Centralized benchmarking of manufacturing within Akzo Nobel Public version

within Akzo Nobel

Being the best,

By checking the rest

Centralized benchmarking of manufacturing within Akzo Nobel

Public version

A study ordered by and performed at:

Akzo Nobel Chemicals Manufacturing Support

As a master thesis for the completion of the study of:

Industrial Engineering & Management

At the:

Faculty of management and organization, University of Groningen

Deventer, 6 December 2005

Author: Daniël Hubbeling (s1063197)

Supervisors University of Groningen: Dr. E.O. de Brock Prof. Dr. J. Wijngaard

Supervisor Akzo Nobel: J.P.M. van Aggelen

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying recording or otherwise without the prior written permission of the author. The author is responsible for the contents of this report.

Summary

The goal of the study described in this report is the implementation of a benchmarking system for the manufacturing processes of various plants within Akzo Nobel in the areas of Technology, Production and Maintenance to create synergy-effects within the entire Akzo Nobel organization.

To reach this goal the following central question is answered: How can a benchmarking system be formalized to benchmark plants within Akzo Nobel at different levels, and how can the results be reported to contribute to synergy-effects within Akzo Nobel?

The answer to this question is given by first laying down a theoretical framework on benchmarking, performance measurement in general and the use of a Balanced Scorecard in this particular case. In addition to this the subject area of the benchmark, manufacturing, is looked into by describing some theory on Overall Equipment Effectiveness (OEE), Mitchell’s Producer Value Model and the view of manufacturing that is used by ManSup (the part of Akzo Nobel that ordered this study).

With the theoretical framework laid down a functional design is given for a system to facilitate a benchmarking process as described in the goal of this study.

The main conclusions of this study are to always look beyond “the numbers”; there is always more behind the performance than just the quantitative information. While implementing a benchmark in an organisation the focus should be on learning and sharing knowledge and not on the ranking of participants. The aim for continuous improvement should not only be applied to the subject of the benchmark (the manufacturing processes) but also to the process of benchmarking itself.

