Koen Blank

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External failure costs at the Service Department of De Vries Kozijnen

B.V.

An analysis and design

By

Koen Blank

University of Groningen Faculty of Economics and Business

MSc Technologymanagement May 2013

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Abstract

This document is my Master’s thesis for Technology Management and presents the findings of research into the external failure costs for the Dutch framing company De Vries Kozijnen in Gorredijk. De Vries Kozijnen was a Dutch manufacturer of premium quality wooden frames, doors and windows. At the time of the research, the company was in a survival state. The company was recovering from a large scale reorganization in 2010 within De Vries Kozijnen necessitated by the ongoing Dutch housing crisis. However, the prolonged crisis in the housing market caused the company to file for bankruptcy In January 2013.

The bankruptcy was filed during the last stages of writing this thesis. This research, including the analysis and design part, assumes survival of the company, but also provides an insight into a company that is in the limbo between survival and failure. At the time this research was conducted the outlook was considered positive. The rest of this thesis assumes this positive state and survival of the company.

The research question answered in this thesis is:

What are the external failure costs of products delivered by De Vries Kozijnen and how can these be substantially reduced?

The failure costs are the costs required to correct products that do not satisfy the requirements. In the scope of this research the corrections are made on products already installed at the customer site. The costs amount to €30.000 to €50.000 per month.

To answer this research question, a range of topics is discussed. The topics include: background information on the company, a literature review on topics regarding service and service failure. An analysis of the problems in the company regarding the Service Department. At the end of the thesis a solution is presented for a set of the issues, together with an examination of the feasibility of the solution, assuming the company survived the crisis.

The scope of the research for this thesis is the Service Department and its direct stakeholders. This not only includes the Service Department Staff and Service Mechanics but all internal and external stakeholders that provide information or materials. This creates an interesting and dynamic environment. The goal is to improve efficiency of the Service Department and reduce failure costs. During the analysis of the data, a wide range of issues is identified. The top 5 of the issues accounts for 74% of the failure costs. These are: 1. Failure by external parties (35%), 2. Missing materials (17%), 3. Miscommunication (9%), 4. Past product issues (8%) and finally 5. Lack in knowledge/skills by Service Mechanics (5%). Issues 1 and 4 are outside the scope of influence of this research and were not considered for the design.

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Acknowledgements

At the start of my thesis I would like to give a word of gratitude to the people who have supported me throughout the process of research and writing this thesis.

First I would like to thank the former employees and management of De Vries Kozijnen in Gorredijk for the access, insights and cooperation in a company facing such turbulent times. I sincerely hope everyone will find an encouraging and stable future in their future employments.

Secondly I would like to thank both drs. H.L. Faber, ing. and dr. W.M.C. van Wezel for their patience, time, advice and alternative views on the many aspects of compiled in this thesis. Discussions have provided food for thought and strengthened the base of the analysis and provided solutions.

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1. Introduction

This Master’s thesis is the result of research within De Vries Kozijnen in Gorredijk (DVK). At the time of the research, the company was in a survival state. The company was recovering from a large scale reorganization in 2010 within De Vries Kozijnen necessitated by the ongoing Dutch housing crisis (Priemus, 2010). However the prolonged crisis in the housing market caused the company to file for bankruptcy In January 2013.

The bankruptcy was filed during the last stages of writing this thesis. The research including analysis and design assume survival of the company. This reflects the state of the company during the analysis and design phase of the research that took place between March and September of 2012. Additional analysis after the bankruptcy was not possible within the scope of the initial research. This research does however provide an insight into a company that is in the limbo between survival and failure. After the downsizing and reorganization (5.1) outlook was even perceived as positive for the long term future. The remainder of this thesis assumes the positive state before the bankruptcy. An altered perspective is provided in this introduction, the abstract and the discussion of this thesis. Research in this thesis is focused at the Service Department and aims to reduce failure costs of the Service Department and improve its efficiency. The content of this thesis includes background information of De Vries Kozijnen found in this chapter. After the background description, the methodology and research questions used for this research are described in chapters 2 and 3. Next an analysis of the issues in the Service Department found during explorative research are presented in chapter 5. With the analysis results, the design for improvement section provides a solution of the issues regarding lack in knowledge and skills in chapter 6. Finally this thesis will end with a discussion on the research in chapter 7.

The background information presented in this chapter includes a history of De Vries Kozijnen, its Service Department and an overview of the terminology used in the remainder of this research.

1.1. About De Vries Kozijnen

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Figure 1: Revenue DVK in millions

As a result of the crisis, a large scale reorganization of both DVK and the rest of the Doorwin group executed. A layoff of almost half of its employees and large financial cutbacks have been made. Doorwin decreased from a 1700 person company to a 900 person company. At de Vries Kozijnen, personnel decreased from 250 to 125 persons, a reduction of 123 FTE, overnight. To be able to continue production, the lean production philosophy was introduced. Lean production and its introduction in de Vries Kozijnen are discussed later in this document (sections 4.2 and 5.2). The next paragraphs describes the Service Department of De Vries Kozijnen.

1.2. Research at the Service Department

While management of De Vries Kozijnen has made increases in efficiency in the production of frames, there are potential additional gains in several areas throughout the company. One of the areas management appointed as underperforming was the Service Department. The primary cause of concern are failure costs. These cost include costs to correct products damaged prior or during installation. These failure costs are explained in detail in chapters 1.3.6 and 4.1. Prior to this research causes and effects of these failures were unclear and open for discussion. This explorative research provides insights of the complex technical and social system causing these issues. A more extensive explanation of the management concerns and research topic is detailed in chapter 3.

1.3. Terminology

In this thesis some of the terminology is susceptible for multi interpretation. Some of this terminology is industry or company specific. This chapter guides the reader to a uniform understanding of this terminology. Each of the six sub paragraphs below discusses a concept used throughout the thesis.

1.3.1. System and organization

In the context of this research the system is the set of entities in the organization that make the Service Department function as a whole. The system has input from other departments of De Vries Kozijnen as well as suppliers. The output of the system is service provided to the service receivers, these are both the contractors who are the direct customers of DVK and the end users. The distinction between the service receivers is explained in paragraph 1.3.4.

