ad hoc decisions regarding inbound transportation. Another significant problem concerning the data flow is the high number of parties involved, which is seen as seen as one of the most significant reasons for the missing overview. Next to that, in this level the lack of communication, the missing internal addressing point and the dispersal of existing data are mentioned as issues to be looked at. Lot of Job movements No priority rules Focus on Department Dispersal of existing data Lack of Communication

High damage risk

- Lack of damage prevention - Old trucks - Drivers without certificate (financial lease ) - Dispersal load stations - Uninsured trucks

Low utilisation

- Number of trucks - Old trucks - Different brands - Alternative use - Technical Functionality - Dedicated use

Difficulties in use ERP

Not one internal addressing point Blocked aisles

Growing Business (After years with red figures)

Priority core process/ other projects Bad state of the floors Truck level Material Flow Data Flow Company Level High number of parties involved

Lack of Overview & Missing control

- No Action Plan - Ad hoc decisions

No records of utilisation and damage causes

M a te ri a ls M a n a g e m e n t L e v e l

Other problems at the third level concern the blocked aisles and bad state of the floors, as well as the lack of priority rules and difficulties in the use of the ERP system. Last-mentioned problem results in inefficiency caused by searching time in case of erroneously indicated pick locations.

Finally, the ‘truck’ level at the top of the model shows the two most specific inbound transportation problems, being the high damage risk and the low utilisation of the actual fleet. The high risk of damages, in the first place, can be concluded from the missing control and prevention of damage and the use of old trucks. Moreover, the use of uninsured trucks and unqualified truck drivers, beside the dispersal of the load locations, contribute to this risk. The threat of dispersed locations is concealed in the fact that in case of problems with a battery it can be difficult to reach or even find the correct location. On the contrary, in case of fire in one of the buildings, all locations should be known and avoided, due to the risk of explosion.

As to the low utilisation of the trucks, this could primarily be improved by looking at the number of trucks and their characteristics (i.e. date of construction, brands, and technical functionality). Moreover, the alternative and dedicated use of the existing fleet are problems that should be taken into consideration.

These two problems of the ‘truck’ level are highly related. An improvement in the prevention of damage can already be a major step in increasing the utilisation of the internal fleet, and vice versa, i.e. a decrease in the alternative use of trucks, can significantly reduce the risk of damages.

Based on the results of this problem analysis, in consultation with the problem owners, has been decided to focus on the efficiency and flexibility of the inbound transportation at Eldon. These two variables mainly aim at the cost and productivity factors of the ‘truck’ and ‘materials management’ levels. A detailed description of the way in which these variables are analysed will be shown in the conceptual model in paragraph 2.4.1.

Figure II – Problem Analysis

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Research Objective

Provide Eldon Drachten with clear steps and recommendations on how to control and optimise the efficiency and flexibility of their inbound transportation process, based on a still-to-create overview of the actual materials management situation. As has become clear in the first part of the problem analysis, this research will discuss a practical problem. In order to assure the quality of this thesis for Eldon NV, the conditions discussed underneath will be tested when reflecting the research.

• Relevant – The first condition will examine whether this thesis has taken into account all company values, interests and data concerning the efficiency and flexibility of inbound transportation at Eldon Drachten. Part of this criterion is fulfilled during the problem analysis.

• Reliable – The second condition assesses the validity of the thesis results. • Executable/ Transferable – The third criterion will discuss whether the results

of the thesis can be implemented. Next to the completeness of the research this includes the total picture of needed resources.

• Understandable – Next to these three points it is of importance to deliver a thesis that is fully understood by the problem owners and the University. Other readers should, if unaware of the practical details, at least, be able to recognise and comprehend the general intention of this thesis.

• Founded (in literature) – The final condition will test the use of primary and secondary data. The degree of this use will indicate whether the thesis can be qualified as unique.

The company motive and the analysed problems concerning inbound transportation in the following sub-chapter will result in the chosen objective for this thesis.