Table of contents

EXECUTIVE SUMMARY ... I TABLE OF CONTENTS ...II PREFACE ... V

Part I Introduction

CHAPTER 1 INTRODUCTION ... 2

1.1. RESEARCH STAGES & METHODS... 2

CHAPTER 2 AKZO NOBEL: A PROFILE ... 4

2.1. HISTORY... 4

2.2. ORGANIZATION... 5

2.3. COMPANY STATEMENT... 7

2.4. CORPORATE IMAGE... 7

2.5. ECONOMIC VALUE ADDED... 8

2.6. SERVICE UNIT:MANUFACTURING SERVICES... 8

CHAPTER 3 THE PROBLEM... 11

3.1. DESCRIPTION OF THE PROBLEM... 11

3.2. PROBLEM OWNERS... 12

CHAPTER 4 PROBLEM STATEMENT ... 13

4.1. GOAL... 13

4.2. CENTRAL QUESTION... 13

4.2.1. Sub-questions... 13

4.3. CONDITIONS... 14

4.4. CONCEPTUAL MODEL... 14

4.5. SCOPE OF THE STUDY... 15

Part II Theory

5.3.4. Collect and share information ... 21

5.3.5. Analysis... 22

5.3.6. Change... 22

5.3.7. Improve... 22

5.3.8. Plan-Do-Check-Act ... 23

CHAPTER 6 PERFORMANCE MEASUREMENT ... 25

6.1. THEORY... 25

6.1.1. Performance indicators ... 25

6.1.3. Performance target... 26

6.1.4. S.M.A.R.T... 26

6.2. METHODS FOR MEASURING PERFORMANCE... 27

6.2.1. Consolidate and stimulate ... 28

6.2.2. Innovate and stimulate... 28

6.2.3. Consolidate and control ... 28

6.2.4. Innovate and control... 28

6.2.5. Choice of a method ... 29

6.3. THE BALANCED SCORECARD... 29

6.3.1. Description of the Balanced Scorecard ... 29

6.3.2. Limitations of the Balanced Scorecard... 30

6.3.3. Linking the Balanced Scorecard to a strategy ... 31

CHAPTER 7 MEASURING PERFORMANCE OF MANUFACTURING ... 33

7.1. THEORY ON MANUFACTURING... 33

7.1.1. Overall Equipment Effectiveness (OEE)... 34

7.1.2. Mitchell’s Producer Value Model... 35

7.1.3. Technology, Production and Maintenance ... 36

7.2. CONSIDERATIONS FOR SELECTING PERFORMANCE INDICATORS... 37

7.3. SELECTION OF PERFORMANCE INDICATORS... 37

7.3.1. General ... 40

7.3.2. Technology ... 43

7.3.3. Production ... 47

7.3.4. Maintenance ... 50

CHAPTER 8 SUMMARY & CONCLUSION ... 55

8.1. WHAT IS BENCHMARKING? ... 55

8.2. WHAT ARE PERFORMANCE INDICATORS? ... 55

8.3. WHAT PERFORMANCE INDICATORS MUST BE USED HERE AND HOW CAN THEY BE MEASURED? 56

Part III Practical application

9.1. GENERAL CONSIDERATIONS... 59

9.2. DATAFLOW DIAGRAM... 61

9.3. DATA MODEL DATABASE PERFORMANCE INDICATORS... 65

CHAPTER 10 COMPARISON & REPORTING... 67

10.1. DATAFLOW DIAGRAM... 67

10.2. DATA MODEL DATABASE PERFORMANCE INDICATORS... 68

10.3. DATA... 69

10.3.1. Plant... 70

10.3.2. Reference group ... 70

10.3.3. Period & history ... 70

10.4. FRAMEWORK FOR REPORTING... 70

10.4.1. Levels of reporting ... 71

10.4.2. Balanced Scorecard ... 72

10.5. SIGNALS FOR IMPROVEMENT POSSIBILITIES... 74

CHAPTER 11 SUMMARY & CONCLUSION ... 79

11.1. HOW CAN THESE PERFORMANCE INDICATORS BE COLLECTED FROM THE PLANTS?... 79

Part IV Implementation & Conclusion

CHAPTER 12 IMPLEMENTATION & INTERPRETATION OF OUTCOME... 82

12.1. COLLECT... 82

12.2. ANALYZE... 82

12.3. IMPROVE... 83

12.4. PSYCHOLOGY... 83

CHAPTER 13 CONCLUSION & RECOMMENDATIONS... 84

13.1. SUMMARY OF SUB-QUESTIONS AS ANSWERED IN INTERMEDIATE CONCLUSIONS... 84

13.2. CONCLUSIONS... 85

13.3. RECOMMENDATIONS... 86

CHAPTER 14 REFLECTION ... 88

14.1. GENERAL REFLECTION... 88

14.2. FUTURE OF THE PROJECT... 89

SOURCES ... 90

LITERATURE... 90

WEBSITES... 92

INTERVIEWS... 92

Preface

When I started my assignment at Akzo Nobel in August 2004, I had no idea of how long I would stay there. As it turned out the 6 month period scheduled in advance was not quite enough to finish the assignment. In the 16 months that followed I was given the chance to not only finish the assignment as was necessary to finish my study at the university, but also to be a part of the further developments in the process of which my assignment was just one part. To be part of an organization like Akzo Nobel in this way was a new experience to me, and I must say that I have learned far more from this experience than just the knowledge that is contained in this report.

I would like to thank Dr. de Brock, who despite of the situation managed to continue as my supervisor, and Prof. Wijngaard for their support in writing this report.

Special thanks go to Joep van Aggelen, who in addition to being my supervisor at Akzo Nobel, took on the role of being a mentor in my personal development far beyond this assignment alone.

Furthermore, I would like to thank my colleagues at ManS, and all others within and outside Akzo Nobel who where willing to give me some of their time and share their knowledge and experience with me.

And last but certainly not least, I would like to thank my family and friends for their mental support and the much needed weekends full of fun and relaxation.

Before you lies the product of 16 months of literature study, interviews and interpretation of personal experience, I trust you will find it useful.

Deventer, December 6, 2005

Part I:

Introduction

“If you would thoroughly know anything,

teach it to others.”

Chapter 1

Introduction

In this report a study is described which has been ordered by Manufacturing Support (ManSup). ManSup is a part of the Manufacturing Technology Department which is a part of Manufacturing Services, one of the Service Units of Akzo Nobel Chemicals. A description of ManSup and its position within the Akzo Nobel hierarchy will be given in chapter 2, where the entire Akzo Nobel organization is described.

This study is also a master thesis for the completion of the study of Industrial Engineering & Management (Technische Bedrijfswetenschappen), major Information Technology of the University of Groningen (Rijksuniversiteit Groningen)

ManSup has made some effort in the past towards creating a system for centrally collecting and comparing the performance data. The goal of this effort is to report to the management of different parts of Akzo Nobel (Chemicals) how their performance compares to that of their peers. One of the objectives of ManSup with this system is to sell this system as a service to their customers and to use the collected data to better aim their efforts at potential clients for their consulting services. In the long run, this system will lead to a comprehensive database of performance data completed with knowledge on so-called ‘best practices’. This knowledge can be used to attain synergy effects within the entire Akzo Nobel organization.

This study can be seen as the next step toward realization of such a system with the main goal to implement it. In addition to a study of literature on this subject a functional design of this system is also given.

1.1.

Research stages & methods

Investigation of problem area

In the chapter 2, a profile of Akzo Nobel is given. In chapter 3 a description of the problem and an analysis of the problem-owners will follow. Based on these two chapters the problem statement for this study is formulated in chapter 4. Data sources used in this stage are mainly interviews with the principal of this study, Joep van Aggelen, senior consultant at ManSup, and the Akzo Nobel Intranet and Internet sites. At the end of this stage, a problem statement will be formulated.

Literature study

In order to continue the study a theoretical framework will be created. This will be done by studying literature, both theoretical and case studies, on the subjects of benchmarking, performance indicators, manufacturing (within Akzo Nobel) and reporting. Data sources used here include books and articles found in the libraries of both the University of Groningen and Akzo Nobel, and information found on the Internet.

Interviews

The next step is to interview people within Akzo Nobel, both at the Service Unit Manufacturing Services and at the different Business Units that will be included in the benchmark. A list of all people interviewed in relation to this study is included in the overview of sources at the end of this report.

Collection of data for benchmark

To perform the actual benchmark some information is needed from the participating plants. In this stage a questionnaire is developed that will be used to collect the performance indicators and other relevant information from plants.

Analysis of benchmark data

With all data collected from the plants a framework can be defined that is used to compare the performance of all participating plants. The ‘best in class’ performers in the different areas of the benchmark can be identified and the ‘best practices’ that cause this best performance can be examined. The actual identification of ‘best practices’ will not be included in this study.

Reporting of outcomes

When the results of the benchmark are known, the next challenge is to report these results to the different levels of management of the participating plants in such a way that they can use this information to improve their manufacturing processes.

Evaluation

After these results are reported back to the participants, an evaluation of the entire process is made to make sure that the image created by the benchmark was correct and complete.

Recommendations

The final stage in this study is to make recommendations to Manufacturing Support on the implementation and continued use of the benchmarking system within the entire Akzo Nobel organization. These recommendations will be based upon findings from all previous stages.

Chapter 2

Akzo Nobel: a profile

Akzo Nobel, based in the Netherlands, serves customers throughout the world with healthcare products, coatings and chemicals. Consolidated sales for 2004 totalled 12.9 billion euros. The company currently employs almost 62,000 people in more than 80 countries. In many markets where Akzo Nobel is active, she counts as a market leader.

2.1.

History

Akzo Nobel’s long history of growth owes its success to the careful integration of a large diversity of companies, incorporating their specific cultures and technical excellence into ever-larger entities. The oldest are Det Holmbladske Selskab (now Sadolin) in Denmark, which was founded in 1777, and Sikkens (the Netherlands) and Bemberg (Germany), both established in 1792. In Sweden, Alfred Nobel, the famous scientist, founded many thriving businesses, some of which are still part of the company today.

