Improvement of the tender process
How to improve the information availability during the tender
process for Royal FrieslandCampina?
Master thesis, Msc Business Administration, specialization Operations & Supply Chains University of Groningen, Faculty of Economics & Business
Public version
Name: T van Nunspeet Student number: s1689371 Date: August 18th 2012
Company: Royal FrieslandCampina
First supervisor Royal FrieslandCampina: G. Frölich Second supervisor Royal FrieslandCampina: G. Gunnink University: University of Groningen
MANAGERIAL SUMMARY
This research has been done on behalf of Royal FrieslandCampina to investigate the tender process of the CPE Fresh department. A tender for FrieslandCampina is a supermarket which wants to offer their customers daily fresh dairy products under their own brand. Because this supermarket has no way for producing these products, it hires a dairy company to do so. As FrieslandCampina is not the only dairy company, the tender will submit the required products and volumes to multiple dairy companies, after which they can bid on the products.
After preliminary research, the main problem was formulated as follows: “The current bidding
and negotiation process with the tender is not based on data, more on experience and intuition while there are a lot of issues which make the decision making process more difficult.”
To be able to solve this problem, research has been done to answer the following research question: “How should the information availability during the tender process be improved and
how can different issues be weighed against each other using an excel model?”
First the general ordering process and tender process of FrieslandCampina were investigated, after which the required information for the tender process was further examined and processed into a MS Excel model.
From the research resulted that the idle capacity, costs and the surplus of bactofugate should be known before FrieslandCampina bids on a tender contract, or certain products of the contract. To generate this information, the following data must be available: normal and tender product volumes with data about the characteristics of each product, the total available capacity per factory, an allocation matrix to assign certain volumes to a factory and the variable costs.
The resulted MS Excel model is expected to support the tender process as it provides much information about the idle capacity per factory, the possible surplus of bactofugate and the variable costs of the tender volumes. By adjusting one or more of the inputs of the model, different scenarios can be compared.
PREFACE
This Master thesis represents the research I have conducted at the headquarters of Royal FrieslandCampina in Amersfoort, in order to complete my Master in Operations & Supply Chains at the University of Groningen.
Over a period of six months I have investigated the tender process for daily fresh dairy products and the required information to decide on what products and volumes Royal FrieslandCampina should bid. The results of this research have been applied to FrieslandCampina and processed in a MS Excel support model.
In this section, firstly I want to express my gratitude to G. Frölich, my first supervisor at FrieslandCampina. He introduced me to the company, its employees and the research, and supported me throughout the research. Also I would like to thank my second supervisor at FrieslandCampina, G. Gunnink, and the logistical managers of the factories in Eindhoven, Rotterdam and Maasdam. Without their help I could not have finished this research. I would also like to thank P. Beemsterboer for giving me this opportunity.
I would also like to express my gratitude to my two supervisors of the University; D.P. van Donk and T.D. Bodea. D.P. van Donk was my first supervisor and provided me with feedback and useful insights from the first problem statement on. Also T.D. Bodea, my second supervisor, provided me with useful feedback, for which I am grateful.
Tessa van Nunspeet
INDEX
GLOSSARY…... 6
FIGURES AND TABLES ... 7
Figures... 7
Tables ... 7
CHAPTER 1 INTRODUCTION... 8
1.1 Royal FrieslandCampina ... 8
1.2 Consumer Products Europe ... 9
1.3 Production process ... 10
1.4 Tender contract ... 11
1.5 Summary ... 12
CHAPTER 2 RESEARCH DESIGN ... 13
2.1 Problem statement ... 13
2.2 Research objective and research question ... 14
2.3 Sub questions... 14 2.4 Research scope ... 15 2.5 Summary ... 16 CHAPTER 3 METHODOLOGY ... 17 3.1 Research methods ... 17 3.1.1 Literature review ... 17 3.1.2 Interviews ... 17 3.1.3 Secondary data ... 19 3.2 Summary ... 19
CHAPTER 4 ORDER PROCESSING ... 20
4.1 Literature on order processing... 20
4.2 Order cycle step 2: the order processing activities ... 21
4.3 Summary ... 22
CHAPTER 5 TENDER PROCESS FRIESLANDCAMPINA ... 24
5.1 Tender process... 24
5.2 Analysis for the tender process ... 26
5.2.1 Scope of research ... 26
5.2.2 Order acceptance ... 27
5.2.3 Planning of production and capacity... 28
5.3 Summary ... 30
CHAPTER 6 DEVELOPMENT OF THE MODEL ... 32
6.1.2 Filling ... 33
6.1.3 Rewrapping ... 33
6.2 Fundamentals of the model ... 34
6.2.1 Production volumes ... 34
6.2.2 Allocation matrix ... 34
6.2.3 Costs ... 35
6.3 Output of the tender model... 36
6.3.1 Capacity ... 36
6.3.2 Bactofugate ... 37
6.3.3 Costs ... 38
6.4 Summary ... 38
CHAPTER 7 CONCLUSION AND DISCUSSION ... 39
REFERENCE LIST ... 41
Literature ... 41
Websites ... 42
APPENDIX A PRODUCTION PROCESSES ... 44
APPENDIX B SEMI STRUCTURED INTERVIEWS ... 46
APPENDIX C OPERATIONAL MANUAL ... 47
1. Input ... 47
2. Calculations and output... 48
GLOSSARY
Benelux Department of Royal FrieslandCampina, CPE, for ambient brand products. One of the Benelux factories produces also for the daily fresh dairy products; Maasdam. CPE Consumer Products Europe, one of the four divisions of Royal FrieslandCampina.
CU Consumer Unit.
DC’s Distribution centre(s).
Fresh Department of Royal FrieslandCampina, CPE, for daily fresh dairy products. Factories of this department are: Eindhoven and Rotterdam.
EHV The Fresh factory in Eindhoven.
Gable Top The filling machines that fill the fluid product in cardboard packs. MSD The Benelux factory of Maasdam.
OEE Overall Equipment Effectiveness.
PL Private Label products, from FrieslandCampina’s point of view, are the brands for the tender.
RiC(’s) Roll in Container(s) is a method of wrapping and preparing products for shipment. RTD The Fresh factory in Rotterdam.
SKU Stock Keeping Unit.
