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Master Thesis
Public version
Aviko
Name: R. G. Tempert
Student number: s1574493
Master program: Business Administration: Operations & Supply Chains
Date: 13 July 2011
Company: Aviko
University: University of Groningen
Supervisor Aviko: M. Visser
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PrefaceThis thesis is the report of a 20 week research into the supply chain of Aviko in Steenderen. This research has been performed on behalf of the thesis project of the specialization Operations & Supply Chains of the Master of Science in Business Administration at the University of Groningen.
The main research subjects of this thesis were the potential cost savings in the production of the frozen fries of Aviko B.V.
This thesis would not have existed without the possibility to perform a research into the frozen product lines at Aviko. This is why I would like to thank Aviko, in particular my company supervisor dhr. Visser, for providing me the opportunity to perform a research on their company. Besides dhr. Visser, I would like to thank all the employees at Aviko who made time for
interviews and participated in the research: the potato department, the manufacturing department, the financial department, the planning department and the supply chain department. I would also like to thank dhr. Reindsen (the one and only Excel expert) for his advanced Excel-lessons, help, information and support during this thesis.
Of course, I would also like to thank Prof. Dr. Dirk Pieter van Donk for guiding me through the thesis project and providing useful feedback. Furthermore, beside Prof. dr. Dirk Pieter van Donk, I would like to thank the co-assessor of this master thesis, drs. J. Drupsteen for the provision of feedback.
In this thesis some subjects are discussed quite detailed. Additionally, a lot of different subjects within the literature are discussed. All this is done to offer Aviko the information on potential cost savings in their supply chain.
I hope you will enjoy reading this report. Rob Tempert
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Abstract4
Table of contentsI Preface... 2
II Abstract... 3
III Table of contents... 4
1 Introduction... 5
2 Description of the company... 6
2.1 History of Aviko... 6
2.2 Production process of Aviko... 6
2.3 End-products of Aviko... 7 3 Problem statement... 8 4 Research design... 10 4.1 Research motivation... 10 4.2 Research scope... 10 4.3 Research objective... 10
4.4 Theoretical framework and research questions... 11
4.5 Research strategy... 12
4.6 Research outcome... 14
5. Results and analysis... 15
5.1 Optimizing a supply chain... 15
5.2 Which cost factors/variables exist in a supply chain... 21
5.3 What are the total costs of the supply chain in the current situation... 25
5.3.1 Aviko as a whole... 25
5.3.2 The production of the frozen fries... 25
5.4 Which factors can be influenced and how must these factors be changed by Aviko in order to decrease the total supply chain costs...28
5.4.1 Introduction of the optimal costs... 28
5.4.2 The EPQ model... 28
5.4.3A The optimal run lengths per plant... 29
5.4.3B The real obtained run lengths per plant... 30
5.4.4 Optimal operational inventory costs... 32
5.4.5 Optimal order interval per plant...33
5.4.6A "Other" stock types and targets... 33
5.4.6B The real inventory level and costs...35
5.4.7A The optimal manufacturing costs... 37
5.4.7B The real manufacturing costs... 37
5.4.7C The direct manufacturing costs... 37
5.4.7D The number of switches...40
5.4.7E The indirect manufacturing costs... 41
5.4.8 The purchasing costs... 42
5.4.9A The forecast... 46
5.4.9B Forecast accuracy per end-product and safety stock... 48
6. Conclusion, discussion and recommendations... 49
6.1 Conclusion... 49
6.2 Discussion... 51
6.3 Recommendations... 52
7. References... 53
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1 IntroductionWith the influence of the economic crisis and the ongoing competition on the global market, the focus on cost reduction is higher than ever before. Cost optimization is vital because prices must be competitive. Aviko is one of the world‟s biggest potato processor, with clients all over the world, and Aviko is trying to optimize their supply chain.
The main problem for Aviko is getting insight in the possibilities to reduce the total costs of their frozen fries products. Aviko thinks that several variables can be influenced in order to decrease the total costs, but they don‟t exactly know what their possibilities are and what the impact of changes are on their costs.
Aviko estimates that several millions can be saved if their materials and resources are used more efficiently, and with the outcomes of this report, Aviko wants to know what their current total costs of the supply chain are and what the total costs are in the „optimal situation‟. In the optimal situation, materials and products are purchased, produced, stored and distributed at the right quantities, to the right location and at the right time, where system wide costs are at a minimum. In this research only the variables which can be influenced by the purchasing, production and planning departments will be discussed in detail. The report will specific focus on the frozen fries production plants in Steenderen, Lomm and Rain. The demand for the frozen products is
relatively unstable, what makes the decision making more difficult.
