Pick, Pack, and Ship!

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Pick, Pack, and Ship!

“Streamlining the Order processing activity at Ofichem BV”

Author: M. Schapink

Study: Business Administration Specialisation: Operations & Supply Chains

Student nr.: 1576615

University: Rijksuniversiteit Groningen Faculty Business Administration Location: Groningen

1st Supervisor: dr. ir. S. Brinkman 2nd Supervisor: dr. G.A. Welker

Organisation: Ofichem Department: Logistics

Location: Ter Apel

Internet: http://www.ofichem.com

Company Supervisor: dr. W.H. Oldenziel Function: Managing Director

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Preface

With this thesis project my study at the Rijksuniversiteit Groningen comes to an end. Before my time at the RUG I studied Business Information Technology at the HanzeHogeschool Groningen. Because I wanted to do a Master’s degree I started with the pre master degree program two years ago. I really enjoyed my time at the RUG and it is has been an enormous supplement to my previous study. In this preface I want to thank everybody who have supported me during my graduation period at Ofichem. First of all I want to thank all the people of Ofichem, for their co-operation and time during my research period. My graduation period at Ofichem was very interesting and enjoyable.

Special thanks go to Weite Oldenziel who gave me the opportunity to graduate at Ofichem. Further, I want to thank my colleagues; Hannie Drosten, Marlies Arends, Jacqeline van Genderen and Wim van Hove also for their support and patience during the project.

Secondly I want to thank Bas Brinkman of the University of Groningen for his clear feedback. During the sessions we had you gave me very clear advices about which directions I could follow. I am sure that without these advices I was struggling with my thesis project much longer. Bas thank you for your time and support (even during your holiday!).

Finally I want to thank my girlfriend, my parents, my in-laws and my friends for their support. They have been very supportive during my whole study period in Groningen.

Matthijs Schapink

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Management summary

This thesis project has been executed at Ofichem which is located in Ter Apel. Ofichem consist of two distinctive companies, Laboratory Ofichem and Ofichem BV. Laboratory Ofichem is the manufacturing part of the company, Ofichem BV is the distributing part of the company. In this thesis project the main focus was on Ofichem BV, and especially on the logistics department.

Ofichem BV haven’t formulated a real strategy yet, they want to express and realise the image that

“everything is possible”. They offer their customers a very wide range of Active Pharmaceutical

Ingredients (API’s), without any limitations regarding order quantities, country of origin, number of products per order, etc.

The management and sales executives observed that since the integration of the distributing part of the company, logistics has problems to process the actual number of sales orders correctly. It seems that the sales order processing (SOP) activity takes too much time and many documentation errors occur. Therefore the management wanted to know which factors influence the order processing efficiency and how these factors can be improved. The definition for sales order processing in this research project is, sales order entry including the allocation of products, delivery date, and the creation of dispatch documents while trying to maintain accurate stock levels.

The main research question of this thesis is:

“ Which factors influence the order processing efficiency and how can these factors be improved whereby the average order processing lead time will be reduced and the order processing accuracy will be increased ? ”

This research has two objectives which are interwoven with each other. The first objective was to indentify the main performance gaps with regards to the order processing activity for the logistics department of Ofichem BV. By means of analyzing the performance of the sales order processing activity, four main performance gaps between actual and optimal performance have been indentified. The second objective was to implement the optimal sales order processing activity at Ofichem BV as far as possible.

During the order processing activities a lot of checks are necessary to be sure that the customer receives his goods in the right quantities, on the right time, at the right location, and that the

accompanying order documents are correct; e.g. correct batch number registration, correct invoices, order confirmations etc. Due to these checks and the fact that an order processing employee have to create almost all order related documents manually the order processing lead time is quite high. Order processing efficiency in this research consists of the elements speed and accuracy. The order processing efficiency is negatively influenced by:

• the lead time in the order processing activity

• the information system

• the coordination between actors

• the stock reliability

There are more performance gaps, however to make this research feasible only these four main topics have been selected.

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This research points out that, redesigning the SOP order flow, reducing the number of double data entry moments, the formulation of clear tasks and responsibilities and more effective communication between the actors involved can improve the SOP efficiency at logistics.

The hierarchy to solve these problems during SOP is based on how much time can be reduced while at the same time accuracy improves. Reducing the moments of double data entry has the most effect on both the order processing time and accuracy. This can be done through changing the information system in such a way that documents can be generated from the system.

The second priority to reduce the order processing time and improve accuracy is to redesign the SOP order flow, whereby a number of steps in the actual SOP activity should be removed, order statuses should be added, operational coordination between sales and logistics should be formalized, and a clear distribution of tasks and responsibilities for employees at logistics should be implemented. Finally a central policy for order processing should be implemented, whereby a central view of order processing originates.

The implementation process wasn’t very easy. Beforehand I didn’t realize that it took so much time to implement relative small changes. Due to the fact that the number of employees involved in the change process was rather small, it was possible to start with the implementation during my master thesis project. Motivating and reducing the natural resistance to the changes were the most important aspects during the change process. To motivate the need for change I have clearly described the difference between the old way of working and the new way of order processing. Employees got enthusiastic when they noticed the lead time reduction in the SOP activity for example.

However there was also some resistance to the changes, especially in the more hectic periods where the order processing employees often felt back in their old habits. By means of frequent

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Introduction

This thesis project is performed at Ofichem which is located in Ter Apel. Ofichem consist of two distinctive companies, Laboratory Ofichem and Ofichem BV. Laboratory Ofichem is the manufacturing part of the company, Ofichem BV is the distributing part of the company. Ofichem has 25 employees which are divided over the departments; manufacturing, sales, logistics, and finance. This thesis is focused on Ofichem BV, and especially on the logistics department.

The distributing part of Ofichem BV is growing too fast for the departments logistics and finance. Originally Ofichem BV was a manufacturer of active pharmaceutical ingredients (API’s) for the production of veterinary and human medicines. Logistics only had to take care of production orders and a few trade orders. Since Ofichem BV expanded their distributing part of the company, the number of trade orders has increased significantly. This expansion caused some logistical problems like inventory differences, inefficient order processing, double data entry etc.