Tender A tender is the buyer in a tender process that sets the required products and volumes in a tender contract, on which producers like FrieslandCampina can bid.
Thick liquid Subgroup of dairy products which contains the literally thick products like yoghurt or custard.
Thin liquid Subgroup of dairy products which contains the literally thin products like drinking milk.
FIGURES AND TABLES
Figures
Figure 1.1 Organization of Royal FrieslandCampina Page 9
Figure 5.1 Schematic presentation of the tender process Page 25 Figure 5.3 Overall Equipment Effectiveness – Definition card Page 30 Figure 6.1 Column chart with the production volumes and free capacity of the
Mixing, dissolving and dosing tank -1 of Maasdam
Page 37 Figure 6.2 Column chart with the production and tender volumes and free
capacity for the 1.5 litre filling line of Rotterdam
Page 37 Figure 6,3 Column chart with the utilization of the yoghurt and custard WA
rewrapping of Eindhoven
Page 37
Tables
Table 3.1 Interviewees Page 18
Table 5.1 Activities and factors as resulted from literature review Page 27
Table 5.2 Cost calculation Page 28
Table 6.1 Input for the tender volumes Page 34
Table 6.2 Hypothetical allocation of the Fresh products Page 35 Table 6.4 Generated and used bactofugate of the theoretical tender and total
volumes for Eindhoven
CHAPTER 1
INTRODUCTION
This chapter will discuss the environment in which this research has been conducted. It will start with the history and products of Royal FrieslandCampina, after which the division studied in this research is discussed. What follows is the description of the three parts of the production process within the factories and the explanation of the tender contract.
1.1 Royal FrieslandCampina
Royal FrieslandCampina is the result of a merger between Royal Friesland Foods and Campina. The history of the first starts in 1872 when a group of farmers joined hands and started their own cheese production. This small group grew out to become Friesland Foods in 1879, which was mainly active in the north and east of the Netherlands. After 125 year, in 2004, the company gained the title Royal.
The name Campina came to life in a merger between multiple dairy co-operations in the southern area of the Netherlands in 1947. The company merged and changed its name multiple times, but in 2001 the name was changed back to Campina because of the reputation of the brand.
After a long investigation by the European Competition Authority the two companies Friesland Foods and Campina were merged together in 2008 and adopted the name Royal FrieslandCampina.1
Royal FrieslandCampina grew out to become not only a large dairy company in the Netherlands, but also worldwide. Still the ownership of the company lies with the 15.300 farmers, not only in the Netherlands, but also in Germany and Belgium. The member dairy farmers own and supervise the company, as well as supply the raw milk required for the production of all the Royal FrieslandCampina products. In the rest of this report, the name FrieslandCampina is used. 2 Many products have been added in the last 125 years. Nowadays the company produces also consumer products like desserts, coffee creamers, dairy drinks, fruit juices, toddler nutrition, milk powder and dairy based meat alternatives.3 A couple of the brands under which the different products are sold are listed below:
- Appelsientje - Campina - Chocomel - Coolbest - Domo
1 Source: http://www.frieslandcampina.com/english/about-us/history.aspx and
1.2 Consumer Products Europe
As can be seen in figure 1.1, the company consists of four divisions: Consumer Products Europe (CPE), Consumer Products International (CPI), Cheese, Butter & Milk powder and Ingredients. The subject of this investigation is the Consumer products Europe division, more specifically the Dagvers (further called Fresh) and Benelux sub divisions.
Figure 1.1 Organization of Royal FrieslandCampina4
The Fresh subdivision produces daily fresh dairy products (pasteurized milk, custard and yoghurt) with a short shelf life. The Benelux subdivision produces brand products for the region Benelux, like Mona and Optimel which are ambient products. Occasionally, when there is under capacity within the Fresh factories, the factory of Maasdam of the Benelux department also produces daily fresh dairy products. Maasdam is the only non-Fresh factory which does so. The production of the factories can be subdivided into thick and thin products. The products called thick, are literately thick of substance for example custard and yoghurt. These products can again be divided in sweet (custard) and sour (yoghurt). The thin product group consists of different kinds of pasteurised milk, for example full fat or semi-fat milk.
The Fresh subdivision consists of two factories: Eindhoven and Rotterdam. The characteristics of the three different factories are described below:
• Eindhoven; this factory can be divided in two parts. One part of the factory produces for the inland production and the other part for the export production. The small export production is mainly for the American army stationed in Europe, the inland part produces pasteurised milk, custard (with ingredients, for example the product Bollino) and yoghurt (with ingredients for example peach yoghurt). For this research, only the inland production is examined.
• Rotterdam; the factory in Rotterdam is the oldest of the three and is more focused on bulk production. Here only the seven largest volumes of products are produced: semi-skimmed milk, full fat milk, chocolate and vanilla custard, skimmed and full fat yoghurt and buttermilk.
• Maasdam; for the Benelux department, Maasdam produces, amongst others, the brand products Optimel, Vifit and Mona. For the Fresh department, Maasdam produces the more special products, for example double flavoured custard.
The above mentioned factories will be the focus of this research. This is because these factories alone produce the daily fresh dairy products for tenders.
1.3 Production process
The production process of the different dairy products can differ a lot, but the products always require three production steps:
1. In the processing step the actual product is processed in tanks from raw milk to the fluid which will be consumed by the end customer. This is also where the most differences between products occur. The production of milk for instance is very different from the production of yoghurt. Yoghurt, for example, needs to cultivate, while milk and custard do not.
During the processing of milk, a by-product is generated, called bactofugate. Bactofugation is a process in which a specially designed centrifuge, called a bactofuge, is used to separate micro-organisms from raw milk to create drinking milk (Bylund and Tetra Pak experts, 2003). By separating these organisms from the raw milk, the shelf life of the product is increased. The result of this bactofugation is a fluid with very high levels of protein and bacteria. This bactofugate can be used for the production of thick liquids. Considering the bactofugate it would be wise to produce both kinds of products (both thick and thin liquid) within a factory.
3. In the rewrapping step, after the fluid products are poured into their packs, these packs need to be prepared for shipment to the distribution centres and supermarkets. This can be done in cardboard boxes, RiC’s (Roll in Containers), crates or cardboard trays. It depends on what kind of pack the product is poured what the rewrapping options are, but most of the products are rewrapped in cardboard boxes. For this rewrapping a wrap around (WA) is used.