The structure of this paper is as follows: Section 2 will introduce the organization, Aviko B.V. where this study has been performed. This section will narrow down to the involved processes. Section 3 will elaborate on the problem statement and the management problem. Section 4 will elaborate on research design providing the research motivation and scope, the research objective and methodology. This section closes with the desired research outcome followed by section 5 which contains the results of the study. This section ends with the discussion of the supply chain costs as well as a conclusive overview of the findings. Finally, section 6 will conclude this paper, providing the answer to the research question, followed by the discussion as well as
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2 Description of the companyThis section will introduce the company in which this study has been conducted. It will start with a general description of Aviko followed by elaboration on the production process and this section closes with a short description of the end-products of Aviko.
2.1 History of Aviko
Aviko was established in 1962 and is currently one of the Wolds‟s top 4 potato processors. In 2009 Aviko processed approximately 1.7 million tonnes of potatoes into 750.000 tonnes of fresh fries, frozen fries and frozen specialties. From these potatoes, Aviko produces more than 400 different end-products which are distributed to 35 countries in the World. Almost half of their end-products are produced in the production location in Steenderen, where also the headquarters is located. Beside their factory in Steenderen, Aviko has four other factories in the Netherlands; in Venray, Cuijk, Warffum and Lomm and four outside the Netherlands; namely in Belgium, Germany, Poland and China. Aviko has worldwide 1700 employees.
2.2 Production process of Aviko
In the figure below (figure 1), the production process of Aviko is shown. Underneath the figure follows a short description of the process.
Figure 1: production process of Aviko
The production process of Aviko starts with the delivery of raw materials. Aviko uses three different kinds of materials: packaging materials (consumer and distribution packages),
consumable supplies/adjuvants for the production process and their main ingredient potatoes. The next step is the production process and can be split up in seven operations namely: peeling, cutting, sorting, blanching, drying, frying and chilling/freezing. The production process can be seen as the primary process of the company; processing potatoes into different end products like fries. Because of all different sizes and shapes of the potatoes, by products in the form of “snippers” arise in the production process, and other potatoes are sorted out (“undersized potatoes”). Snippers are fries which are below the minimum length or are not thick enough. Those snippers will be pulverized and afterwards mashed products will be made. If the quality of the snippers is below the minimum and those snippers cannot be used for mashed products, Aviko sells it to Rixona, who uses the snippers for animal consumption. After the production process, the potatoes are processed into fries and those fries will be temporary hold in inventory in the so
Packaging Intercompany Distribution DC
Production
Suppliers Fries DC Transportation
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called “drain” or will be packaged immediately in consumer packages and finally put indistribution boxes in order to transport the end-products to the distribution centers. Dependent on the capacity utilization rate of the distribution center and the location of the client, the products will be first distributed to another distribution center or directly transported to the client. 2.3 End-Products
Aviko distinguishes three different categories in end-products; fresh fries, frozen fries and frozen specialties. In 2010 Aviko is able to produce in total 430 different end-products.
Semi-finished products are characterized by the cutting size/ thickness, length, point, moisture and colour. Every semi-finished product has an own bill of material. In the bill of material the needed materials (f.e. the packaging material) and a maximum of 5 possible varieties of potatoes is given. The difference between the semi-finished and end-products is that end-products are packaged in consumer/distribution packages with different quantities and also have a specific foil label. In the next table (figure 2) is an overview of the number of semi-finished products and end-products per category given.
# of Semi-finished products # of end-products per category
Fresh fries 13 58
Frozen fries 103 258
Frozen specialties 93 114
Total 209 430
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3. Problem statementA primary concern of the management of Aviko is the challenge to find new opportunities for cost reduction in the supply chain. Firstly the supply chain of Aviko and its difficulties will be discussed.
Aviko is fully responsible for the production of the fries and the packaging process. Aviko has also (limited) influences on the supply of potatoes, the distribution to the warehouses and clients, and the distribution centers. Aviko has appointments and contracts with farmers for the supply of potatoes, and for the distribution of the end-products, Aviko hires an extern distribution company. The main part of the distribution centers is also rented. So the value chain of Aviko isn‟t fully vertical integrated. Vertical integration is an approach for increasing or decreasing the level of control a firm has over its inputs and distribution of outputs. The vertical integrated level and the design of a supply chain can make supply chain management more difficult. In cooperation with the supply chain manager of Aviko, a list of possible difficulties in supply chain management are discussed.
