Controlling the auxiliaries inventory at a logistic service
provider: A case study at Wagenborg Nedlift
Author: Derwin Kiers S1534815
d.d.kiers@student.rug.nl
August 2011
Master thesis: Business Administration
Wagenborg Nedlift
Specialization: Operations and Supply Chains Management
Wagenborg Nedlift Gideonweg 5 Postbus 254 9700 AG Groningen The Netherlands University of Groningen
Faculty Economics and Business
Preface
This report is written in the context of optimizing the inventory level of auxiliaries at a logistic service company. This research is carried out through an internship at Wagenborg Nedlift. To read this report, background knowledge on both inventory management and outsourcing is necessary.
To conduct this research, I needed a lot of information about the auxiliaries and the performance of the Material Service Department. That is why I would like to take the opportunity to thank all the people of Wagenborg Nedlift who helped me with getting the right information to finish this research. My special thanks go to Marten van der Molen and Willem Biezenaar. They gave me the opportunity to get the internship at Wagenborg Nedlift and they also helped me structuring my paper. I would also like to thank Jan Dinkla and Dinant Schroer for helping me with getting the right information about the auxiliaries. I also would like to thank all the employees of Wagenborg Nedlift who took the time to help me with my survey and answered all my other questions.
Furthermore, I would like to thank my counsellor and supervisor at the University Dr. Nicky van Foreest for his time, helpful comments and recommendations. My appreciations also go to my second examiner Dr. Martin Land, who made time available to examine my report. Next to this, I would like to thank my peer Floor ter Heijne for her comments and criticism.
Last but not least I would like to thank my family, friends and girlfriend for their support during my master year.
Derwin Kiers
Management summary
This research will investigate how the auxiliaries’ inventory control of Wagenborg Nedlift can be improved. The task of the Material Service Department is to serve the Business Units and to deliver good quality and safe auxiliaries within budget. In the pre-investigation it became clear that there are potential improvements possible regarding the performance objectives costs en flexibility. The stock levels can be decreased, because they have too much auxiliaries on stock. This research is a good starting point for the decision to explore in-house or outsourced supply of the auxiliaries.
The main outcomes are:
• With the outcome of the 7 investigated auxiliaries, it can be said that the inventory levels of the auxiliaries can be decreased with 40 per cent on the short term and with another 5,3 per cent on the long term.
• For most of the auxiliaries the best solution is to outsource a certain proportion and to keep a certain proportion in-house. The investigated auxiliaries cover less than 1 per cent of the total inventory. When Wagenborg Nedlift investigates more auxiliaries in the future, the conclusions can be better supported. It is advisable to first make a selection of the materials with a large stock level, high purchasing price, low use rate and high examination costs. These auxiliaries have the most impact on the total costs made by the Material Service Department. Then calculate for the selected auxiliaries how much can be kept in-house and how much can be outsourced.
• When the optimal stock level is determined, the remaining stock can be stored at a separate location to save future purchase cost or they can sell them. By leaving the reaming stock out of the examination, the company can save between the 40 and 60 per cent on examination fees. When choice is made to store the auxiliaries, it is important that this location is closed and not open for employees. A closed warehouse is necessary to prevent that employees use non-approved auxiliaries.
Table of contents
1. INTRODUCTION ... 1
2. THE MATERIAL SERVICE DEPARTMENT OF WAGENBORG NEDLIFT... 2
3. THE MANAGEMENT PROBLEM OF THE MATERIAL SERVICE DEPARTMENT AND THE RESEARCH DESIGN ... 4
4. DIAGNOSE OF THE AUXILIARIES ... 9
5. HOW TO CHOOSE THE OPTIMAL IN-HOUSE INVENTORY LEVEL ... 12
6. IMPLEMENTATION OF THE SOLUTIONS ... 21
7. CONCLUSION, RECOMMENDATIONS AND FURTHER RESEARCH ... 26
REFERENCES ... 29
1. Introduction
In 2007, Wagenborg Nedlift changed their organizational settings and merged all the different Nedlift locations into one company with one strategy. One of the aims of this merger was to let the different locations work closer together and try to save money on the materials that are used. All the different locations have their own auxiliary inventory (the auxiliaries are used on cranes and other vehicles and can be changed for each different project or job). After this merger, the management has the feeling that they have too much auxiliaries on stock to serve the different Business Units of Wagenborg Nedlift. Wagenborg Nedlift is located at several locations, namely: Groningen, Delfzijl, Eemshaven, Hengelo, Schoonebeek, Meppel, Rijsen, Voorschoten and Vlaardingen. They are also located in Hörstel-Dreierwalde, Germany. This thesis will focus on the auxiliary inventory management of Wagenborg Nedlift and how they can determine the appropriate level of auxiliaries? This study will also deal with the choice of in-house and outsourced supply. Contracting out auxiliaries to material rental companies, will reduce labour, facilities and equipment costs. And every dollar saved on material purchasing and other costs is a dollar more profit (Slack and Lewis, 2008).