The product portfolio of Ofichem BV is very broad. This diversity in products as well as in order specifications makes the order process at Ofichem very complex. The general idea at Ofichem is that since the integration with Ofichem BV the order process need to be restructured in order to be able to process the actual number of orders. Simply said the actual order processing activity takes too much time. Also the sales executives notice that their time for other activities, like sending quotations, prospecting, and forecasting, etc becomes less. To get more time to perform these tasks properly the order processing activity should be improved, so that they can focus on pure sales activities again. The objective of this research is to find out which factors influence the order processing time / accuracy (further on in this research order processing efficiency) and how these factors can be improved, so that the average order processing time will be reduced and at the same time accuracy will be increased.

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1. Description of the organization

1.1 Introduction

In this chapter the firm Ofichem will be described. Ofichem which stands for Oldenziel FIne CHEMicals started in 1978 as a manufacturing company of veterinary Active Pharmaceutical Ingredients (API’s). Since the early 1980s Ofichem also manufactures an exceptional range of API’s for human medicines. Through their international organisation in Europe, Middle East, Asia and the Americas, API’s are bought and sold all over the world. What makes Ofichem exceptional in the market, is that they produce a number of these ingredients themselves. The knowledge they acquire through their international network creates a good source of up-to-date market information, that their customers in turn may use in their decisions. Furthermore, a lot of their European customers prefer to do business with a European trading partner instead of direct contact with Chinese suppliers. In the pharmaceutical industry, there is also the perception that the quality of API’s which are bought from European

companies is more reliable than directly imported Chinese material.

1.2 Description of Laboratory Ofichem

Laboratory Ofichem manufactures a full range of veterinary pharmaceutical ingredients, and an assortment of human pharmaceutical compounds. The veterinary raw materials are partly produced by Ofichem and partly manufactured by partner companies. In addition to veterinary pharmaceutical materials, Ofichem manufactures an exceptional range of Active Pharmaceutical Ingredients for human medicines since the early 1980s. Examples of such medicinal raw materials are cisplatin, pamidronic acid and thiazinamium methyl sulphate. Manufacturing and packaging takes place in GMP-grade clean rooms and is ISO 9000: 2000 certified.

1.3 Description of Ofichem BV

The distributing part of the company is formed two years ago. This subsidiary company operates worldwide with a few sales executives in Germany, France, Spain and China. Almost all API’s Ofichem BV deals with, are bought in China. In China they have a purchaser / agent, who takes care of the direct purchase activities with the suppliers like price negotiations, locating and searching for new suppliers, trading of samples etc. This person has contacts with a lot of factories in China, and because he is familiar with the local customs, traditions, and language it enables Ofichem BV to obtain good prices. The sales executives eventually decide which products they buy on which moment in which quantity, but the role of their middleman is very important.

This research project is focused on the primary process of Ofichem BV, which is rather

straightforward. Almost every day a container with API’s comes in and also every day a full truck of packed products provided with the necessary documentation leaves the warehouse. The primary process has a mixing function (Stock & Lambert, 2001), through which customers of Ofichem BV can order in another rhythm and other quantities than Ofichem BV does. As soon as the products are received in the warehouse physically, they will be moved to a particular storage location. This storage location is also the Customer Order Decoupling Point (CODP). The CODP is the main stocking point from which deliveries to customers are made (Hoekstra & Romme, 1985). As soon as an customer order will be fulfilled, the requested products are being picked from their storage locations, then packed for shipment and subsequently shipped to the location of the customer. The shipment function has been outsourced to an external freight forwarder.

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Figure 1: Organisation chart Ofichem

1.3.1 Objectives

Ofichem BV haven’t formulated a real strategy yet, they want to express and realise the image that

“everything is possible”. They offer their customers a very wide range of products, without any

limitations regarding order quantities, country of origin, number of products per order, etc; e.g. they accept orders of 25 Kgs but they also deal with orders of 10000 Kgs, the can deliver from their warehouse but they can also arrange direct shipments from suppliers in China to their customers which are all over the world.

Slack 2001, defines five performance objectives or competitive factors on which a company wishes to compete. These objectives are quality, costs, dependability, speed, and flexibility. However to

determine the relative importance of the five performance objectives they can be divided into order winners and order qualifiers. Companies can have different views of each of the performance objectives, therefore the performance objectives including their relative importance will be described and explained in the context of Ofichem BV.

Quality

Many definitions of quality refer to the ‘specification’ of a product or service, usually meaning high specification (Slack & Lewis, 2001). The pharmaceutical industry is subject to a number of regulations stipulated by Food and Drug Administration (FDA) and other regulatory authorities. These regulations enforce strict quality standards on pharmaceutical companies to ensure the safety and benefits of the products made by them. Ofichem BV has it’s own laboratory in which samples of the products they deal with are analysed first. In case of bad values the whole batch will be blocked and returned to the supplier. For Ofichem BV quality is important though, but their customers don’t regard quality as key reason for purchasing his products at Ofichem BV. Therefore quality is an order qualifier.

Speed

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Asian, or American countries, so in that context speed is not the reason why those companies do business with Ofichem BV.

Flexibility

Flexibility is the ability to adopt different states, take up different positions or do different things (Slack & Lewis, 2001). As already has been mentioned before, Ofichem BV wants to express and realise the image that “everything is possible”. Ofichem BV strives to fulfil as many specific wishes of their customers as possible, so flexibility is an order winner. There are two dimensions of flexibility namely range flexibility and response flexibility. Ofichem BV mainly excel in response flexibility, because communication lines are short through which they can adjust order specifications very rapidly. Furthermore, flexibility can be divided into product, delivery and volume flexibility. Product flexibility is not an issue for Ofichem BV, because they don’t introduce new products, they only deal in existing products which are needed by their customers. Delivery flexibility is a very important dimension of flexibility for Ofichem BV, so that planned or assumed delivery dates can be changed. Volume flexibility is necessary when a customer wants to increase his order quantity for example.