• Complex, many interdependencies • Each player sub-optimizes
• Dynamics in demand, availability • Managing uncertainty
• Conflicting performance objectives: Trade-offs • Short life-cycles, fashion, technology
• Global dimensions, markets, wages, sources • No magic formula for everlasting success
• The Supply Chain is a dynamic system that evolves over time • System variations over time
The supply chain manager indicates that especially the first-four points make supply chain management difficult for Aviko. As said earlier, Aviko is confronted with more entities in their supply chain that results in a more complex supply chain, many interdependencies and besides each player in the supply chain optimizes his own value chain. Another difficulty for Aviko is the limited availability of supplies (especially the potatoes) and the dynamics and uncertainty in the demand of their end-products. Given those difficulties Aviko wants to get a better insight in opportunities to save money in their supply chain.
The supply chain manager indicates that a potential saving could be found in the supply of potatoes. Aviko potato is the department that is responsible for the supply of potatoes, and they have to establish contract with farmers. 80% of the potatoes are coming from farmers with contracts and the other 20% are purchased on the European market. Aviko Potato has to decide how much, at which price and at which moment it purchases the raw potatoes and Aviko wants to know if there are opportunities to improve the purchasing policy and how much money can be saved with the suggested improvements.
The supply chain managers also indicates that the manufacturing costs have to be discussed. The production department is responsible for the production of goods. The production process can be split up in seven operations namely: peeling, cutting, sorting, blanching, drying, frying and chilling/freezing. The objective of the operations department is to produce as efficient as possible while minimizing the total production costs. Houlihan, Jones and Riley (1985) stated that
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4. Research designThis section describes the research design. It will start with the research motivation why this study has been conducted, followed by the scope of the study. After introducing the research objective the questions and the methodology will be elaborated. The section closes with the desired research outcome.
4.1 Research motivation
The focus on cost reduction is nowadays higher than ever before. Cost optimization is vital because of the ongoing competition. Therefore Aviko is trying to improve the performance of all his processes. Aviko has several ideas how to reduce the total costs, but they didn‟t exactly know which cost factors can be influenced by the decision making within Aviko and what the impact of an adjustment in the decision making is on the total cost of Aviko. The decision making is
nowadays made on basis of excel calculation, in the future Aviko has idea‟s to buy an extensive ERP package, and with the outcomes of this thesis Aviko wants to get insight in potential cost savings in order to conclude if buying a new ERP package could be a wise (/more profitable) decision.
4.2 Research scope
This study will examine especially in the frozen production plants in Steenderen, Lomm, and Rain. The production of the fresh fries are excluded, because Aviko has a small number of fresh end-products (58 fresh end-products and 372 frozen end-products) and also the demand of these fresh products is relatively stable. Besides, the fresh fries production process is more or less a mass production process, and therefore Aviko expected that the highest savings must be reached in the frozen products.
Due to time limitations it isn‟t possible to measure the effects in cost reduction of all cost factors. This research will focus on the cost factors in the planning, production and potato (purchasing) departments. The planning decisions, the efficiency and the reliability of the (short and long term) planning are specific area‟s which will be discussed in this research in the field of the planning department. For the potato department the matching between the supply and the demand of potatoes and the portfolio of contracts versus purchasing on the European market are area‟s which will be discussed. In the production department the efficiency and the degree of conforming to schedule will be measured.
This research must lead to recommendations in potential cost savings in Aviko‟s supply chain. Those recommendations will lie in finding an optimal utilization of their raw materials and finding opportunities to lower their total costs. This thesis will focus on the potato harvest year 2009-2010, which is started in week 45 of 2009. This research will not suggest improvements on the technical part of the production process or reorganizing/building new plants or warehouses. 4.3 Research Objective
The aim of this research is to find opportunities to reduce the total costs of Aviko. The opportunities have to be found in the cost factors in the planning, production and potato
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4.4 Theoretical framework and research questionsIn this part a theoretical framework and the research and sub questions will be explained.
An important reason for the rise of supply chain management can be found in the increased global competition between companies. Within these increasingly competitive environments, single companies are not able to survive on their own, but only as part of a supply chain (Porter, 1998). Together with the recent developments in information technology and logistics, it forms the basis for the concept of supply chain management (SCM). “The supply chain encompasses all activities associated with the flow and transformation of goods from raw materials stage, through to the end user, as well as the associated information flows. Material and information flow both up and down the supply chain. Supply chain management is the integration of these activities through improved supply chain relationships, to achieve a sustainable competitive advantage” (Handfield and Nichols, 1999).
Su and Lei (2008) defined supply chain management as the costs associated with all the supply chain processes, which can be influenced by supply chain optimization. They described supply chain cost as just a metric, used to support profit analysis and decision making of either one single company or the whole supply chain. Supply chain costs are those costs associated with maintaining a supply chain, including acquiring and delivering material, planning and order management, but none of the expenditures associated with research and development or sales and marketing. Supply chain cost is accumulated from process to process at the same time of value being created. Costs in each process of supply chain can be calculated on the purposes of relevant management.