2. The Material Service Department of Wagenborg Nedlift
This chapter provides a description of Wagenborg Nedlift and the Material Service Department. Section 2.1 will describe the history of Wagenborg Nedlift and their parent company Koninklijke Wagenborg. In section 2.2 the strategy and goals of Wagenborg Nedlift will be stated, this will provide insights in the aspects that are important for the company. Because this research will focus on the Material Service Department of Wagenborg Nedlift, section 2.3 will give a description and the main goals of this department. The purpose of this chapter is to create a general understanding about Wagenborg Nedlift and the Material Service Department and how they provide their services.2.1 History
Wagenborg Nedlift specializes in horizontal, vertical and special transport. Together with skilled engineering and project management, Wagenborg Nedlift offers a complete range of lifting services, heavy transport and installation. With over 400 employees it operates throughout Europe and beyond for clients like the oil and gas industry, petrochemical industry, energy sector and the building and infrastructure industry. They operate in a highly competitive environment with customers who demand tailored products and services. Wagenborg Nedlift has a clear organizational structure consisting of three Business Units: Crane Rental, Transport and Projects (see appendix I for the complete chart). The members of these three Business Units work closely together to come up with the optimal solution for their clients. Together with their parent company Koninklijke Wagenborg, they can offer a complete package of logistic services1.
2.2 Strategy
The company slogan of Wagenborg Nedlift is: “Sign of Solutions”. Wagenborg Nedlift follows the one-stop-solution to meet the expectations of their clients. One-stop-solution can be described as outsourcing logistics management and operational activities to one organization (Skjott-Larsen et al., 2008). This means that Wagenborg Nedlift can take the responsibility for all the logistical problems of their customers.
This also gives them the opportunity to sell more services to their clients. Wagenborg Nedlift offers a broad range of logistic services, covering not only traditional operation activities, such as transportation, but also total projects where they sign contracts with sub-suppliers to ensure the best solution for the problem. They also have specialized handling equipment to carry out heavy logistic problems. Their goal is to come up with a solution for every problem their clients have.
To carry out the projects and jobs for their clients it is very important that the cranes and other vehicles have the right equipment and that the auxiliaries are safe to use. That is why the Material Service Department is an important part of Wagenborg Nedlift. In the next section the Material Service Department and their tasks will be described.
2.3 Material Service Department
One of the tasks of the Material Service Department is taking care of the auxiliary materials. These auxiliaries are used on cranes and sometimes on forklift trucks. The Material Service Department is responsible for the availability of auxiliary equipment (e.g. blocks, compressors and chains). These auxiliaries are requested by planning or by another tenant (usually by phone or mail). These movements are all registered in the ERP-system of Wagenborg Nedlift (MetaCOM). The planning department reserves auxiliary materials at the Material Service Department for projects or customers, but they do not know if the materials are still available at that moment. If some materials have already been coupled to another project or job, the Material Service Department has to hire the needed materials at an external rental company. The main task of the Material Service Department is to ensure the correct quality and quantity of auxiliary materials and that the delivery of the equipment to be used are all available on-time and under budget. They mainly serve the Business Units Cranes and Projects.
The various responsibilities and processes of the Material Service Department can be summarized as follows:
• issue and intake of auxiliary materials; • hiring of auxiliary materials;
3. The management problem of the Material Service
Department and the research design
This chapter will describe the design of the research. In section 3.1 the research motivation will be described as well as the management problem and the financial impact of the problem. Section 3.2 will cover the objective, the methodology applied and the sources of the evidence used. In Section 3.3 the problem statement, the research question and the sub questions will be addressed.
3.1 Research motivation
The management of Wagenborg Nedlift states that the management of their inventory can be improved; they have the feeling that they have too many auxiliaries on stock. The impact of the Material Service Department on the turnover lies between the 3 and 5 per cent. Hence, for every 100 euro earned, 3 to 5 euro is spent by the Material Service Department. Wagenborg Nedlift has about 1400 different kind of auxiliaries in their inventory with a total of 20.000 pieces and they want to get an overview about how much of these materials are used regularly and if it is necessary to adjust the auxiliary inventory. The inventory costs of the auxiliary materials are high, because they have to certificate about 18.000 pieces of auxiliaries. These materials are inspected every year (some of the materials are inspected every six months). The management wants to know the optimal inventory level of auxiliaries in-house and when it is more efficient to decrease the inventory level to zero by outsourcing that auxiliary.
pre-investigation can be found in appendix II. That the performance objective cost is an important one for Wagenborg Nedlift is not surprising. Net price is of course an important criterion for consideration in the vendor selection process. So when Wagenborg Nedlift wants to maintain and/or increase their market position, they have to cut down costs increase their flexibility and deliver the same quality.
Figure 1: 5 performance objectives of the Material Service Department
Below is a summary of the consequences per performance objective:
• Quality/Safety: The quality provided by the Material Service Department outruns the wishes of the Business Units cranes and projects in most cases. They deliver the right equipment and these auxiliaries are safe to use and have the right certification.
• Speed: The Material Service Department can deliver the materials fast. One of the reasons for the fast delivery is that they have almost everything in their inventory. 0 1 2 3 4 5 Quality/Safety Speed Dependability Flexibility Cost desired state
• Dependability: The Business Units are satisfied about the promised delivery dates from the Material Service Department. In almost all the cases they do what they promised to do.
• Flexibility: There are four general types of operations flexibility:
o product or service flexibility – the ability to introduce and produce novel products or services or to modify existing ones;
o mix flexibility – the ability to change the variety of products or services being produced by the operations within a given time period;
o volume flexibility – the ability to change the level of the operation’s aggregated output;
o delivery flexibility – the ability to change planned or assumed delivery dates.