Akzo’s roots go back a long way: to Ketjen (1835), Noury & Van der Lande (1838), Zwanenberg (1887), Vereinigte Glanzstoff Fabriken (1899), Nederlandse Kunstzijdefabriek Enka (1911), Koninklijke Nederlandse Zoutindustrie (1918), and Organon (1923).

In 1929, Vereinigte Glanzstoff Fabriken and Enka merged to form Algemene Kunstzijde Unie (AKU). Koninklijke Zout-Ketjen and Koninklijke Zwanenberg Organon merged to form Koninklijke Zout Organon in 1967, and in 1969, Akzo was formed as a result of a merger of Koninklijke Zout Organon and Algemene Kunstzijde Unie.

Nobel Industries was founded in 1984 through the merger of KemaNobel (established 1871) and Bofors, which was founded in 1646 but is no longer part of the company. After the merger, other companies –respected names, such as Berol, Crown Berger, Eka, and Sadolin & Holmblad– were acquired. In 1991, a major financial reconstruction took place with state-owned Securum becoming the principal shareholder.

Early in 1994, Akzo Nobel was formed through Akzo’s acquisition of the Nobel shares owned by Securum and through a successful bid for the remaining shares.

In July 1998, Akzo Nobel acquired Courtaulds, the international chemical company that had leading positions in high-tech industrial coatings and synthetic fibers. Its best-known brands, International paints, Courtelle acrylic fibers, and Tencel, a cellulosic fiber, were included.

Courtaulds, which was founded in 1816 as a silk weaving company, pioneered the global synthetic fiber industry at the beginning of the 20th century. In the 1960s, Courtaulds acquired International Paint and Pinchin Johnson. Together with Fibers, these formed the basis of the acquired company, which dates from the de-merger of Courtaulds Textiles in 1990. In 1999, Akzo Nobel sold its fibers business, Acordis, to CVC Capital Partners and the veterinary business unit Intervet acquired Hoechst Roussel Vet. In 2001, Pharma business units Chefaro and the diagnostics business of Organon Teknika were divested.

The focus of the new Akzo Nobel now lies with the three core segments Pharma, Coatings and Chemicals.

2.2.

Organization

The company consists of three divisions that each contains a number of Business Units. The divisions are Pharma, Coatings and Chemicals.

Figure 2-1: Organizational structure of Akzo Nobel showing the three divisions and their Business Units

Akzo Nobel’s Chemicals group operates five business units, most of which hold leading or strong global positions within their respective markets. For example, Akzo Nobel is the world leader in pulp bleaching chemicals and initiators / catalysts for polymer production. Akzo Nobel also holds leading or strong worldwide positions in Functional Chemicals and Surface Chemistry, is an important producer of salt and a leading producer of resins for the coatings and printing inks markets.

With an emphasis on superior technologies and driving innovation, the growth efforts of the Chemicals division are directed at North America and Asia from an already strong base in Europe. However, most of the businesses have a global presence, in terms of both production and services, and the extensive client list includes some of the world’s biggest companies.

Akzo Nobel’s Coatings division is the world’s leading coatings company. The Coatings division produces paint and finishes for industrial, transport and marine markets, as well as the do-it-yourself and professional decorating sectors. The Coatings group has operational bases in 60 countries and employs around 30,000 people.

Akzo Nobel’s Coatings group has amassed more than 200 years of experience, not only in the development and manufacturing of coatings, but also in providing focused solutions to the customers’ evolving needs. The Decorative Coatings Business Unit offers a wide range

of professional and do-it-yourself paints for home improvement, while the Car Refinishes database consists of more than 75,000 Sikkens® colours for vehicles.

Every third aircraft in the world is also coated with products of the Coatings division and if it rides the waves, it is very likely to be painted with paint from the Marine & Protective Coatings Business Unit, because they are the global market leader in marine paints. In addition, the Powder Coatings Business Unit is the global leader in powder coatings, used on some of the world’s most prestigious buildings, and paint systems of Akzo Nobel protect and enhance mobile phones, furniture, bicycles, pipelines and construction machinery.

Akzo Nobel’s Pharma group is establishing itself as an innovative player in the global healthcare market. The smallest of the three divisions in terms of sales, it is however the top performer in terms of earnings, commanding an important presence in the fields of both human and animal healthcare.

Akzo Nobel’s two Pharma businesses hold leading or strong positions in a number of important markets. In human healthcare (Organon), Akzo Nobel is the world leader in neuromuscular relaxants, the world’s second largest supplier of infertility products, among the top four in hormonal contraceptives, and one of the top five players in HRT/osteoporosis.

Akzo Nobel’s animal healthcare business (Intervet) is the world’s third biggest supplier of veterinary products. Research plays a vital role in all the Pharma group’s activities. The strong pipeline contains numerous products in various stages of development, including the so-called male pill. A new venture, Nobilon, has been set up to develop, produce and market human vaccines. Akzo Nobel is committed to making significant investments to develop new and better drugs to boost further growth.

Akzo Nobel’s Business Units have a large operational freedom, based on entrepreneurial spirit while serving customers, and the use of technology and resources while profiting from the global scale of the company.

Besides Business Units, there also are a number of Service Units. These Service Units function as internal suppliers for various services to the Business Units. Administration, facility management and research are some examples of functions that are placed in such Service Units. Manufacturing Services, of which Manufacturing Support is a part, is also is a Service Unit.

2.3.

Company Statement

To guide the management of the parts of this diverse en extended organization the Board of Management has formulated the following company statement:

2.4.

Corporate Image

A very important issue for Akzo Nobel, as well as most other chemical companies, is their image to the outside world. It can even be said that this is at least as important as or even more important than the manufacturing process itself. With this in mind, it is important for Akzo Nobel to be known as a reliable and responsible company.

In practice, this can be found in an active policy in the area of Health, Safety & Environment (HSE). Akzo Nobel also is a member of the global Responsible Care and Coatings Care programs. Both are programs for companies in chemicals and coatings industries. Members of the Responsible Care program commit themselves to the following:

Our Company

Akzo Nobel is a multicultural company. We are market-driven and technology-based, serving customers throughout the world with healthcare products, coatings and chemicals.

Akzo Nobel conducts its diversified activities through business units, which report directly to the Board of Management.

We maintain a product portfolio with leading positions in important market segments.