Various SCM measures and techniques have been developed to optimize the supply chain activities of companies. The cost management in the supply chain is considered as an important factor, and several cost management techniques are developed (see f.e. Seuring and
Schneidewind, 2000; Christopher and Gattorna, 2005; SU and LEI, 2008). Traditional cost accounting is not suitable to actively manage costs, which has led to
developments of cost management techniques to support specific decision making in the supply chains of companies (Hilton, Maher and Selto, 2000). Mostly all traditional cost management techniques look at the internal costs of companies, especially the indirect and direct costs. Activity based costing provides an alternative approach to the allocation of indirect cost among products (Kaplan and Cooper, 1997). Another technique of Shank and Govindarajan, the strategic cost management technique emphasized of costs within the value chain, but the discussion of cost drivers stays on a general level. In 2001, Seuring developed a supply chain costing technique, which allow for the classification of costs within the supply chain. The technique combines the flows of material and information and the partnerships within the supply chain. This supply chain costing technique takes both the production and transaction costs into account, which results in three cost levels; direct costs, indirect and activity based costs.
Since this study is a research-study the research objective will be met by using a research question. With support of the research objective, the following research question has been formulated:
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To be able to answer the research question, several sub questions have been formulated. Sub questions serve as a support for answers to the main research question and ensure a thorough study.The first question will discuss several methods and models which can help by optimizing a supply chain. The purpose is to find theoretical as well as mathematical optimization methods and models which will be used later in this paper to decrease Aviko‟s current total costs. Therefore the first sub question will provide more insight into existing optimization methods/models in literature.
1. How to optimize a supply chain in a food processing industry?
The second sub question will discuss the different cost elements, factors and drivers in the supply chain of Aviko. For further research it is important which cost factors are included in the total costs and how these costs elements can be categorized into a general cost framework. The second sub question has been formulated as follows:
2. Which cost factors exist in the supply chain of Aviko?
With the costs factors and elements and the cost framework in mind, the current costs of Aviko have to be discussed. The total costs of the supply chain have to be categorized into the different cost factors founded in the second research question. Without knowing the current cost per category for Aviko, the potential savings cannot be calculated and therefore the third sub question has been formulated as follows:
3. What are the total costs of Aviko in the current situation?
The last step to make is to calculate the optimal costs by using the optimization models founded in the first research question. These optimal costs have to be compared to the current costs, in order to find opportunities for cost reductions. Not all cost factors can be influenced and therefore these factors have to be appointed. The cost factors which are influential by Aviko are more important and the relations between changes in these factors and the total costs have to be discussed, and therefore the following sub question is formulated:
4. Which of the cost factors can be influenced and how must these factors be changed by Aviko in order to decrease the total costs?
If all sub questions have been answered, the main research question can and will be answered followed by the completion of the research objective. To derive at the answers of these questions, literature has been studied and data and information is retrieved within Aviko. The next section will describe the research design more thoroughly.
4.5 Research strategy
The aim of this research is not to make general valid conclusions, but on giving specific
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information inside of the organization, and therefore mainly internal primary and secondary will be exploited.The first step to take is to visit several departments to make observations and get a better
impression of the company. Next to observations, interviews with several managers will be done. The following people in the organization will be interviewed:
Logistics Manager Planning Manager Supply Chain Manager
Buying Manager (Aviko Potato) Production Manager of Steenderen
Those managers can give more information about their tasks and responsibilities of the different departments within the organization. Those managers must to be able to give more information about the constraints and possibilities in their decision areas. These interviews with several managers will hopefully results in directions for cost reduction. Without these interviews there isn‟t a starting point for the cost reductions. If the directions are clear, internal secondary data is retrieved by reading and studying existing documents of Aviko. Mostly historical data of 2009 and 2010 will be researched. Documents, (financial) reports and excel sheets will be used for further research. Those documents will be used to get better insight in their current total costs of the supply chain.
This study will use literature, reports, interviews and observations to retrieve both quantitative and qualitative data. In the following paragraphs the suitable research strategies per research question will be discussed.
The first research question is focusing on existing optimization models. Ebscohost and several journals will be used to find theoretical and mathematical models. With the use of those mathematical optimization models, computer simulations can be filled in specific for Aviko in order to find opportunities for cost reductions.
To second question, is focusing on the cost factors in the supply chain of Aviko. To get answers on this question, mainly theoretical research will be used. The Ebscohost tool/database of the RuG will be used to find relevant articles. Theories must get a first impression of the cost factors in the supply chain of Aviko.
The third research question is focusing on the current and past costs of Aviko. To get better insight in their total cost, useful internal secondary data have to be found. In this section the financial department and the financial reports plays an important role, in order to get a better insight in the total costs of Aviko in 2009 and 2010.