The Material Service Department can improve especially on delivery flexibility. They deliver the auxiliaries between half pas seven and half past four, so if a Business Units has to replace an auxiliary at night the Material Service Department cannot satisfy this need. Another issue is that they also find it hard to change the level of their inventories to the operation’s aggregated output.
• Costs: Due to the high competition, the Business Units Cranes and Projects want to offer a low price to their customers. Because of the high inventory and examination costs, the charged costs from the Material Service Department to the Business Units are high.
After this pre-investigation, there are two focus areas. First, it can be said that according to the Business Units Cranes and Projects, the Material Service Department is not flexible enough, especially when it comes to the delivery of auxiliaries. The second problem is that the Material Service Department is making too many costs.
3.2 Methodology and sources of evidence
DDC-model. DDC stands for ‘Diagnose’, ‘Design’ and ‘Change’. The model can be found in figure 2.
Figure 2: DDC-model derived from De Leeuw (2002, p. 291).
Objective: Analyse the inventory in order to make improvements in the inventory management and control, so that the management of Wagenborg Nedlift can make decisions regarding the appropriate level of their auxiliary materials. Another purpose of this research is to find out the optimal in-house stock level and how they can decide how much auxiliaries they can outsource to become more flexible and to save costs.
For this research, four sources of evidence, information and classification will be used: articles; interviews; documents and archives; participation in the daily activities in the warehouse.
3.3 Problem statement
To help solving the problem of the management, there are two main research questions that need to be answered regarding the appropriate level of the auxiliary materials:
1. When is it better to outsource an auxiliary instead of having it on stock?
The answer to the first research question should contain a formula which can be used to determine when it is better to outsource an auxiliary instead of having it on stock. This formula is based on costs. The answers should also enclose a decision layout to justify the outsourcing process on other criteria than costs.
2. What kind of inventory management technique can the company use to get the information about the appropriate level of their auxiliaries?
To come up with a good solution, sub-questions are formulated for each phase in the DDC-model. The sub-questions per phase are:
Diagnose phase:
1. How can the life-cycle and main costs of an auxiliary be defined?
This question will give insight into the costs drivers in which an auxiliary is involved during its lifetime.
2. Which criteria determine if an auxiliary is important for the company?
By answering this question the auxiliaries can be categorized according to their importance. The answer should also contain the criteria which can be used in the formula for the first research question.
Design phase:
3. Which inventory management techniques are appropriate for a logistic service company?
The answer to this question will give insight in the right technique to manage the auxiliary materials at Wagenborg Nedlift. The right technique helps to determine the right level of auxiliaries.
4. What are the advantages and disadvantages when auxiliaries are being outsourced?
By answering this question the choice between in-house supply and outsourced supply can be underpinned.
5. What are the factors that influence the choice between in-house and outsourced supply?
The answer to this question will provide a path that can help Wagenborg Nedlift to determine when it is better to outsource and when it is better to keep an auxiliary on stock.
Change phase:
6. How can the solutions and instruments be implemented?
4. Diagnose of the auxiliaries
In this chapter a diagnosis of the auxiliaries will be performed. First, in section 4.1, the general life-cycle of auxiliaries will be drawn to give a clear picture of the in-house processes and costs of the Material Service Department. Second, the criteria which determine the importance of an auxiliary will be described in section 4.2. Section 4.3 will give a short conclusion.
4.1 How can the life-cycle and main cost drivers of an auxiliary be defined?
In figure 3 the life-cycle and main costs of the auxiliaries can be found. In general, this life-cycle is representative for all the different kind of auxiliaries.
Holding inventory directly means costs and one of the main tasks of inventory management is to lower these costs (Wild, 1997). There are in general three types of inventory costs. Wagenborg Nedlift has to deal with a fourth type of inventory cost, namely examination costs. Below is an explanation of the four types of inventory costs for Wagenborg Nedlift:
• Holding costs: can be defined as the opportunity costs for tied up capital, but also warehouse space, manpower and software. Excessive inventory creates the need for floor space, equipment, and manpower to transport, stock, and manage the inventory with no added value and will increase the overall service costs (Luh et al., 2000).
• Ordering or setup costs: can be defined as fixed costs associated with the replenishment of materials. But also administrative costs (e.g. handling invoices, inspections, receiving, checking) and transportation costs.
• Examination costs: Wagenborg Nedlift carries out an annual examination for each auxiliary. They have chosen to conduct an annual examination, because they want to be sure that every auxiliary has a high quality standard and is safe to use. When an auxiliary is rejected during the examination, the examination costs are € 12,50 per rejected auxiliary, but are zero when the company buys a new one.
only price and quality are important dimensions of competition, but customer service has also become more and more important. Furthermore when a project comes to a hold due to service constraints, it can happen that Wagenborg Nedlift has to pay a penalty to their clients due to agreements stated in the contracts.
4.2 Which criteria determine if an auxiliary is important for the company?
First of all, the strategic importance of an auxiliary is crucial to determine the level of importance. Some unavailable auxiliaries will lead to a delay in the work process. A delay can lead to penalty costs and a stationary crane will not generate revenues. So one of the questions is, does the auxiliary lead to delays when it is not available?