€ -€ 20 € 40 € 60 € 80 2008 2009 2010 2011 2012 (estimated)

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Service Department Back office service mechanics Production Customer/ contractor End user Departments within DVK Suppliers

De Vries Kozijnen Service Department system

Figure 2: De Vries Kozijnen Service Department System

1.3.2. Service Mechanics

In this paragraph the concept of Service Mechanic is explained in greater detail. A Service Mechanic is a skilled worker that maintains or repairs machinery (“Definition of mechanic,” n.d.). For De Vries Kozijnen the machinery are represented by frames, windows and doors. The workers perform assigned work on their own and assess required corrective actions based on skill and experience. Service Mechanics provide service on products manufactured on production lines of De Vries Kozijnen as well as products manufactured in factories that were closed during the large scale reorganization in 2010 within the Doorwin holding.

Each of the Service Mechanics has a van with equipment required materials to perform service on frames windows and doors. Materials and task descriptions are picked up on daily supply visits to the factory.

1.3.3. Service

In the scope of this research service is a set of actions required to create a working product after this product has left the factory site. This can be either a paid service acquired by a contractor to get the product installed and fine-tuned, or unpaid repairs covering warranty.

1.3.4. Service receiver

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1.3.5. Frames

Doors and windows are an essential part of any building and are tied to a building using frames.

Combined frames, doors and windows provide a means to enter a building through a door or a view on the world outside through a window. It is the main product produced by DVK and in this context is a complete product. The product includes the outer frame that is attached to the walls of a building and all moving parts. The moving parts are doors, windows and glass panels. A cross-section of a window frame is shown in Figure 3.

Figure 3: VrigoPlus display frame (“De Vries Kozijnen product page VrigoPlus,” n.d.)

1.3.6. Issues and failures

In this research an issue is defined as “A discussion about a product or service with a perceived problem by a service receiver”. Whenever a person contacts the Service Department, this person is experiencing a problem and asks for corrective actions. This is an issue in the perception of the Service Department.

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2. Methodology

This chapter contains the methodology used to perform the research for this thesis. Both the overall DOV-methodology developed by de Leeuw (1996) as well as the specific methodologies required for individual phases in this research. These specific methodologies include scientific data collection, stakeholder analysis and design generation and evaluation techniques. An overview of the overall methodology is described in paragraph 2.1 below. The Individual phases and additional specific methodologies are described in paragraphs 2.1 to 2.4.

2.1. DOV methodology

For this research the “Diagnose Ontwerp en Verandering” (DOV) methodology developed by de Leeuw (1996) is used. The three stages in the methodology are equal to the (translated) name of the methodology: Diagnose, Design and implement. The model (shown in Figure 4) recognizes the need to redefine earlier steps when new insights are gained in later stages. This in contrast to other methodologies such as van Strien (1997) that require a new start of a project after implementation to use new insights.

This methodology is chosen for its structured approach. It is a proven method for complex systems with both technical and social aspects. The individual stages are described in detail in the next sub-paragraphs.

Diagnose Design Implement

Figure 4: Stages in the DOV methodology (Adapted from: Leeuw 1996)

2.1. Validity and reliability of the research

During this research the validity and reliability of the research and the applied data is carefully maintained. Using multiple sources each with its own techniques of validation creates valid conclusions for the entirety of this research. The three sources of data regarding Literature, Objective

data and Subjective data are described below. Additionally validity and reliability of the research is

maintained through the use of scientific methodology as described in this chapter. Validity and reliability of literature

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Validity and reliability of subjective data

Subjective data includes observations, casual talks, participation and semi structured interviews as described in chapter 2.2. Issues from these sources is subjective due to interpretation of both the sender (interviewee) and receiver (researcher) (Louise Barriball & While, 1994). The sources in this research are all stakeholders in the system. The different stakes in the problem might lead to a colored perception, withholding information due to possible consequences or differences in opinion on the matter at hand (Jackson, 2003; Mitchell & Agle, 1997). To assure reliability conclusions based on responses during interviews, cross checking multiple sources is used to prevent basing conclusions on one unreliable source.

Validity and reliability of objective data

To analyse the current situation within DVK, the use of objective data is convenient because retrieval from digital sources does not put a large burdon on the organisation in contrast to interviews. However data can be manipulated or “corrupted” resulting in lower reliability of the data. To assess data retrieved from IT systems Pipino et al. (2002) developed a set of 16 dimensions of data quality (shown in Table 1). These dimensions are used for the analysis of data retrieved from IT systems from DVK in chapter 5.6.

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Figure 5: Four quadrants of data quality(Pipino et al., 2002)

The sixteen dimensions of data quality are evaluated in two ways.

- Subjective: Through the use of interviews of multiple users of the data of the system

- Objective: by the researcher using metrics for the dimensions.

The evaluations are used to assign the data in one of the four quadrants of data quality shown in Figure 5. Quadrant IV signals high quality data and it is usable to make valid assumptions based on this data. Medium quality of data are placed in quadrants II and III, these quadrants signal the need be critical of the data retrieved from the system. According to Pipino et al. (2002) organizations using data should consider improving the data quality in the future. If data is in quadrant I, this data is of poor quality. Data in this quadrant is of low quality and should not be used to make assumptions. Organizations facing low quality data in quadrant I should consider taking steps to improve the data quality as soon as possible.

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2.2. Diagnose stage

The Diagnose stage aims at getting a clear understanding of the causes and effects of the problem within the scope of the research. The aim is to get an overview of the problem in three steps (Figure 6). This will answer the first three sub questions for this research:

1. What are the current issues regarding the Service Department? 2. What are the causes and effects of the issues?

3. What Issues in the Service Department have the best potential for efficiency improvement

Problem defining diagnose Problem definition & Research definition Explanatory diagnose Diagnose stage

Figure 6: Diagnose stage (Adapted from: Leeuw 1996)

Problem defining diagnosis

Research for this thesis starts with a literature review on external failure costs to gain insights into the known causes and effects of the issues regarding the Service Department. Using literature will also ensure that the terminology used in this research is consistent with existing scientific terminology.

The diagnosis phase starts with an initial analysis by performing a Problem Holder (PH) analysis, Stakeholder analysis and goal setting.

For stakeholder analysis the stakeholder model developed by Mitchell and Agle (1997) is selected (Figure 7). This model defines stakeholders along three dimensions: power, legitimacy and urgency. The purpose is to identify stakeholders and classify their current state. Identifying and classifying the stakeholders will result in a better understanding of the organization’s stakeholders. This knowledge is of value when conducting interviews as it will likely increase the cooperation of the interviewees

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Using the insights from the initial analysis, the conceptual model is developed. Creation of a conceptual models is a technique used in soft systems thinking (Jackson, 2003). This qualitative model will make the mental model used during this research explicit.

In depth analysis

After the initial analysis an in depth analysis is performed with the use of different techniques such as: participation, observation, semi-structured interviews combined with extensive checking with literature. With all the information the conceptual modal can be verified and adjusted. This will evolve to an empirical causal model.

For the research at De Vries Kozijnen it is important to have multiple information sources. The problems occur in a social system with many stakeholders. These stakeholders have different views on the situation. To analyze the problem both objective and subjective data is collected.

Objective will be collected using data available IT systems. The Enterprise Resource Planning (ERP) system will be used for detailed information and case studies. For more general information the organization uses printed A3 papers with a standard format. This includes current states, improvement directions, goals, data and actions required to achieve goals. For an assessment of the validity and reliability of the acquired data Pipino, Lee, & Wang (2002) have set a range of criteria to evaluate the data (e.g. an appropriate amount of available data or ease of manipulation. These criteria must be met before conclusions are drawn from the data in the IT-system. In the course of this research the data gathered some raised questions about reliability and validity. The analysis of the validity of the used data is found in paragraph 5.6.

For subjective data collection three types of data are collected. The first data consists of observations during participation in regular meetings related to external failure costs. This gives insight in how the organization collaborates in solving problems when they might occur. The second type of data is collected through semi structured interviews. The semi-structured interview type is valid for this research topic because of the exploratory nature of the research and the need to look deeper into the social aspects of the issues. During interviews it will give the option to probe for deeper insights into the matter discussed while maintaining the structure to keep the interview on topic (Louise Barriball & While, 1994). The third type of data results from observation. This can be both at De Vries Kozijnen and visits at external sites. For example, looking at how orders are assembled for the mechanics provides insight in how materials might end up missing on an external site.

Review of the problem

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2.3. Design stage

The goal of the Design phase is to generate solutions for the issue is found in the analysis phase. Improving on the situation to meet the goals defined in cooperation with the management. Design targets are based on both literature, discussions with stakeholders and common sense. The in depth design is generated using UML. Designed solutions are evaluated on feasibility. These results provide answers for sub-questions four and five of this research:

4. How can the system of the Service Department be altered to reduce external failures? 5. What is the feasibility of the proposed changes in the system

Diagnose results Design question Redesign(s) Evaluation of

redesign Redesign choice

Figure 8: Steps in the design phase (Adapted from: Leeuw 1996)

The five steps in the design stage of the DOV model are displayed in Figure 8. The end of the diagnose phase Starts the design phase. While the set of issues is the same, the mindset is different. A critical review and the right this mindset is important to evaluate the usability in the new phase, designing a relevant solution.

2.3.1. Defining design questions

Before designs are formulated it is important to formulate design questions. These are formulated to insure the design(s) are structured, desirable and feasible (Checkland, 2000). Checkland notes it is most important to not only think about the intended change but also about the human situations that enable change. This is illustrated in Figure 9.

Figure 9: Thinking about desirable and feasible change (Checkland, 2000)

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of detail in design and amount of solutions are inversely correlated. Involving management is key in making sure improvement on the chosen issues are relevant.

When the design questions are formulated, designs are derived from multiple sources. Literature provides a (close to) optimal theoretical solution. This solution is adjusted to fit the organization. Experts (for example a university professor) are consulted for additional insights for the fit in the organization. Other sources are (partial) solutions already given in earlier interviews. Additionally solutions used in other companies in the holding group are used. In some cases brainstorm sessions with members from the organization might provide solutions to the issues.

2.3.2. Exploring redesign options using the Matrix of Change

The complexity, observability and time constraints make it impossible to find an optimal solution or even to know if and when an optimal solution is found (Checkland, 2000). When designing and evaluating complex (consumer) products, the House of quality (Hauser & Clausing, 1988), is frequently used. The house of quality is a matrix which has two primary functions.

1. Aid in identifying how well solutions meet the design criteria. 2. Highlight conflicts in the roof of the house.

An example of a House of Quality (HoQ) is shown in Figure 10 below.

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In their research Brynjolfsson, Renshaw, & Van Alstyne (1997) have adapted the product design and evaluation methodology to suit the needs of managers in business process reengineering. This Matrix of Change (MoC), shown in Figure 11, differs from the House of Quality in two ways.

1. Starting point from an existing situation in MoC versus clean slate in HoQ 2. Business challenges in MoC versus engineering challenges in HoQ

The first is an altered perception of the starting point and challenges that are faced. Where the original house of quality focuses on a clean slate and engineering challenges, the MoC does not assume this clean slate but states it as the most radical option available when legacy becomes problematic. The second difference is the type of challenges. This has changes from engineering challenges in the HoQ to challenges in organizational behavior in the MoC.

Figure 11: Matrix of change example (Brynjolfsson et.al, 1997)

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For this research existing practices and their interdependencies are derived from data generated in the analysis phase of this research but will only include the practices relevant to the design question defined at the beginning of the design stage.

Choosing and evaluating of design options

The design stage ends with an evaluation of the selected design. This design must fulfill the design questions defined earlier. Further evaluation includes the effects and additional anticipated and possibly unwanted side effects of the design. The Matrix of Change identifies the aspects that can help or hinder implementation. In case of conflicting solutions a choice is made for one of the solutions. When solutions complement or reinforce each other implementing multiple solutions is a possibility. In this case the set of solutions is evaluated against the design criteria. To assess the impact of these aspects literature and expert sources are used. When impact of the hindrance is too great or the reinforcing aspects large enough a redesign is chosen.

2.3.3. Design of an ICT system

For the design of ICT systems, UML is an industry standard for object oriented design defined by the Object Management Group (OMG) (Rumbaugh, Jacobson, & Booch, 1999). This design tool provides an overview of the functionality from multiple perspectives. While the UML framework provides many different diagrams to design and describe an ICT system not all parts are always used. The two parts required and used for initial design are:

1. Use cases to provide an overview of the functionality from the perspective of the end user 2. Class diagram to describe the structure of the system from a technical perspective.

Both of these parts of the UML tools are described later in this section.

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Use case diagram

Use case diagrams show a user perspective both written (informal) and in diagram (formalized)

format. An example of a use case diagram is shown in Figure 12. This type of diagram shows behavior, intentions and goals of the users of the system.

Figure 12: use case diagram (Rumbaugh et al., 1999)

Actors are the stakeholders of the system shown as stick figures. When interacting, these actors use

the system to insert or retrieve information from the system. The actors have names describing their role in the system rather than personal or department names.

Use cases are circular items in the use case diagram describing the actions performed by the system. These actions are named with a combination of a noun and a verb to describe what the use case does.

Use cases relevant to the described system are within a rectangle. The rectangle is the system boundary. The top of the system boundary displays the name of the system.

Use cases and actors are linked to describe relationships. On lower aggregation levels links between use cases indicate extended or dependent use cases.

Class Diagram

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Figure 13: UML class diagram example(Rumbaugh et al., 1999)

Classes are programming items that contain the structure of an item. Figure 14 shows an example of such a class. The class has a name, Reservation that describes the type of items instantiated by the class. In the center section the attributes of the class are shown. In the example these are reservation

date and a maximum advance time attributes. The bottom of a class in a class diagram describes the

operations that can be performed on an instance of a class. In the example a reservation can be created or destroyed.

Figure 14: Example of a class (Rumbaugh et al., 1999)

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User interface design

As previously mentioned an interface design provides a less abstract an overview of the system and contains familiar items:

- Buttons

- Input fields

- Text fields

- Used attributes

When the interface is designed, time and skills of the intended user have to be taken into account. The more complex a user interface the more effort it takes for the user to optimally use the system. Complexity is created by both the number of items on the screen and the number of screens (layers) the user has to use to navigate to desired functionality (Raskin, 2000).

2.4. Implementation phase

Actual implementation in the organization as described in the DOV model is not part of this research. Instead the implementation phase consists of advices on how to implement the designed changes using the model (Figure 15). Transferring knowledge to key stakeholders (management) can be (are) part of this process. This answers the last sub question of the research:

6. What steps are needed for implementation by De Vries Kozijnen

Evaluated design Implement changes Evaluate implementation

Figure 15: Implementation of design (Adapted from: Leeuw 1996)

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3. Research question

In this Master thesis the causes of the external failures at De Vries Kozijnen Gorredijk are analyzed and solutions designed. In order to perform a structured and scientific research, the following questions are derived from a management problem and the research goal. The management problem is described in the paragraph below. After the management goal the research goal is stated. This chapter ends with the research question and six sub questions.

3.1. Management problem

The goal of management is to create profitable products. Part of the reason why sales initially look profitable but later become unprofitable is fine-tuning and repairs of the product after it is installed. In some cases the fine-tuning is a paid service. Other service is performed under warranty and is unpaid. These tasks are repairs on faulty products and are called external failure costs. These external failure costs are discussed in more detail in paragraph 4.1. The management reports indicate that the failure costs are high and the Service Department is not running efficiently or effectively. In this case low efficiency is requiring more time, materials or effort to accomplish a task. Low affectivity is when a service is provided does not produce the required outcome.

In the near future the number of mechanics in the Service Department can be decreased from six to four due to ending contracts. The workload on the current staff is too high to be handled by four mechanics.

The management question

Based on the description above the following management question is formulated:

What has to be changed in the organization to raise efficiency of the Service Department and reduce external failure costs?

3.2. Research goal

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3.3. Research question

The management problem and research goal provide the basis to compose a research question and six sub questions to be answered throughout this thesis. In depth explanation of the research questions below can be found at the end of this paragraph. How the research is answered can be found in the chapter containing the methodology (Chapter 2).

Main research question:

What are the external failure costs of products delivered by De Vries Kozijnen and how can these be substantially reduced?

Sub questions derived from the main research question are as follows:

1. What are the current issues regarding failure costs in the Service Department? 2. What are the causes and effects of the service failures?

3. What Issues in the Service Department have the best potential for efficiency improvement?

4. How can the system of the Service Department be altered to reduce external failures? 5. Is the Service Department able to incorporate the proposed changes in the system? 6. What steps are required by De Vries Kozijnen for implementation of the proposed

changes

Each of the research sub questions is explained in the section below.

The first sub question has been set up to get a baseline reading for the current situation. The current situation might contain elements of failures described in literature such as issues regarding the staff or multiple attempts to correct a single failure (Liao, 2007).

1. What are the current issues regarding failure costs in the Service Department?

The second sub question is aimed to describe the system for the failure costs. This will gain insight in the causes and effects of the issues found in the current system. The issues might cause an effect on customer satisfaction (Anderson, Baggett, & Widener, 2009) or reputation of the entire company (Purohit & Srivastava, 2001).

2. What are the causes and effects of the service failures?

The third sub question seeks the answer to what issues have the best potential for efficiency improvement. This can only be performed after the cause and effects are known as a system in total. A group of many small issues causing one big type of problems can have a bigger effect than single medium issue causing a problem. Without tracking the failures the causes and effects might not even be known in the organization (Hoffman, Kelley, & Rotalsky, 1995).

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The last sub questions four and five seek solutions to problems found in earlier. These not only have to be found but also checked for feasibility.

4. How can the system of the Service Department be altered to reduce external failures? Changing the system requires capability of the organization and its employees to absorb the changes in its workflow (D. H. Kim, 1993). In this research sub question the proposed changes are matched with capabilities of both the Service Mechanics and the Service Organization as a whole.

5. Is the Service Department able to incorporate the proposed changes in the system?

The actual implementation of the design is outside the scope of the research. Nevertheless a set of steps needed for successful implementation will be given. If the proposed changes are feasible as researched changes in the organization might be required to support the implementation (Limayem, Hirt, & Cheung, 2007).

6. What steps are required by De Vries Kozijnen for implementation of the proposed changes

3.4. Conceptual model

A conceptual model is developed to reflect the mental model of the researcher (Jackson, 2003). This model is used as a guideline to find potential causes and effects of issues within the scope of this research. The conceptual model is at a high aggregation level and reflects potential causes and effects that are researched.