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be compared to the “optimal” costs in order to find opportunities for cost savings. The earlier founded optimization models in the first research question and the EPQ model will be used to calculate the optimal ideal (cost) situation.
4.6 Research outcome
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5. Results and analysisIn this part the sub questions made in section 4.4 will be discussed. In the following section the first sub question: “
How to optimize a supply
chain in a food processing industry?” will beanswered.
5.1 Optimizing a supply chain
An important reason for the rise of supply chain management can be found in the increased global competition between companies. Within these increasingly competitive environments, single companies are not able to survive on their own, but only as part of a supply chain (Porter, 1998). Together with the recent developments in information technology and logistics, it forms the basis for the concept of supply chain management (SCM).
To start, the definitions of a supply chain management have to be discussed, because several authors use different definitions. The council of logistics for example uses the definition: “Supply Chain Management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies.” Handfield and Nichols (1999) uses another common definition, they define supply chain
management (SCM) as “The supply chain encompasses all activities associated with the flow and transformation of goods from raw materials stage, through to the end user, as well as the
associated information flows. Material and information flow both up and down the supply chain. Supply chain management is the integration of these activities through improved supply chain relationships, to achieve a sustainable competitive advantage”. The last definition is commonly used in theories, and this definition will be used further on in this paper.
Various SCM measures and techniques have been developed to optimize the supply chain activities of companies. The cost management in the supply chain is considered as an important factor, and several cost management techniques are developed (see f.e. Seuring and
Schneidewind, 2000; Christopher and Gattorna, 2005; SU and LEI, 2008). Traditional cost accounting is not suitable to actively manage costs, which has led to
developments of new cost management techniques to support specific decision making in the supply chains of companies (Hilton, Maher and Selto, 2000). Mostly all traditional cost
management techniques look at the internal costs of companies, especially the indirect and direct costs. Activity based costing provides an alternative approach to the allocation of indirect cost among products (Kaplan and Cooper, 1997). Another technique of Shank and Govindarajan, the strategic cost management technique emphasized of costs within the value chain, but the
discussion of cost drivers stays on a general level.
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Figure 3: Supply Chain Operations Reference Model (SCOR)Any supply chain exists of a source, make, deliver and return process. A participant receives material and information via the source process from its predecessors. Within the make process, these materials and information are transformed into (finished) products, which then are carried on to the next stage of supply chain within the deliver process. If unqualified ones are found or products are discarded as useless, then they go into return process. Each interaction of two processes is a „link‟ in the supply chain. To coordinate these operational processes and links, a plan process is needed to lead all of them. Integrated into these standard processes, supply chain cost can be depicted. Supply chain costs are those costs associated with maintaining a supply chain, including acquiring and delivering material, planning and order management, but none of the expenditures associated with research and development or sales and marketing. Supply chain cost is accumulated from process to process at the same time of value being created. The model of Su and Lei (2008) focus on reduction in costs and cycle times. The reduction in cycle times is behind the scope of this paper and therefore the model will not be discussed in detail in this section. Later in this part, the cost reduction aspect of the model will be introduced.
Another optimization theory is developed by Ferrio and Wassick (2008), they present a mixed-integer linear program (MILP) capable of optimizing a multi-product supply chain network made up of production sites, an arbitrary number of echelons of distribution centers, and customer sites. The emphasis of their model is on the redesign of existing supply chain networks. The decisions involved in managing a supply chain range from the tactical, such as detailed production scheduling, to the strategic, such as the number and location of production facilities. In their model the attention is on the handling of manufactured materials from the production locations to the customer‟s locations in a multi-echelon supply chain. Constraints in the model enforce demand satisfaction, facility capacity limits, material balances, and network structure constraints. The number and geographic locations of manufacturing sites and customers is fixed but the model provides the means to choose distribution centers from a predefined pool of candidates through the use of site selection constraints. The model can be used to minimize the total network cost which is a sum of production costs, DC throughput costs, freight costs, logistic costs and fixed costs for selecting a distribution center.
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production facilities, lies behind the scope of this research and therefore this model isn‟t very useful. The next model of Su and Lei (2008) is more appropriate for this research.Su and Lei (2008) presents a theoretical model of supply chain cost reduction, containing four components, which identify the foundation and provide some techniques for saving supply chain cost, as shown in next figure.