Wagenborg Nedlift needs to determine if an auxiliary can be rented at an external rental company and if the operations performance of that rental company is superior compared to the operations performance of Wagenborg Nedlift. Hence, will outsourcing increase the flexibility and reduce the costs of the Material Service Department.
4.3 Conclusion
Figure 3: life cycle of auxiliary materials
Life cycle of auxiliary materials
MetaCOM Examiner Employee Manager Purchase auxiliary Test auxiliary and check certification Add auxiliary in ERP system Auxiliary data Issue Intake Entrance inspection Auxiliary data Auxiliary data Put on stock Annual examiniation Auxiliary data Annual examiniation and adjust certification Rejection? NO Repariable? Repair YES YES
5. How to choose the optimal in-house inventory level
This chapter will come up with solutions for the management problems: How to decide the optimal inventory level of auxiliaries in-house and when is it more efficient to outsource auxiliaries. In section 5.1 the factors that influence the choice between in house and outsourced supply will be given. The advantages and disadvantage of outsourcing auxiliaries will be treated in section 5.2. In section 5.3 the main functions for inventories at a logistic service company and especially for Wagenborg Nedlift will be described. This section also deals with how Wagenborg Nedlift can increase their (delivery) flexibility so they can respond to their environment. In this section the decision logic for outsourcing an auxiliary can be found. In section 5.4 a clarification of the decision logic model will be given. This chapter will end with a short conclusion.
5.1 What are the factors that influence the choice between in-house and
outsourced supply?
The first factor that influences the choice between in-house and outsourced supply is the type of auxiliary. Standard auxiliaries with a low work load capacity can be easily hired at an external rental company. For the special and hand-made auxiliaries with a high work load capacity, it is more costly and often takes more time to hire such items and sometimes it is even not possible to these items. For Wagenborg Nedlift it is easier and possibly more efficient and less risky to outsource standard auxiliaries. For the special auxiliaries they can explore the use of in-house supply. These statements are stated by the managers of the Material Service Department but are not yet supported in literature.
5.2 What are the advantages and disadvantages when auxiliaries are being
outsourced?
Gotzamani et al. (2010) found that companies worldwide are facing high competition and specific customer demands. The customers of Wagenborg Nedlift demand tailored products and services, this has forced Wagenborg Nedlift to continuously evaluate, improve and reengineer their logistic operations. Hsiao et al. indicate that: “benefits of outsourcing increases when the degree of demand complexity of the firm is high” (2009, p. 82). The Material Service Department only has to serve in-house customers, namely the Business Units Projects and Cranes. The demand of the Business Units can be categorized into five main categories: hoisting equipment, tackles, stopping tags, hydrolytic and electric equipment. These auxiliaries can be purchased, hired externally or can be self-made. Some of these auxiliaries are hard to get and some can be bought or rented at every hoisting and lifting company. So, it can be said that the Material Service Department has to deal with neither the highest complexity demand nor the lowest complexity demand. This means that it is predictable that the best solution should be to outsource a proportion of the auxiliaries and to keep a proportion in-house.
By outsourcing a proportion of their auxiliaries, Wagenborg Nedlift can cut inventory costs. Merino and Rodriguez (2010) stated that many firms rely on outsourcing to increase their competitiveness, concentrating their financial and managerial resources in their core activities. Companies that make use of outsourcing can accomplish a decrease in warehousing costs, material handling costs and inventory carrying costs (Lieb and Bentz, 2005; Göl and Çatay, 2007; Slack and Lewis, 2008; Narayanan et al., 2011). This is because external specialists have greater access to superior cost drivers like low-cost locations, expertise, learning and scale economies (Rieple and Helm, 2008). Below is a summary of the gains which can occur when outsourcing auxiliaries (Göl and Çatay, 2007; Rieple and Helm, 2008; Slack and Lewis, 2008):
• Flexibility, non-core suppliers can be changed as market or supply conditions change (Skjott-Larsen et al., 2008);
of return (Skjott-Larsen et al., 2008; Hsiao et al., 2009). Outsourcing auxiliaries will cut down inventory levels and this will cut down fixed costs. • Improved customer service level, because of the increased (delivery)
flexibility, the company can respond quickly to customer demand (Skjott-Larsen et al., 2008). For Wagenborg Nedlift this means that an external rental company can respond faster to the demand of the Business Units than in-house supply.
If the Material Service Department decides to make use of hiring companies for their auxiliaries, they first have to answer an important question raised by Slack and Lewis (2008), namely: ‘Does in-house or outsourced supply in a particular set of circumstances give the appropriate performance objective that it requires to compete more effectively in its markets?’ This question is difficult to answer, because setting the risks and costs against the potential benefits of outsourcing is complex (Hsiao et al., 2009). A summary of the advantages and disadvantages of in-house and outsourced supply per performance objective can be found in figure 4 on the previous page.
5.3 Which inventory management techniques are appropriate for a logistic
service company to increase flexibility and decrease costs?
Wagenborg Nedlift is active in an uncertain environment. To deal with this uncertainty, the organization can create an intra-firm or inter-firm inventory management flexibility to respond swiftly to changes in delivery date/time or changes in the quantity of the ordered auxiliaries. In this section inventory management techniques are described which can be used by Wagenborg Nedlift to improve their inventory control.