Our People

Akzo Nobel regards people as its most important resource. We foster leadership, individual accountability, and teamwork.

Our employees are professionals whose entrepreneurial behavior is result-oriented and guided by personal integrity. They strive for the success of their own units in the interest of Akzo Nobel as a global company.

In return, our employees can count on opportunities for individual and professional development in an international working environment. We offer them rewarding and challenging assignments with room for initiative.

Our Commitments

We will focus our efforts on the success of our customers

We will provide competitive returns on our shareholders’ investments We will create an attractive working environment for our employees We will conduct our activities in a socially responsible manner

Our Ambition

We strive to be the first choice of customers, shareholders and employees, and to be a respected member of society.

• A continuous effort in improving performance in the areas of Health, Safety & Environment;

• Listen and respond to concerns of the general public;

• Support other members of the program to perform optimally in the areas of Health, Safety & Environment;

• Report targets and progress to the general public.

The Coatings Care program adds an element of Product Stewardship to the above. This means that manufacturers do not only focus on production but on the entire lifecycle of their products. In the development of new products, attention is given to durability, reusability and the possibilities of recycling. In this way, products will eventually have less negative effects on the environment while customers benefit at the same time.

2.5.

Economic Value Added

Throughout Akzo Nobel, Economic Value Added (EVA) has been introduced as a tool to measure economic profit and to create a value focused mindset. To ensure commitment of employees the tool has been linked to the incentives policy for the Board of Management and staff.

EVA is calculated by deducting from net operating profit after taxes a capital charge representing the cost of capital calculated based on an average return investors expect. This means that value is created when results generated by a business activity exceed the cost of capital and value is destroyed when the cost of capital exceeds the generated results.

EVA (Millions of euros) 2003 2002

Pharma 331 367

Coatings 161 153 Chemicals 56 32 Corporate (28) (21)

Total 520 531

Table 2-1: Economic Value Added of Akzo Nobel's divisions

By implementing EVA as a standard throughout Akzo Nobel, the Board of Management has created an effective way of gaining insight in value creation of all parts of the organization.

2.6.

Service Unit: Manufacturing Services

The Service Unit Manufacturing Services (ManS) is part of the Chemicals division and consists of four departments.

Figure 2-2: The position of Manufacturing Services in the Akzo Nobel organization

The main objective of this Service Unit, as an internal consultant, is to advise clients in the areas of process engineering, optimization and automation of systems, materials technology, project management and Health, Safety & Environment services. These areas have been divided in four departments:

• Akzo Nobel Materials Technology Center (AMC) is located in Arnhem, The Netherlands. AMC's experts specialize in materials engineering, corrosion and fouling prevention and various advanced inspection techniques, including Risk Based Inspection (RBI). Advanced test facilities are available. AMC also has a presence in Dobbs Ferry to serve the US market.

• Manufacturing & Engineering Services (MES). This group, located in Dobbs Ferry, New York, specializes in process engineering, cost estimation, systems engineering & process automation and project management. MES can help manage capital investment projects from scope definition to construction and start up.

• The HSE (EUMEA) group delivers the required HSE services in Europe, Middle East and Asia Pacific and is situated in various locations in the world (Hengelo, Düren and Shanghai). The group is active in various areas of HSE, such as organizing Safety & Health workshops, organizing HSE exchange platforms, providing HSE consultancy, executing the Corporate HSE Audits, providing Integrated QHSE management systems and HSE risk assessments. Close co-operation exists with the Safety Services lab in Deventer to help plants solve process safety related problems.

• Manufacturing Technology Department (MTD) is based in Deventer, the Netherlands. This group specializes in plant de-bottlenecking, process improvements, value analysis, commissioning and start up and the management of specifications. Furthermore, expertise is available regarding the review of maintenance concepts and installation management. Manufacturing Support is part of this department.

The client base of ManS consists of parties within Akzo Nobel (plants, sub-Business Units and Business Units), Joint Ventures in which Akzo Nobel has an interest and external companies that have in one way or another been a part of Akzo Nobel.

Chapter 3

The problem

In this chapter, the subject of this study will be introduced and an overview of the different problem owners will be given.

3.1.

Description of the problem

At Manufacturing Support (ManSup), they have become aware of the need of customers to compare the performance of their manufacturing process to that of others. In the past, this has proven to be a costly exercise because of the need of external consultants. The starting-point is to develop a benchmarking system that is affordable for clients of ManSup (read: requires little paid hours of ManSup). This benchmark is to get a continuous nature in the form of a process with fixed dates on which the next benchmark is to be made.

The next step that is to be taken is to design a benchmarking model that can be used to compare the performance of the manufacturing process of various plants. The result of this will be a collection of performance indicators in the areas of Technology, Production and Maintenance. The possibility to add other areas later must remain open. The collection of performance indicators used can possibly be put in the form of a Balanced Scorecard.

One of the problems that ManSup has encountered in the past is that the collection of these performance indicators can be somewhat problematic in practice. This is mainly caused by the fact that performance indicators are not standardized within Akzo Nobel and that different parts of the company have different ways of internal reporting on manufacturing and give different meaning to some of the definitions they use.

The intention of ManSup is to report a comprehensive analysis of the results combined with possible improvements to the participant’s process based on the collected data once a year. Furthermore, reports on the results of the comparison of performance indicators will be (automatically) created once every three months. This three-monthly report will be based on the so-called Rolling Forecast to give the participants an idea of the development of their performance in time and how their performance indicators compare to that of the ‘best in class’ in every area. Reporting from this system will take place at three levels in the organization, at the level of (s)BU Manufacturing Manager, at the level of Plant Manager and at the level of Plant Maintenance Manager, Plant Technology Manager and Plant Production Manager.

Comparisons based on this information will be reported anonymously to participants. This means that the clients will see the comparison of their performance indicators to that of others but cannot see what performance indicators belong to whom. Reports will be made based on relative differences between performance indicators and not on absolute numbers. One possibility that is looked into is to report the comparison using visual aids.

In the end, the continuous collection of information will lead to a large database that can be used to identify ‘best practices’ within Akzo Nobel and share these with all parts of the company.

3.2.