1.4 Tender contract
Besides their own brand products, FrieslandCampina also produces products for supermarkets, for example C1000 and Plus. The supermarkets who buy the products, sell them under their own brand names as an alternative for the brand products. This is the tender concept; the supermarket is the tender who pays a dairy production company to produce their products.
A tender is: “A written offer to contract goods or services at a specified cost or rate; a bid”.5 The tender process is an auction mechanism where the buyer sets the different required products and volumes in a tender contract, and the suppliers can subsequently bid on these products. “It is a
mechanism for selecting the most efficient proposal for generating the desired outcome” (Rolfe et al, 2011, page 519).
In this case the main desired outcome of the tender contract is the lowest costs for the supermarkets. This is not the only point of focus for the buyers; they also want to divide the different products over as many suppliers as possible. It was found by Gomez-Lobo and Szymanski (2001) that the larger the number of bidders, the lower the contract costs. Besides this, by spreading the products, the buyer also spreads the risk of not receiving any products because of for example a factory breakdown. So by giving some products to suppliers which are a bit more expensive than others, this will satisfy the suppliers and keeps them willing to participate for the following year(s). This lowers the total contract costs. Resulting from a number of interviews, this is also the case for the tender process of the daily fresh dairy products of FrieslandCampina.
So a tender contract is a request for price proposal which is drawn up by a supermarket which requires different dairy products with their own recipe and brand names on it. From the viewpoint of FrieslandCampina, these products are called private label (PL) products. In a tender contract the supermarket describes what products and how many litres per week they would like to receive per week. The tender contract is sent to different dairy companies in Western Europe, after which the companies can chose to bid on which or all products by stating their prices. These biddings can be altered until the deadline of the contract, after which the tender will decide which company they want for which product. The contracts are mostly defined for six months or a year and after a certain time period, an evaluation and if required, adaptation of the contract, takes place.
1.5 Summary
CHAPTER 2
RESEARCH DESIGN
In this chapter the research design of the investigation is presented. The chapter starts with the problems as encountered in the organization and the formulation of the management problem, after which the main problem is indentified. Secondly the research objective and related research question are presented. Sections 2.3 and 2.4 present the sub questions for the investigation and the research scope.
2.1 Problem statement
According to the problem owner, the director of the supply chain Benelux and Fresh, research into the tender process for the Fresh and Benelux divisions of FrieslandCampina is required. The main reason for the investigation is that in the last years it occurred that the company received undesired outcomes from the tender process, and the employees feel that the process can be improved to prevent this. The following management problem, as stated by the main problem owner and initiator, is used as the starting point for the investigation:
“There is insufficient information for FrieslandCampina Fresh/ Benelux to make a valid decision
whether or not to bid on a tender contract, on which products, and for what price. Current decisions are mainly based on experience and intuition (‘gut feelings’).”
With this management problem as a starting point, interviews were held with the problem owner and different managers of both the Fresh and the Benelux division. For more information on the company itself, the company website and intranet were examined.
After the preliminary investigation, the main problem is defined as:
“The current bidding and negotiation process with the tender is not based on data, more on
experience and intuition while there are a lot of issues which make the decision making process more difficult.”
The remainder of this paragraph presents a number of issues which make the decision making process for the tender contracts more difficult.
- Per machine it differs what products can be made on it (thick or thin), but also the capacity per hour differs per machine.
- Because of the capability differences of the factories, not all products can be produced everywhere.
- The capacity for thick and thin liquids is fixed and is not interchangeable. - The bottleneck differs per factory and per product group.
- The scheduling of the maintenance differs per factory.
- The factories of Eindhoven and Rotterdam are part of another subdivision than the factory of Maasdam.
Because of these issues concerning the machine capability, capacity and maintenance, it is unclear for FrieslandCampina how much idle capacity is available at each factory per day, week or month for tender products and for which kinds of products. Given that the factories are part of different sub divisions this information is not very easily shared.
- The three factories all have their own specific costs, this means that the costs for producing a product differs per factory.
When it is still uncertain which products and which volumes will be received from a tender, it is also very difficult to determine the price for the tender products. The difference in costs per factory increases the complexity for determining tender prices.
2.2 Research objective and research question
Based on the explorative research described in the previous paragraph, the following research objective and research question were formulated:
Research objective:
To improve the tender process.
Research question:
How should the information availability during the tender process be improved and how can different issues be weighed against each other using an excel model?
The quality of decision making is related to the quality, quantity and accessibility of information (Stevens, 1975 and O’Reilly, 1982). So by improving the information availability, the tender process can be improved. With information availability is meant the quantity, quality and accessibility of information based on which decisions are made. As resulted from the preliminary investigation there is currently limited information available during the tender process, on which the decisions can be based. An example is the capacity information; how much idle capacity is there? And how much products or litres could be produced with this available capacity?
To be able to present the available information in an orderly manner, an excel model is thought of as a useful presentation of information. What the required and available information is will be investigated.
2.3 Sub questions
Before decisions about the information availability can be made, it is necessary to investigate what information should be used when conceding a tender. For this, a literature review is required to investigate which factors are suggested by scientific literature, to keep in mind during the consideration of a new order. This is presented in chapter 4 by investigating the following sub question:
1. What are relevant factors when considering and accepting a possible new order?
To gain a clear view of the different steps of the tender process, empiric research has been done by investigating the involved departments and interviewing involved employees. The result of this research is presented in chapter 5 with the following sub question:
2. How the current tender process of FrieslandCampina is structured: which departments and employees are involved and which factors are considered?
The third sub question diagnoses the situation of FrieslandCampina according to the results of the literature study of chapter four and the results of the second sub question. The corresponding sub question to this diagnosis is formulated as follows:
3. Which ordering process factors should FrieslandCampina examine during the tender process and how can these factors be applied to the characteristics of the tender process of daily fresh dairy products of FrieslandCampina?
With this sub question the literature study is compared to the results of the empiric study into the tender process of FrieslandCampina. The ordering process factors are the steps of the ordering process which are suggested in literature as to best describe the ordering process. The results of this diagnosis are presented in chapter five, together with the results of sub question 2.