Intra-firm inventory management refers to internal systems and procedures (Song & Song, 2009). To achieve more inventory flexibility when using intra-firm inventory management, the company has to share information between cross-functional units and avoid internal conflicts and competition. To respond to changes in delivery time or date, the Material Service Department should increase their accessibility.
Song and Song suggest using a reactive method to respond to the needs of customers. For Wagenborg Nedlift, using the reactive method implies that they must react on the environment and the wishes of their customers. The reactive method is only successful when Wagenborg Nedlift has a flexible inventory, because they need to have the ability to respond swiftly to changes. Many software packages have been developed to implement reactive logic for inventory management systems. Davenport (1998 as cited by Rabinovich et al., 2003) mentioned that these enterprise wide information systems provide a seamless integration of data flows within a company. These systems can enable a better match between the resources allocated to a task so that the company can make better use of their inventory and increase the level of inventory performance (Rabinovich et al., 2003). Wagenborg Nedlift has an enterprise information system, but the integration of data flows is not available. They cannot rely on the information in their system. The inventory levels given by the system do not always match the physical inventory levels. Furthermore they do not always know on which project an auxiliary is used. Due to the amount of time, this research will not further focus on this problem. But to use the reactive method, they should focus on a better use of their enterprise information system in the future.
To cut down inventory costs, Wagenborg Nedlift has to know their optimal inventory level. The aim of the Material Service Department of Wagenborg Nedlift should not be to have all items available at all times, but they need to meet the required demand at a minimum cost. For Wagenborg Nedlift this means that they must try to lower their total inventory costs, but maintain the quality their customers expect. To measure the optimal inventory level of an auxiliary, they have to know how much of that auxiliary they have simultaneously in use.
Figure 5: The decision logic of outsourcing auxiliaries (supplemented and elaborated from Slack and Lewis, 2008, p. 110)
5.4 Clarification of the decision logic
In this section the steps drawn in figure 5 will be further explained.
5.4.1 Is the auxiliary of strategic importance?
5.4.2 Does the company have specialized knowledge?
When an auxiliary needs to be handled with specific actions, which are important to perform well in horizontal, vertical and special transport, then it is better to keep that auxiliary in-house. According to Reitzig and Wagner (2010), a possible disadvantage of outsourcing is opportunity costs of not learning about alterations through internal production.
5.4.3 Is company’s operations performance superior?
For each performance objective, the Material Service Department has to decide if their performance is better, equal or worse than the performance of an external hiring company. The following performance objectives are applicable for all the auxiliaries:
• Quality/Safety: Because the external hiring companies also use certificated auxiliaries, it can be stated that the quality and safety of a rented auxiliary is similar to an in-house auxiliary.
• Speed: Because both the Material Service Department and an external rental company have auxiliary on stock, they can both deliver the auxiliaries fast. Speed can also be built in the supply contract.
• Dependability: With supply contracts, the Material Service Department can ensure that the dependability of the hired auxiliaries is comparable to the dependability in-house.
• Flexibility: The Material Service Department is only available during office hours. Most of the external hiring companies can be reached 24/7. External rental companies concentrate their resources on auxiliaries and this gives them more ability to respond to volume and product changes.
The following performance objective differs per auxiliary. For each auxiliary the company has to consider if their performance is superior to that of an external company.
explore outsourcing of auxiliaries and should not be seen as the complete truth. The formula is based on historical data. The following notations are used in the formula:
Bi Weekly external hiring costs of auxiliary i
bi External claim costs for damaged auxiliary i per week
(bi = Pi / (ui * 0.7))
Pi Purchase price of auxiliary i
hi Weekly inventory holding costs of auxiliary i
ei Examination costs of auxiliary i (also assistance costs) per year
ri Average number of weeks auxiliary i has been used per year
Li Life time of auxiliary i in years
ui Average number of weeks auxiliary i can be used per life time
(ui = Li * ri)
ni Estimated future use in number of weeks per year
I In-house supply = (Pi / ui * ni) + ((52 – ni) * (hi)) + ei
O Outsourced supply = Bi + bi * ni
The following formula is used to determine at which ni it is better to outsource
an auxiliary: (Pi / ui * ni) + ((52 – ni) * (hi)) + ei > Bi + bi * ni. When the costs for
in-house supply per year (I) are higher than the costs of outsourced supply per year (O), you can say that the operation performance Wagenborg Nedlift is not superior compared to the external rental company. Hence, it is more cost efficient to outsource auxiliary i when (I) > (O). The breakeven point lies at I = O.
When the differences in costs are small the decision between in-house supply and outsourced supply should be based on other factors like flexibility or speed and further research is advisable. More research is anyway necessary when - € 50 > | I – O | < € 50.
When | I – O | > € 50 it is advisable to outsource and when | I – O | < - € 50 it is advisable to keep that auxiliary in-house. (Remark: for bi the factor 0.7 is used,
because external hiring companies reject auxiliaries faster than the Material Service Department.)
5.4.4 Is significant operations performance improvement likely?
is room for negotiating about the purchase price and when it is possible to lower the examination costs. If it is possible to increase the lifetime of the auxiliary it can also occur that it is better to keep the auxiliary in-house. A possible solution to increase the lifetime of the auxiliary is to track when, where and why auxiliaries get damaged so improvements in auxiliary handling can be investigated and repair and purchasing costs can be decreased.