Problem owners

1. Manufacturing Support

Manufacturing Support wants to use this system to offer a valuable service to its clients and wants to use the collected data to better aim its efforts to approach its customers with possibilities for improvement. The long-term goal is to build a history of developments in the performance of the different plants and the ‘best practices’ that led to them.

2. Plant Management

The Management of the various plants expects to get a better idea of how their performance compares to that of others, both within and outside of the (sub-)Business Unit to which it belongs. Furthermore, they expect to gain insight in the reasons why other plants perform better than they do (in certain areas) and possibly share ‘best practices’ that can lead to improved performance in their own plant.

3. Management of (sub-)Business Unit

The Management of (sub-)Business Units expects to get a better idea of the performance of their plants. They also may identify ‘best practices’ in other parts of the company that can lead to more effective and efficient policies in their own organization.

Chapter 4

Problem Statement

The problem as stated in chapter 3 leads to two concrete assignments. The first one being the development of a conceptual framework for the benchmarking exercise in this specific environment and the second one to design an intranet-based information system that is used to collect, store and report data.

4.1.

Goal

The implementation of a benchmarking system for the manufacturing processes of various plants within Akzo Nobel in the areas of Technology, Production and Maintenance to create synergy-effects within the entire Akzo Nobel organization.

4.2.

Central Question

How can a benchmarking system be formalized to benchmark plants within Akzo Nobel at different levels, and how can the results be reported to contribute to synergy-effects within Akzo Nobel?

4.2.1. Sub-questions

To get some insight in what benchmarking actually is and what experiences have been with it so far some theory on this area is explored and a number of case studies will be looked into. This sub-question will be the subject of chapter 5.

2. What are performance indicators?

To gain a better understanding of performance indicators some theories on this subject are explored as well. This sub-question will be the subject of chapter 6.

3. What performance indicators must be used here and how can they be measured?

In order to perform a benchmark that is valid for the entire reference group it is essential that the right performance indicators are chosen. This sub-question will be the subject of chapter 7.

4. How can these performance indicators be collected from the plants?

To (periodically) get the values of the performance indicators from all the plants in the reference group can be problematic in some cases. To avoid these problems from occurring here, a suitable medium for this has to be chosen and some ‘best practices’ from past experience will be looked into. This sub-question will be the subject of chapter 9.

5. How can these performance indicators be compared and reported?

When all information is collected, it has to be analyzed in such a way that discrepancies in the performance of the plants can be interpreted and reported on the right way. This sub-question will be the subject of chapter 10.

6. How can the system be implemented in the organization ensuring continuity?

The goal for this system is essentially a long-term one. A database will be created in which the development of performance of all the participating plants over time and the working methods that lead to these outcomes will be recorded. To make sure that the system and the collected information will be fit for continuous use within the entire Akzo Nobel organization, and continues to contribute to improve performance, it is necessary to look into the conditions to make this possible. This sub-question will be the subject of chapter 12.

4.3.

Conditions

The following conditions apply to this study:

1. The collection of data is to take place through the Akzo Nobel Intranet;

2. The resulting model for the benchmark will cover the areas Technology, Production and Maintenance, possibilities to add other areas at a later date must remain open.

4.4.

Conceptual model

In the following conceptual model a framework is given in which the key elements of this study and their relations are given. Although a top-down structure starting at the corporate level is made clear in this picture, it has to be noted that the benchmarking model that will result from this study will be implemented bottom-up and will be offered as a service to (sub-)Business Units that can use it on a voluntary basis. The corporate level of Akzo Nobel has very little direct influence on the day-to-day operations within Business Units and is therefore shown with dashed arrows.

Figure 4-1: The conceptual model for this study

4.5.

Scope of the study

The scope of this study will include the following elements:

• A benchmarking model;

• A set of performance indicators on which the benchmark is to be based; • A model for collecting data from the reference group;

• A way of reporting the outcomes of the benchmark to participants at different management-levels;

• Organizational and psychological issues concerning the continuous nature of the system.

Plants

Performance Indicators

Akzo Nobel Corporate Management (Sub-)Business Units Standardization of definitions Benchmark Manufacturing Departments Manufacturing Strategy

Part II:

Theory

“What gets measured,

gets done”

Chapter 5

Benchmarking

In this chapter, some theories on benchmarking will be examined and a model is formulated of how a benchmark can be organized in this particular case.

5.1.

Theory

To begin the exploration of the subject of benchmarking the following definitions will give a general idea of the concept of benchmarking.

De Vries and Van Der Togt define benchmarking as a method to compare an activity, function or process of a company to ‘best practices’ of other companies and/or organizations, so that the own activity can be improved significantly based on this comparison. (De Vries, 1995)

Camp defines benchmarking as a continuous, systematic process in which products, services and work processes of organizations are compared with those of the best performing organizations in a specific area. (Camp, 1992)

The second of the definitions given above was composed by Robert Camp who is considered to be one of the pioneers of benchmarking. While he was working as a manager at the Xerox Corporation in the early 1980’s, he was one of the first to apply benchmarking within a professional organization to figure out why the company’s performance had been lagging. Later he described the key issue in benchmarking as: "Here's how I do my process--how do you do yours?"

Figure 5-1: Generic benchmarking process (Camp, 2000) Benchmarking process Benchmarking measurements (Quantitative information) Benchmarking methods (Qualitative information) Performance gap (How big? Where? When?)

How to close performance gap? (improve knowledge, methods, and

processes Management involvement

Communicate results Participation of employees

The model of a process shown in figure 5-1 shows a generic benchmarking process as it has been described by Camp. (Camp, 2000) From this model and the definitions it can be concluded that a benchmarking process can be roughly divided in two main phases: comparison and improvement.

5.1.1. Comparison

In the comparison phase the relative performance of an organization and its causes are determined. This is done by collecting and comparing information on the subject that is to be benchmarked. This information can be distinctly divided in two groups: quantitative and qualitative information.

The quantitative information consists of quantifiable performance indicators that are used to measure the performance of a plant objectively. The quantitative information gathered can be used to compare the performance of participants in the examined areas. This way the ‘best in class’ performer and an average performance score can be determined. The difference between the ‘best in class’ performance and the performance of a certain plant is known as the performance gap. This performance gap indicates a difference in the working methods used or in the environment of the process. To examine the cause of this gap and to identify possibilities for improvement the qualitative information has to be examined.