The fourth and last sub question of this research investigates how the available information should be presented and used when considering a tender. This sub question makes use of the results of the previous sub questions; the factors which FrieslandCampina should take into account during the tender process and the different steps of the current tender process. As introduced earlier, the information will be presented in an MS excel model. The choice for excel is made because of the numerical nature of the information like idle capacity calculation. According to the requirements of the research initiator, the excel model needs to present all relevant information required to consider a tender, and be able to present the (financial) consequences of changing volumes and allocation. In chapter six the previous investigated data is used and modelled so that the information availability during the tender considerations and acceptation process is improved. This is done according to the last sub question:
4. How should the relevant information be used and presented in an excel model to support the tender decision?
2.4 Research scope
For this investigation there are certain limitations:
- The aim of the research is to develop an excel model to support the current tender process, not to change it.
- The initiator is not looking for an action plan, but for an actual model.
- The purpose of the investigation is to examine how to best deal with tenders by making use of the current capacity and capabilities. Investments in additional capabilities and capacities are out of scope of this investigation.
- The model which needs to be developed needs to be flexible because of the changing capacities and product mixes.
2.5 Summary
After the management problem and main problem were formulated, this chapter presented the research objective and research question. The research question was formulated as follows: “How
should the information availability during the tender process be improved and how can different issues be weighed against each other using an excel model?” To be able to answer the research question, four sub questions were identified and explained. The chapter closes with the research scope.
CHAPTER 3
METHODOLOGY
For the investigation, three different research methods are used to answer the four different sub questions: a literature research, interviews and secondary data. The fact that multiple sources and research methods are used, both primary and secondary, increases the validity of the research.
3.1 Research methods
3.1.1 Literature review
For the investigation into the first sub question, What are relevant factors when considering and
accepting a possible new order?, a literature research was conducted. When FrieslandCampina receives a tender contract, it needs to be examined and the concerning managers need to decide whether to accept this order or not. To investigate what factors are of importance for this decision, a literature review of the order process was performed. The review searched for appropriate articles and books in three databases:
• Business search premier • EconLit
• Google scholar
Different search terms and also in multiple combinations were used to find the most relevant articles. Among these search terms were: order acceptance, order process, transformation process, make-to-order, costs and demand. Mostly a combination of two search terms was used, this to refine the search while at the same time keeping sufficient options open.
After the initial search, the articles were judged for relevancy based on the title, subject terms and abstract. New articles were also found by examination of the reference lists of relevant articles. Examples of the used journals are:
• International Journal of Operations & Production Management • International Journal of Production Economics
• International Journal of Logistics Management • Production and Inventory Management Journal
Besides articles, also books and a conference proceeding were used for the investigation of the first sub question.
3.1.2 Interviews
For the investigation of the second sub question, How the current tender process of
FrieslandCampina is structured: which departments and employees are involved and which factors are considered?, interviews with employees of FrieslandCampina were held.
interviewees the possibility to talk freely to discover thus far unknown subjects or facts. The open ended questions had a hierarchical structure (Cooper and Schindler, 2006, page 207). Almost all data gathering was done by employee face-to-face interviews, but because of long travel times to the business units Maasdam, Rotterdam and Eindhoven, also short questions were sent and answered by e-mail. The preference of e-mail over the use of the telephone was based on the busy schedules of the interviewees.
The table below presents all the interviewees, with their function title. They were selected based on their function description, knowledge and experience with the tender process. Interviewees also advised the investigator to interview other colleagues. Some of the interviewees were only consulted once, others multiple times. This depended on their specific knowledge of the subjects and their involvement in the tender process.
Name Function
Peter Beemsterboer Director Supply Chain Benelux/ Fresh Robbert Crucq Manager Logistics Fresh
Gerrit Gunnink Operations Controller Fresh Arno van Zeeland Head Planning Fresh
Sjef van den Hoven Quality Assurance Manager Fresh Willem Middelkoop Supply Coordinator Fresh
Matthijs van Rijn Plant Manager Rotterdam Joost Gijsbers Manager Logistics Maasdam Robert Logtenberg Plant Controller Maasdam
Martin Suijker Assistant Plant Controller Maasdam Ben Oosterom Plant Manager Maasdam
Dennis van Zwieten Sales Manager Retail Gert Ligtermoet Demand planner
Table 3.1 Interviewees
To prevent interviewer errors, for example the failure to record answers accurately and completely, and falsification of data (Cooper and Schindler, 2006), the following measures were taken. The possible errors are kept in mind during the preparation of the interviews, the interviews itself and after the interviews. This is done for example by asking the interviewees whether they would like to cooperate and if and when they have time to do so. Also enough time was planned for these interviews to prevent incomplete conversations. During the interview, the interviewer took notes. Sometimes this led to a pause in the interview, but the accuracy is a very important element for good data collection. After the interview, the notes were processed and sent by email to the interviewee for verification and possibly follow up questions.
3.1.3 Secondary data
Mainly for the last sub question, How should the relevant information be used and presented in
an MS excel model to support the tender decision?, internal secondary date was used. According to an online power point presentation of Pearson Education, secondary data is defined as: “data
that is already investigated by someone else than the investigator and/or for other purposes than the current research”.6 This data includes for example the different capacities and costs of the three factories.
3.2 Summary
To be able to answer the in chapter two formulated sub questions, three research methods will be used: literature review, interviews and secondary data. Which research method will be used for which sub question, was also mentioned.
The following chapter discusses the first sub question: “What are relevant factors when
considering and accepting a possible new order?”
CHAPTER 4
ORDER PROCESSING
This chapter will focus on the factors which influence the order acceptance decision, according to the first sub question: “What are relevant factors when considering and accepting a possible new
order?”
When FrieslandCampina receives a tender contract, the managers need to examine and decide whether to accept this order and bid on it or not. If the managers decide to participate in the tender process, they need to investigate on what products and volumes they can bid. To investigate what factors are of influence in this decision, a literature review into the order process was performed. This chapter will start by investigating the factors which have been the focus of the research into the ordering process.
4.1 Literature on order processing
In this paragraph the ordering process is first defined, after which the different steps of the order processing as investigated and developed by Welker (2004) are presented.
Welker (2004, page 15) defines the ordering process as: “A business process that involves
various activities which are executed by various parties. It is an interface process in which demand and production must be matched’. With business process is meant: “A set of logically
related tasks, to achieve a defined business outcome” (Davenport and Short, 1990).