Figure 4: Supply chain cost reduction model
Supply chain costing
It is difficult for managers to make supply-chain decisions without accurate supply-chain costing information. Increased visibility of costs will give the supply chain a competitive advantage by providing appropriate costing information that enable managers to make better informed decisions with regard to the supply chain activities they manage. Traditional costing systems, however, are limited to analyzing production costs and less effective when considering the complex processes of supply chain. To overcome some of the limitations with traditional cost accounting systems, activity based costing (ABC) methods were developed to identify cost drivers by aligning costs to activities (Kaplan, 1998), cost to serve (CTS) to analyze customer costs, and total costs of ownership (TCO) to connect costs with specific suppliers. In these methods the overhead costs and other expenses are allocated depending on the resources the cost objects consume, and are not solely related to volume but according to the causal effect. The essence of these costing methods is to give a more accurate reflection of how costs are consumed and where they go.
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Improving processes
Supply chain consists of a lot of activities in each of the processes. In real practices, there exist many wastes in conducting the activities and inefficiencies due to improper processes design. To implement cost saving projects on processes, the first step is to identify process improvement potentials. Non-value-added or less efficient activities can be identified through supply chain process analysis. The earlier presented SCOR model depicted in Figure 3 is just a simplified example of top-level process map. Another model is the process chain model, which enables visualization and analysis as well as the organization of processes within the supply chain (Bause, Beilner, Kemper, Schmitz, Wenzel, 2001). Each process in the supply chain can be represented with the help of the parameters input, output, resources, structures, etc. Adopting the process chain model, the processes can be described by means of process chain elements on a lower level. However, it is not easy to utilize every improvement potential because of the resistances to change and the financial reasons. So to classify identified areas of potential improvement is necessary and significant.
Compressing supply chain time
The most frequent means of obtaining savings from reducing supply chain time, which means increasing velocity of materials, is to reduce or eliminate material inventories wherever they exist in the supply chain. Through reducing supply chain time, the inventory turnover of supply chain can be increased, followed by the reduction of capital and carrying costs. In order to reduce cycle times between supply chain entities, managers must work to create new relational forms that rely on trust to a greater extent. The manufacturing and transportation time are not easy to reduce. The most time reduction potentials lie in the inventory time when stocks are in static state with raw materials, work in process or finished products. To reduce the inventory time, it is important that firms improve their business processes and coordinate them with each other. Good and stable relationship and the application of information technology between firms can help to remove the unnecessary transaction procedures and eliminate information-related time delays in any chain. In addition, the supply chain operational planning is very important in pursuing this time goal through the integration and synchronization of supply chain processes. Approaches such as vendor managed inventory (VMI), postponement and making to order are often used to reduce the inventory time.
Smoothing interfaces
The supply chain theory was against the high administrative costs and low efficiency of the hierarchical structure. But the adoption of supply chain also causes the rise of transaction costs because of the trades beyond the boundaries of companies. As out-sourcing increases, the supply chain becomes more like a network than a chain (Normann and Ramirez, 1994), and as a result, the number of interfaces between organizations increases, followed by a growing proportion of transaction costs in total supply chain cost at these interfaces. So the challenge is to improve the ability of a supply chain to appear as a single entity to customers.
The main purpose of smoothing is to increase the efficiency of the interfaces and to cut down the transaction costs. In general, transaction costs are defined as costs for coordinating a transaction, which is regulated distribution of goods or rights, such as information. Therefore, transaction costs are not only costs for distributing information, bust also costs with respect to contracting, several decisions and their realization and control (VoB and Schneidereit, 2002). Another
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entities, such as longer-term contracts, partner or alliance-type arrangements should be built. Information technology can be used to enable a better transfer of information between supply chain partners. In particular, using the same software, e.g., supply chain management software for the planning process or EDI for information distribution may decrease transaction costs. The interfaces between business entities will only become truly efficient when all of the participants modify their behaviours.Especially the supply chain costing aspect of the model of Su and Lei can be useful in order to get a better insight in Aviko‟s (current) costs. To overcome some of the mentioned limitations with traditional cost accounting systems, activity based costing (ABC) methods will be used in section 5.3 and 5.4 in order to identify cost drivers by aligning costs to activities. The overhead costs and other expenses will be allocated per category and plant in order to give a more accurate reflection of how costs are consumed and where they go. And besides, the visibility of cost information of Aviko isn‟t always clear for the departments. Departments within Aviko doesn‟t exactly know what the cost impacts are for the other departments (and thus the total costs) if they make an unusual decision. Su and Lei mentioned that if a company want to achieve accurate and transparent cost data in supply chain, a comprehensive standard and advanced costing system should be operated.
Besides the optimization model of Su and Lei, Seuring (2001) developed a supply chain costing technique, which allow for the classification of costs within the supply chain. The technique combines the flows of material and information and the partnerships within the supply chain. His costing technique takes both the production and transaction costs into account, which results in three cost levels; the direct costs, indirect and activity based costs.