If they want to have the same delivery flexibility as an external rental company, they also need to be available 24/7. It almost impossible to have the same inventory as an external rental company, because this will lead to enormous inventory costs.
5.4.5 Is it possible to rent the auxiliary externally?
When it is possible to hire the auxiliary at an external rental company who is not a competitor, the Material Service Department should also judge the location of that company. It is advisable that they select an external hiring company within the Netherlands. When the decision is made to outsource an amount of a particular auxiliary there are two options:
• Option 1: The remaining auxiliaries can be sold and the resources that become available can be used for different objectives.
• Option 2: The remaining auxiliaries can be stored at a different location and can be re-used when an examined auxiliary is rejected, broken or when the strategy of the company changes and there are more auxiliaries needed. This option will cut down the future purchasing costs.
5.4.6 Is the rental company a competitor?
Although the workforce works close together with competitors at the construction yard, the management of Wagenborg Nedlift decided not to rent equipment and auxiliaries from competitors. Hence, if an auxiliary can only be hired at a competitor, they have to keep that auxiliary on stock or stop with that lifting activity.
5.4.7 Is it an option to stop with that lifting activity?
5.5 Conclusion
To get to the optimal in-house inventory level, the Material Service Department has to know how much of an auxiliary they have simultaneously in use. They can cut the examination costs by selling or separately store the remaining stock. When it is more cost efficient to outsource an auxiliary instead of in-house supply, they can decide to outsource an amount of that auxiliary. It is very important that the other performance objectives of the Material Service Department increases or at least stay equal when they outsource some auxiliaries. The choice of in-house or outsourced supply should not only be based on costs. As found in the pre-investigation, an increase in the (delivery) flexibility performance is also desirable. Given that the other performance objectives at least stay within the desired state drawn in figure 1, it is necessary that outsourcing increases the flexibility performance or when it is more cost efficient.
6. Implementation of the solutions
In this chapter the two main research questions will be answered. First the decision rules to improve the inventory management of the Material Service Department on the short term will be given in section 6.1. Section 6.2 will give the decision rules about which auxiliaries should be investigated first for the long term improvements, because it will take a lot of time to investigate all the 1400 different kinds of auxiliaries. With the decision rules the auxiliaries which have the most impact on the total costs made by the Material Service Department can be selected first. In section 6.3 the implementation of 7 auxiliaries for the short term improvements will be described. The formula given in section 5.4.3 will be implemented for 7 auxiliaries in section 6.4 and also the right amount of stock for the 7 auxiliaries will be determined. In section 6.5 a short conclusion will be given.
6.1 Decision rules for the short term improvements
Wagenborg Nedlift, because they are used internally. Two decision rules are given to make a selection of the auxiliaries which can be investigated.
• The first rule is to leave out the auxiliaries who are coupled to a crane or truck. Every crane or truck has his own supply of auxiliaries which are not stored in the warehouse.
• Secondly the auxiliaries which are used only internally can be filtered out of the investigation. These can be found by selecting only the auxiliaries which are rented to the Business Unit Cranes or Projects. The demand of the Business Units can be categorized into five main categories: hoisting equipment, tackles, stopping tags, hydrolytic and electric equipment. The electric equipment is also used internal, so these can be left out of the investigation.
With the help of these rules, there are still a lot of auxiliaries selected for the investigation, about 75 per cent. It is worth wile to investigate most of the auxiliaries, because determining the optimal stock level will save the company a lot of inventory costs. In section 6.3 the method to get to the optimal stock level will be given.
6.2 Decision rules for the long term improvements
The auxiliaries which have the most impact on the total costs are the ones with a high stock level and the ones with high examination costs. The decision to investigate if it is better to have in-house or outsourced supply can only be conducted when it is possible to outsource that auxiliary. To cut down the number of auxiliaries for the investigation the following rules are drawn:
• The first rule to select the auxiliaries which should be investigated first are those with a stock level larger than 10 or with a purchase price higher than € 1.000,-. So all the items with a stock level smaller than 10 and with a purchase price less than € 1.000 can be kept on stock.
• Thirdly the auxiliaries with a high use rate are likely more cost-efficient to keep in-house, so auxiliaries with a use rate more than 20 weeks per year can be kept on stock.
• Fourthly the auxiliaries which are difficult to outsource can be left out of the investigation, it is advisable that the Material Service Department keeps these auxiliaries in-house. It is difficult to hire special auxiliaries with a high workload.
With the help of these rules, there will be approximately 40 per cent of the total stock left to investigate.
6.3 The implementation for 7 auxiliaries focused on short term
improvements
Together with the heads of the Material Service Department Groningen and Hengelo, 7 auxiliaries are selected. For these auxiliaries the maximum level of auxiliaries’ needed to fulfil the yearly number of auxiliaries’ simultaneously in use will be determined. The following steps are taken to get the number of maximal simultaneously in use:
• Step 1: To find the optimal stock level, some data is required. First it is important to know how many of this auxiliary is on stock. This can be found in the dump of all the materials that the Material Service Department has on stock.
• Step 2: Filter on the auxiliary number.
• Step 3: Determine the remaining stock by taking the total stock (can be found in Appendix III) minus the number of maximal simultaneously in use (can be found in the ERP-system).