Dependability

Dependability here is used to mean keeping delivery promises, honouring the delivery time given to the customer. It’s the other half of total delivery performance along with delivery speed (Slack & Lewis, 2001). For Ofichem BV this total delivery performance is an order winner. Customers of Ofichem BV are all manufacturing companies, who are dependent on the delivery performance of Ofichem BV. These customers have to rely on the delivery dates they have fixed with the sales executives of Ofichem BV. During this research there were no indications that the delivery performance of Ofichem BV was beneath the desired level.

Costs

For Ofichem BV cost is not the greatest performance objective, they simply cannot compete with the Chinese suppliers. Because of the high quality regulations and the flexibility that Ofichem BV offers to their customers the cost price of their products is relatively high. As already have been made clear their Chinese colleagues can offer much lower prices. Ofichem BV can never compete with these traders, because of the high service of Ofichem BV offers to their customers. On the other hand the market is very dynamic and prices change every day, so cost is important to take care of for Ofichem BV, but it’s not the main reason why their customers do business with Ofichem BV. Cost is regarded as an order qualifier though.

Order Winners Order Qualifiers

Flexibility Quality

Delivery performance (Speed+Dependability) Costs

Table 1: Order-winning and qualifying competitive factors

1.3.2 Products

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1.3.3 Inventory within Ofichem

Inventory appears in several forms;

• Raw material inventory

• Work-in-process (WIP) inventory

• Finished product inventory

All these forms of inventory can be found at Ofichem, but for this research only the finished product inventory is important. There are several reasons why Ofichem holds this inventory. Inventories influence the cost and service level and are thus important for Ofichem. Products may be withdrawn from inventory in every quantity the customer wants. Some customers are willing to wait for their products; but others expect immediate service on demand.

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2. Research plan

2.1 Introduction

In chapter 1 it’s already mentioned that Ofichem BV exists only for two years and logistics hardly can’t keep up with this fast growing distributing part of the company. My master thesis project is also a result of these problems. In this chapter my research plan will be described. First the research motivation and a detailed problem analysis are presented. After that the problem statement including the research objective, the main research question and the different sub-questions will be outlined. Furthermore, the theoretical framework and the methods for data gathering will be discussed. In the end of this chapter a conceptual model will be presented which will be used as a guideline through this thesis.

2.2 Research motivation

Originally Ofichem was a manufacturer of Active Pharmaceutical Ingredients (API’s) for the production of veterinary and human medicines. Logistics only had to take care of the distribution of a couple of sales orders. Since Ofichem expanded their distributing part of the company with Ofichem BV, the number of sales orders increased significantly. After this expansion the overall performance of the logistics department decreased. It’s not only the significant sales order increase they were faced with, but also the product portfolio which has been quadrupled. Of course these kind of growth rates are very positive for the company, however due to this extreme growth in such a short period of time logistics hardly can’t keep up with the daily workload anymore. The management thinks that the order processing activity is performed very inefficiently at the moment. In this research will be checked whether this perception is correct and what needs to be changed in order to realize a more efficient order process. As you might expect, my master thesis project is mainly focused on Ofichem BV, the distributing part of the company.

2.3 Problem analysis

To identify the main bottlenecks in the actual Sales Order Process (SOP) several interviews with all actors involved (Management, Sales, and Logistics) have been arranged. Furthermore, I have also worked as an order processor for a couple of weeks to get familiar with the job and to experience the bottlenecks in the actual process myself. In below subparagraph’s you can find an overview of the most critical problem areas identified during both; the interview sessions and my cooperating period as an order processor and process analyst.

2.3.1 Bottlenecks identified during interviews

The management indicated that the current stock reliability is very poor and need to be increased as soon as possible. At random they execute cycle counts and more than 50% of these counts indicated significant inventory differences (administrative versus physical). Furthermore, they also execute physical inventory counts once a month whereby all items are counted, and recounted at one time. Normally these kind of inventory count’s are only executed once per quarter / year, however due to the unreliable stock information this became a monthly procedure for Ofichem B.V.

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Logistics indicated that most of their time they spend on creating the necessary shipping documents (Invoice, Packing list, Certificate of Analysis, Bill of Lading, etc.) for every customer order individually. Furthermore, they indicated that they prefer to have direct contact with their customers as well in order to accommodate a better customer service with regards to delivery reliability. E.g. When a customer wants to place a rush order, firstly they contact their Sales representative (according to actual communication policy). Accordingly, Sales contacts Logistics to check the actual inventory and best estimated arrival date. Logistics indicated that it might be good to revaluate the communication policy in order to reduce the amount of non value added communication.

The biggest concern for Sales is the poor level of stock reliability. They don’t have any confidence in the information system that is used and where all their customer orders are entered and executed from. As such quite often they ask Logistics to double-check the physical inventory for a particular product first in order to be able to share reliable dispatch information with their customers. Considering the fact that Sales is also responsible for the Purchasing process, they really need be sure that the actual inventory levels the information system indicate are correct.

Also Sales indicated that in order to expand their business, the amount of documentation errors (typo’s, incorrect quantities, missing batches, etc) need to be reduced as soon as possible.

Furthermore, they indicated that they still execute a lot of Logistics related tasks like; -sales / purchase order entry, - stock level enquiries, - communication about shipments and documentation availability, etc.

2.3.2 Bottlenecks identified during cooperating period in order

processing.

To get a good impression of the actual state of the order processing activities, I joined the order administration department in the first weeks of my thesis project. By means of doing this I wanted to discover the problems they are facing with my own eyes, but also to get a good overview of the complete order process. During this period I discovered several problem areas.

The purchase and sales order process can be executed much more efficiently. It’s obvious that a lot of process steps are executed by many different actors. Further it seems that there is hardly no mutual communication between logistics personnel during hectic periods. This being said, there are also no formal procedures where tasks and responsibilities with regards to the main logistical processes within Ofichem are defined. Due to this lack of process formalization several examples of inefficient order processing have been observed.