Seuring defined the three cost levels as follows: the direct costs are caused by the production of each single entity of a product and include such costs as materials, labour and machine costs. Mainly, these costs are controlled by prices for material and labour. The activity based costs are caused by activities that cannot be directly related to products, but are caused by administrative activities performed in order to deliver products to customers. These costs arise from the organizational framework inside the company. The transaction costs encompass all activities dealing with the information and communication with suppliers and customers. Therefore, these costs arise from interactions with other companies in the supply chain.
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Figure 5: Target costing on product, process and transaction levelThese cost reductions can be obtained by tackling the product level target costs, which mainly focus on the direct costs of the product parts. The direct costs of the products, especially the material costs, can be influenced by Aviko, and setting objectives and budgets for the purchasing of potatoes and the contract prices for their suppliers could lead to achieving these targets. Still, the co-operations with supplier‟s causes transaction costs, so these levels can be used for cost reduction too, but these will not be discussed in detail in this research.
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5.2 Which cost factors/variables exist in a supply chainThe focus on cost reduction is nowadays higher than ever before. Cost optimization is vital because of the ongoing competition and the increased global competition between companies. Within these increasingly competitive environments, single companies are not able to survive on their own, but only as part of a supply chain (Porter, 1998). Together with the recent
developments in information technology and logistics, it forms the basis for the concept of supply chain management. Aviko is trying to improve the performance of all his processes and therefore firstly the cost drivers and elements in a supply chain will be discussed.
Swaminathan, Smith and Sadeh (1998) classify different elements in the supply chain into two broad categories; structural and control elements (see Figure 6). Structural elements are involved in actual production and transportation of products, and control elements help in coordinating the flow of products in an efficient manner with the use of messages. Structural elements are further classified into two basic sets of elements, namely, production and transportation elements. Control elements are classified into inventory, demand, supply, flow, and information control elements.
Figure 6: Supply chain elements
Structural Elements
As indicated earlier, structural elements are involved in the production and transportation of products. Strategic placement of these elements constitutes major issues relating to supply chain configuration. In the following subsections a short description of the structural elements will be given.
Production
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A retailer is where customers buy products. The main focus here is on reducing the cycle time for the delivery of a customer order and minimizing stock outs. A distribution centre is involved in receiving products from the manufacturing plant and either storing them or sending them right away (cross-docking) to the retailer. The main focus here is to reduce the inventory carried and maximize throughput. A manufacturing plant is an agent where components are assembled and a product is manufactured. The main focus here is on optimal procurement of and on efficient management of inventory and manufacturing process. Supplier agents supply parts to the manufacturing plant. They focus on low turnaround time and inventory. Their operation is characterized by the supplier contracts which determine the lead-time, flexibility arrangements, cost sharing, and information sharing with customers.Transportation
For the transportation of products, different kinds of vehicles can be used. Each vehicle has associated characteristics in terms of capacity and relative speed. The transport planning department is responsible to find efficient routes and schedules for the vehicles.
Control Elements
Control elements facilitate production and transportation of products within the supply chain. Choice of appropriate control elements is the objective of problems related to supply chain contracts and supply chain coordination. In the next paragraphs a brief description of control elements currently are defined.
Flow Control
Flow control elements coordinate the flow of products between production and transportation elements. Two types of flow control elements are: loading element and the routing element. Loading elements control the manner in which the transportation elements are loaded and unloaded. Routing elements control the sequence in which products are delivered by the
transportation element. The route taken by the transportation vehicle depends to a great extent on the destination of the loaded products.
Inventory Control
Inventory control elements are an integral part of any supply chain. They control the flow of materials within the supply chain and are mainly of two types; centralized and decentralized control. With centralized control, the inventory at a particular production element will be controlled, while taking into account the inventory levels in the supply chain as a whole. A typical example is inventory control based on echelon inventory. With decentralized control, the inventory at a particular production element will be controlled by considering inventory levels at that entity in the supply chain. Typical examples of these kinds of policies are: base-stock policy, safety stock policy and MRP based ordering.
Demand Control
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Forecast elements determine how forecasts are generated within the supply chain and how they evolve over time. In a “Pull” system, products are built to order. In a “Push” system, forecast evolution plays a very important role because manufacturing decisions are based on demand forecasts. Greater forecast inaccuracy leads to greater mismatch between products demanded and products produced, that leads to higher inventory costs. And therefore forecast accuracy plays an important role in materials procurement and capacity planning.Supply Control
Supply control elements dictate terms and condition for delivery of the material once orders have been placed. Contractual agreements are an important form of a supply control element. Contracts contain information on the price of the material, length of the contract, volume to be purchased over the contract period, penalty for defaulting, lead time to get the product once the final order has been placed, the amount of flexibility that the buyer has in terms of updating demand forecasts over time, and types of information control that could be used.