The selected auxiliaries are:
XHHR080060: (Hijsband, rond, 8 ton, 6 mtr.) • Total stock: 55
• Maximal simultaneously in use: 17 • Remaining stock: 38
The outcome for the following auxiliaries can be found in Appendix V: XHSS050060: (Staalstrop, 5 ton, 6 mtr.)
XHSS850070: (Staalstrop, 85 ton, 7 mtr.) XHTKEH0015: (Takel, ratel, 1.5 ton, 3 mtr.) XHTKEH0100: (Takel, ketting, 10 ton, 6 mtr.) XVYZAG0380: (Aggregaat, hydr, 380V) XOSTOP0010: (Ondersteuning pot 1mtr. rond)
The sum of the total stock of these auxiliaries is 253. The sum of the total remaining stock of these auxiliaries in use is 101. The total needed stock level for the selected auxiliaries in 2010 was 152. With the outcome of these selected auxiliaries, the Material Service Department can bring back their inventory with 40 per cent on the short term., because (152-253)/253= - 0.40.
6.4 The implementation for 7 auxiliaries focussed on long term
improvements
The performance of the Material Service Department for Quality/Safety, Dependability and Speed is similar (not superior) to the performance of an external rental company. As said in 5.4.3, the performance objective flexibility will increase when the Material Service Department outsources their auxiliaries. So this section will investigate if it is more cost efficient to have the selected auxiliaries in-house or to outsource these auxiliaries.
replaced for another kind of auxiliary (e.g. the XHHR080060 (Hijsband, rond, 8 ton, 6 mtr.) can be replaced by a longer one or one with a higher workload capacity.)
For the XHHR080060 (Hijsband, rond, 8 ton, 6 mtr.) all the steps taken to come to the solution will be described in this section. The solutions for the five remaining auxiliaries can be found in Appendix VI. The following steps are set to measure if the performance of the Material Service Department, regarding costs, is superior or compared to external rental companies:
• Step 1: The amount of auxiliaries’ maximal simultaneously in use will be used.
• Step 2: Find for which ni | I – O | > € 50 it is advisable to outsource.
• Step 3: Determine the maximum level of auxiliaries needed to fulfil the maximum yearly number of auxiliaries in use and determine how high the maximal in-house and outsourced supply is.
XHHR080060 (Hijsband, rond, 8 ton, 6 mtr.):
To find how much of this auxiliary they should outsource they can use the formula. According to the formula, it is only cost-efficient to hire the auxiliary when ni is 1 or
less (see appendix III). In 2010 there were maximally 17 auxiliaries simultaneously in use. Tracing these auxiliaries in the ERP-system gave as result that 15 where needed more than one week and 2 where needed less than one week, so the company’s operation performance for 15 of these auxiliaries where superior compared to the external rental company. The optimal in-house stock level in 2010 for this auxiliary was 15 and 2 could have been rented at an external company for one week. Because I – O < € 50 even for one week (see appendix III), they have to further investigate if it is desirable to outsource this auxiliary. If they decide to outsource two XHHR080060 the remaining stock of this auxiliary is 55 (total stock) – 15 (optimal stock level) = 40.
6.5 Conclusion
It is advisable to first find out how much auxiliaries they have maximal simultaneously in use, so they can adjust their inventory levels on the short term. For the long term it can be stated that both in-house and outsourced supply is relevant for most of the investigated auxiliaries. They can lower their inventory levels by outsourcing a number of auxiliaries. Another important finding is that there is a lot of remaining stock. As can be seen in figure 5, there are two options to deal with the remaining stock. They can either sell it or keep it separate from the other stock and leave it out of examination. The remaining stock can then be used to replace broken auxiliaries, and this will save the company future purchase costs. By leaving the remaining stock of the investigated auxiliaries out of examination, the company can save between the 40 and 60 per cent on examination fees (see appendix VIII) and can cut down their inventory levels with 40 per cent.
For the long term improvements it is advisable to first make a selection of auxiliaries with a large stock level, high purchasing price, low use rate and high examination costs. These auxiliaries have the most impact on the total costs made by the Material Service Department. After investigating the selected auxiliaries, they can decrease their inventory level with another 5,3 per cent.
7. Conclusion, recommendations and further research
When comparing the units on stock in Appendix III and the optimal inventory level found in section 6.3, it can be said that the feeling of the management, that there are too many auxiliaries on stock, is correct. As found in the pre-investigation, the main improvements are located at the cost and (delivery) flexibility performance objectives. To improve the cost performance on the short term, they can lower their inventories and save examination fees. With the outcome of the selected auxiliaries, the Material Service Department can bring back their inventory with 40 per cent on the short term.
correct. With the outcome of the selected auxiliaries, the Material Service Department can bring back their inventory with another 5,3 per cent on the long term.
To cut down holding costs, ordering costs and examination costs, they can decrease their inventory level by selling the remaining auxiliaries (stock level – optimal inventory level) that are not directly needed. Another solution is to keep the auxiliaries and only examine the optimal stock level of the auxiliaries. The remaining stock can be stored separately from the optimal stock level and these auxiliaries should be only examined when needed and can be used to replace damaged and broken auxiliaries. This solution will cut the total inventory costs, because it will remove a proportion of Examination costs for the total inventory costs, the company can save between the 40 and 60 per cent on examination fees. For this solution, good administrative processes are required to prevent that non-approved auxiliaries are used on projects or jobs. When they choose to store the auxiliaries, it is important that this location is closed and not open for employees. A closed warehouse is necessary to prevent that employees use non-approved auxiliaries.