Figure 16 below shows the initial model for the external failure costs at de Vries Kozijnen. On the left hand side there are four types of stakeholders: Suppliers, End users, internal departments and Customers. These stakeholders potentially cause errors such as Product failures, Human errors, Procedural errors, and calculation errors. These errors might cause issues, leading to Failure costs.

Issues Failure costs

Product failures Human errors Procedural errors Calculation errors Internal Departments Suppliers Customers End users

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4. Literature review

To provide an outside perspective this chapter provides an overview of literature relevant to the analysis phase of this research. The literature aids the researcher in the pursuit of a complete image of the needed information (sources) during the analysis phase (chapter 5). Additionally it helps finding solutions for the identified issues required in the design phase of this research (chapter 6).

4.1. Failure and Failure costs

At the start of this research, management of De Vries Kozijnen expressed concerns regarding the failure costs generated by actions of the Service Department (chapter 3.1).

Failure costs are incurred to correct quality in products and services before (internal) or after (external) service is provided at the customers’ or end users’ site (Schiffauerova & Thomson, 2006). Nicholas (1998) describes quality of conformance as when a product satisfies or exceeds the customers’ expectations. The definition of failure costs in this research is “Failure costs are the costs

to raise the product from an unsatisfactory level, to a level that satisfies the quality of conformance”.

This definition is derived from the definitions of both Nicholas and Schiffauerova.

The consequences of failures as known from literature are broader than the costs for correction of a failure. Dissatisfaction might alter a repurchase decision, the customer might switch to a competitor (Hoyer & Macinnis, 2008). For De Vries Kozijnen this can have a tremendous impact. When one of the leading Dutch building contractors decides to switch to a competitor this has a multi-million euro impact on revenue over many years.

Having products that do not conform to the expected performance can have a negative impact on the brand perception (Purohit & Srivastava, 2001). For De Vries Kozijnen this is a risk as their products are positioned as a premium brand. Word of mouth can change the purchase decisions of customers who have not experienced failures (Hoyer & Macinnis, 2008).

4.2. Lean thinking

To be able to continue high quality production, the Lean Production philosophy has been introduced at De Vries Kozijnen in 2010. A brief overview of the literature on Lean Production will be given below. The overview of the literature on Lean Production is used to assess the implementation of Lean Production at De Vries Kozijnen (5.2). The analysis contains both in the entire organization in general as well as the Service Department in specific.

The Lean Philosophy originates from the Toyota Production System (TPS) and focuses on identifying the value chain and eliminating wastes in an effort to make production more efficient (Womack & Jones, 1994). While originating from the car industry it is now widely used in production and non-production environments such as programming (Poppendieck, 2011). Lean is currently fashionable and even argued to be a fad (Näslund, 2008). Näslund compares Lean Production to previous fads and concludes it is not radically different while it does receive enormous attention amongst researchers and managers. Even with the critiques by Näslund, a recent study shows there is a positive impact on business performance for companies with a high variety of products (Demeter & Matyusz, 2011).

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Value chain

In the Lean philosophy the value chain consists of all the steps that are needed to get the product to the customer. These steps include everything from sales to production and after sales care. The value chain is not limited to the company using Lean, it stretches from suppliers to customers. For De Vries Kozijnen this contains all the involved parties from suppliers to end users. Examples are:

- Suppliers of materials such as required hinges and glass.

- Other companies in the holding (supplying doors).

- Contractors that use frames in new or renovated buildings.

- Other users of frames with doors and windows, these are, for example, people living in

houses or working in an office.

The scope of this research includes a part of the total value chain and is thus affected by the lean philosophy. Identification of the value chain is part of identification of stakeholders of the Service Department.

Eliminating wastes

In the lean philosophy eliminating wastes is the process of removing all actions that do not add value to the value chain (Womack & Jones, 2003). Womack and Jones have identified seven types of waste: 1. Over production -Over production is the production of goods without demand. This is a fundamental change in thinking from traditional production systems. Maximum output is not the goal, this might produce goods that might never be sold. Instead the production should be driven by demand.

2. Unnecessary inventory - Inventory and Work In Progress (WIP) increases lead time. Next to the costs and risks associated with WIP, unnecessary inventory also hides the underlying problems in a production system.

3. Inefficient transportation - Transportation is necessary to get a product to the customer but does not add value to the product.

4. Unnecessary or excess motion - Excess or unnecessary motion such as moving, lifting, walking or bending can have a large impact on the overall production. A small unnecessary motion performed frequently on a bottleneck can harm the overall productivity of the system as a whole.

5. Waiting times - When a product is not moving or being treated it is not only not adding value, it is actually costing something.

6. Rejects and defects - Products that do not meet the quality required need rework or might even be scrapped altogether. Such products have already taken production time and materials that now have less or no value.

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Having an overview of the elements of Lean Production creates an understanding of changes occurring in the company. The value chain might create opportunities for cooperation. For example: delivery of goods packaged by a supplier in quantities that fit production requirements. The elimination of wastes gives insight of what solutions might be feasible. For example if the solution creates waste it is an infeasible solution to the problem. Cases might occur where an issue does not need a solution from the researcher, because the system will be able to resolve this as part of continuous improvement.

4.3. Quality of service cost

When discussing external failures the current movement in scientific literature is to opt for a “zero defect environment” with a general consensus on defects: defects are costly. Preventing defects will generate costs as well.

There are two competing theories, The classical and a modern view (Figure 17) (Schiffauerova & Thomson, 2006; Schneiderman, 1986). The classical theory for total Cost of Quality rises to infinite when a zero defect strategy is chosen. The modern theory on Cost of Quality (CoQ) seems to support the zero defect statements. Because appraisal costs are higher than prevention therefore preventing any faulty products is more costly that. This makes investing in prevention until 100% good products are produced the best strategy.

Figure 17: Left is the classical theory and right is the modern theory of cost of quality (Schiffauerova & Thomson, 2006)

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4.4. Service Failure

A customer can have intense reactions to service failures. Improper handling of the recovery process can result in a situation where the customer is more dissatisfied with the recovery than the initial failure (Smith, Bolton, & Wagner, 1999). Therefore proper handling of the recovery process is critical in managing customer satisfaction.