In her thesis, Welker (2004) investigated the formalization of the ordering process which produced, amongst others, an overview of activities which are linked to the ordering process. These activities can be divided into four clusters of activities, which will all be shortly discussed.
1. Pre-sales activities
This cluster involves pre-sales activities like order planning and (sales) forecasting (Shapiro et al., 1992 and Vollmann et al., 1997).
2. Order processing activities
Based on Shapiro et al. (1992) and Lin and Shaw (1998) Welker (2004) defined the following order processing activities:
- Order quotation - Order acceptance
- Order delivery date promising - Entering in information system - Order selection and prioritization
After accepting an order, this is the physical activity to receive the required inputs, through production, purchasing or stock retrieval, to repare the products for shipment and to ship the products to the customer (Vollmann et al.,1997, Waller et al., 1995 and Lin and Shaw, 1998).
4. After sales activities
This last cluster of activities involved in the order processing is the after sales: • Invoicing (Shapiro et al., 1992 and Waller et al., 1995)
• Order status reporting or order status reporting (Ballou, 1999) • Returns and claims (Shapiro et al., 1992)
• Post sales services, like maintenance (Shapiro et al., 1992)
To narrow the activities, only those activities which comply with the ordering process definition of Welker (2004), as stated in the opening of this paragraph, will be used for the rest of the investigation. The pre- and after sales activities are not, or if they are, only indirectly, involved in the order process. The third cluster of activities, the order fulfilment cluster, does not relate to the match between demand and production and takes place after customer specifications are translated into a production order. For these reasons the first, third and fourth clusters of activities will not be further examined in this report. The order processing activities, as described above, will be used as a framework for the examination of the tender situation of FrieslandCampina.
4.2 Order cycle step 2: the order processing activities
In this paragraph the six activities of the order processing step of the order cycle, as shortly discussed in the previous paragraph, are explained.
Order quotation
According to Waller et al (1995), order quotation is specifying the product configuration, price and delivery time that comes closest to matching the customer requirements. To meet the specific customer requirements, a product could be configured during multiple consultations, especially for engineer-to-order organizations. The price of the product is dependent on the specific customer wishes and the possibilities within the capabilities of the manufacturer. According to Raaymakers et al. (2000) the delivery date is often set by the customer. For make-to-stock companies a short delivery time is possible, while for engineer-to-order organizations the delivery time could be multiple weeks or months.
Order acceptance
Before orders can be accepted, they need to be checked on three aspects (Welker, 2004): • Accuracy of the information (for example quantity and price),
• Customer credit limit (“threshold that a company [creditor] will allow its customers to
owe at any one time without having to go back and review their credit file”.7 • Availability of the requested items.
When an order does not qualify for one of these aspects, the order can be rejected. These aspects hold for make-to-stock organizations, but “when the production is triggered by a customer order,
it is necessary the check whether the requested delivery date is realizable” (Welker, 2004, page 18). Also for a make-to-order company, there are no products waiting in stock, but the planning of production, resources and capacity are very important aspects to keep in mind. This will be discussed in paragraph 4.2.6.
Delivery date promising
Delivery dates are often set by the customer, when they want to receive the ordered products (Raaymakers et al., 2000). For a make-to-order organization like FrieslandCampina, where the production process is triggered by a customer order, the supplier needs to check whether the requested delivery date is realizable or not and needs to communicate this to the customer.
The entering of all the data in an information system
After the order information and the delivery date is checked, the order is mostly entered in an ordering information system after which the order is officially accepted (Waller et al., 1995). An information system is defined as: “A combination of hardware, software, infrastructure and
trained personnel organized to facilitate planning, control, coordination, and decision making in an organization”.8
Order selection and prioritization
Order selection and prioritization is necessary when there is for example capacity or material shortage. This could be done based on, for example, the due date, size of the order or the supplier-buyer relationship. It could also happen that because of unforeseen capacity or material shortage, orders need to be cancelled.
Planning of production, materials and capacity
This is also called the scheduling step (Shapiro et al., 1992) and refers to the activities in which the orders get scheduled into an actual production or operational sequence. The order information is translated into production orders. The resulting planning of the production is an important input for the purchasing or producing of materials and the utilization of the capacity for new orders on the short-term. This holds for the engineer- and make-to-order organizations. Besides the production scheduling, the logistical part is also an element of the planning of production, materials and capacity. The company and customer need to agree on delivery methods and frequency.
4.3 Summary
ordering process (Welker, 2004, page 15) it resulted that only the second cluster showed compliance and the other clusters will therefore not be further investigated.
The different activities of the order processing were defined and explained in paragraph 4.2. The six activities are: order quotation, order acceptance, delivery date promising, entering of all the data in an information system, order selection and prioritization, the planning of the production, materials and capacity.
CHAPTER 5
TENDER PROCESS FRIESLANDCAMPINA
This chapter covers both the second and the third sub questions of this investigation. “How the
current tender process of FrieslandCampina is structured: which departments and employees are involved and which factors are considered?” and “Which ordering process factors should
FrieslandCampina examine during the tender process and how can these factors be applied to the characteristics of the tender process of daily fresh dairy products of FrieslandCampina?” The chapter starts with the description of the tender process after which it will be analysed according to the results of the literature research of chapter 4.
5.1 Tender process
Reception of the tender contract
As defined in section 1.4, the tender process for FrieslandCampina starts with the buyer who sets up the tender contract with different products and volumes which it wants to receive for the next six to twelve months. This list of products, recipes, packing volumes and quantities is sent to the sales departments of different suppliers in Western Europe, one of which is FrieslandCampina. When the sales department of FrieslandCampina receives the tender, they examine not only the recipes of the separate tender products, but also further specifications, for example what kind of packs and shipping conditions. Generally the tender contract does not include impossible recipes or shipping conditions, and is forwarded to three departments: finance, transport and supply chain. In this investigation only the examination of the tender contract by the supply chain will be discussed.
Examination of the tender contract
Within the supply chain, the tender contract is reviewed by different people: the Supply Coordinator Fresh and the logistic managers of the three factories. The exact process is given in figure 5.1 and the process is shortly described next.
As part of the Fresh department, the Supply Coordinator handles the allocation of product volumes to Eindhoven and Rotterdam. With allocation is meant that he decides which products and in which volumes are produced where. For example: all the 2L milk cans will be produced in Eindhoven as well as 40% of the buttermilk volumes, while Rotterdam will produce the remaining 60% of the buttermilk volumes. Because of the limited capacity of the factories and the always changing product volumes, this is an important task.
factories, the supply coordinator can also allocate product volumes to Maasdam, but since that factory is part of another division the Supply Coordinator does not have as much insight in the capacity and current production. To prevent assigning too many volumes to Maasdam, or any of the other factories, direct communication about the tender allocation is required. Therefore, after the Supply Coordinator made a draft allocation of all the tender products, he consults with the logistical managers of the factories. During this consultation the logistic managers can also state whether they have preferences for specific products or not and the draft allocation will be adjusted.
Because the Supply Coordinator allocates the tender contract with all the volumes, it is clear what the problematic products of the tender contract are, as some volumes will not fit within the available capacity of the three factories. So after the draft and final allocation is set up and sent to the Sales department, they have information on which product volumes they should and should not bid.
Figure 5.1 Schematic presentation of the tender process
Bidding and negotiation process
After receiving information from the supply, finance and transport departments about the tender contract, the sales department will sent a preliminary bid on either the complete contract, or some of its product and volumes. This depends on the received information and the knowledge of the rest of the market, for example on what they expect the competition is going to bid.
The tender will compare this preliminary bid to the competition and decide whether it is low enough to participate in the negotiation process. If decided it is not low enough, FrieslandCampina can sent a new bid and when it is approved they can participate in the negotiation process. During these negotiations, different offers are made, for example: “We can produce the milk volumes for a lower price, but only if we also get the volumes of custard”. The tender will also give counter offers, which the sales department discusses with the supply chain, before accepting or rejecting.
On the final day, when offers are set under pressure of not getting any product volumes, the tender company chooses which supplier gets to produce and deliver which products. This decision is mainly based on the prices and the idea of keeping all suppliers reasonably happy, but it is possible that a supplier will ‘win’ products which he did not want in the first place. As stated in chapter 2, this is exactly what happened to FrieslandCampina.
5.2 Analysis for the tender process
This paragraph will examine which of the in chapter 4 found factors are appropriate for the specific characteristics and situation of the tender consideration process of FrieslandCampina. The factors which are within the scope of the investigation are further discussed. This is done by investigating the following sub question: “Which ordering process factors should
FrieslandCampina examine during the tender process and how can these factors be applied to the characteristics of the tender process of daily fresh dairy products of FrieslandCampina?”
5.2.1 Scope of research
Because not all factors as mentioned in chapter 4 are appropriate for the investigation, this paragraph first examines which of the in chapter 4 found factors are not relevant for the tender process of FrieslandCampina. For some factors no problems were encountered during the investigation, these factors will therefore not be further investigated, but are relevant to the ordering process. Also activities performed by another department than the supply chain, because of the focus of this thesis, are also not further investigated. The investigated activities and factors are presented in the table below.
Order processing activities Not relevant for investigation because:
Order quotation Not encountered as a problem during
preliminary research. Order acceptance; accuracy of information
(except costs) and customer credit limit
Performed by the sales department. Order acceptance; availability of the requested
items
FrieslandCampina produces to order, not to stock.
Delivery date promising FrieslandCampina cannot influence the delivery dates of the tender products.
Order selection and prioritization Delaying orders is not an option for FrieslandCampina.
Planning of materials Not encountered as a problem during preliminary research.
Table 5.1 Activities and factors as resulted from literature review.
The order processing activities that remain and are used to analyse the situation of FrieslandCampina in the following paragraphs are:
• Order acceptance:
o Calculation of the costs • Planning of production and capacity:
o Process steps
o Capacity of process steps
o Overall Equipment Effectiveness (OEE)
Besides these factors, there are specific attributes of the dairy food processing relevant for this investigation. As Van Donk (2001, page 300) described, certain food processing characteristics distinguish a company as FrieslandCampina from others. He identified three groups of characteristics:
• Plant characteristics. The food processing factories are structured in a flow shop.
• Product characteristics. Dairy products generally all have a short shelf life which influences the production strategy in ‘make-to-order’. Also the quality of the raw material can differ, which causes the production process or end product to change. A last product characteristic is the by-product which often results with the production of diary products. • Production process characteristics. The food processing industry has a divergent structure as there are many different recipes and packaging options for one kind of product. Because of this divergent structure, usually the production is done in small batches. These characteristics were not further investigated, but because of the nature of the investigated factories, they will influence the order processing. An example is the by-product; as earlier mentioned the by-product bactofugate is generated when processing raw milk for milk and can be used in the production of custard and yoghurt products. As a surplus of bactofugate results in disposal costs, it is important to also examine the influence of the tender on the bactofugate generation and use.
5.2.2 Order acceptance
Of the order acceptance, only the calculation of the costs is investigated. The reason for not investigating the accuracy of information, customer credit limit and the availability of the requested items, can be found in table 5.1.
possible in the factory with the lowest variable costs. These energy and labour costs of the tender production will be further investigated.
Table 5.2 Cost calculation
5.2.3 Planning of production and capacity
The production rate, the number of outputs that are produced during a given period, is in the food processing industry mainly determined by the capacity of the factory. This is also the case for FrieslandCampina. The production is mainly limited by the number and size of the storage tanks and filling lines, which determine how many different products can be made and in what batches. That is why the capacity of the different production steps is used to determine whether or not a tender contract can be accepted or what products and in what quantity could be produced for the tender. In this paragraph the process steps and machine capacity are analysed.
Process steps and their capacity
As shortly explained in chapter 1, the production process consists of 3 production steps: 1) processing, 2) filling and 3) rewrapping. Each of these steps has its own kind of machines and related capacity.
1. Processing
This production step consists of the different kinds of tanks in which the raw milk and other ingredients are blended into an end product. For each product this stage is different, because different processes need to be performed. These different production processes can be found in appendix A.
the volumes need to be grouped according to their required processing so that they can be divided over the different processing tanks. To be able to analyse the tender volumes, the capability and capacity per processing tank needs to be calculated.
2. Filling
The three factories can fill the products in different kinds of packs: gable top, tetra brik, mini cross and cups. Most of these filling lines are capable to fill different sizes of packs and are either for thick or thin liquid production. Most filling machines have two sides on which the products can be filled; so one machine can produce twice as much product and also two different products at the same time. It depends however on the filling machine what the possibilities are, as a machine is always either for thick or thin liquid production.
For the tender contract, it is important to have a complete overview of the idle capacity of the three factories, so the capability and capacity of each filling machine needs to be calculated. This is presented in chapter six.
3. Rewrapping
There are four different ways to pack the finished products; in a cardboard box, crates, RiC’s and a cardboard tray. Most of the products are rewrapped in cardboard boxes what is done by a wrap around machine (WA). The capacity of these WA’s is comparable to the capacity of the filling lines, so this should not give any problems during the production process, for as long as there are equal WA’s as filling lines requiring wrapping. This is the case for the factory in Maasdam because there the products are only rewrapped by WA’s and every filling line has its own dedicated WA. In Eindhoven and Rotterdam there are only a limited number of WA’s available for wrapping, which needs to be kept in mind during the planning of the daily production.
Overall Equipment Effectiveness (OEE)
The OEE of a production line is a measurement for the effectiveness of the usage of production equipment. It is a time based system, which measures the ratio between the total production time, the ‘used time’, and the time the production actually ran effectively; the ‘effective time’. By dividing the effective time by the used time, the overall equipment effectiveness is the result. FrieslandCampina uses the production monitoring system Patch, which maps the performance of the linked production machine, to calculate the Overall Equipment Effectiveness (OEE). Every week the program generates an overview of the performance of all the separate lines over the last week. The following figures present the calculation of the OEE. The total time is reduced by losses in effectiveness. Each line in figure 5.3 presents a certain time indication, with an explanation for the loss in time compared to the previous indication. The factory open time, for instance, is the result of the total available time in a week (168 hours) minus the time the factory is closed.
Figure 5.3 Overall Equipment Effectiveness – Definition card
Allocation
The allocation of production volumes over Eindhoven and Rotterdam is a continuous process for the Fresh department. Certain Fresh products can only be produced in one factory, but for others the planners can choose. Rough allocations are made when the budget is set up, but deviations can still be made. This is not the same for Maasdam; this factory has its own budget with products, so no allocations need to be made.
As explained, after the tender contract is received, the Supply Coordinator examines the allocation of the tender volumes over the three factories. If required the Fresh allocation can be altered for the tender volumes.
Besides the idle capacity, the bactofugate is also influenced by the allocation of production volumes. When much more milk than thick liquid products is allocated to one factory, that factory will generate more bactofugate than can be used in the production of thick liquids. The result is that this bactofugate needs to be disposed of, while another factory could have used it.
5.3 Summary
In this chapter the second and third sub questions were investigated: “How the current tender
process of FrieslandCampina is structured: which departments and employees are involved and which factors are considered?” and “Which ordering process factors should FrieslandCampina
examine during the tender process and how can these factors be applied to the characteristics of the tender process of daily fresh dairy products of FrieslandCampina?”.
Section 5.1 has provided the tender process and the involvement of different employees. This process was further used to examine which ordering process factors should be examined during the tender process.
• Production capacity of the three production steps, this includes the calculation of the capacity.
• Allocation of the product volumes, both Fresh and tender volumes, to the three factories. • Variable costs.
CHAPTER 6
DEVELOPMENT OF THE MODEL
This chapter discusses the fourth and final sub question of this investigation: “How should the
relevant information be used and presented in an excel model to support the tender decision?” As shortly discussed in chapter 2, an end goal of this investigation is to develop a model which presents all relevant information required to consider a tender and needs to be able to present the consequences of changing volumes and allocation.
From chapter five resulted that there are three factors which should be used during the tender process. These factors; the production capacity, allocation of the production volumes and variable costs are investigated here and used in the excel model.
This chapter starts with the calculation of the production capacity after which the fundamentals of the model are discussed in section 6.2. In section 6.3 the outputs of the model are discussed: capacity, the by-product bactofugate and the costs of the tender volumes.
6.1 Production capacity
As discussed in chapter 5, the processing, filling and rewrapping capacity needs to be examined during the tender consideration and acceptation process. It is important that the logistical managers examine whether the additional volumes of the tender contract can be produced within the available capacity. To be able to do this, the model calculates the capacity per production group, per factory and per week. This is all done a bit different for each productions step, which is discussed in the following paragraphs.
During this chapter are three groups of product volumes are used: • the Fresh volumes to represent the daily fresh dairy products,
• the Maasdam volumes to represent the Benelux volumes that are produced in Maasdam, • the tender volumes that represents the product volumes that resulted from the tender
contract.
6.1.1 Processing
For Eindhoven and Rotterdam, there are separate processing tanks for all the different products. For this investigation the capacity for the yoghurt, buttermilk and custard processing is calculated. Instead of a separate tank per product group, Maasdam has only two processing tanks: mixing, dissolving and dosing tank-1 for products based on yoghurt and mixing, dissolving and dosing tank-2 for flavoured drinks and custard.
The processing capacity is calculated by the following data:
• The times or hours a day the tank can be used. Because of clean up and change-over times, the tanks cannot be used fully.
• The capacity per hour or per day. This differs per processing tank because of their nature and therefore the available data on the capacity for each process differs.
• Capacity factor. The processing tanks for milk and the tanks of Maasdam cannot optimally be used, therefore a capacity factor which constrains the available capacity, is in place.
This data results in a capacity per week for each processing group which is used to examine whether there is enough capacity available for the required production volumes. By updating one of the above mentioned capacity factors, the capacity per week is also updated.
6.1.2 Filling
Almost all available filling machines and lines are presented and used in the model, except for the export lines of Eindhoven. The filling capacity is calculated in the same way for each factory, by using the following data:
• The total amount of hours per week the filling department is running. Generally this is the same as for the processing step, but exceptions can be made.
• The theoretical capacity per filling line, per hour.
• The maximum usage of the filling lines. This is mostly set on 90-95%, as discussed in chapter 5.
• The Overall Equipment Effectiveness of the filling lines. To give a good representation, the OEE is taken as an average over multiple weeks; week 50-52 of 2011 and week 1-7 of 2012.
By multiplying this data, it results in a capacity per week for each of the filling lines. By updating one of the above mentioned capacity factors, the capacity per week is also updated.