To increase the flexibility and the delivery flexibility, it is better to outsource all the auxiliaries, but because this will lead to high hiring cost, this is not the best solution. Therefore it is advisable that the Material Service Department also look for in-house solutions to increase their flexibility. A possible solution is to increase the delivery flexibility is to increase the accessibility by making the Material Service Department available 24/7.
Further actions for the Material Service Department:
• When the Material Service Department decides to outsource an auxiliary, it is advisable to determine the desired delivery time for each of these auxiliaries, so they can add these requirements in the supply contract.
• For further research it is advisable to investigate how they can optimize the use of the ERP-system. Trainings are needed so that the employees can easily find how much auxiliaries are available in the different locations and how they can reserve auxiliaries.
This research is a good starting point for the decision to exploring in-house supply or for exploring outsourced supply of the auxiliaries. As stated in figure 5 (page 16), the decision logic of outsourcing auxiliaries will lead to exploring one of the two possibilities, explore in-house supply or outsourced supply.
References
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Reports:
Appendix I: Chart Wagenborg Nedlift B.V.
Director BU: Cranes Crane Rental BU: Transportation Surface transportation Special road freightBU: Projects
industrial assembly relocation
boiler construction / overhaul Engineering
project crawler cranes
SPMT’s
towing & jacking technology
Administration Quality, Health,
Environment (KAM)
ICT Marketing & PR
HRM Technical Service
Appendix II: Pre-investigation
Step 1: The Material Service Department will be assessed on the 5 performance objectives. First the desired state of the Material Service Department is determined with help of the managers of the Business Units Cranes and Projects
Step 2: Select the employees whom to send the survey to.
A short survey is sent to the employees of the sections Cranes and Projects.
How does the Material Service
Department score on: Bad Insufficient Sufficient Good
Very Good Quality/Safety: O O O O O Speed: O O O O O Dependability: O O O O O Flexibility: O O O O O Cost: O O O O O
Step 3: For the section Cranes the survey was send to 17 employees. 15 employees did fill in the survey, a response rate of 88 %.
For the section Projects the survey was send to 12 employees. 11 employees did fill in the survey, a response rate of 92 %.
Appendix V: Outcome of the six remaining auxiliaries for
section 6.3
XHSS050060: (Staalstrop, 5 ton, 6 mtr.) • Total stock: 31
• Maximal simultaneously in use: 2 • Remaining stock: 29
XHSS850070: (Staalstrop, 85 ton, 7 mtr.) • Total stock: 4
• Maximal simultaneously in use: 4 • Remaining stock: 0
XHTKEH0015: (Takel, ratel, 1.5 ton, 3 mtr.) • Total stock: 30
• Maximal simultaneously in use: 18 • Remaining stock: 12
XHTKEH0100: (Takel, ketting, 10 ton, 6 mtr.) • Total stock: 10
• Maximal simultaneously in use: 6 • Remaining stock: 4
XVYZAG0380: (Aggregaat, hydr, 380V) • Total stock: 7
• Maximal simultaneously in use: 3 • Remaining stock: 4
XOSTOP0010: (Ondersteuning pot 1mtr. rond) • Total stock: 116
• Maximal simultaneously in use: 102 • Remaining stock: 14
Appendix VI: Outcome of the five remaining auxiliaries for
section 6.4
XHSS050060: (Staalstrop, 5 ton, 6 mtr.)
When the yearly use rate is more than 8 weeks, it is more cost-efficient to keep this auxiliary on stock. In 2010, there were maximally 2 of this equipment in use. This article was only needed for 3 weeks, so the optimal stock level in 2010 for this auxiliary was 0 and it was more cost-efficient if they had rented these auxiliaries. Remaining stock: 31 – 0 = 31.
XHSS850070: (Staalstrop, 85 ton, 7 mtr.)
The tipping point for this auxiliary lies at 4 weeks. So, when the auxiliary is used more than 5 weeks per year, it is more cost-efficient to keep it on stock. Four auxiliaries XHSS850070 were needed for 7 weeks and because the maximum use rate for 2010 was 4, it is more cost-efficient to keep these 4 on stock. Hence, for this auxiliary it was not cost-efficient to rent it at an external rental company. Remaining stock: 4 – 4 = 0.
XHTKEH0015: (Takel, ratel, 1.5 ton, 3 mtr.)
In 2010, the maximum number of this tool in use was 18. From this 18 in use, 16 had a higher use rate than 4 weeks per year and 2 less. So, for this article the optimal stock in 2010 was 16. Two auxiliaries could be hired at an external rental company when needed. Remaining stock: 30 – 16 = 14.
XHTKEH0100: (Takel, ketting, 10 ton, 6 mtr.)
The tipping point for this auxiliary lies at the use rate of 3 weeks per year. The maximum number of auxiliaries in use in 2010 was 6. Five had a use rate higher than 3 weeks and 1 less than 3 weeks. So the optimal stock for this auxiliary in 2010 was 5 and 1 should been hired at an external rental company. Remaining stock: 10 – 5 = 5.
XVYZAG0380: (Aggregaat, hydr, 380V)