Furthermore, the current information system originally has been created as a registration / distribution database for Ofichem sourced Active Pharmaceutical Ingredients and this worked fine. However due to the expansion of Ofichem BV both their product and order portfolio increased drastically, which clearly revealed the system’s imperfections. Due to the system hierarchy a lot of double data entry is necessary during the order processing activities. In this research the suitability of the information system will be analyzed very thoroughly.

Moreover, a lot of manual document checks (order confirmations, shipping documents) are being carried out before the final documents are being couriered to the customer, whereby the order process is being delayed quite substantially.

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2.3.3 Summary

This type of research is a problem-solving research. In a problem-solving research the complete problem of the customer will be taken into consideration (De Leeuw, 2000). The complete problem of Ofichem BV consists of many different issues. In this section an overview of the observed bottlenecks at Ofichem BV will be presented. In below table these bottlenecks have been categorized into four main problem areas

Bottleneck Problem area

Inventory differences (physical vs administrative) Stock reliability Errors related to shipping documentation Information System Many actors involved in the order processing

activity

Lead time in the order processing activity Many checks/signatures needed in the order

processing activity

Lead time in the order processing activity Double data entry Information System

Manual creation of shipping documents Information System Logistical related communication via Sales to

customer

Coordination between actors Lack of trust in stock level output data provided

by the information system

Stock reliability

Sales takes care of distribution related tasks Coordination between actors Lack of communication during hectic periods Coordination between actors Information system originally developed as an

API registration database and not as an order processing system.

Information System

Lack of Management Information Information System

Table 2: Bottlenecks & Problem areas observed during interviews and co-operating period.

Based on these bottlenecks four main problem areas could be observed, which will be the main focus areas for this thesis project. In chapter 4 these problem areas will be described into more detail. Furthermore, a list of possible root causes for every problem area will be presented here as well.

2.4 Problem statement

The problem statement (management problem) is the occasion for my master thesis project at Ofichem BV. In this problem statement the research objective, the main research question, sub-questions and constraints will be mentioned. The management problem is the basis for formulating the research objective.

In paragraph 2.2 I already mentioned that the actual order processing activity takes too much time, whereby there is not enough time for other tasks. This problem exposed in consequence of the enormous turnover growth of Ofichem BV after the junction of the commercial part and the laboratory part of the company. The logistics department (former order administration) should take care of the following tasks according to the management:

• order processing (sales & purchase orders)

• registration of incoming and outgoing goods in the information system

• answering the telephone

• order planning

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2.4.1 Research objective

In this research the main focus will be on the order processing activity, because the management observes a lack of efficiency here. According to Welker (2004) order processing activities concern activities that are directly related to the handling of individual customer orders, which contains order quotation, order acceptation, order entry and order scheduling. Order acceptance, order entry and order scheduling are the most important order processing activities in this research project.

Welker (2004), describes order acceptance as the activity in which order information of the customers is checked and is entered in the order information system, whereby the checking of information concerns:

• the accuracy of the information such as product description, product number, quantity and price

• the availability of requested products.

It is clear that logistics spends too much time on order processing at the moment, especially during the activities of order acceptance and order entry. Every order document (order confirmation, picking list, invoice) is made manually, which results in a lot of double data entry, which in turn results in mistakes; e.g. wrong prices on invoices, wrong quantities, typing errors in product names etc.

This research has two objectives which are interwoven with each other. The first objective is to critically analyze how the actual order processing activity differs from the optimal order processing activity for the logistics department of Ofichem BV. The second objective is to implement the optimal order processing activity at Ofichem BV as far as possible.

2.4.2 Research question

The management observes that the task of order processing takes too much time, which means that there is not enough time left to perform the tasks properly.

Therefore the management want to know which factors influence the order processing time (further on in this research order processing efficiency) and how these factors can be improved, so that the average order processing time will be reduced and at the same time accuracy will be increased. The main research question of this thesis is:

“ Which factors influence the order processing efficiency and how can these factors be improved whereby the average order processing lead time will be reduced and the order processing accuracy will be increased ? ”

As already described in the research objective the most important order processing activities are;

order acceptance, order entry and order scheduling, so potential factors that might influence the order

processing efficiency will be investigated.

2.4.3 Sub-questions

To answer the main research question, first a group of sub-questions have to be answered. The following sub-questions are formulated:

1) What is the actual order flow of sales orders at the department of logistics? 2) What are the main performance gaps and root causes in the actual SOP activity?

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2.4.4 Constraints

There are some constraints regarding this research project. To make this research feasible these constraints have to be mentioned. According to De Leeuw (2000) constraints can be divided into process and product constraints.

For this thesis project the process constraints are:

• Limited time (22 weeks)

• Ofichem BV should provide access to all necessary sources of information which might be needed for the research project

• The cooperation and obligingness of the employees who are involved in the research The product constraints are:

• The main focus will be on the order processing activities, order acceptance, order entry and order scheduling, where order processing accuracy is mainly applicable to the order entry activity.

• Finance and production are not part of this research project, which is mainly focused on the department of logistics.

• Implementation of the recommendations is part of this research project.

2.5 Theoretical framework

This research project mainly focuses on the logistics department of Ofichem BV. According to

Schönsleben (2004) logistics in and among companies is the organization, planning, and realization of the total flow of goods, data and control along the entire product life cycle. On the other hand logistics management deals with efficient and effective management of day-to-day activities in producing the company’s output.

In a trading company logistics should coordinate the primary process, which mainly consists of order processing and order fulfillment. The primary process at Ofichem BV has a mixing function, whereby customers can place orders on the moment and in quantities they want (Stock & Lambert, 2001) In scientific literature a lot of definitions of order processing can be found. According to Welker (2004) order processing is the process in which customer order are translated into product orders, resulting in the delivery of goods according to customer requirements for quality, time and quantity. In the work of Derks and Weston(2004) order processing is described as SOP (Sales Order Processing) which is highly procedural, because the steps that need to be performed to process a sales order, and the rules that guide their execution, can to a large extent be pre-specified. They make a distinction

between three typical SOP organizational units namely, Sales, Dispatching, and Accounting. See table 1 below.