In the model of customer satisfaction by Smith et al. (1999) the effects of service failure and effects of the recovery attempts are influenced by two dimensions. The first is the outcome dimension, this happens when the service is not fulfilled. In case of De Vries Kozijnen this can be when a mechanic is unable to repair a malfunction due to lack of required material or knowledge.

The lack of the proper material is a topic of regular discussion. Details of this discussion are described in chapter 5.9. Issues regarding lack of knowledge and information are discussed in chapters 5.11 and 0.

The second dimension is the process dimension. This is when the service is provided in an improper way (Smith et al., 1999). In case of DVK this could be when interaction with an employee of DVK is perceived as unsatisfying or, in an extreme, as rude.

Both these outcome failures and process failures have negative impacts. The impacts are on brand perception (Purohit & Srivastava, 2001) and end user satisfaction (Moorman, Deshpandé, & Zaltman, 1993; Park, Lee, Lee, & Truex, 2012). Brand perception and satisfaction levels are important for an A-brand such as De Vries Kozijnen.

4.5. Downsizing organizations

Even in the initial talks between the management of DVK and this researcher before the research started, downsizing at DVK was one of the topics of discussion. Literature helps classify the strategies of downsizing and possible consequences to these strategies. Strategies described in literature are used to access the downsizing process of DVK in the analysis (5.1)

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Figure 18: Three types of downsizing strategies (Cameron, 1994)

4.5.1. Workforce reduction

The traditional type of downsizing is workforce reduction and is executed as a survival strategy by companies facing an immediate threat (Feldman, 1995). Workforce reduction is used to create an immediate or short term effect. This strategy involves large scale layoffs. The remaining workforce performs the work previously done by others. While it creates a short term effect on the amount of overhead and direct costs, it has serious negative effects (Cameron, 1994). The speed and rigorousness of rapid downsizing often creates a loss of productivity (Kets de Vries & Balazs, 1996). Additionally it often creates loss of valuable knowledge and skills shared amongst employees (Feldman, 1995).

In their research Vries and Balazs (1996) examined the human side of downsizing. The remaining staff in the organization after rapid downsizing by layoffs can exhibit stress and fear. This is caused by higher workload and the uncertainty about the survival of the company. At De Vries Kozijnen such effects should not be ignored.

Authors also note that the choices in layoffs are often questionable. In an example given by de Vries and Balazs (1996), star performers of the organization required for the competitive advantage, are frequently part of the layoffs. In contrast managers or office personnel often stay in the company (Cameron, 1994).

While a crisis situation might require rapid downsizing, it is described as one of the least desirable strategies due to the negative effects (Cameron, 1994).

4.5.2. Work Redesign

A Work Redesign strategy aims to reduce work as well as the number of employees. The work redesign strategy is typically used in a pursuit to be operate more efficiently (Bond, Flaxman, & Bunce, 2008; Cameron, 1994).

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In contrast to the Workforce Reduction strategy, the Work Redesign strategy changes the characteristics of the work. This in turn enables the work to be performed by a smaller workforce. The required efficiency improvement makes this a longer term solution.

Using this strategy lowers the risk of overload and burnout of the employees (Cameron, 1994), it can reduce distress (Bond et al., 2008). On the other hand it can create fresh energy to reinvent the organization (Kets de Vries & Balazs, 1996). Vries and Balazs (1996) however note that changes in tasks can cause stress as well. Diminished career opportunities as a result of eliminated hierarchical levels can cause a less desirable attitude of the employees lower in the hierarchy (Feldman, 1995). Effective leadership is one of the factors crucial to the success of work redesign according to Cameron (1994). A positive energy and initiative can motivate the workforce. The leader must not avoid confrontation and discomfort but must be available, accessible and visible during the downsizing process. The leader must portray a strategic future rather than provide an escape from the past.

Overall the work redesign strategy is much more desirable than the workforce reduction strategy (Cameron, 1994). Better results are expected from this strategy in comparison to the workforce reduction strategy. However, it might not be feasible to implement it in a crisis situation.

4.5.3. Systemic downsizing

The strategy of Systemic Downsizing is fundamentally different from the prior two strategies (Cameron, 1994). According to Cameron systemic downsizing can be classified as a culture of downsizing.

When Systemic Downsizing is implemented there is time for the employees to adapt and give feedback to the process. Management experiences cooperation and greater understanding rather than the anxiety related to the workforce reduction strategy (Cameron, 1994). The anxiety decrease from being able to cooperate in changes is largest amongst employees able to focus on the current tasks (Bond et al., 2008). Bond et al. found this in their research amongst 312 customer service center employees. This resulted in significantly higher health amongst employees measured by the decrease of absent days over one year.

Management plays a crucial role in setting strategic goals and translating them in achievable KPI’s. While managers acknowledge this need this is rarely correctly implemented in practice (Chang, 2005). Differences in goals and rewarded achievements in KPI’s are examples of management incentives having negative effects.

Systemic Downsizing can be part of a continuous improvement strategy with organization wide

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4.6. ERP systems

Issues in Enterprise Resource Planning (ERP) systems identified in literature are used to evaluate the ERP system in use at De Vries Kozijnen (chapter 5.6). ERP systems are software packages that enable integration of business processes by using transactional data (Y. Kim, Lee, & Gosain, 2005). Often ERP systems are off the shelf software packages developed by the leading business software houses. 84% of the ERP software in use by the fortune 500 companies is acquired from just five suppliers (Y. Kim et al., 2005). While the use of an ERP system is aimed at making the business more effective and streamlined the software might cause additional hurdles for the user. Even for companies classified as ‘more successful (than most)’ issues like ‘lack in functionality to support existing business processes’ exist (Y. Kim et al., 2005).

Topi, Lucas and Babaian (2005) have identified six potential categories of ERP usability issues in fortune 500 companies:

1. Identification of and access to the correct functionality 2. Transaction execution support

3. System output limitations 4. Support in error situations 5. Terminology problems 6. Overall system complexity

Each of the six categories of issues is discussed below, including the causes and effects of these issues. Additionally the coping strategies used by companies or individual users are discussed. Identification of and access to the correct functionality

In research conducted by Topi et al. (2005) several users note that finding and navigating to several functions in the ERP system required unreasonable effort. The navigation consists of having to go through multiple levels of menus or screens to get to one basic screen. Memorizing paths to follow and specific codes becomes a burden to new users. In some cases laminated “cheat sheets” are used to resolve these issues rather than creating a system that is easy to use.