The qualitative information consists of information on the working methods and the process that is benchmarked. Information on the environment of the process belongs to this category as well. By examining the qualitative information of the ‘best in class’ compared to other plants ‘best practices’ can be identified. These ‘best practices’ can be shared with the other benchmarking partners so they can implement them as well.

In the comparison phase the emphasis always lies on the external frame of reference for the comparison.

5.1.2. Improvement

In the improvement phase, actions for improvement are determined and planned based on the outcome of the comparison phase. After this, the planned actions are implemented.

According to Camp a number of factors can be identified that contribute to the successful implementation of improvements based on a benchmarking exercise (Camp, 1992):

• The commitment of management of an organization; • Communication between all levels in an organization;

• A joint effort of management and employees to realize action plans;

• The commitment of all involved to achieve excellence based on new working methods.

5.1.3. Benchmark types

Now that the basic principle of benchmarking is made clear some aspects of the actual carrying out of a benchmarking exercise are looked into. According to De Vries, four basic elements of benchmarking can be distinguished while looking at different types of benchmarking. (De Vries, 1995) They are:

• Goal;

• Organizational level; • Selection of partners; • Subject.

The goal of benchmarking can be very diverse but will always have something to do with improving internal efficiency or external effectiveness. Examples of internal efficiency are reduction of costs, reduction of processing time and improvement of productivity. Examples of external effectiveness are customer satisfaction and the image customers have of the company.

The benchmarking exercise can focus on activities at different levels of the organization. This can vary from a single activity at a service department to the entire primary process of an organization.

When benchmarking, the key issue is to compare one’s own activities to that of a ‘best in class’ organization. The third element mentioned is to determine the selection of partners, the ‘class’, in which comparison is to take place. This can be roughly divided in three groups:

• Internal benchmarking, only activities within the own organization are part of the benchmark;

• Competitive best benchmarking, activities are compared with direct, indirect or potential competitors;

• Best practice benchmarking, a specific activity is compared with one or more other organizations inside or outside the own market sector who have achieved excellence in this field.

Competitive best and best practice benchmarking are also known as external

benchmarking because of the comparison that is made with parties outside of the own

organization.

Both internal and external benchmarking has its pro’s and cons. Most obvious of which is that an internal benchmark does not provide a reference with external parties and so a comparison to other parties within or outside of one’s own market is not possible. An advantage is however that with internal benchmarking a more specific approach to the organization’s own situation can be taken and more detailed information can be used. Furthermore, the collection of data will, normally speaking, be much easier for an internal benchmark than for an external one.

The fourth element is the subject of the benchmark. This too can be divided in three different groups:

• Strategic benchmarking, in which the client or market has the focus. Examples are a better positioning in the market, a better connection with customer demand or the supply of added value to customers;

• Operational benchmarking, in which one or a number of specific processes or activities are looked at. The emphasis in this form of benchmarking lies with improvement of efficiency (achieving of cost-leadership in the market) or improving quality in relation to competitors (differentiation).

• Business management benchmarking is specifically aimed at secondary functions such as planning processes and support departments within an organization and not the primary process.

5.2.

Why benchmark?

Reasons for benchmarking are mainly found in the fact that an ever-increasing need for mineralization of cost, process control, process improvement and adding value exists resulting from external and internal influences. Benchmarking can contribute to this by creating an objective image of the competitive position and by the ability to determine targets objectively by defining ‘best in class’ performances.

Another advantage of benchmarking is that confrontation with performance figures from outside the organization can be used to overcome arrogance and an internal focus within one’s own organization. Furthermore, benchmarking can contribute to the shaping and implementation of a strategy by providing insight in strengths, weaknesses and critical factors for success and receiving feedback on these factors.

5.3.

The benchmarking process

In practice a large number of alternative forms of benchmarking can be identified, each of which is promoted as being the best by their respective author(s). It appears however that a professional application of any of these alternatives has a bigger influence on the outcome of the benchmarking exercise than the choice of the alternative. According to Mittelsteadt a number of common elements can be found in each of these alternatives (Mittelsteadt, 1992). They are:

• Preparation; • Research;

• Selection of benchmarking partners; • Collection of data;

• Analysis of the gathered information; • Change;

• Improve.

In this paragraph each of these elements of the benchmarking process is described and an introduction is given on how this element is to be filled for the problem to which this study is to give a solution.

5.3.1. Preparation

In the preparation phase, goal and subject of the benchmark are determined. In this case, the goal of the benchmark is to improve the overall performance of the manufacturing process, with respect to its ‘cost-leadership’-position, of all participating plants within Akzo Nobel in the areas of Technology, Production and Maintenance. This benchmark can be typified as an ‘operational benchmark’ because it only focuses solely on the efficiency of the manufacturing process.

5.3.2. Research

In the research phase, the manufacturing process will be examined closely. Performance indicators will be selected that will give an objective picture of the performance of the participants on the areas of Technology, Production and Maintenance and that can be used to compare the performance within the reference group.

To make sure that the benchmark will contribute to an improvement of the performance of the entire Akzo Nobel organization the performance indicators have to be in line with the operational execution of the Akzo Nobel strategy.

5.3.3. Selection of partners

The selection of partners in this benchmark depends on the clients of ManSup who are willing to participate in this multi-BU project. The diverse nature of the participating plants calls for a built-in flexibility for benchmarking in different reference groups at different levels. One could even imagine the possibility to add data from competitors or other external parties.

In general this means that this benchmarking study can best be described as an internal benchmarking exercise in the terms described earlier in this chapter. Although some participating plants will not be fully part of the Akzo Nobel organization but will be related through Joint Venture structures or through an historic relation with Akzo Nobel it would be best to take an approach in which participants are seen as cooperating entities instead of competitors.

5.3.4. Collect and share information

In this phase, information that is needed for the benchmark, both quantitative and qualitative, will be collected. The collecting and sharing of information will be the responsibility of ManSup in this case, no information will be exchanged directly between benchmarking partners.