Information Control
Information control elements are essential for coordination within the supply chain. Two types of information flow are: directly accessible and periodic. Directly accessible information transfer refers to the instantaneous propagation of information. For example, this could be information on inventory levels, capacity allocations, machine breakdowns, etc., at other production elements or the routes to be taken by other transportation elements. Periodic information updates may be sent by different production and transportation elements to indicate changes in business strategy, price increases, introduction of new services or features in the products, introduction of new production elements, etc. Periodic information is sent to all the entities in the supply chain in the form of messages, as opposed to real-time information, which is explicitly agreed upon in the supply control element.
Not all element are equally important in this research, therefore only some important elements mentioned by Swaminathan, Smith and Sadeh (1998) will be discussed in detail further on in this paper. In consideration with the supply chain manager of Aviko, the elements where
opportunities in cost reduction exist, and have to be discussed in this paper are underlined, and will be discussed in more detail later on.
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The following paragraphs will discuss the cost factors in a supply chain.Decades ago the focus of cost management was on reengineering internal processes for efficiency (e.g., just-in-time inventory, lean production) and effectiveness (e.g., six-sigma quality initiatives, team production), firms are now taking up Shank and Govindarajan‟s (1992, 1994) prescient challenge to manage costs throughout the value chain. Although a 2008 survey of top executives found that 57 percent identified cost reduction as the primary strategic goal for supply chain management (McKinsey & Company 2008).
Anderson (2007), define “strategic cost management” as a deliberate decision making aimed at aligning the firm‟s cost structure with its strategy and with managing the enactment of the strategy. The focus is on interactions across firm boundaries, specifically the supplier/buyer interface, as a source of competitive advantage that can results in low cost, high quality, customer responsiveness, innovation and productivity. (Gietzmann 1996; Dyer 1996; Cooper and
Slagmulder 2004)
Shank and Govindarajan (1992, 1994) posited that two types of cost drivers are the basis for strategic cost management: structural and executional cost drivers. Structural cost drivers reflect the organizational structure, investment decisions, and the operating leverage of the firm. Executional cost drivers reflect the efficacy and efficiency of executing the strategy. Stated differently, structural cost management may be conceived of as a choice among alternative production functions that use different inputs or combinations thereof to meet a particular market demand. Executional cost management is concerned instead with whether, for a given production function, the firm is on the efficient frontier. In this paper especially the executional costs of Aviko will be discussed.
Su and Lei (2008) makes another differentiation of the total costs, they identified the total costs of a company into different categories, including, manufacturing costs, transportation costs,
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5.
3 What are the total costs of the supply chain in the current situation? 5.3.1 Aviko as a wholeTo calculate the total costs of Aviko in the current situation, the financial report of the harvest year 2009-2010 will be used. The total costs in 2009-2010 can be split up for the four production plants and can be classified in the following cost categories defined by Su and Lei (2008).
Figure 8: Total costs of Aviko in 2009-2010
Most of the costs come from the financial report of Aviko. Every cost variable and thus also the overhead costs in the financial report are grouped into a specific cost category. So, in the above table also the overhead costs are allocated to a specific production plant and category. In appendix nr. 1 a more detailed financial report is given, where also for every cost variable the corresponding cost category is given.
Explanation of the cost categories (in figure 8)
1) The purchasing costs are the total costs which are paid to the farmers for the potatoes. Bonuses (for very good quality potatoes) and fines (for bad quality potatoes), and extra compensations on the potatoes are also included. In appendix nr. 2 a more detailed overview of the paid potato price in 2009 and 2010 are illustrated.
2) The manufacturing costs are costs that arise in the production process. Important direct costs that are included in the manufacturing are the costs of hiring staff, energy costs, maintenance costs, packaging costs and depreciation costs. The overhead cost, such as the environmental costs, technical service costs, quality group costs and the general production costs are also included.
3) The transaction costs are occurred on the interfaces between different functions or entities. Administration, IT, finance and the sales department costs are included. 4) In the transportation costs, the costs of the transport staff and the transportation costs
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5) Holding finished products on stock results in inventory costs. The costs of the personalstaff in the warehouses, energy costs, maintenance costs, renting cost of warehouses and the depreciation costs of their own warehouses are included in the inventory costs. 6) In the other costs, costs are put which can‟t be allocated to the previous categories. F.e.
the R&D costs, marketing and the cleaning department costs. 5.3.2 The production of the frozen fries
As said earlier, in this research not all production plants and end-products will be discussed. The production of the fresh fries and the production plant in Cuijk are excluded. The main focus is on the production of the deep frozen fries and specialties which are produced in Steenderen (on production line 4), