A new look at logistics at the Multi Purpose Catalysts plant

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What you measure is what you get

A new look at logistics at the Multi Purpose Catalysts plant

"It is bad to have no information, but it is worse if you believe that you have enough"

(Néstor C. Kirchner, Presidente de la República Argentina)

Master thesis Industrial Engineering & Management Science University of Groningen, Faculty of Management and Organisation

Student: B.M. de Graaf

Supervisors Albemarle Catalysts: ir. J.G.M. Oude Groeniger Project Leader Supply Chain Management A. Quist Plant Manager Combined Production Unit Supervisors University of Groningen dr. ir. F.W. Melissen Faculty of Management and Organisation prof. dr. J. Wijngaard Faculty of Management and Organisation

Public version

‘de auteur is verantwoordelijk voor de inhoud van het afstudeerverslag; het

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Executive summary

Over the past ten years or so, supply chain management (SCM) has flourished as an idea, if not as a coherent practical programme. At the EUMEA Business Unit of AKZO Nobel Catalysts a growing interest in Supply Chain Management led to the obvious question whether there were improvement opportunities to be found at the Multi Purpose Catalysts plant, so as to reduce cost as well. During the research period the organisation changed hands to become the Catalyst division of Albemarle Corporation. This by no means influenced the outcome of the research and the name AKZO Nobel Catalysts can freely be exchanged for Albemarle Catalyst division.

At the beginning of the research several interviews were held in order to set the direction for the thesis. During interviews it became clear that the internal performance of the plant is unknown.

The second issue that became apparent was the general feeling of delivery unreliability of a product group referred to as Additives. The external performance of the latter product group remains by and large unknown to the organisation. The research objective of the thesis is formulated hereunder:

The purpose of the research is to identify improvement opportunities at the MPC organisation, thereby contributing to setting direction for cost reduction and increasing delivery reliability.

The research consisted of the following parts: a description of the current situation, search for problem areas in Production Planning & Control, prioritisation of the problem areas identified and formulation of possible solutions to the problem areas.

The current situation was expressed by describing the various activities and processes involved in manufacturing, planning and direct support activities. The diagnosis of the current situation was sharpened with the use of an audit framework called the logistical concept. By systematically searching for potential problem areas in the physical structure, Production Planning & Control, information system and organisational embedding, a set of problem areas could be uncovered.

The problem coherence appeared to strongly correlate with one another. The most striking problem areas identified relate to demarcations in the planning process, lead time control and agreement on and attention to service levels between the three SBU’s. Moreover, apart from differences in market characteristics, the organisation is judged by two different financial measures of performance. For internal transfers to the FCC and HPC organisations, the plant is seen as a cost centre. The Business Development Group is neither responsible for revenue nor profit for these products. In contrast, full management responsibility lies with the Business

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Development Group’s own products. From this perspective, the plant as well as its own products is measured as a profit centre.

Recommendations made to the organisation can be categorised into three main problem areas, namely reducing the complexity of the organisation, formulation of Performance Indicators &

control mechanisms and to improve cost allocation. The philosophy behind Overall Equipment Effectiveness could be useful in controlling lead times in production and assisting planning.

Control and differentiation of internal and external lead times can subsequently form the basis for further decision making in logistics, just as monitoring external customer service levels, be it on co-production or for commercial markets. This management information can be interpreted as Performance Indicators needed to monitor the logistical efficiency and effectiveness of the MPC plant in order to undertake action when deviations from the norm need intervention; a dashboard.

Management attention should also shift towards a more integral capacity planning and work load control, once the dash board is in place. Revision of agreements with (internal) customers and stock policy should not be shunned once better understanding exists of the plant performance and lead time control. More effective use of the available capacity can be made when shifting away from Material Requirements Planning towards Manufacturing Resource Planning.

Depending on the time bucket, forecasting accuracy will then become more important. Eventually, planning could be upgraded with a production planning, based on resource planning so as to align resources with long term product/market demand. Optimisation might require more accurate understanding of the cost involved on activity level. Setting up a prospective ABC model in order to get more insight in costs associated with production, especially for toll production with relatively low margins, is advisable. An alternative Internal Pricing mechanism, which better reflects the cost behaviour of the purchasing departments, has also been proposed.

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Preface

The master thesis was written to conclude my studies of Industrial Engineering & Management Science at the University of Groningen. The internship was conducted at the Amsterdam site of AKZO Nobel Catalysts b.v., or more specifically the Multi Purpose Catalysts plant. Just over halfway the internship the Business Unit Catalysts changed hands to Albemarle Catalyst division.

This in no way affected the outcome of the research. The name of AKZO Nobel Catalysts used in the thesis can freely be interchanged with Albemarle Catalyst division, since the organisation of the relevant department remained totally unchanged during the rest of the research.

The internship would not have been possible without the frequent help of some people. First of all, I would like to thank my supervisors Han Oude Groeniger and Arno Quist for making the internship possible in the first place and for patiently and consciously answering my questions during the past ten months. But, the thesis would not be in the format it is now without the help of my supervisors at RuG too. A special word of thanks goes to dr. Melissen for his guidance, critical notes and teaching me some valuable lessons during this research. Besides, I would like to thank prof. Wijngaard for his well-meant remarks as the second corrector. Furthermore, my gratitude goes to Johan Last for devoting his time, the many coffee breaks spent together, as well as to everyone else who worked on the same project, but whose names I cannot possibly list in this report. Finally, I would like to thank my two home bases: my parents for supporting me in several ways during the research amongst others making provision for food and shelter and my colleague during the research period and alumnus Dennis Hamstra for his courtesy to arrange a place to stay in Amsterdam when necessary and joint cycle trips towards the company, right across the city centre.

Amsterdam, 31 January 2005

Bas de Graaf

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Abbreviations

ABC Activity Based Costing

BDG Business Development Group

BPM Business Process Management

CEO Chief Executive Officer CPU Combined Production Unit

CM Contribution Margin

DC Decoupling Point

EBITDA Earnings before Interest, Taxes, Depreciation and Amortisation ERP Enterprise Resource Planning

EUMEA Europe, Middle East and Africa

FCC Fluid Cracking Catalyst

HPC Hydro Processing Catalyst

JIT Just-in-Time

LIMS Laboratory Information Management System MRP-II Manufacturing Resource Planning

MPS Master Production Schedule

MRP-I Material Requirements Planning

MST Modern Sociotechniques

MPC Multi Purpose Catalyst

OIBF Operating Income Before Finance OEE Overall Equipment Effectiveness

PI Performance Indicator

PO Purchase Order

ROI Return On Investment

RuG Rijksuniversiteit Groningen

RF Rolling Forecast

SO Sales Order

SBU Sub Business Unit

SCM Supply Chain Management

SCOR model Supply Chain Operation Reference model TOC Theory of Constraints

TOP Three Years Operating Plan TQM Total Quality Management

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Symbols

Symbols for mapping the logistical situation

Name Description

physical process

physical storage All storage of goods between two physical processes (warehouse, stock)

physical transport transportation of goods from one physical process to another

control process

every process that starts, stops or changes the physical process in speed or direction

(planning, MRP, etc..)

orders/planning

registration process

every process that registers, analyses and records the performance of the physical process (registration, simulations, control, etc..)

results/notification

order penetration point indicates how deeply an order or plan penetrates in the physical processes

organisational structure and/or reporting lines

processing

control

storage

these symbols function as further indication of the character of the process, i.e. a production process with internal storage

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Introduction

In the past, companies used stocks to decouple the production control of other organisations.

These stocks were used as a buffer against uncertainties. Slack et al. (2001) describe stock as stored accumulation of material resources in a transformation system. In a manufacturing environment this entails material that is present in the chain. The difference in the timing or rate of supply and demand between supplier and buyer is the reason for stock and the decoupling of processes is achieved through stock. Mutual tuning between organisations did not often occur.

The introduction of Enterprise Resource systems and the growing necessity to reduce costs forced many organisations to re-asses their production concept. One can think of Manufacturing Resource Planning, Business Process Reengineering, Lean Production, Just-In-Time and more recently Supply Chain Management. More often than not organisations came to realise that fine- tuning of activities between organisations in a chain can be mutually beneficial. Research done by the American Commerce Department indicates that since 1980 total inventory value has strongly declined compared to the sales value. Calculations show that American companies saved USD 10 billion annually, a cumulative value of USD 115 billion since 1988 (The Economist, 2000). According to the authors of the research, main reason is the improved data exchange between organisations, and suppliers and buyers. Inventory, according to them, is a result of delivery reliability from the supplier and demand from the customer. The information gap between the organisations resulted in excess inventory buffers. The authors expect that an improved and rapid exchange of information will contribute to a lowering of physical inventories.

When a company decides to make agreements to reduce cost and speed up in order to gain better control over the stream of goods between organisations, this is commonly referred to as Supply Chain Management. A distinction can be made between Supply Chain Management which takes on a holistic¹ approach towards the supply chain and a concept called focal operations. In a focal operations approach, an organisation’s primary process is analysed and efficiency is improved by, for example, allowing inventory only when needed (Just-in-Time), identifying bottlenecks, balancing capacity and coordinating the smooth flow of materials (a lean organisation). The term logistics, often used in this context, might therefore be somewhat confusing. American definitions of logistics are often limited to warehousing, inventory management and transportation activities. In Europe logistics also cover the area of operations and will be the focal point of this thesis. The train of thought being that before any organisation can benefit from efficient information-exchange with external organisations, the internal organisational information-exchange needs to function properly as well, so as to become lean itself and be ready to enjoy the mutual benefits from Supply Chain Management. Difficulties to be

1 dealing with the whole of something and not just a part

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Introduction

encountered are extracting relevant information from information systems, keeping up relevant production statistics and formulating performance indicators in order to streamline production planning and control cycles.

In chapter 1, a general description is given of AKZO Nobel and in particular the Multi Purpose Catalysts plant which will be the focus of the thesis. In the chapter thereafter the perceived management problem will be elaborated on, as well as the demarcation of the research. The chapter sets direction for the thesis. As there is no concrete problem, the research will be explorative of nature in search for problem areas in Production Planning & Control. The third chapter addresses the manner in which the research has been carried out and in the fourth chapter the relevant theory to the topic will be discussed. Chapter 5 consists of a description of the current processes and logistics in the organisation, whereas in chapter 6 (potential) problem areas will be further elaborated on by discussing the current situation according to a framework called the logistical concept. The problems diagnosed will be prioritized and clustered in chapter 7 and subsequently the author will formulate solutions to the diagnosed problems. The thesis closes in chapter 8 with a conclusion and recommendations for the organisation in order to improve the current situation.

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General introduction

Chapter 1. General information

The aim of this chapter is to provide background information on the setting in which the research has taken place. The first sections focus on the history of AKZO Nobel, whereas from section 1.2 the focus shifts to the Combined Production Unit and specifically to the Multi Purpose Catalysts plant. It will give a short introduction to the manufacturing plant, its organisation and its customer base.

§ 1.1 Background to the company

Occasionally you may have heard about AKZO, and since 1994 of AKZO Nobel, but never really thought about the products they produce. It is more than likely, though that you are currently using a product involving AKZO Nobel. Oral contraceptives, antidepressants, paint, salt, asphalt, toothpaste, cosmetics, plastics and glass is just a small selection of AKZO Nobel’s involvement in every day life. This is no wonder since for many years AKZO has been dubbed ‘the Republic of Kingdoms’ (AKZO Nobel, 1999a). Multinational AKZO has not grown organically to its present size, but rather is an amalgamation of previously independent and fiercely competing small Dutch enterprises. Wiert Wzn. Sikkens, local house painter and window cleaner, started a paint factory in Groningen in 1792, the company merged with Ketjen in 1962, in essence leading to the formation of the coatings division of AKZO, then merging with Nobel. Local druggist Gerhard T.

Ketjen planned to erect a sulphuric acid plant in Amsterdam on 6 September 1835 which forebodes the birth of the chemical division of AKZO.

According to the book of Genesis, Enoch, son of Jared and father of Methuselah, walked the Earth for 365 years and then ascended to heaven without dying. Inspired by this achievement, a club was formed in France in 1981 that took his name (Hénok). Les Hénokiens is an association of companies that are at least 200 years old, have stayed in the control of one family throughout, are financially healthy, modern and are still run by a family member (The Economist, 2004a). In the Netherlands, the name and fame of the Dutch trading company of old, de Verenigde Oost- Indische Compagnie VOC, established in 1602, and its offspring world-wide, comes every Dutchmen spontaneously to mind. Calculating the age of big complex companies – many of which are public, not family owned – is arguably just as tricky, for many of these firms have grown through multiple acquisitions (The Economist, 2004a). Today’s biggest, best-known companies are mostly spotty youths by comparison with the ancient family firms referred to above – not least because their main activities have become possible only since the industrial revolution. The uninterrupted line Koninklijke Zwavelzuurfabrieken v/h Ketjen (1835), Koninklijke Zout - Ketjen (KZK - 1961), Koninklijke Zout - Organon (KZO - 1967), AKU-KZO (AKZO - 1969), AKZO - Nobel (AKZO Nobel – 1994) shows the formidable strength of the 170 years old, but vibrant company Ketjen. Admittedly, Sikkens then already existed for over 40 years and its Danish counterpart,

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General introduction

Holmbladske, for almost 60 years. The trade names Sikkens and Sadolin coatings are in everyday use still, as is the trademark Ketjen. Today, AKZO Nobel has expanded its activities to over 80 countries and currently employs about 64,500 people. Its activities can be divided into three divisions: Pharma, Coatings and Chemicals. Together these divisions generated sales totalling EUR 13 billion in 2003 of which 27% in healthcare products, 40% in coatings and 33% in chemical products.²

§ 1.1.1 From Ketjen to AKZO, a brief history

The founding of AKZO Nobel Catalysts dates back to 1835 with the foundation of Ketjen. On 1^st April 1845 Gerard Tileman Ketjen decided, together with B. Tideman and J.L. Jarman, to build a sulphuric acid plant. It was the first of its kind in the Netherlands and only the third one in Europe.

The factory was built on an open space called Trapjesschans, on the edge of Amsterdam.

Business flourished and in 1854 Ketjen expanded its capacity by building another sulphuric acid factory after he bought both Tideman and Jarman out. In 1856 the provincial government of Noord-Holland forced Ketjen to increase the height of the chimneys to reduce air pollution. In 1880 this led to the relocation of the entire production site to Kostverlorenvaart, because the city of Amsterdam wanted to expand. Roughly 10 years later, in 1891, Ketjen bought himself another sulphuric acid factory located in Uithoorn. In 1900 the factory located at Kostverlorenvaart had to be replaced again in order to give way to Amsterdam’s town-planning. This time the factory was built in a swamp area, across the river IJ, called Amsterdam-Noord. The factory in Uithoorn closed in 1916 and its workforce was relocated to Amsterdam. WW II was difficult, but the period thereafter was boom time. New factories were built around the sulphuric acid production, such as the Fluid Cracking Catalysts (FCC) plant in 1953, the Multi Purpose Catalysts (MPC) plant in 1955 and the Hydro Processing Catalysts (HPC) plant in 1972. All factories produced catalysts for the refinery industry. After 1961 mergers followed and in 1969 AKZO emerged. In 1994 AKZO acquired the Swedish company Nobel and continued under its new name AKZO Nobel.

§ 1.1.2 From AKZO Nobel Catalysts to Albemarle Catalyst division

AKZO Nobel Catalysts is a relatively small business unit compared to other AKZO Nobel Chemicals’ units. In terms of sales it is the third smallest of AKZO Nobel Chemicals’ business units, contributing just 7% of total sales in 2003.³ Business Unit Catalysts operates worldwide and has been further divided into regional sub Business Units (SBU), namely Asia Pacific, Americas and EUMEA⁴ in order to better monitor and respond to customers’ requirements, see the figure hereafter for an overview of proven oil reserves in the world.

2 www.akzonobel.com

3 Annual report 2003, for more information see www.aex.nl

4 Europe, Middle East and Africa

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General introduction

Proven oil reserves

Middle East 66%

Asia/

Pacific 4%

Former Soviet Union

6%

Africa 7%

Western hemis-

phere 15%

Western Europe

2%

Figure 1-1 Proven oil reserves January 1st 1998, % of total⁵

A fourth and much smaller sub Business Unit called Business Development Group, produces catalysts for a variety of markets, not necessarily the oil industry. The plants of the Business Development Group are used as a pilot plant for Research and Development if and when required. For an overview of AKZO Nobel Catalysts and its sub Business Units see also Appendix A.

About midway the internship, AKZO Nobel Catalysts changed hands from AKZO Nobel to Albemarle, Albemarle Catalyst division. This deal will turn Albemarle from a niche player in polyolefin catalysts into a leader in the overall catalysts market. The deal is expected to raise Albemarle’s overall EBITDA (Earnings before Interest, Taxes, Depreciation and Amortisation) margin⁶ by one full percentage point, to 17 percent. Distortionary accounting (different interest rules in countries) and financing effects (acquisitions) on company earnings do not factor into EBITDA and allows investors to make an apple-to-apple comparison of profit potential between companies⁷. In terms of EBITDA, the merger is expected to generate an annualized cost saving of USD 5 – 10 million (Chemical Week, 2004).

§ 1.1.3 Strategy AKZO Nobel Catalysts

Since the larger part of the internship and information collecting was done during the AKZO Nobel era, the name AKZO Nobel Catalysts will be continued throughout the thesis and the thesis assumes the situation before the acquisition. The acquisition does not influence the outcome of the research as the Catalysts departments directly involved during the research remained the same.

5 The Economist (1998)

6 EBITDA margin: the extent to which cash operating expenses use up revenue

7 www.investorwords.com

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General introduction

In parts of 15^th-century Africa, salt was more precious, because scarcer, even than gold. Traders determined enough to transport salt some 1.500 km from the north found they could exchange the white stuff for its equal weight in gold – surely a clever deal. As indicated earlier in the report, roughly 50 years ago, KZK (Koninklijke Zout Ketjen) or even its predecessors had both the vision and the financial skill to start the catalyst business. During the process of growth, the name Ketjen was absorbed by a series of mergers and acquisitions, which is not at all unusual since one-third of all firms in the Fortune 500 in 1970 no longer existed in 1983, killed by merger, acquisition, bankruptcy or break-up (The Economist, 2004b).

Presently, AKZO Nobel Catalysts has a leading position in the petroleum catalysts industry and is constantly seeking opportunities to enhance this position even further. The future of Catalysts, despite talks about alternative fuels, looks bright because gasoline and diesel production will remain the main focus of refineries for the coming 10 to 15 years. To give an impression of competition, the market shares of AKZO Nobel Catalysts and its competitors are reflected in figure 1-2.

Figure 1-2 Market share Refining Catalysts 2002

Stricter environmental regulations imply the need for cleaner fuel, increasing the demand for catalysts. Therefore, keeping up with technology is important for AKZO Nobel, but good logistics is equally important. In the end, the success of AKZO Nobel Catalysts is not only dependent on the quality of its research, but on actually delivering the right product to customers exactly when they require it⁸.

§ 1.2. General background to the Multi Purpose Catalysts organisation

The thesis has been written specifically for the Sub Business Unit Business Development Group with focus on the Multi Purpose Catalysts Plant (MPC plant) at the Amsterdam site. This section will give a short introduction to the manufacturing plant, its organisation and its customer base.

8 Catalysts Courier 53 and mission statement

AKZO Nobel 21%

Grace Davison 18%

UOP 10%

Engelhard 9%

Criterion 9%

Other 33%

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General introduction

§ 1.2.1 Organisation

The Multi Purpose Catalysts organisation is a chemical manufacturing plant and employs around 35 people. The organisation was set up in 1955 with the purpose to produce catalysts for niche markets of the fuels industry at AKZO’s production site in Amsterdam-Noord. The Multi Purpose Catalysts plant is part of a larger production centre called the Combined Production Unit (CPU).

Over the past years, the CPU organisation has gone through a lot of changes. As recent as 2000, CPU provided production and support facilities to four Business Units of AKZO Nobel: AKZO Nobel Polymer Chemicals, Functional Chemicals, Base Chemicals and Catalysts. Today, its responsibility is limited to just the Multi Purpose Catalysts Plant and utilities for the Amsterdam site of the AKZO Nobel Catalysts division. The current CPU organisation is illustrated in figure 1- 3.

Figure 1-3 Combined Production Unit organisation

In the recent past, the plant also started to function as “internal” toll manufacturer besides solely serving markets of the Business Development Group. Toll products are outsourced products from other organisations. Outsourcing is work done for a company by another company or people other than the original company's employees. Outsourcing means purchasing a product or process from an outside supplier rather than producing this product or process in-house⁹.

§ 1.2.2 Markets and products

The MPC organisation has been active in a variety of catalyst markets amongst which the Fluid Cracking Catalyst market (henceforth Additives), the Hydro Processing Catalyst market, the Oxychlorination market (catalysts used in the plastics industry) and other refining niche markets that will henceforth be referred to as Specialties. In the latter market, custom catalysts are developed in close cooperation with customers. On demand, the organisation can make proprietary catalysts or carriers for fixed or fluid bed applications in the Multi-purpose Catalyst

9 www.commerce-database.com

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General introduction

Plant that specially operates for this purpose¹⁰. The catalyst markets can be broadly divided into two categories: fixed bed - and fluid bed catalysts. Fixed bed catalysts are solid and will stay in a reactor for a certain amount of time until the catalyst loses its performance (i.e. the Hydro Processing Catalysts market), whereas fluid bed catalysts are continuously fed into the reactor (i.e. Fluid Cracking Catalysts market), as part of the catalyst is lost during processing.

The direct customer base of the plant is small. In terms of volume the MPC plant mainly serves the (internal) customers next door, that is, the FCC and HPC plants who re-sell the products to their customer base. MPC’s own markets, Oxychlorination and Specialties, are characterised by a limited number of buyers since these are niche markets. Considering the small number of professional customers, one would expect demand to be rather predictable. To a certain extent this is true. However, the demand for the biggest single market, the Fluid Cracking Catalyst market, can be regarded as ad hoc and production is characterised best as make-to-order. When it comes to purchasing Additives, customers are price/performance sensitive. The product is relatively new to the market, expensive and the alternative is to make changes in the plant.¹¹ Forecasting of the product group is complicated by fierce competition as competitors offer similar products. Customers tend to switch between suppliers to see which type of Additive works best.

This is in contrast with the Specialties market, which is highly predictable and has a much more stable customer base. Moreover, almost X per cent of all contribution margin is generated by this product group, see table 1-1.

Markets Volume Contribution margin¹²

Fluid Cracking Catalysts X X

Hydro Processing Catalysts X X

Oxychlorination X X

Specialties X X

Table 1-1 Market characteristics June 2003 to August 2004¹³

Sales and marketing is carried out at the headquarters of AKZO Nobel Catalysts in Amersfoort.

The markets of the SBU Business Development Group, Oxychlorination and Specialties, are served by two marketing/sales managers. The internal tolling products are managed by the respective sales and marketing departments of the Hydro Processing Catalysts and Fluid Cracking Catalysts organisations of SBU EUMEA and SBU Americas.

10 www.akzonobel-catalysts.com

11 Business plan Additives

12 Contribution margin is defined as sales revenue minus variable cost

13 Based on COPA database

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General introduction

A Pareto analysis¹⁴ of sales over the period June 2003 - June 2004 revealed that 30 percent of all products accounted for 85 per cent of total sales volume. A total of 14 different product types were sold during the period.

0%

20%

40%

60%

80%

100%

120%

0% 13%

25% 38% 50%

63% 75% 88%

100

%

# products

Sales volume (Mt)

Figure 1-4 Pareto analysis products June 2003 to August 2004

Important product groups to the plant in terms of sales (CM) are Additives (FCC market), KF 542 (HPC market), FPC-2 (BDG, Oxychlorination market), KDC-6 (BDG, Specialties market), FEK-2 (BDG, Specialties market) and ACN (BDG, Specialties market). Additional information on the products and their expected market development can be found in Appendix B.

§ 1.2.3 Production

The Business Development Group searches for effective and efficient solutions for the conversion of petrochemical feed stocks. In order to achieve this, the plant is fitted with a functional layout suitable for small lot production and capable of manufacturing a variety of products for both fixed and fluid bed catalysts. In addition to the specialty products, the organisation launched it own series of catalysts for the Oxychlorination market in the early 90s. The products for the FCC and HPC markets are produced in a production concept better known as ‘mass customisation’. It relates to providing customised products through flexible processes in high volumes at reasonable low cost. To give a better impression of the differences between the three plants on the Amsterdam site an overview is given in table 1-2. All three plants operate on a five shift basis, which means production takes place seven days a week twenty-four hours a day.

FCC HPC MPC

Number of operators 50 30 20

Expected production (Mt) 40.000 10.000 2.000 Table 1-2 General characteristics 2004

14 Pareto law, also referred to as the 20/80 rule: which x per cent of the products accounts for y per cent of total sales

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Management Problem

Chapter 2. Introduction to the problem area

This chapter provides background information on the research motive and the management problem and illustrates the background the thesis is written for. The motive is explained in section 2.1, the perceived management problem and background in sections 2.2 and 2.3.

§ 2.1 Research motive

At the sub Business Unit EUMEA of AKZO Nobel Catalysts, the need for cost reduction and the recognition of improvements to be made in logistics led to a general interest in Supply Chain Management. Under the supervision of consultants, in September 2003, the supply chain project SCORE, based on the well-known SCOR model, was kicked off. For more information regarding the SCOR model, see Appendix C. Ultimate goal of SCORE is to improve the organisation’s Return on Investment (ROI). The Return on Investment is an important performance measure in the financial world. Its performance is related to the returns on shares of the company. Effective logistics can contribute to improving the control over the flow of goods in an organisation and have a positive effect on the cash flow. Evidence shows that savings in logistics may have a significant influence on the results of an organisation, as with relatively small effort fairly big results can be achieved (Visser & Van Goor, 1994). For more background information on the term Return on Investment see Appendix D.

Logistics aims at tuning the different links within the supply chain. The purpose of the SCORE project is to implement a structured organisation for continuous improvement in the supply chain environment. The scope of SCORE included the organisations of SBU EUMEA and two production units in Amsterdam, namely the FCC (Fluid Cracking Catalysts) and HPC (Hydro Processing Catalysts) plants. The Multi Purpose Plant was left out of the investigation. The underlying reason was the organisational structure of AKZO Nobel Catalysts, as the MPC plant does not belong to SBU EUMEA. Talks about SCORE at EUMEA drew the attention of the Business Manager of Specialty Catalysts & Zeolites who wondered whether there were improvement opportunities at the MPC plant too.

§ 2.2 Management problem

In large corporations, such as AKZO Nobel Catalysts, several layers of strategy can be distinguished. Strategic management is the highest level of strategy and is formulated by higher management to set general direction and applies to all (sub) parts of the organisation. Under this corporate strategy business unit strategies can be distinguished. These business units operate semi-autonomously within the corporation and are responsible for their own budgeting and development of a business strategy for as long as this is not conflicting with the overall corporate strategy. Finally, the business strategy of the sub Business Unit forms input for the lowest level of

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Management Problem

strategy, namely the operational strategy which focuses on day-to-day operational activities and is controlled by a budget. The strategies within AKZO Nobel are recorded annually in a Quality Plan. The mission of the Business Development Group as well as the MPC organisation is formulated as:

“To supply top performance catalysts, technologies and related services to the fuels industry while meeting the financial targets of AKZO Nobel, our responsibility to our employees and our

commitments to society¹⁵.”

This brings us to the problem description. The Plant Manager is in search of cost reduction as there will be continuous financial pressure on budgets formulated by AKZO Nobel and the Business Development Group. The question arose whether the plant and its primary process operate efficiently in light of the improvement opportunities shown at the other two organisations, but also in view of the growing interest in

Supply Chain Management. There is a strong feeling that the MPC organisation could identify improvement opportunities.

Management suspects that both stocks and the plant’s resources are currently not managed to their full potential and therefore show room for improvement.

This has so far not been given any priority and has never been audited from this perspective.

A supplementary factor for a growing interest in Supply Chain Management stems from the Additives production. The plant’s capacity is for the greater part utilised for toll production. There is currently some open criticism from the FCC organisation on MPC’s delivery reliability. Poor performance of MPC as far as reliability is concerned could result in a bad performance in the Additives market. Part of the difficulty can be attributed to the non-existence of a reliable sales forecast as forecasted orders tend to change a lot. A solution for this problem, as formulated by the manager of the World Wide Additives team, is being sought in improving forecast-models.

However, ultimately, the lead time of Additives continues to be, to a great extent, dependent on processing time and reliability of the MPC’s internal organisation.

15 Annual Quality Plan 2004 SBU Business Development Group

Contribution Margin of the three different Catalyst organisations within the plant

0%

20%

40%

60%

80%

100%

200 0

200 1

200 2

2003

Forecas t 20

04

Year

Cumulative contribution margin (%) FCC organisation

HPC organisation BDG organisation

Figure 2-1

Contribution margin developments through the years

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Management Problem

1997 199

8 1999

2000 2001

2002 2003

forecast 2004 forecast 2005

forecast 200 6

Year

Production (Mt)

Over the past couple of years, production demand of the MPC plant increased steadily in terms of volume (reference figure 2-2). This can mainly be attributed to the recent allocation of the Additives product group from the FCC organisation to the MPC plant which really started off volume wise in

2002. Although production volume increased over the past years, Operating Income Before Finance (OIBF) declined strongly in 2003, but fortunately has rebounded this year, see table 2-1.

All toll production is excluded from the MPC organisation’s inventory and is directly transferred to the HPC and FCC organisations after tolling. The latter organisations are to be regarded revenue centres, whereas the MPC organisation is a standard cost centre for these product groups.

Revenue centres acquire goods from a manufacturing division and are subsequently responsible for selling and distribution of those goods. Hierarchally, the plant belongs to the Business Development Group. From this point of view the plant is considered a profit centre as management has responsibility for both production and sales. Decisions on price and product mix have been delegated to the Marketing department and decisions on major investments pass headquarters in Arnhem. Communication on SBU level takes place quarterly between the BU manager of the Business Development Group and the Plant Manager. In these meetings budgeted cost is looked over as illustrated in the profit and loss account in table 2-1. It goes without saying that objectives are set assuming actual cost does not exceed budgeted cost. The profit and loss account provides the organisation with aggregate information.

2000 2001 2002 2003

1 HY 2004 Total Sales X X X X X Total variable selling cost X X X X X Net revenue (NR) X X X X X

Variable cost X X X X X

Contribution margin (CM) X X X X X Fixed manufacturing cost

(FMC) X X X X X

Other costs X X X X X

Operating income before

finance (OIBF) X X X X X Table 2-1 Profit and loss account Multi Purpose Catalysts plant (*€1000)¹⁶

16 The allocation of the internal tolling products has been somewhat arbitrarily administered over the years.

Sales of the internal tolling products (Additives) of the FCC organisation were only recently registered as sales by the organisation. Before 2004, all internal tolling was generally allocated under other income (other costs), except for the tolling of the KF 542 from the HPC organisation.

Figure 2-2 Final product demand through the years

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Management Problem

§ 2.2.1 Zooming in on the problem area

The problem area described by management is mainly concerned with the organisation’s internal performance and lead times of Additives. For the demarcation of the problem area talks were held with the Plant Manager, Supply Chain Manager and employees of logistics to provide direction. The aim is to introduce the various stakeholders. In the introduction to the problem area the plant manager was identified as a problem owner. A problem owner is a person who has a problem or is worried about something (De Leeuw, 2000). In some cases there are multiple problem owners within an organisation and this situation is referred to as a ‘mess’ of problems. In this research multiple departments, even from other SBU’s, are affected and are therefore perceived potential problem owners. A diagnosis is necessary to give direction to the search for improvement opportunities, which can be performed either narrowly or broadly. In a broad diagnosis causes of problems are included too, whereas in a narrow diagnosis just the problems are included. In first instance, the narrow approach was used to get a feeling of the problems in the organisation. During the orientation the following two factors came to light:

1. Management expects improvements at the plant with regard to logistics. This expectation is partly based on the improvement opportunities shown at the EUMEA plants as well as by management experience. The plant has not been under real logistical pressure lately and could show hidden improvements opportunities as these are not exposed;

2. Performance on BDG markets is checked by the Marketing/Sales manager of the Business Development Group. Most if not all of the important products for the BDG market are delivered from stock. This is in contrast to the toll production, which is made to order. A complicating factor is the delivery reliability of Additives to the FCC organisation. For the greater part the delivery reliability is dependent upon the production at the MPC plant. The EUMEA FCC organisation assumes that the delivery problem lies in the internal environment of MPC. Information on the internal tolling performance is neither included in the delivery performance of the BDG organisation, nor available elsewhere in the Catalysts organisation.

During the interviews no apparent problems came to light, except for the internal performance and external performance on the tolling markets being unknown. The biggest potential problem of the plant can be regarded the friction with the Additives organisation. There is a feeling that something does not go right here. Rather than acting re-actively, the plant manager wishes to shift to a more pro-active approach. Better insight in the causes of the current performance is seen as a prerequisite for making a further step towards lean manufacturing.

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Management Problem

The figures hereunder illustrate the importance of Additives for the plant’s survival. Either way, if the plant looses the Additives due to relocation, or whether the Additives or any other product for that matter suddenly start to increase in volume, the plant will be under (logistical) pressure.

Potential problem areas may exist in the current setting, which as yet have not been regarded as problematic, but will become more apparent when the organisation comes under logistical pressure. This approach obviously has its effect on the rest of the research, since it will take on a more descriptive form against a theoretical background in search of possible problem areas. This should be kept in mind while reading the thesis as the theoretical ideal serves as guidance for setting improvement opportunities.

§ 2.3 Times are changing

Times are changing in the chemical industry. Sulphur chemistry has played a major role in the history of AKZO and not only in the chemical division. It all started with a licence granted by King Willem I, right after the war, with Belgium that is in 1835, to a local Amsterdam druggist to either import or produce sulphuric acid. Eventually, a plant was erected at a location where is now the Nieuwe De la Mar theatre in downtown Amsterdam. Sulphur emissions were leading to rain to become acid and a constant stream of complaints was the result. According to legend, local farmers finally considered compensation by Ketjen as part of their fixed income (AKZO Nobel, 1999b). Despite all these difficulties, by 1937, Ketjen was the largest sulphuric acid producer in Europe. Soon after the war, with Germany this is in 1947, a carbon disulphide plant followed, based on German technology. A plant to produce petroleum cracking catalysts was added in 1953 under licence from PPG - Pittsburgh. About the same time, Chefaro Maatschappij – Rotterdam merged with Ketjen, which laid a solid foundation for the formation of the unit rubber chemicals (reaction product of carbon disulphide and amines or aniline, equally based on German technology). At the time, also AKU was using huge amounts of carbon disulphide in their rayon viscose production (reaction between cellulose and CS2). 1987, AKZO acquired Stauffer

Additives

2000 200

1 2002

2003 forec

ast 200 4

forecast 200 5

forec ast 200

6

Year

Sales volume (Mt)

Figure 2-3 Sales volume per product family

Additives

2000

2001

2002

2003

forecast 2004

Year

Sales (CM)

Figure 2-4 Sales (contribution margin) per product family

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Management Problem

Chemical Company – headquartered in San Francisco which made the company world leading in sulphur based chemicals, among which insoluble sulphur.

History has not been very kind to these sulphur based chemicals of old. The sulphuric acid plant in Amsterdam was sold to PVS which bankrupted recently. Rubber Chemicals were brought in a venture with Monsanto in 1997, which business was downgraded from a business in specialties to commodities right from the start of the joint venture. 1999 the entire Fibre division, then known as Acordis, was spun off. Most of the plants have been closed since. Which leaves the product group insoluble sulphur, acquired in 1987, as the only specialty left and catalysts in the process from specialty to commodity. In a speech in 1999, Kees van Lede, CEO and chairman of the board of AKZO Nobel, considered the (rest of the) company millennium proof (AKZO Nobel, 1999c). Several demergers have taken place since and probably more is yet to come. One cannot always accurately predict the future, but one can definitely help predict the course of events. However many roads lead to Rome, this report does not pretend to be a roadmap to the future. All it pretends to be, is to try and lead the way to a process of continuous improvement for the MPC plant of the BU Catalysts.

§ 2.4 Demarcation of the problem area

In the following diagram the demarcations are shown. Each arrow shows a demarcation decision.

The explanation of each demarcation follows hereunder.

Figure 2-5 Demarcation

1. The SBU Business Development Group is part of BU AKZO Nobel Catalysts, see Appendix A. In light of the geographical spread of the organisation and in view of the Business Development Group’s general interest in Supply Chain Management, focus will be on this Sub Business Unit;

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Management Problem

2. The Business Development Group has two manufacturing locations. One production site is located in Pasadena, Unites States, the other one which is the scope of this research, is the Multi Purpose Catalysts plant located at Amsterdam-Noord;

3. The final demarcation refers to this research being limited to the direct, first tier suppliers and customers of the organisation.

In the research possibilities for improvement will be looked upon. The research will focus on processes on operational level and the logistical concept. Policies and strategy will not be evaluated in this paper. Strategy and subsequent business performance indicators for the Business Development Group are, as mentioned earlier, recorded in the Annual Quality Plan. The aim of the research is to create new insight in the current functioning of the MPC organisation which perhaps leads to a mind shift. Times have definitely changed, not the least at MPC. And they will likely continue to change. Already, a shift can be seen from small-lot production for the Business Development Group to more mass production for the FCC and HPC markets.

In addition to the organisational demarcation for the research, there are also two underlying conditions:

- The current customer service levels have to be maintained or improved;

- The production portfolio does not change;

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Research design

Chapter 3. Research design

In the previous chapter the context of the research was formulated and the problem area demarcated. This chapter will discuss in which manner the research has been carried out.

§ 3.1 Research objective

The perceived performance problem regarding the MPC organisation and Additives is to be translated into research objectives that can lead to improvement of the current functioning. The research can be separated into two parts. Firstly, the organisation wishes to research the processes and the opportunities for improvement in order to increase the current performance.

Secondly, a system has to be in place which can control and set direction for improvement. On the basis of the problem description given in the previous chapter, the following research objective has been formulated:

The purpose of the research is to identify improvement opportunities at the MPC organisation, thereby contributing to setting direction for cost reduction¹⁷ and increasing delivery reliability.

In order to be able to make recommendations, the current planning situation has to be described first, only whereafter problem areas influencing the plant’s efficiency¹⁸ and effectiveness¹⁹ can be identified. In particular, the latter two aspects (efficiency and effectiveness) will reveal the relevance of the research. The Plant Manager calls for (new) insights in relation to the current functioning of the plant and how to cope with the situation. The research objective aims at contributing to this need.

§ 3.2 Research design

As indicated in section 2.2, there is a general feeling at MPC level that the plant’s efficiency and delivery reliability show potential for improvement. Based on this feeling and zooming in on the problem area at the beginning of the research, the following management problem has been formulated:

In which way can the functioning of the Primary Process be enhanced so as to increase efficiency and effectiveness?

17 In the view of the author, this corresponds with AKZO Nobel Catalysts’ aim of increasing the Return on Investment

18 Efficiency is the degree to which a system or components performs its designated functions with minimum consumption or resources

19 Effectiveness is the degree to which a system’s feature and capabilities meet the user’s need

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Research design

The problem will be dealt with as a practical research in which the management process does not function properly or is perceived to have improvement opportunities (De Leeuw, 2000). The phased plan used to structure the research is described by Kaper and Knaapen (1991). The two authors differentiate eight steps to increase controllability in a problem solving situation. The figure given below shows the plan as viewed by the researcher.

Table 3-1 Phase model for problem solution (Kaper & Knaapen, 1991)

§ 3.2.1 Central research question

In order to effectively deal with the management problem, a central diagnostic question has been formulated. This question aims at providing insight into the potential different problem area(s) underlying the management problem. Starting point of the thesis is in researching the factors influencing the current functioning of the Production Planning & Control in the MPC organisation.

The more effectively Production Planning & Control takes place, the better the organisation will be able to respond to the changing environment and enjoy potential cost savings from logistics.

The central research questions in the thesis read:

How does the current Production Planning and Control look like? What are problem areas in Production Planning & Control and what recommendations can lead to improving efficiency and

effectiveness of the primary process?

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Research design

§ 3.2.2 Methods & material

The answers to the three questions will be elaborated upon in chapters 5, 6, and 7 respectively.

In this section the three research questions will be highlighted and the methods used to obtain the required information for these chapters will be mentioned as well.

In the first part of the research the processes within the organisation will be described, thereby answering the first question. This will be done on the basis of interviews with employees, observations and available internal documents.

The second phase of the research will focus on causes of the management problem identified earlier. Possible causes will be listed, on which basis the problem areas will be prioritized. The aim is to visualise improvement potential in optimising customer service in relation to cost. The description will be structured along the framework of the logistical concept given by Visser & Van Goor (1994). This allows for sharpening and structuring the diagnosis for causes in the organisation by structuring problems in relation to Production Planning & Control. Besides the logistical concept, additional literature relevant to the described situations is used in the search for (potential) problems. The outcome sets direction for the third phase of the thesis, the design phase.

In the design phase solutions will be formulated for the diagnosed problem(s) that influence the organisation. The choice for actual implementation of the proposed solutions to the diagnosed problems is left to the organisation.

The answering of the three basic questions will be done according to several theoretical concepts and diagnosing instruments for (logistical) improvement and problem solving. Next to the theoretical concepts used in the thesis, several instruments for problem listing, -diagnosis and cause analysis were used. These will be discussed and highlighted when used.

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Contemplation

Chapter 4. Contemplation

On the basis of existing literature, a theoretical demarcation will be outlined to identify concepts relevant to the research objective. As will be seen, looking for improvement opportunities (efficiency and effectiveness) is closely related to searching for quality improvement of processes or an organisation. Process management plays an important role in quality management. Process management aims at determining the performance of a process, analyses bottlenecks and improvement opportunities in order to bring about improvements (Wentink, 1998). The first two sections will give an introduction to strategy and objectives in relation to logistics; section 4.3 focuses on Process management.

§ 4.1 Strategy

The competitive strategy an organisation pursues plays an important role in defining the logistical objectives. Strategy is narrowly linked to the organisation’s market orientation. According to Narver and Slater (1990) a company can have three market orientations, which should all be present in the company:

• focus on buyers

• focus on competition

• focus on interfunctional tuning

Of the three orientations, Narver and Slater advocate an explicit focus on competition. The goal is not to create value for the current buyers, but to do better than competition. An organisation must not lose sight of the fact that it operates in a force field of competitors and everyone strives for the favour of the buyer.

§ 4.1.1 Strategy

Porter (1985) distinguishes two basic generic competitive strategies: cost leadership and a differentiation strategy. In cost leadership an organisation strives to produce (standardised) products at the lowest cost possible. Cost in functional areas (purchasing, research and development, manufacturing, marketing, etc.) is reduced as much as possible in order to suppress cost. Production and logistics have dominant

functions in the organisation. In the differentiation strategy, the organisation strives to differentiate itself from rivals by offering unique products. Marketing is the dominant function in the

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Contemplation

organisation in contrast to cost leadership. The increased cost is compensated by specific characteristics of the product. Another strategy has evolved over time which is a combination of both. Pino and Van ‘t Veld (1990)²⁰ refer to the latter strategy as the integration or strengthening strategy (figure 4-1) in which an organisation strives to produce at low cost and sell high quality, the upper left quadrant in the matrix. This vision takes on an integral approach towards the organisation and combines the advantages of the other two strategies by integrating marketing, production and logistical functions in conducting business. Only an optimal and integral tuning between the three disciplines will result in lower cost. The lower right quadrant is a competitive strategy for losers. Only a small number of customers will accept low quality at high prices over a longer period of time.

§ 4.2 Logistical objectives

The purpose of the whole research is to ultimately contribute to reducing cost and increasing the reliability of the Multi Purpose Plant. Reducing cost and increasing delivery reliability are two of four logistical objectives an organisation can pursue. According to Brevé (1993) an organisation can have two other (logistical) objectives besides enhancing delivery reliability to reach these requirements: enhancing flexibility and reducing lead-time. Reducing cost should be seen in relation to customer satisfaction. Customer satisfaction plays an important role in logistics. In the end, the organisation is dependent upon its customer base. A definition of customer satisfaction in the marketing literature is from The Chartered Institute of Marketing²¹:

“The provision of goods or services which fulfil the customer’s expectations in terms of quality and service, in relation to price paid”

In logistics, market demand and customer satisfaction are translated into the concept of customer service. Customer service is the degree in which the organisation complies with the logistical demands of the customer. Visser and Van Goor (1994) therefore argue that logistical objectives are to be in the form of: increasing customer service at the current cost level or reducing cost but retaining the current service level. The aim is to optimize customer service in relation to cost.

Brevé (1993) indicates that as a result of changed market requirements, the manner of competition changed from a competition based on efficiency to a competition based on flexibility, quality and efficiency. As a consequence, it is necessary for organisations to have a strong external focus, act rapidly, and have tuning between departments.

20 Pino and Van ‘t Veld in Visser en Van Goor (1994)

21 www.cim.co.uk

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Contemplation

§ 4.3 Process Management

The research focuses on the production process of the Multi Purpose Catalysts plant. A number of theories and concepts will be used aimed at analysing and improving processes. ‘Process management’ is of influence and will play an important role within this research. Process management aims at improving the quality of processes. Point of departure is that primary and supporting processes need to be known before they can be controlled, improved or renewed.

Business Process Management (BPM) is a method in Process Management that enjoys much support (Wentink, 1998). BPM is aimed at ideas, methods en techniques to bring processes on a higher level of productivity, quality, flexibility and innovation. BPM aims at determining performance, analysing bottlenecks and to bring about improvement of processes. A process approach implies by definition a customer orientation. Processes are the structure by which the organisation creates value for the customer. In these processes activities generate output for internal and eventually external customers. Both managers and employees do not always fully comprehend how the process works or should function. A process is often developed by piece meal, without considering a total design. Determination of the performance of a process is often insufficient and its performance not measured.

§4.3.1 Coupling quality to objectives and processes

Improving processes is to be seen more closely as improving the quality of processes or an organisation. Van der Bij et al. (2001) state that quality relates to products, processes and the organisation, in which the system can be regarded as part of the organisation. The quality of a product is determined by the quality of both the production process and the quality of the organisation.

• Product quality relates to the quality of the product or service to be delivered. In order to refer to product quality it has to be explicated in product properties;

• Process quality refers to the quality under which the product is actually manufactured.

Customers will not normally be directly confronted with the production of goods. Only by means of inferior product quality will they be confronted with the imperfections of the production process, the primary process, or transformation process, from which the organisation derives its raison d’être;

• Organisation quality was introduced with Total Quality Management (TQM). The concept entails that demands from customer, management, employees and society are equally satisfied. See the mission statement of the Business Development Group in section 2.2.

A new look at logistics at the Multi Purpose Catalysts plant

What you measure is what you get