2.3 Research Objective

In order to fully understand the topics of this research a look will be taken at the terms cited in the above-mentioned objective. In the first place, the main topic of this thesis, inbound transportation, in this report is defined as ‘the internal physical movement of goods (raw materials, finished goods, etc.) by means of material handling systems’. Material handling systems4 hereby can be classified as ‘freely moving or fixed devices used to move a large variety of goods horizontally as well as vertically over short and long distances’. As most aspects discussed in the problem analysis concern the efficiency and flexibility of trucks, in this report the main focus will be on the management and use of freely moving material handling systems, often referred to as internal fleet. The management of the internal fleet in this thesis in defined as ‘the long-term focus on optimisation of the economic life of the internal fleet caused by a continuous reduction of the material handling costs and an increased material handling efficiency and flexibility’5.

The next term cited in the objective is optimisation. According to the Nevada Department of Education (2007) this can be seen as the process of seeking the most favourable condition or solution to a goal by balancing the trading-off results on more than one criterion. Optimisation of the economic life, used in the definition of internal fleet management, therefore can be understood as the trade-off between ‘the period of time during which an asset will have economic value’ and ‘its usability’6

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See Appendices II and III for an overview and description of the different material handling systems

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Johnson Lift/ Hyster - http://www.johnson-lift.com/draft2/index.php?C=fleet_management

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Research Questions

On the basis of the created overview of the actual materials management situation, which steps need to be taken in order to control and optimise the inbound transportation efficiency and flexibility?

The following two terms discussed are the research variables of this thesis, inbound transportation efficiency and flexibility. Efficiency, in the first place, is labelled as the degree to which the material handling systems perform their designated functions with the minimum consumption of resources (i.e. man hours, time, energy)7. Secondly, flexibility in this report will be seen as the ‘capacity flexibility’ definition introduced by Morlok and Chang (2004). This is classified as the ability of a transport system to accommodate variations or changes in traffic demand. In this report the variations and changes will to a large extent concern the characteristics of the fleet or a specific truck. Next to that the variations in the different routes are discussed by the optimal routing design. The improvement of these internal flexibility types may be achieved via a degree of external horizontal collaboration. Therefore the last form of flexibility entails the service of the different logistics suppliers. The trade-off existing between the different research variables will be discussed when introducing the conceptual model.

The mentioned part of the objective to provide clear steps and recommendations to Eldon Drachten implies the use of an Inbound Transportation Action Plan. This Action Plan can be derived from the Research model, presented in paragraph 2.5. The steps addressed in the plan will be used to get clarified and founded recommendations. These steps can be used, to a large extent, for similar researches in the field of inbound transportation or related areas (see next paragraph).

All above-mentioned definitions are part of the term covering inbound transportation, materials management8. This term can be defined as the planning and control of the flow of materials that are a part of the inbound logistics system. Next to inbound transportation, this includes procurement, warehousing, production planning, receiving, materials quality control, inventory management and control, and salvage and scrap disposal (Coyle, et al. 2003). During the progress of the research an overview of the actual materials management situation will be created. This will contain a detailed and inclusive picture of the inbound transportation situation and the most relevant interfaces with the other inbound logistics aspects. Next to the present research this improved overview can function as the basis for additional and further research that might be of interest for the company.

2.4 Research Question

In this paragraph the direction and dimension of the research will be discussed. After stating the research question, the conceptual model and research boundaries will depict the exact research area.

Above-mentioned research question needs to be answered in order to meet the research objective. The stated variables that influence the inbound transportation efficiency and flexibility will be discussed in the next paragraph by means of a conceptual model. This will be done with the help of figure III, showing the existing relationships between the variables and the way in which the different parts will be

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Based on definition Software Engineering Institute - http://www.sei.cmu.edu/str/indexes/glossary/

8

Often used synonyms are: ‘Materials Handling’ and ‘Inbound Logistics’ Re

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measured in this thesis. In the final section of this paragraph the scope and research agreements made between Eldon NV, the RuG and the student will classify the boundaries of this research.

2.4.1 Conceptual Model

As indicated, the research is based on the question how Eldon NV should optimise the efficiency and flexibility of their inbound transportation. The conceptual model, shown underneath, hereby provides the depiction on the line of thought used to answer this research question.

Inbound Transportation Efficiency Inbound Transportation Flexibility - / + Damage Prevention & Control C ; T Service Logistics Suppliers C ; T ; D Fleet/ Vehicle Rightsizing C ; T Lean Manufacturing & Optimal Order Picking

C ; T

Efficient and Flexible Acquisition Utilisation Sales/ Discard C ; T C ; P C ; T + + +

‘C’ = Cost; ‘P’ = Productivity; ‘T’ = Time; ‘D’ = Degree of cooperation

Starting at the right side of the model, efficiency and flexibility are seen as the two major aspects of inbound transportation that will be analysed in this thesis. As can be seen from the figure the relation between the efficiency and flexibility of inbound transportation can be seen as a trade-off (+/-). According to Slack, et al. (2004) a trade-off describes the idea that the improvement of one aspect of operations performance comes at the expense of deterioration in another aspect of performance, now substantially modified to include the possibility that in the long term different aspects of the operations performance can be improved simultaneously. The different variables that are part of this trade-off form the remaining part of the conceptual model and, moreover, the body of this thesis.

On the left of this trade-off the two main variables are split up in the efficiency and flexibility of the acquisition, utilisation and sales/ discard phases. These three phases, introduced in the used Total Cost of Ownership concept (Still, 2007) cover the complete lifespan of the different used trucks.

The acquisition and sales/discard phases of this concept address the direct and indirect costs (C) of adjustments in the inbound transportation situation (mainly the composition of the internal fleet). These adjustments, resulting in expenses and some incomes (i.e. residual values), form the basis for the utilisation phase. This most essential phase of the TCO concept is measured by means of cost as well as productivity calculations.

The overview of the efficiency and flexibility of the utilisation, on its turn, affects the acquisition and sales/ discard decisions. This interrelatedness of the three phases

emphasises the need for an inclusive and detailed overview of the complete total cost of ownership (TCO) concept. The variables shown in figures IIIa until IIIc and discussed underneath will be part of this inclusive and detailed overview.

Figure III – Conceptual Model

Acquisition

Direct Costs: Indirect Costs: - Acquisition price - Overhead Costs

- Conveyance & Installation - Optimisation of Infrastructure - Additional Equipment - Minimisation of Extra Investments (-)

- Prolongation Guarantee Period - Environmental Regulations

C ; T

Figure IIIa – Acquisition Phase

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The acquisition phase (figure IIIa shown on the previous page), in the first place, deals with the direct and indirect costs that, except for the minimisation of extra investments, result in an increase of the cost factor of efficiency and flexibility.

The impact of the different costs is measured on the basis of the total costs of the year 2006, next to mutual comparisons on the basis of the truck characteristics (i.e. load, construction date, and speed) and the different cost prices of the logistics suppliers. This last factor includes the differences in the procurement conditions. These conditions embrace the type of acquisition (lease, buy, rent) and, if applicable, the length of this acquisition, and the included services (i.e. conveyance, insurance and training).

Secondly, the phase discussing the utilisation focuses on the costs and productivity of the internal fleet. The productivity measurements entail the calculation of the capacity utilisation and the number of shock registrations of the different trucks as well as the entire internal fleet. These measurements of the use and the breakdown and damage issues result in a better overview of the actual costs. Other criteria to assess the costs of utilisation are the different truck characteristics and the comparison to the total costs of 2006.

Based on the utilisation measurements the decision can be made to sell or discard a specific truck. Sales hereby will result in an incoming value stream, whereas discard could lead to possible extra expenses. The height of the receivings or expenses is determined based on the contractual situation and the truck characteristics, including utilisation details.

At the left side of the model four boxes discussing damage prevention and control, lean manufacturing and optimal order picking, the right fleet and vehicle size (Lauria, 2003), and the service of logistics suppliers are shown. These variables, forming recommendation areas in the body of the thesis, are measured on the basis of the cost involved, the time needed and, in case of the logistics suppliers, the degree of cooperation. The costs aspect hereby assesses the needed expenses to have the optimal efficiency and flexibility. Often resulting in extra costs the factor time analyses, mainly, the time needed to implement, adjust, or remove certain elements the inbound transportation situation. On the other hand, together with the degree of cooperation, the factor time deals with the actual response and level of involvement of Eldon NV and the different logistics suppliers in changing situations. Hereby is presumed that cooperation with a limited number of parties can result in a higher level of flexibility.

The different introduced ways of measuring the efficiency and flexibility of inbound transportation at Eldon NV are in more detail discussed in the theoretical framework and the actual body of the research.

Utilisation

Direct Costs: Indirect Costs: - Company Materials - Damage of Goods - Energy Costs p/h - Accident Handling - Depreciation - Overhead Costs

- Breakdowns & Damage - Interruption of Inbound Logistics - Inspection Costs - Personnel Costs

- Capacity Utilisation - Insurance Costs

C / P

Figure IIIb – Utilisation Phase

Sales / Discard

Direct Costs: Indirect Costs: - Sales Profit/ Prognosis (-) - Discarding (+ / 0)

- Residual Value (-) - Transportation Costs (+)

- Costs of Advance Returns (+) - Overhead Costs (+)

- Unused Equipment(-)

C

Figure IIIc – Sales/ Discard Phase

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2.4.2 Research Boundaries

As indicated, in this section the scope and made agreements essential to the progress and results of the thesis will be pointed out. The following boundaries apply to this research:

• All company data will be obtained from Eldon Drachten. In principal all recommendations will be aimed at the situation of this particular branch, however possible Group solutions might influence the end result.

• The focus of this study is on the inbound transportation part of materials management. This excludes any external material flows; however essential interfaces with other materials management areas will be taken into account. • The focus of this report will be on the freely moving material handling

systems. Fixed systems will be seen as external influences that might affect a possible recommendation.

Essential is the fact that the company cost data that will be used for this thesis covers, if retraceable, the period between the 1st of January 2006 and the 31st of July 2007. Utilisation observations were performed in the months June, July and August of this year.

Next to the scope the following agreements apply to the progress and results of the research:

• The final body of the report will contain a maximum of 50 pages.

• This research is performed between the 1st of May and the 26th of November 2007.

• The company data used in this thesis will be reviewed and if needed altered by Eldon NV before a final version of the report is handed to all parties

Having the boundaries, and therefore the research field clearly defined, gives the possibility to introduce a research model that shows the layout and plan of the thesis. 2.5 Research Model

The fifth sub-paragraph introduces, as mentioned, the Research Model of this thesis. The model contains, as shown in figure IV on the next page, the steps that will be executed to answer the research question of this report. These nine steps, based on the Systematic Handling Analysis (SHA) concept introduced in 1969 by Muther, can be seen as sub-questions that need to be answered in order to come up with deliberate and clear recommendations for this report.

After the analysis of the motive and the actual problem, the collection of relevant materials management information can be seen as the basis for getting an inclusive and detailed overview of the inbound transportation situation and related areas (i.e. procurement and warehousing). The first four steps of the model, discussed in chapter 4 (CH4), deal with the classification, analysis, and visualisation of the materials, products, layout, flows and material handling systems.

Subsequently data will be collected about the research variables, in this case concerning the optimisation of the inbound efficiency and flexibility. This, initially, will result in the discussion of the total cost of ownership of the internal fleet in chapter 5. Based on the previous steps in chapter 6 the recommendations will be introduced on the basis of steps 6 until 9. With the help of provisional discussion plans and the evaluation of these plans, this chapter will result in several recommendations addressing one of the four topics, being damage prevention/ control, lean manufacturing and optimal order-picking, fleet/ vehicle rightsizing, and service logistics supplier. The primary and secondary data used in chapters 5 and 6 will be described in the next sub-chapter and the theoretical framework.

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Add/ Adjust variables

1. Classify Materials and Products 2. Analyse Layout and Flows 3. Classify Material Handling Systems 4. Visualize Flows

5. Collect Data on Research Variable > Total Cost of Ownership

6. Draw up Provisional Discussion Plans > Damage Prevention/ Control

> Lean Manufacturing & Optimal Order picking > Fleet/ Vehicle Rightsizing

> Service Logistics Suppliers

Possible further Research Research Variables Optimisation Inbound Transportation Flexibility Optimisation Inbound Transportation Efficiency Collect Materials Management Information Basis for CH4 CH5 9 . E va lu a te D a ta CH6 Problem Motive and Analysis

Installation of Final Discussion Plan 7. Analyse Limitations and Draw up

Final Recommendations

8. Calculate Need of Materials and Resources CH6

Like indicated for chapter 6, during and after the execution of these first eight steps regular evaluations will be performed in order to come up with a reliable plan on which further decisions can be based. These evaluations, except for the mentioned paragraph on limitations, will not be discussed separately, but handled throughout the different chapters of the report. Moreover, throughout the evaluation of the different steps possible issues might arise that need further research. This can lead, next to small adjustments of the actual research question at the start of a research, to the need to study other variables.

Finally, after the completion of all steps the recommendations proposed in the final discussion plan can be installed, taking into account the external influences, further research and other projects and plans of the company.

As indicated in the problem analysis Eldon NV does not make use of an action plan for the management of inbound transportation. A first recommendation therefore will be to use the presented research model or some kind of similar model to plan the different actions in the field of inbound transportation or other materials management areas. The use of such an action plan is of great essence in improving the overview and control in, amongst other areas, the management of inbound transportation. With the intention to demonstrate advantages of the use of an action plan this thesis can be considered rather procedural.

2.6 Data Collection and Use

Having discussed the different steps that will be performed, this last pararaph of the research design will point out the type of data that will need to be collected and used. On the basis of table II the different forms of primary and secondary data will be addressed.

In the first place semi-structured and unstructured interviews will be used to obtain data from the managers and other personnel of Eldon Drachten. This will be done using one-to-one and one-to-many interviews.

R e s e a rc h D e s ig n

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Table II – Collection and Use of Data

Interviews with Logistics Manager, Production Manager and other personnel Catalogues, company records and website

Observations and questionnaires

Literature/ Theory – Books, articles, Internet, theses Benchmarks

Advice and data from logistics suppliers

Secondly the use of observations in this report can be interpreted in the broadest sense. This implies structured and unstructured as well as participative and non-participative observations. A clear example is the use of a truck measurement tool, discussed in the theoretical framework in more detail. Questionnaires on the other hand will be executed using just one method, namely the self-administered (delivery and collection) questionnaire (Saunders et al., 2000). Using this method the majority of the truck drivers at Eldon NV are asked to answer 11 questions regarding the use of the different trucks and the mutual communication concerning inbound transportation. The fourth line, mentioning the collection and use of literature will be dealt with in detail in the next chapter addressing the theoretical framework.

Benchmarks, next to the internal measurement methods introduced earlier in this report, will be performed at external, non-competitive parties. On the basis of visits, telephone calls, emails and reports a better insight will be obtained regarding the way the inbound transportation process is handled. Data obtained from Wolters Noordhoff, Portena, Heineken, Nijburg Products and Draka Kabel will be used throughout the report. Next to the different websites, also through visits, telephone calls, emails and reports advice and data of Jungheinrich, BT, Crepa, Still and Posthuma Batterijen is obtained. The information of these five logistics suppliers, to a large extent, will be discussed in chapter 5, discussing the TCO concept.

Finally, in order to be able to write a report up to university standards, the advice of university supervisors will be used, next to theses of previous years, master thesis workshops and project guidelines.

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3. Theoretical Framework

As has become clear the focus of this report will be on optimising the efficiency and flexibility of the inbound transportation at Eldon Drachten. With the relevant terminology clearly defined in the previous chapter, here the aim will be on introducing the used methods and theories to meet the research objective.

The first topic discussed will be the Systematic Handling Analysis (SHA) introduced by Muther (1969). Slightly adjusted, in order to be specifically aimed at inbound transportation, this concept is used to guide the research process step-by-step. Secondly, the total cost of ownership (TCO) concept, initially introduced in the conceptual model, is addressed. Subsequently, capacity utilisation, one of essential parts of this TCO concept, is discussed. Finally, last three chapters discuss the theory used to analyse inbound transportation flexibility, which are, as shown in the conceptual model, fleet/ vehicle rightsizing, optimal order picking, and service logistics supplier.

3.1 Systematic Handling Analysis (SHA)

This first sub-chapter of the theoretical framework concentrates on the systematic handling analysis shown in a detailed model in Appendix IV. This analysis, as shown in the left top of this figure, consists of four phases. Phases I and IV, respectively being ‘External Influences’ and ‘Installation’, will only be addressed in short in this thesis. The external aspects of influence to this report are mainly addressed in the problem analysis. On the other hand recommendations and further research possibilities regarding the installation of inbound transportation solutions are mainly discussed in chapter 6 and the conclusion of this thesis.

The main focus therefore will be on the ‘Handling Plans’ (phases II and III), hereby aiming at a high level of detail, in order to provide clear and useful recommendations that can be used by Eldon Drachten to start phase IV. These phases of the SHA, as written by Visser & van Goor (2004), are suitable for analysing possibilities to improve material flows in warehouses with a fixed layout. In this research the improvement focuses, as indicated, on the optimisation of the inbound transportation efficiency and flexibility. One addition is the fact that next to the cited warehouses also the flows in the production halls will be analysed.

The first four steps will be described shortly underneath:

• 1 - Classify Materials and Products; this first steps aims at the ordering of all materials and products at Eldon Drachten. Classification, amongst other criteria, can be based on shape, size, number and weight.

• 2 - Analyse Layout and Flows; secondly the SHA concept concentrates on mapping the fixed layout and analysing the physical movements of all materials at Eldon Drachten. Additionally the flow of data will be analysed, including the type of data, involved parties, and storage locations.

• 3 - Classify Material Handling Systems; the specific focus on material handling system has lead to a supplementary step focusing on the classification of the freely moving systems and the used conveyors. Next to brand information there will be taken a look at factors like ownership, insurance, repairs, location and movements.

• 4 - Visualize Flows; finally this last step provides a schematic overview of the actual materials management situation. The different visualisations will not be dealt with in a separate chapter, but as part of one of the three previous steps.

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The next five steps, based on the gathered primary data, focus on the collection, analysis and evaluation of different materials management methods that deal with the two research variables of this thesis.

• 5 - Collect Data on Research Variables; at this point primary and secondary data is obtained that provides Eldon NV with possibilities to optimise inbound transportation efficiency and flexibility.

• 6 - Draw up Provisional Discussion Plans; this step focuses on the elaboration of the data found in the previous step. Several possible solutions are drawn up in a discussion plan on a still provisional basis.

• 7 - Analyse Limitations and Modify Proposals; step seven discusses the limitations of the drawn up provisional plan and afterwards addresses possible modifications, leading to a final discussion plan.

• 8 - Calculate Need of Materials and Resources; this penultimate step will work out, next to the overall costs, factors like the number of material handling systems and employees needed to support the drawn up plan.

Last three steps are performed while working on this report. The result, a final discussion plan, will be discussed in chapter 6.

• 9 - Evaluate Data; finally, the ninth step concentrates on evaluating the previous steps of the analysis. Next to this overall evaluation, a more specific procedure is needed in case of essential changes in, amongst other things, the flow of materials or literature on inbound transportation.

The results of step five for this thesis can be found in the following sub-paragraphs. 3.2 Inbound Transportation - Total Cost of Ownership (TCO)

One of the methods collected from literature in step 5 of the above-mentioned analysis is the calculation of the Total Cost of Ownership (TCO). According to Ellram and Siferd (1998) there are several key benefits to using the TCO approach to analyse inbound transportation costs (see Appendix V). Of this list the main focus of this thesis will be on the creation of a better understanding of the cost factors and the drive towards improvement. Last-mentioned comprises the idea of cost reductions and performance and process improvement.

The TCO concept, according to the Still brochure “Heute wissen, was Sie morgen sparen”9, consists of three phases. These ‘Acquisition’, ‘Utilisation’ and ‘Sales/ Discard’ phases include different direct and indirect costs that are addressed in a complete model in Appendix VI. The cost factors that are taken into consideration for Eldon NV have been introduced under the conceptual model. In the following sub-chapters the theory supporting these cost factors will be addressed.

3.2.1 Acquisition costs concerning Inbound Transportation

In this part the different forms of acquiring material handling systems are addressed, being buying, renting and leasing. The first, and most straightforward, option discussed is the buying of specific truck. In this case the buyer becomes the economic and legal owner after the complete payment of the vehicle. Often the acquisition of additional equipment and batteries is dealt with at the same time. Maintenance and insurance are issues that have to be handled separately.

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English Translation: “Know today, what you save tomorrow” Th

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Short-term rental can be seen as the opposite of buying a truck. Often 1 or at the utmost 2 years a truck can be used. Hereby the lesser remains the economic and legal owner. Moreover the maintenance, inspection, and insurance will be arranged by the lesser. For this complete package a monthly fee will be charged, agreed upon by both parties.

The last possibility is the long-term rental, also referred to as leasing. Hereby leasing can be divided into operational and financial leasing. The main differences between the two forms are related to the ownership of the trucks and the total acquired service. In the case of operational leasing the truck remains in the possession of the lesser, whereas the lessee becomes economic and legal owner when using financial leasing. On the other hand, in general, operational leasing includes repair services and insurances, while financial leasing only deals with the acquisition of the actual truck. Between these two extremes several intermediary solutions are possible. Also several logistics suppliers have specific lease forms, i.e. full service lease and sales and lease back. Hereby last form entails the sales of the internal fleet to the supplier, who afterwards leases the same or adjusted fleet back to the company, including possible other services.

Overall, when comparing these are the main points that plead in favor of the three most important forms of acquisition10.

Table III – Advantages Acquisition forms

Own Resources Operational Lease Financial Lease

Saving interest cost Reduction in administrative cost Fiscal facilities Residual value Risk reduction

(fire/theft/ residual value) No use of work capital Improvement solvability:

off-balance financing Specific truck financing

No use of work capital Owner at the end of

term – residual value

The risk reduction mentioned as part of the operational lease is caused by the inclusion of a certain insurance in the complete package. On the other hand fiscal facilities can be interpreted as possible governmental allowances for a specific truck. 3.2.2 Utilisation costs concerning Inbound Transportation

As mentioned the utilisation phase can be seen as the most important phase for this thesis. According to the safety conditions of Eldon NV (Article 1.20) the utilisation of machines and trucks is only allowed for the ones that are appointed. It is hereby necessary to take the present safety prescriptions into regard. Damage to property of Eldon NV caused by the unauthorised utilisation is charged to the user.

Next to safety issues in utilisation this phase mainly aims at measuring how intensively the different trucks are being used. According to Schönsleben (2004), and shown in the formula, this can be done by calculating the capacity load, which is the ratio of the actual load to its theoretical capacity.

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The data concerning the theoretical capacity will be obtained from figures provided by Eldon Drachten. The theoretical capacity, according to Schönsleben (2004), hereby can de defined as the maximum output capacity, determined by the number of shifts, the number of workers or machines (trucks), and the theoretically available capacity per shift.

On the other hand, the actual load data needs to be obtained via tools that can measure or accurately estimate the actual number of hours a material handling system is being used during a certain time. In this research three tools will be used to find out the actual load.

In the first place the Jungheinrich Information System for forklift truck management (Jungheinrich ISM) will be used. This tool, installed on a rental reachtruck, measures the utilisation at different locations in the company, next to vertical and horizontal shocks during this utilisation. The measurement of the utilisation includes the number of contact hours and the different type of movements (driving, lifting and lowering). The shocks, on the other hand, are measured on three levels, vertically as well as horizontally. In case of a shock of the highest level (III) the truck reacts by reducing the maximum speed to 2 km/h, making it impossible to continue using the truck. As only drivers with an electric card assigned to them can make use of the specific truck, all utilisation and shock details can be traced back. A special ‘master card’ is needed to unlock the truck after a shock of the highest level has occurred. All these different handlings are stored in the supplied ISM program.

In the second place, a more simple information system is used on the two rented BT reachtrucks. This build-in system can be used to obtain information concerning the actual contact hours, the hours used to drive and the hours used to lift. Every week data is extracted from these systems that are used in the final product warehouses. Finally, through observations and questionnaires some more specific aspects of the actual load are measured. Questionnaires in this case deal with the actual use according to the opinions of the truck drivers at Eldon NV.

Like addressed by Jungheinrich ISM the system can be of interest in more areas of the variable efficiency. Firstly, the analysis of the specific movements made by the different trucks can be used to see if it is the most appropriate for the job. Moreover, shock registration can be used to control and eventually minimize the inbound transportation damage.

3.2.3 Sales/ Discard costs concerning Inbound Transportation

In this thesis the actual sales and discard will not be discussed in detail. However, factors like the sales and lease back possibility when acquiring trucks and the cost, and in specific depreciation data, showing an optimal replacement time, to a large extent, influence this aspect of the total cost of ownership concept.

3.3 Lean Manufacturing and Optimal Order Picking

This part of the framework looks at the efficiency and flexibility of the flows within the production halls and the warehouses. Lean manufacturing is an actual topic on the production floor at Eldon NV, whereas optimal order picking will be addressed to analyse the different flows in the warehouses.

Lean Manufacturing is a method aiming at the improvement of company processes by avoiding all different kinds of waste. Lean Manufacturing separates seven types of waste, being: overproduction, inventories, manufacturing mistakes, manufacturing

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interruptions, waiting times, transport, and unnecessary (search) movements (van Ede, 2006)11. The possibilities to minimise the transport waste, which is strongly related to the other wastes, will be dealt with in this report. Due to this relatedness, to a large extent, these minimisation solutions will form the basis for additional research. The order picking process, on the other hand, is the process of retrieving products from specified storage locations on the basis of customer orders (Roodbergen and de Koster, 2001). Different order picking methods can be employed in a warehouse, for example, single-order picking, batching and sort-while-pick, batching and sort-after-pick, single-order picking with zoning, and batching with zoning (Yoon and Sharp, 1996). Each order picking method consists of some or all of the following basic steps: batching, routing and sequencing, and sorting, as shown in Appendix VII (Gu et al., 2006). The productivity of the order picking process depends on the other warehouse operation and design factors, shown in the same appendix. Except for the equipment selection these factors are considered to be fixed for this thesis. Order picking productivity in this case therefore can be improved by reducing handling time and using the right fleet size. The total picking time can be divided roughly into time for driving or walking to locations (travel time), time for picking the products and time for remaining activities (such as obtaining a picklist and an empty pick carrier) (Roodbergen and de Koster, 2001). The first two parts of this division will be discussed in further detail in the body of this report.

3.4 Fleet/ Vehicle - Rightsizing

Taking into account the importance of having an efficient as well as flexible inbound transportation this chapter looks at the selection of the right size and characteristics of the internal fleet.

The focus in companies used to be on downsizing the number of trucks. As indicated by P.T Lauria (2003) this concept aimed at reducing the size and cost of the fleet in the near term by identifying specific vehicles and pieces of equipment whose continued ownership is not warranted by their current level of usage and disposing of them. More recently the term rightsizing was introduced, which according to P.T. Lauria (2003) has three main components:

• Developing a fleet inventory and vehicle usage database • Identifying candidates for reassignment or disposal

• Negotiating the disposition (retention or removal) of candidate vehicles

The first of the three steps is part of the objective of this research, of which the result can be found in Appendix VIII. Based on this first step, and additional factors, like market improvements, trucks can be identified that are candidates for reassignment or disposal.

As the article by P.T. Lauria (2003) discusses a fleet of company cars, the main focus is just on the number of vehicles. However, in this thesis next to the right number of trucks, the fleet needs to have the right specifications in order to have an optimal efficiency and flexibility. Beside the type of truck, decisions on, amongst other characteristics, the speed, width and height are often very important. The last step negotiates the disposition of the trucks, which in case of removal results in necessary steps shown in the Selling/Discarding phase of the TCO concept.

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3.5 Service Logistics Supplier

The last section of the theoretical framework discusses the efficiency and flexibility of the service provided by the different logistics suppliers. Service hereby includes the degree of involvement of the logistics suppliers, next to the time needed to react to changes in the inbound transportation process of Eldon NV. The degree of involvement will be analysed on the basis of the Still Partner Plan12. Introduced as the totally flexible system for intralogistics this partner plan helps to select the right solution looking at the products (trucks), the procurement conditions, including finance and running time, service (maintenance and inspection) and material flow.

This and other factors of supplier flexibility can be measured on the basis of a balanced scorecard, Supplier Evaluation Model (SEM) or other vendor-rating method. These methods will not be discussed in this thesis and can be seen as a possible topic for further research.

Having a clear picture of the variables used to measure and optimise the efficiency and flexibility of the inbound transportation at Eldon NV, the following chapters of the thesis will continue with the presented steps in the research model.

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Still PartnerPlan - The Flexible System - http://www.still.co.uk/3307.0.0.html - Appendix XI Th

Lifting Efficiency and Flexibility

Lifting Efficiency and Flexibility

Preface

Management Summary

Table of Contents

1.

Introduction – Eldon NV

2.

Research Design

3.

Theoretical Framework