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In this research project the focus will be on the following activities, for sales:

• sales order entry

• allocation of product batches to orders For dispatching:

• maintain accurate stock levels

• create dispatch documents (order confirmation, packing list, invoice)

The definition for order processing which will be used for this research project is, sales order entry including the allocation of products, delivery date, and the creation of dispatch documents while trying to maintain accurate stock levels. However the main topic of this research is improving the order processing efficiency. To describe the actual order processing activity and the optimal order flow, Actor Activity Diagramming(AAD) is chosen as modeling technique. Many modeling techniques primarily aim at a complete and severe representation of reality, but they are not well suited for an assessment of business processes from a management and an organizational viewpoint (Schaap, 2001). Therefore AAD is a well suited modeling technique for this research.

2.6 Methods for data gathering

In the problem statement it’s already mentioned that the actual order processing efficiency at Ofichem BV is too low. In below conceptual model the main focus areas to improve the order processing efficiency at Ofichem BV have been defined. This model is mainly based on the work of Welker (2004). According to Welker (2004) the efficiency of order processing can be judged on two main indicators: order processing lead time and coordination cost. Order processing lead time refers to the administrative lead time necessary to process an order and coordination costs is related to the number of actors involved in processing the customer orders, but also the coordination mechanisms used and the time necessary to achieve coordination.

Figure 2: Conceptual model

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3. The actual order processing activity

3.1 Introduction

In this chapter the actual order processing activity will be described, with which the first sub-question of this research project: What is the actual order flow of sales orders at the department of logistics? will be answered. A distinction is made between sales orders and purchase orders because a lot of differences in processing these orders can be mentioned, but the focus of this research project is on the SOP activity. Actor Activity Diagramming is used as modeling tool to describe the order processing activities.

3.2 Description of the actual order flows

3.2.1 Actor activity diagramming

Actor Activity Diagramming is a modelling tool in which a business process is

decomposed in terms of transformations and transactions (Schaap, 2001). Actors bringing the product or service from one state into the next state perform the transformations. The transactions are

transitions from the product or service in a defined state from one actor to another actor. AAD has been derived from the Role Activity Diagram (Ould, 1995). There are some differences

with other modelling tools like RAD, functional flowchart and UML diagrams. In AAD the

simultaneous behaviour of energy used and goal reached is made visible by the explicit modelling of transitions.

A business process is supposed to start when an external or internal customer requests or orders a product or service. Once an organization has accepted the request or order it is bound to work on it. The actors in the organization ( the employees) are executing activities in which they transform a product or services into a higher state. Part of the process might be the forwarding of the product or service from one actor to the next actor.

In this research Actor Activity Diagramming is chosen because the modeling technique is rather easy to understand for people who don’t know anything about functional flow charts or UML. During the order processing activity at Ofichem BV, their Information System plays an important role. Actors can interact with it by entering data, organizing output or querying for information.

3.2.2 Order processing purchase orders

As already has been pointed out in the first chapter, the sales executives of Ofichem BV are also responsible for purchasing the API’s, which are directly related to their sales activities. First of all it has to be made clear that the sales/purchase executives normally buy their products on the basis of “scored orders”. Sometimes they buy certain batches, because the prices are favorable. Their middleman in China gives them advice regarding these kind of situations. In this section all the steps during the “administrative” purchasing process will be described. You can find a detailed AAD of the purchase order processing activity in Appendix 1.

Place purchase order with the supplier

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Send purchase order to logistics

The sales/purchase executive then sends (via XIOP) the purchase order to the logistics department. The document contains information like product description, ordered quantity, supplier information, internal product number, payment conditions etc.

Put order into information system

An order processing employee puts the data regarding to the purchase order into the information system.

Print internal purchase order form

When all the fields regarding the purchase have been filled in, the order processing employee prints an internal purchase order form. On this form the most relevant data regarding the purchase is specified.

Make purchase order confirmation

The order processing employee makes a confirmation document of the purchase order on the basis of historical purchase confirmation documents of the particular supplier. On their internal server they save all purchase confirmation documents. The name of the supplier in combination with the internal product number is used to save a particular document. When the right document is found, they first check whether the data is still correct. Then they adjust the variable data objects like quantity, price, date etc. If there are any uncertainties about certain specifications the order processing employee consults the sales/purchase executive.

Add purchase order to shipments list

As soon as the order processing employee has made the purchase confirmation document, all the information he/she just entered have to be filled in again in a separate shipments list (MS Excel). This document is used to monitor all the purchase orders that are open and to keep track of all the different states a purchase order can have.

Check purchase order confirmation

When the purchase order confirmation document is finished, it will be checked by the logistics manager. This person checks whether the data on the purchase order confirmation corresponds with the data on the purchase order send in by the sales/purchase executive. If mistakes are made these will be marked and the document will be returned to the order processing employee in question.

Check and sign purchase order confirmation

The managing director of Ofichem BV performs the final check in the process of purchase order processing. At the end of each day he quickly checks and signs the purchase order confirmation documents which has been made.

Send purchase order confirmation to Sales/Purchase

The next morning the signed documents are send (via XIOP) to the sales/purchase executives in question.

Update shipments list

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3.2.3 Sales Order Processing (SOP)

In figure 3 the SOP of Ofichem BV is presented. In this paragraph the AAD will be explained, whereby each step in the ordering process will be described into detail.

Customer places an order

Usually (about 75% of the orders) a customer places an order directly with the sales executive, the remaining 25% of the customers place their orders directly at logistics in Ter Apel. Customers can place their orders by phone, fax, or e-mail. The placement of a customer order is the first step (a chargé) in the SOP at Ofichem BV.

Translating customer order into internal sales order

The sales executive translates this customer order into an standard (MS Excel) document and sends this document together with the original customer order to logistics in Ter Apel.

Put sales order into information system

Usually the sales order entry process at logistics is performed in batches, whereby a number of sales order documents are collected before they are entered into the information system.

The order processing employee first checks the clarity/completeness of the order specifications and the order due date before he/she enters the order data into the information system. If there are any uncertainties about certain specifications or the order due date is not realizable the order processing employee consults the sales/purchase executive.

Print internal order form

As soon as the sales order data has been entered into the information system, an internal order form will be printed. On this document all specifications (e.g. customer name, delivery conditions, payment conditions, delivery date, products ordered, prices, quantities etc.) regarding the sales order are printed. This document is also used in the warehouse for picking the products.

Make sales order confirmation

The order processing employee makes a confirmation document of the sales order on the basis of historical sales confirmation documents of the particular customer. The same data saving method is used as already has been described in the order processing description of the purchase orders.

Check sales order confirmation

When the sales order confirmation document is finished, it will be checked by the logistics manager. This person checks whether the data on the sales order confirmation corresponds with the data on the internal order form and original customer order. If mistakes are made these will be marked and the document will be returned to the order processing employee in question.

Check and sign sales order confirmation

The managing director of Ofichem BV performs the final check in the process of sales order processing. At the end of each day he quickly checks and signs the sales order confirmation documents which has been made.

Send sales order confirmation to customer

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Bring address labels and order form to warehouse

As soon as the products have to picked to leave the warehouse the order processing employee prints the address labels for the pallets and brings these together with the internal order form to the

warehouse.

Picking the products

On the basis of the internal order form the warehouse employee picks the products which belong to the orders that have to be fulfilled on that day. He also writes down the batch numbers of the products that he has picked on the internal order form. In the pharmaceutical industry it is very important to register which batch numbers of a particular product are delivered to which customer. In case of problems with a particular batch, a seller have to be able to identify the customers who have had that particular batch in very short period of time.

Making sales order related documents

Meanwhile the order processing employee arranges the following documents:

• Assignment for shipment with their freight forwarder

• Packing list

• Invoice

• Certificate of Analysis

All these documents are handmade, they are made on the basis of historical sales order documents of the particular customer. The same data saving method is used as already has been described in the order processing description of the purchase orders.

As soon as the warehouse employee has written down the batch numbers of the products he has picked, he brings the internal order form back to logistics. From this moment in time the order processing employee can complement the sales order. He/she first adds the batch numbers of the products to the different order lines in the information system. Then the batch numbers will be added to the packing list also. All the documents regarding the customer order are bundled in a plastic folder which will be passed on to the manager logistics.

Check sales order documents

All sales order documents are checked on spelling errors, completeness etc. by the manager logistics. In case of errors the documents have to be revised by the order processing employee.

Check picked goods in warehouse

The logistics manager also checks whether the orders in the warehouse are physical complete and provides them with a packing list. Ofichem BV has a fixed freight forwarder who is responsible for the delivery of the goods to the customers.

Check and sign sales order documents

At the end of each day the managing director quickly checks and signs all the order related documents that are produced on that day.

Make sales order documents ready for distribution

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Archive sales orders in information system

When the order processing employee has made all the documents ready for distribution, the order will be archived administratively in the information system. From this moment in time the physical stock level should be in accordance with the administrative one.

Archive sales order documents physically

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Figure 3: Actual Sales Order Processing activity

The above mentioned AAD clearly reveals some inefficiencies in the actual order processing activity at Ofichem BV. E.g. currently there are a lot of actors (five) involved; In the actual process from order entry until order archiving eighteen different process steps need to be executed. Furthermore there are five process steps where the order processing employee enters the same customer order related data and last but not least three documentation related checks can be indentified.

3.2.4 Issues related to coordination

During my cooperating period in order processing I noticed that a lot of time and effort was needed to achieve coordination on order acceptance, due dates and documentation. As has been described in the conceptual model (figure 2) as well this negatively impacts the two main indicators of order processing efficiency (order processing lead time and coordination costs). In this paragraph a couple of these issues related to coordination will be described.

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keep his own administration about the promises that have been made to sales in his mail. So you can say that the logistics manager has a non-routine task, however the daily check of all the sales order documents can be characterized as rather routine though.

Sales is dependent on logistics regarding delivery date promising in the case of prompt orders, because the logistic manager is authorized to assign due dates. Moreover, sales is dependent on logistics regarding the reliability of the administrative stock levels of the different products.

There is also some difference of interests between sales and logistics. In general, sales will be highly motivated to accept as many orders as possible and to accept delivery times that are sometimes very difficult to realize. In daily practice, the order processing employees have to consult the logistics manager first, before they can authorize a prompt order. Sometimes a sales executive overrules the logistics manager; e.g. in case of a commercial important order and or customer. It seems that sales has the most power in these decisions, because for Ofichem BV flexibility towards the customer is an order winner.

3.2.5 Information processing

The processing of information is a very important dimension of the SOP activity. First, information on customer requirements has to be translated into internal sales orders and order agreements. Thus, information has to be exchanged between the customer the sales executive, the order processing employee, and the warehouse employee. According to Welker (2004), information processing concerns both a procedural part, the workflow, and a content related part, namely the information requirements and information processing capabilities.

Procedural information processing, the workflow

The SOP activity can be considered as an information flow, because a customer order contains much information about the demand specified by the customer, which should be translated to other

functional areas of the organization in order to react adequately on customer demand (Shapiro, Rangan, and Sviokla 1992). From this point of view the ordering process is a sequence of information processing activities (workflow): order quotation, order acceptance, order entry, order planning and generating order documents.

In the AAD in figure 3 you see the workflow of sales orders moving from one actor to another. The sequence of information processing is largely prescribed by the information system used. The sales executives use a standard internal sales order form to translate the original customer order. The order processing employees use this standard order form to enter the customer order data into the

information system. For checking the entered order data there is no standard procedure, in case of vague or incomplete data the order processing employee consults with the sales executive in question. During the creation of the packing list and to remain reliable stock levels the order

processing employee is dependent on the accuracy and carefulness of the warehouse employee, who has to write down the batch numbers of the products that have been picked.

Information requirements and information processing capabilities

According to Welker (2004), the information-processing dimension also has a content-related part. This content-related part concerns the information requirements (information needed) and the information processing capabilities (the availability and accessibility of information).

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suited for the whole SOP activity, because order related documents (e.g. order confirmation, packing list, and invoice) cannot be generated from it, administrative stock levels are unreliable and outdated, and the system lacks a certain amount of user friendliness.

3.4 Summary

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4. Performance gaps

4.1 Introduction

As you might have noticed in the preceding chapter, the SOP activity as well as the purchase order process is not performed very efficiently at the moment. In this chapter the gaps between the actual and the optimal order processing activity will be mentioned. Hereby the second sub-question of this research project: What are the main performance gaps in the actual SOP activity? will be answered. As already has been made clear in chapter 2, Sales Order Processing in this research consists of sales order entry including the allocation of products, delivery date, and the creation of dispatch documents while trying to maintain accurate stock levels.

In paragraph 2.3 several bottlenecks have been described. These bottlenecks have been categorized into four main problem areas. This chapter includes a clear diagnosis per problem including main root causes. The four main problem areas which have been identified are:

• the lead time in the order processing activity;

• the information system;

• the coordination between actors;

• the stock reliability;

There are more problems in the actual order processing activity, however to make this research feasible I only selected these four main topics to concentrate on.

4.2 Lead time in the order processing activity;

As has been indicated by both the management and logistics personnel, the actual order processing lead time at Ofichem BV is quite high. Main bottlenecks that have been observed in this case are the number of actors involved within both the purchase and sales order processing activities, but also the number of manual checks/signatures that are needed. It has been observed though that these checks are still necessary, because a lot of errors are made (mainly shipping document related). These errors are mainly related to the amount of double data entry, because every single shipment document is being created manually now.

4.2.1 Root causes

• Main driver for the actual order processing lead time is the manual creation of shipping documents like Invoice, Packing List, COA, Bill of Lading, etc. Based on the input during the interviews and cooperating period it seems that an order processing employee needs about 60% of his time to arrange all necessary documents requested by the customer.

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4.3 Information system

The current information system is originally designed as an API registration / distribution system for Ofichem sourced products. From own experience and several interviews it seems that this system don’t meet the specific user requirements for Logistics, Sales but also the Management. That’s why there are five different bottlenecks that can be related to the use of the current information system. E.g. during the purchase and sales order processing activity a lot of double data entry moments have been observed, which eventually result in errors being made but also implies inefficient order

processing. Taking into account the fact that the current information system has a retarding effect on the purchase and sales order processing activity it has been decided to make this subject part of my research scope as well.

The information system is mainly used for order entry and inventory control, it is not very suited for the whole SOP activity, because order related documents (e.g. order confirmation, packing list, and invoice) cannot be generated from it, administrative stock levels are unreliable and outdated, and the system lacks a certain amount of user friendliness.

There is also no good insight into the order planning, they cannot adequately judge the priorities of all the different orders on hand. On average they have 200 orders on hand, which are all entered into their information system. However to get an overview of all the orders sorted on delivery date for example, they have to print a report on a certain moment in time. They print this report once a week and the logistics manager together with sales then makes a weekly planning. When they have decided which orders are going to be dispatched in a particular week, the logistics manager looks up all the internal order forms and divides them among different boxes (every workday has it’s own box). This way of working is not only very time consuming, it’s also very local. E.g. the sales executives cannot glance through the planning, when they are “on the road”. Furthermore, it is not possible to follow the progress of an order, because you cannot add any status to an order.

4.3.1 Root causes

• The order execution part of the information system has been created later on and the functionalities are very limited. As this part of the system has been created the data model couldn’t be revised anymore which in turn results in a lot of unnecessary double data entries.

• Not possible to generate standard order documents like Invoice, Packing List & Order Confirmation from the system, while all information required is stored in one database.

• Information system lacks a certain amount of user friendliness.

• Number of reports that can be generated is very limited and complex.

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4.4 Coordination between actors

One of the bottlenecks that have been observed is that the Sales representatives feel that they are executing too many logistical related tasks, but on the other hand Logistics indicate that they want to have more direct communication with their customers about logistical related issues. Furthermore, it became clear that there are no formal procedures with regards to the purchase and sales order processing activity where tasks and responsibilities are clearly defined. During my observation period it became clear that this has a direct influence on the order processing efficiency and as such it has been identified as a main problem area in this thesis project

4.4.1 Root causes

• No clear distribution of tasks and responsibilities

• Lacking communication between actors

• Lacking competencies manager Logistics

4.5 Stock reliability

There are two bottlenecks that can be linked to this problem area. These bottlenecks have been identified by both the management as well as the Sales representatives. Stock reliability can have a direct impact on the performance objective flexibility which has been identified as an order winner for Ofichem BV. E.g. in terms of volume flexibility, when a customer wants to increase his order quantity Sales need to rely on the stock level data represented by the system in order to decide whether this request is possible or not. Several monthly cycle counts prove that the actual stock reliability is insufficient.

There is not much trust of Sales in the administrative stock levels. Due to the fact that that the sales executives are “on the road” most of the time, they must be able to rely on the administrative stock levels that the information system indicates. The information system that is used at Ofichem BV is not very user friendly, through which users have different interpretations of dealing with it. This results in a lot of communication about stock levels between sales and logistics, whereby an order processing employee often has to count the amount of a particular product on stock in the warehouse physically. Furthermore, the order processing employees and or warehouse employees often don’t register the right batch numbers which are picked for a particular product, which in turn results in discrepancies in administrative stock levels. In the problem statement it’s already mentioned that there are some problems regarding the registration of incoming and outgoing goods. At the end of each month all the products in the warehouse are counted and every month discrepancies between the physical stock level and the administrative one in the information system are discovered. During the counting process a counting list is used. This list is a report that can be printed from the information system, which shows the total quantities of all the products on stock specified on batch number.