6.1.3 Rewrapping
As shortly discussed in chapter five, instead of the available and used capacity, the utilization of the rewrapping machines is investigated in percentages of the total available capacity. According to the logistical manager of Eindhoven and Rotterdam there are three rewrapping groups which need to be investigated and presented in the model because these combinations cause problems. These three rewrapping groups are:
1. In Eindhoven; the 4 WA’s with which the yoghurt and custard filling lines are connected. 2. In Eindhoven; the WA with which the milk and buttermilk filling lines are connected. 3. In Rotterdam; the WA and RiC on which the 1.5 litre milk is wrapped.
6.2 Fundamentals of the model
To make the actual model work it requires data of the production volumes which it needs to allocate. Also to be able to allocate these volumes, allocations to the factories need to be set up. These fundamental parts for the model are discussed here.
6.2.1 Production volumes
Three groups of production volumes need to be processed in the tender model: the Fresh, Maasdam and tender volumes. Generally speaking, the Fresh volumes can be allocated to the factories of Eindhoven and Rotterdam, the Maasdam volumes only to Maasdam and the tender volumes to all of the three factories.
Of the first two production volumes, a lot of data is available: the content, product kind, required filling line, required rewrapping and the percentage bactofugate it can use. This is all stored in a separate sheet in the MS excel model and is generated when the specific article number is in the list of the Fresh or Maasdam production volumes.
The tender volumes are received with limited information: the product name, content, package, rewrapping, number of SKU’s per rewrapping and the total annual volumes the tender wants to receive. What is missing per product group, is the filling line it requires and how much bactofugate the product can use during processing. The tender volumes are set as input for the model as is presented in the following table. The total volumes need to be divided into the upper part of the table according to their characteristics, after which the volumes per week are calculated automatically.
Table 6.1 Input for the tender volumes
6.2.2 Allocation matrix
The table below presents the allocation matrix of the Fresh products per group over the four available options; Eindhoven (EHV), Rotterdam (RTD), Maasdam (MSD and externally. This is a hypothetical allocation roughly based on the currently allocation of the Fresh volumes.
For the tender volumes a separate allocation table is set up, this allocation is roughly based on the allocation of previous tenders and the idle capacity in the three factories after allocation of the Fresh and Maasdam volumes.
Table 6.2 Hypothetical allocation of the Fresh products
6.2.3 Costs
For the investigation into the tender consideration and decision process, the energy and labour costs are of importance. The energy costs used in this investigation is an average cost per litre produced product. The labour cost consists of the average number of employees working the processing, and filling and rewrapping lines and their average wages. Because of the sensitivity of this information, FrieslandCampina requested not to publish this information.
The total amount of energy costs are calculated by multiplying the total allocated volumes, for both the normal and the tender production, with the relevant factory’s energy costs per litre. The total labour costs are calculated by adding up the sub totals per production step, which is the result of the product of the total required hours, the average number of required employees and their average wage.
Important for the usage of the model is that all this fundamental data can easily be changed in the model. This does not only give FrieslandCampina the possibility to update the model but also to try out different scenarios. These scenarios could include different allocation percentages, but also certain parts of the tender volumes. To keep the calculation of the production capacity up to date, this also can be altered.
6.3 Output of the tender model
To be able to consider the consequences of different scenarios for the acceptation of a tender, the results of the model need to be calculated and presented in a clear and logical way. How this is done for the three outputs, capacity, bactofugate and costs, is presented in this paragraph. When leaving out the tender volumes, the model will still function in the same way and generate the capacity and surplus of bactofugate. Only the costs will not be calculated as they are based on the tender volumes.
6.3.1 Capacity
The calculation of the used and available capacity is for the processing and filling production step almost identical. The only difference is, that the processing step calculates with volumes, while the capacity and usage of the filling department is calculated in units. For both production steps the total capacity per week is calculated as well as the total required capacity for the production volumes of that week. For the rewrapping step the total volumes of products are recalculated to the total number of required hours. This is then compared with the total hours available for that same week.
The capacity of the different factories and production steps are presented in column charts like presented below. First the capacity of the processing step is discussed after which the filling and packing steps follow.
This chart presents the used and available capacity for the mixing, dissolving and dosing-1 processing tank of Maasdam. As can be seen, the blue parts represent the required capacity for the production volumes. The red parts on top of the blue ones present the idle capacity of that week. When the red part is below the x-axis, it means that there will be under capacity for that week. This indicates that the managers of the Maasdam factory need to reallocate some of their volumes for the last four months of the year or expand their opening hours.
Figure 6.1 Column chart with the production volumes and free capacity of the Mixing, dissolving and dosing tank -1 of Maasdam
Figure 6.2 Column chart with the production and tender volumes and free capacity for the 1.5 litre filling line of Rotterdam
Also the utilization of the rewrapping department is presented in column charts to give the users of the model a quick overview of the utilization. Here the column per week only consists of one part which presents the utilization in percentages of the total available capacity. The chart below presents the utilization of the four WA’s for the yoghurt and custard rewrapping in Eindhoven. With the current allocation, the utilization of these WA’s is between the 15 and 25%, which leaves room to shift or delay production batches.
Figure 6.3 Colum chart with the utilization of the yoghurt and custard WA rewrapping of Eindhoven
6.3.2 Bactofugate
The total generated and used bactofugate, as can be seen on the right side of the table beneath, is calculated by the generated and used bactofugate of the normal production volumes increased with the litres used and generated bactofugate for the tender volumes (left side of the table). These are the volumes of generated and used bactofugate for the production in Eindhoven, with hypothetical tender volumes, based on previous tenders.
Table 6.4 Generated and used bactofugate of the theoretical tender and total volumes for Eindhoven
Yoghurt & Custard
6.3.3 Costs
The calculation of the additional costs of the tender volumes is based on the allocated volumes per product group and the costs for energy and labour for the processing, filling and rewrapping steps. The product groups of the tender are: drink milk, buttermilk, custard, double custard and yoghurt. When this is added up, it presents the total amount of costs connected to the tender volumes.
When testing different product allocations, the financial results can be seen in this table. By comparing the different costs-outputs, the most preferred allocation can be found. This would only be based on the costs of the different factories, but the costs are very important for the bidding process with the tender.
6.4 Summary