Transaction execution support

Transaction issues includes data that has to be entered multiple times. Repeated entry of data is both overly complex and prone to errors. Some users are using copy paste as a method to prevent errors in typing the same data multiple times.

System output limitations

All ERPs have output of the data in the system. Output includes for example be a global overview for management purposes or case specific reports. Many users in the research by Topi et al. (2005) report that the inflexibility of the standard output was limiting the user too much. To circumvent these limitations users use exports of raw data and manipulate this in Excel to get the required results.

Support in error situations

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Terminology problems

Terminology problems include a change of names for actions or processes in the switch from pre-ERP to post-ERP (Topi et al., 2005). Changes in vocabulary are a major problem for companies with off the self ERP systems because the industry vocabulary might differ from the company vocabulary. Differences in vocabulary can cause miscommunication and errors due to misunderstanding.

Overall system complexity

“Complexity of ERP means only a few people understand the system beyond a single module, making overall design decisions difficult ERP software lacks some functionality to support existing business processes” (Y. Kim et al., 2005).

Overall the issues users of ERP systems face are diverse in nature and are not only limited to usability issues faced by some or small business users (Raskin, 2000). For this research the list above provides structure to evaluate the ERP system in use at De Vries Kozijnen.

4.7. Material handling

Service Mechanics at De Vries Kozijnen need materials to perform service. These materials include:

 Hinges and levers

 Glass panels

 Paint

 Sealant, lubricant and glue

 Product specific tools

Some of this material can be re-used or recycled. Without the proper materials the service cannot be provided. Challenges Identified in this paragraph are used to evaluate the material handling at DVK (chapter 5.9).

‘After Sales Service’ is becoming more important as the customer relationship is increasingly influenced by activities after purchase (Amini, Retzlaff-Roberts, & Bienstock, 2005; Blumberg, 1999). In their article Amini et.al (2005) describe logistics in a case study for time critical repair service on medical devices.

Amini et al. (2005) research both forward and reverse logistics in service organizations. The service provided in this research was on medical devices and quick response. While the product and time scale from the research from Amini et al. is different than this research, the theory in logistics and reverse logistics provides a set of challenges used for the assessment of logistics at De Vries Kozijnen. In both companies in the research Amini et al. (2005) and De Vries Kozijnen, product configurations are tailered to the customer and not easily replaced. There are six challenges in the (reverse) logistics for repair services (Amini et al., 2005):

1. Uncertainty in demands of parts

2. Extensive inventory of repair parts due to required parts of past and new product(variations) 3. Customer specific repair processing, depending on customer operations

4. Short cycle times

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These six challenges in material handling in service and warranty are described below Challenge 1: Uncertainty in demands of parts

Repair services face an uncertainty in demand (Blumberg, 1999). Even in conventional logistics handling initial delivery of goods after sales, forcasting demand not trivial (Nicholas, 1998). For repair services this uncertainty is enhanced due to the lack of control on demand. A supplier cannot control the demand for replaced faulty products.

Challenge 2: Extensive inventory of repair parts

Determining optimal inventory levels is complex. Low inventory can only be achieved when suppliers are able to produce and deliver spare parts during the entire lifetime of the product. The complexity is greater when supply of parts for a wide variety of versions in many product iterations are required. Challenge 3: Customer specific repair processing

The proces of repairs might have to be adjusted to the customer. For example: short cycle time in remote locations might be unrealistic and the key service agreement of a six hour repair window might be re-negotiated (Amini et al., 2005)

Challenge 4: Short cycle times

Service repair in some cases need fast cycle times (Blumberg, 1999). This depends on the type of products, the end-user and service contracts. In an example by Blumberg, service on medical devices need fast service due to the cost in human lives when critical devices are not functioning.

Challenge 5: The need for cooordination

Smooth operation of logistics of a repair service involves the entire value chain (Blumberg, 1999). These include Storage warehousing, collection and sorting, transportation, disposal and depot repair. In their research Park, Lee and Truex (2012) found trust among the involved parties an important moderator of the effectiveness of the coordination.

Challenge 6: Flexible capacity requirements for storage, processing and transportation activities. Over time the amount of service and required spare parts might vary. This is due to the uncertainty described in challenge 1. Sudden spikes or decrease over time. Excess capacity can be linked to wastes used in Lean Production (chapter 4.2).

Logistics model including reverse logistics

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Figure 19: Direct and reverse logistics and repair services cycle (adapted from: Blumberg, 1999)

Not only the initial delivery is important but the additional logistics as well. Additional logistics include handling products that do not conform to the needs or expectations of an end user. Products that do not confirm expectations can either be a broken product or the need for additions to the product. The latter might be an opertunity to make a product more profitable. The process of meeting the after sales expectations of customers is called Reverse Logistics and Repair Services (RLRS).

4.8. Meeting effectiveness

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Task interdependence

When tasks of employees require a collaborative effort to get an end result (task interdependence) meetings are perceived as more useful than individualistic tasks.

Interruption

A meeting can be an interruption or even prevent work to remain unfinished. Rogelberg et. al. (2006) find that the perception of interruption is lowered by scheduling meetings instead of meeting on the spot. This creates the opportunity for an employee to prepare for the interuption in advance.

A second factor in the perception of interruption is the difference in the goal of an activity. Rogelberg et al (2006) argue the perception of interuption to be decreased when the meeting topic and activity as a whole align with the otherwise performed activities.

Perceived effectiveness

The time demands for a meeting are a factor in perceived effectiveness of a meeting. According to Rogelberg et. al. (2006) having more meetings or spending extended time might however raise perceived effectiveness in case of high task interdependence.

4.9. Knowledge, skills and learning

Learning is not only important but being better at learning than competitors might even be the only sustainable competitive advantage for a company (De Geus, 1988). For the use and transfer of knowledge this section provides a background for designed solutions in chapter 6.

In his research Kim (1993) addresses both individual and organizational learning. He divides learning in two modes: First, “know-how”, this is what is learned. Second, “know-why”, which is understanding and applying learning. Both modes are important because a person will not use learned things if he or she does not know why an action must be performed. While a person who understands the reasons for the actions but does not have the capabilities cannot perform the actions.