The collection of quantitative data will take place at fixed time-intervals and has to be done using the Intranet. Furthermore, the collection will have to cost as little man-hours on the side of ManSup as possible to keep the costs of participating down. The gathering of detailed qualitative information on the manufacturing process takes place during the analysis based on the performance gaps found in the reference groups.

This benchmark will result in a continuous benchmark process that will report at fixed intervals. The possibility must exist for participating plants to receive a report on how their

performance relates to the other benchmarking partners once every three months and once every year a comprehensive report with possibilities for improvement will be compiled by ManSup.

There will be reported at three different management levels: the Manufacturing Manager, Plant Manager and the level of management of disciplines within the plant’s organization (plant maintenance manager, technology manager and production manager).

5.3.5. Analysis

In this phase the collected quantitative data will be compared within the selected reference group and ‘best in class’ performers in the different areas can be identified. Based on this comparison of quantitative data, ManSup can further analyze the causes of performance gaps that were ascertained and the ‘best practice’-working methods that lead to the best performance can be identified.

5.3.6. Change

The identified ‘best practices’ in turn, can be used to compile specific improvement plans for each of the plants. ManSup can offer support for the plants to improve performance based on this information.

It has to be kept in mind, however, that the success of working methods can depend on the environment in which the process operates. This means that the same working methods may have different results in different environments. Since it can obviously be very hard or even impossible to change the environment of a process, one has to make sure that the identified ‘best practices’ are translated into realistic plans for improvement of the specific situation and that in conjunction with these improvement plans realistic operational targets are set.

5.3.7. Improve

The compiled improvement plans will then have to be implemented in the different organizations.

5.3.8. Plan-Do-Check-Act

These last four steps mentioned here (Collect & share, analysis, change and improve) show some similarity with another well-known framework for looking at improvement processes, the so-called ‘PDCA-cycle’, Plan-Do-Check-Act.

The PDCA-principle was originally developed by Walter Shewhart in the 1930’s, but is more widely known from its use by Dr. W. Edwards Deming. (Deming, 1994)

The PDCA cycle is designed to be used as a dynamic model. The completion of one turn of the cycle flows into the beginning of the next. Following in the spirit of continuous improvement, the process can always be reanalyzed and a new cycle of change can begin.

Figure 5-2: Deming’s PDCA Cycle

Because the PDCA cycle as it is applied within the benchmark starts with the comparison of performance data and not the plans to implement a change in the manufacturing process, the description of these four steps will start with the check phase.

Check

In the check phase, or the study phase as it sometimes is referred to, the subject for improvement is studied. In this case the subject is the manufacturing process of the participating plants.

This is the stage where the benchmarking system as it has been described in this report plays the biggest role. To study the manufacturing process at the different plants, a quantitative benchmarking analysis is performed to compare the performance of the manufacturing process of each of the participants.

Act

Based on this benchmarking analysis, possible areas for improvement can be identified. The existence of a performance gap between one’s own performance and that of the identified best in class performer on a particular area indicates an opportunity for improvement.

From this analysis a choice is to be made as to what will be the subject of improvement. Of the several possibilities that are identified the one that promises to be the most profitable (or promises the greatest benefit with least effort/cost) is to be chosen.

Plan Do

Check Act

Plan

In the plan phase, the implementation of the actual improvement is planned. This is done by comparing one’s own situation with the situation at the best in class performer as identified in the benchmark, also known as a qualitative benchmark analysis.

After the qualitative benchmarking analysis, it must be decided whether it is worth to actually implement that particular change. If a particular change proves to be too costly, it may be considered to abort the change and plan a new one. However, if it can be expected that the change will lead to a desirable improvement or outcome, it may be considered to expand the change to a different area, or slightly increase the complexity.

According to Deming a thorough analysis in this stage is essential as it is the foundation of the whole cycle. A hasty start may prove to be ineffective, costly and frustrating. One should be aware that there is a general tendency to short-circuit the analysis phase as people are eager to get into motion and actively work on improving the process. A problem in this stage may be how to formulate a feasible goal for the improvement.

Do

In this phase the change that was formulated in the plan phase, is implemented. Wherever possible this should be done on a small scale or in the form of an experiment. After the implementation a next cycle is started with another check phase in which the results of the implementation will be ‘checked’.

As each full PDCA cycle comes to completion, a new and slightly more complex project can be undertaken. This “rolling” aspect of the cycle is integral to the continuous improvement process and is often shown as a so-called improvement ramp as can be seen in figure 5-3.

Figure 5-3: Improvement ramp of the PDCA cycle

P D C A P D C A P D C A Time Level of improvement

Chapter 6

Performance measurement

In this chapter the subject of measuring performance is looked into. This will be done by describing some theory on the subject of performance indicators, by describing a method for selecting the right way of measuring performance for a specific situation and by describing the Balanced Scorecard methodology. In addition to this, a method for measuring performance for this specific situation is selected and discussed.

6.1.

Theory

6.1.1. Performance indicators

According to a study performed by the Dutch Ministry of Internal Affairs, performance

indicators can be described as an absolute or relative measurement of the performance,

giving a summary of a specific situation at a specific moment in time, which can be directly attributed to an organization. (Ministerie van Binnenlandse Zaken, 1999)

The reason for defining a performance indicator is to keep track of developments such a performance indicator is supposed to represent. The information that can be ‘read’ when interpreting the performance indicator can be used to manage an organization.

A performance indicator is called a key performance indicator when the performance it represents is an integral part of the strategy that has been adopted by a (part of an) organization.

6.1.2. Validity & Reliability

Performance indicators are only useful when they can be relied upon to give an objective image of a situation. Two main criteria for this are validity and reliability. The importance of both of these factors can differ and depend on the goal of the performance indicator.

A performance indicator can be called valid when it gives a sufficient image of the reality it is supposed to represent. A performance indicator can be called reliable when the measurements can sufficiently be guaranteed to be accurate, objective and recent enough for the goal of the performance indicator.

It is possible that performance indicators are sufficiently valid but not reliable and vice versa and it is even possible that the fact that things are being measured influence the validity and reliability. Performance indicators based on opinions instead of facts are rarely reliable and valid. A number of measures can be taken to reduce the risk of invalid or unreliable performance indicators. They are:

• Use more than one performance indicator to measure the same performance. This can reduce problems with both validity and reliability. When a performance indicator is too one-sided, a second one may be able to compensate this and two measurements of the same reality increase reliability.

• It is important that performance indicators of sufficient validity and reliability cover all or most aspects of the goals of the measurement. If this is not the case, the

risk of the so-called ‘tunnelling effect’ exists. Performance indicators that are simple to measure receive more attention than difficult ones resulting in sub-optimization.

• Performance indicators must be based on information that is already available and used in an organization. They can possibly be derived from indicators that are used at lower levels in the organization. This way, measurements will be more valid and reliable while less effort is required to gather them.

• When it appears to be impossible to find suitable performance indicators for end results, it may be possible to find performance indicators for intermediate results. In this case, it is important to distinguish between measurements of end results and intermediate results. Examples of this include the measurement of customer satisfaction based on the number of complaints that was received or the improvement of employee’s skills based on the amount of hours of training received.

6.1.3. Performance target

Performance indicators can only be used to manage when a target for this indicator has been specified. A difference between the value of a performance indicator and the corresponding target can be perceived as a signal for action.

The target can be based on previous levels of the performance indicator, on qualitative research, on a legal basis, (international) standards or on the performance of other organizations. The last one will be used in this study, since in a benchmarking exercise the target will be based on the result of the ‘best in class’ performer on a specific performance indicator.

6.1.4. S.M.A.R.T.

A commonly used set of criteria for measuring performance are the so-called S.M.A.R.T. criteria. These criteria are developed as a tool to specify the right performance indicators and targets. However, with this in mind, they must also apply to performance indicators used to measure the progress in achieving this target. The set consists of five elements:

• Specific, the performance indicator must be clear and concrete and not subject to different interpretations by different parties;

• Measurable, the measurements of the performance indicator must be objective and in line with its goal so change of performance can be made visible in the right way; • Acceptable, the measurements of the performance indicator must be accepted and

supported by all parties involved;

• Realistic, the performance indicator must be realistic, meaning that it must be possible for those involved to influence the performance that is measured by this indicator. In addition, the target that is set for this indicator must be possible to reach. Setting the targets too high might influence the motivation and commitment of those involved to improving performance on this area;

• Time-bound, a time-span over which performance is measured and targets are to be reached has to be specified in order to make clear to all involved when actions have to take place to improve performance.

6.2.

Methods for measuring performance

The first step towards measuring performance of an organization is to establish the correct focus. A clear definition has to be made of what will be the subject of the measurement. This has to be done to prevent redundant or trivial information from interfering with the ‘big picture’ of what is to be measured. In addition, by defining the subject before selecting the indicators it can be prevented that the selected indicators give too narrow a view of the subject.

It is virtually impossible for a single system to give a complete picture of the performance of an organization. However, the main goal of measuring performance is to observe the ‘big picture’ of the performance of an organization, or part thereof, by monitoring a limited amount of relatively easy to measure information.

In addition to clearly defining the subject of measurement, a method for selecting performance indicators has to be chosen beforehand. The correct application of such a method will ensure that the whole set of indicators creates a sufficient picture of an organization’s performance, and the relationships between these indicators are clearly defined.

Kerklaan defines two dimensions that have to be taken into account when selecting the method that is to be used: the style of leadership and the main problem type. (Kerklaan, 1994) The main problem type can be split up in ‘consolidation’ and ‘innovation’. Style of leadership also has two possibilities: ‘stimulate’ and ‘control’. By combining these two dimensions, the following matrix can be created. Each combination of these two dimensions has a most suitable method for performance measurement.

Main problem type

Style of leadership

Consolidate Innovate

Stimulate System/Process models Horizontal approach

Control Vertical approach Balanced Scorecard

Figure 6-1: Matrix for selecting the method of performance management (Kerklaan, 1994)

Consolidation vs. innovation

The tasks that the management of an organization faces can be roughly divided in two types: consolidation and innovation. Depending on the conditions in which an organization has to operate, one or the other will have the emphasis. Consolidating tasks will aim to sustain current activities and focuses mainly on existing rules and procedures as well as sustaining the level of knowledge and experience in the organization. This will ensure that the predetermined quality levels will be monitored.

Innovating tasks include the search for new procedures and working methods as well as new product development and are focused at external developments.

Stimulation vs. control

A commonly used contrast in types of management is stimulation versus control. A stimulating style of leadership will be used with a bottom-up approach of the development of processes and systems and is typical for organizations with a decentralized setting of goals.

A controlling style of leadership can be seen in more centralized organizations and has a more top-down approach.

The four types of methods that are mentioned in the matrix will be described below.

6.2.1. Consolidate and stimulate

One of the most important features of this type is that it focuses on existing systems. Methods that are used are aimed at consolidation by monitoring feedback loops at different levels of the organization. Feedback loops can be found at the strategic, tactical and operational levels of an organization. The methods are based on system- and process-models of the underlying processes.

The stimulating part of this type of performance measurement is that the development of the system- and process-models can (and should) be done in cooperation with the people that are directly involved. The building of these models leads to a better understanding of ones own processes and works as a catalyst for improvement.

6.2.2. Innovate and stimulate

This type of performance measurement is aimed at improving processes by working back from the product to requirements of the processes. By looking at this in a systematic way, critical points in all processes can be determined. By starting at the customer’s demands of a product a translation to internal customer-supplier relationships can be made. By making these relationships measurable, a framework emerges in which both the product and the primary process can be optimized.

This method is based on a horizontal approach to the primary process by involving the people directly concerned with different aspects of the process.

6.2.3. Consolidate and control

This type of measurement consists of methods that help top management levels implement an existing strategy or policy. These methods are aimed at the alignment of the use of resources and clearly formulated measurable goals. Typically, these methods will start by trying to build a hierarchy of goals for an organization at different levels.

6.2.4. Innovate and control

The last of the four types of performance measurement is ‘innovate and control’. Methods of this type are aimed at supporting top management levels that want to innovate in a controlled and systematic manner. These types of methods are commonly compared to cockpits of an organization. By monitoring a number of predefined performance indicators