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Physical stock adjustments

1. Incoming goods are counted and compared with the packing list of the supplier 2. Outgoing goods can be divided into two different groups:

o Goods needed for own manufacturing purposes

o Goods that have to be dispatched to customers

Administrative stock mutations

1. On the basis of the checked packing list, the goods are manually booked in the information system.

2. As soon as an order is archived, the administrative stock levels of the batches which are added to that particular order will be booked off automatically. The stock levels of the batches which are used for manufacturing purposes, have to be booked off manually.

Stock reliability for a large part depends on communication between the actors involved, e.g. in case of discrepancies between delivered and ordered goods, the warehouse employee have to

communicate how much of a particular batch is actually delivered. The normal procedure for this is, that the warehouse employee writes down the batch numbers and quantities of the received products on a separate document first, and then hand in the original packing list of the supplier together with the extra document. It usually happens that mistakes are made during this process or that the order processing employee doesn’t get the work of the warehouse employee at all.

Another factor that makes inventory control at Ofichem BV complex is the fact that they have to deal with three different units of measure. Most of the products they deal with have Kilo’s as unit of measure, but there also products which are measured in KgA (Kilogram Activity) or in BOU.

As you might expect a lot of stock discrepancies are found with the products that are measured in KgA or in BOU. Moreover, many discrepancies are found for the products that are used for both

manufacturing and trading purposes.

4.5.1 Root causes

• Incorrect batch registration for both inbound and outbound products.

• Administrative inventory transactions are not consequently executed for batches which are used for own manufacturing purposes.

• Unclear / lacking communication between actors involved in the order processing activity.

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5. The optimal SOP order flow

5.1 Introduction

In this chapter the optimal sales order processing activity will be presented which also answers the third sub-question of this research project: How should the optimal order flow of sales orders at the

department of logistics look like? The new order flow is based on the actual order processing activity,

however some steps have been removed or put in another order. Besides, in this optimal order flow the focus was constantly on the performance gaps which are described in the chapter 4

• the lead time in the order processing activity;

• the information system;

• the coordination between actors;

• the stock reliability;

These performance gaps are used as a red-line during the redesign phase of this thesis project. This chapter will describe some suggestions to optimize the actual order processing activity from these four perspectives whereby increasing efficiency is the main goal. Furthermore, in paragraph 5.2.4 some suggestions with regards to the fourth sub-question: How can incoming and outgoing record keeping

be improved to increase the accuracy of inventory levels? will be given.

5.2 Description of optimal SOP order flow

During the order processing activity at Ofichem BV a lot of communication lines between a number of different actors are needed to fulfil the customer demand. As already has been mentioned in the research plan, this is a problem solving research project. Therefore the redesigned order flow will be presented by means of an AAD in figure 4, hereafter the changes that have to be made to the SOP activity will be described in relation with the observed performance gaps. The AAD will not be explained into detail again, but only the changes compared to the actual order flow will be clarified. As you might notice in the figure the process is much shorter than in the actual situation. As already has been said in the introduction some process steps have been removed, but to keep in control of the process communication between the employees involved will be even more important. Logistics and Sales for example have to make clear agreements about how they are serving their customers and who is responsible for which tasks. In the actual situation namely Sales takes care of all the

communication with customers. More ideally Logistics should take over the distribution related part of the communication with customers. Customers should be informed by Logistics about distribution related topics and Sales should more take care of selling products, customer acquisition, relationship building etc.

Communication between the warehouse leader and logistics is also very important during the SOP activity. On the outbound side the warehouse employees are responsible for picking and packing the products in the right quantities, and on the inbound side they have to move the products to the right locations and check whether the right quantities are delivered. In case of discrepancies or

imperfections the warehouse leader should communicate clearly with the manager logistics about this. In the actual situation the warehouse leader as well as the manager logistics are not enough

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Figure 4: Optimal Sales Order Processing activity

5.2.1 Lead time in the order processing activity;

The lead time for complete SOP is very high. An order processing employee is for about 60% of his time busy creating administrative order documents in MS Word. As you might have seen in the Sales Order Processing AAD, there are several moments of double data entry. That’s also the reason why there are so many checks required during the SOP activity. To shorten the lead time of the SOP activity, the number of operations and actors should be reduced.

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phone calls have to be answered. In order to be able to cope with these extra tasks the SOP activity should be executed more efficiently somehow.

Once an order has been entered into the information system you should be able to generate almost all order related documents (e.g. order confirmation, packing list, and invoice) from the system. In the actual SOP activity creating every single document is a separate step in the process as well as a moment of double data entry. In the optimal SOP activity the order related documents will be generated by the information system, which will decrease the number of double data entry moments from four to one. This of course results in a lot of time savings for the order processing employees, which in turn can be used to enhance direct contact with their customers. Furthermore, the creation of the shipment assignment on paper has been deleted from the SOP activity, because the same information has been entered into the online freight forward system as well.

5.2.2 Information system;

For sales it’s a problem that they couldn’t follow the progress of a customer order during the SOP activity. Therefore in the optimal situation the sales orders have to be grouped together sorted on different criteria; (e.g. order status, customer, product, due date, etc.) In appendix 2 a table is added with all the different order statuses an order can have. Some of these order statuses can be viewed as milestones and are added in the AAD in figure 4 as well. Through these extra order information the sales executives can better follow the progress of individual orders, whereby they don’t have to call logistics for these issues as much as in the actual situation. To implement this, changes in the information system are absolutely necessary, just as the possibility to generate order related documents automatically from the information system to reduce the number of double data entry moments.

Furthermore, due to authorization reasons for every order a copy of the certificate of analysis (CoA) of every product batch have to be enclosed. These CoA’s are currently archived in maps, sorted on delivery date. To shorten the lead time of the SOP activity even more, a digital repository should be created. Instead of physically spitting through all the maps (in the office in Ter Apel), the CoA’s can be located by every employee of Ofichem BV who needs them from every place and on any time they want.

Pick, Pack, and Ship!