While individual learning is essential to keep performing in a changing environment, organizational learning is essential for the survival of the company. Both types of learning are not automatically present at every company. When an individual leaves the company, in an ideal case the company would not lose knowledge. Kim (1993) states mental models of individuals should be transferred to shared mental models in the company in order to achieve this. Individuals adjust their own mental models with to align with the shared mental models within a group. A broken loop between individual and organizational learning has suboptimal learning as a result. In the analysis of knowledge and learning within the Service Department of DVK the types of learning and broken loops can be analyzed with the theory from Kim (1993).

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Explicit knowledge can be codified this means it can be placed in natural language, models and computer programs. Because of its nature explicit knowledge is relatively easy to transfer. Examples of explicit knowledge are: Manuals, History of use, Product specifications.

Tacit knowledge is tied to the individual and is cognitive. Knowledge of this type is not easily transferred because it cannot easily be codified in natural language or databases. Examples of tacit knowledge are: understanding, intuition and experience.

Figure 20: The knowledge continuum by Lahti & Beyerlein (2000)

In their overview of scientific articles regarding knowledge transfer Kumar and Ganesh (2009) defined three important parts that enable knowledge transfer (Figure 21). These are the Source of knowledge, the recipient of knowledge and the transfer process. The source and recipient can differ greatly in size from an individual to entire organizations. The transfer is a process of exchange of explicit or tacit knowledge between two agents (Kumar & Ganesh, 2009). For De Vries Kozijnen the agents are the Service Mechanics as both source and recipient. Other agents such as product development, project management or outside experts are sources.

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5. Analysis results

This chapter contains the analysis part of this research. The analysis starts with the impact of the large scale reorganization in the years prior to this research within DVK. A background analysis includes an assessment of the use of the lean philosophy and stakeholder analysis. Insights from literature described in the previous chapter (4) are used to evaluate the current situation within DVK. The insights from the analysis will create an understanding of the organization and prepares research for the next phase.

For the analysis of the gathered data as described in the methodology, Objective Data, Observations and Interviews are obtained and analyzed. Each of these types of data has a different perspective on the problem and is used to complement and verify each other.

At the end of the analysis a model that describes the system of issues is compiled (chapter 5.16). This model evolves from the conceptual model constructed at the start of this research (chapter 3.4).

5.1. Downsizing at De Vries Kozijnen

The large scale reorganization of De Vries Kozijnen (DVK) initiated in 2010 has had tremendous impact on the company and continues to do so. Without an analysis of the impact of downsizing at DVK this research would be incomplete.

Production volume is measured in meters of framing wood used in end products. Especially in the past projects are often known well in advance of production dates making forecasts relatively easy. Originally the production averaged between 2000 and 2200 meters per day. At the beginning of 2010 order intake dropped and forecasts projected a drop to volumes closer to 1300 meters per day. Measured volumes from management reports shown in Figure 22 show the decline over the past years. The drop in estimated required production is a direct result of the Dutch housing crisis (Priemus, 2010; Ronald & Dol, 2011) and resulted to the crisis within DVK.

Figure 22: Average production volume (source: DVK management report)

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The crisis situation in 2010 demanded rapid layoffs of over 125 of the 250 employees equaling 123 FTE. This is the traditional downsizing strategy, workforce reduction (chapter 4.5.1). This is one of the least desirable strategies (Cameron, 1994). In contrast to the observations in literature (Cameron, 1994) there is a balance in the workforce reduction at both production and office personnel at De Vries Kozijnen. This has resulted in a loss of valuable knowledge throughout the organization. The most extreme example of loss in knowledge and skills within De Vries Kozijnen is the R&D Department. Initially employing four employees, this department has been eliminated in 2010. Recently it is reinstated with only one person (1 FTE) performing the development process. The knowledge and development strategies, however, was lost. After the initial crisis had been diverted more desirable strategies that could be identified as work redesign and systematic downsizing (Cameron, 1994) were used particularly in the production environment. This includes redesign of production to have a more continuous flow through the factory. Implementation of Lean Production is one of the techniques uses for systemic downsizing. Details of this implementation are discussed in the next paragraph (5.2).

The human side of downsizing (Kets de Vries & Balazs, 1996) is one not to be ignored. The “survivors” exhibit stress and fear due to higher workload and the uncertainty due to an unstable housing market. During this research the topic of the past downsizing and its consequences was topic of discussion in interviews and unscheduled talks with employees. Most of these talks involved office employees (estimated 30). Additionally all six Service Mechanics and five production employees have been questioned. Especially the office personnel noted the inability to perform tasks beyond the bare basic tasks to keep the processes ongoing. In general this does not induce stress or fear, hard work to keep the company floating is accepted. However high stress levels are easily inflicted as shown in the example below:

An announcement of a canteen meeting later in the day created noticeable tension in the office. This tension was observed in most office employees. This expressed itself in nervous facial expressions and movements. Casual talk in the area surrounding the coffee machines was replaced by discussion and speculation in a low voice. One employee spoke of headaches and stomachaches prior to an extra

canteen meeting.

Koen Blank

External failure costs at the Service Department of De Vries Kozijnen

B.V.

An analysis and design

By

Koen Blank

Abstract

Acknowledgements

Table of Contents

1. Introduction

1.1. About De Vries Kozijnen

1.2. Research at the Service Department

1.3. Terminology

1.3.1. System and organization

1.3.2. Service Mechanics

1.3.3. Service

1.3.4. Service receiver

1.3.5. Frames

1.3.6. Issues and failures

2. Methodology

2.1. DOV methodology

2.1. Validity and reliability of the research

2.2. Diagnose stage

2.3. Design stage

2.3.1. Defining design questions

2.3.2. Exploring redesign options using the Matrix of Change

2.3.3. Design of an ICT system

2.4. Implementation phase

3. Research question

3.1. Management problem

3.2. Research goal

3.3. Research question

3.4. Conceptual model

4. Literature review

4.1. Failure and Failure costs

4.2. Lean thinking

4.3. Quality of service cost

4.4. Service Failure

4.5. Downsizing organizations

4.5.1. Workforce reduction

4.5.2. Work Redesign

4.5.3. Systemic downsizing

4.6. ERP systems

4.7. Material handling

4.8. Meeting effectiveness

4.9. Knowledge, skills and learning

5. Analysis results

5.1. Downsizing at De Vries Kozijnen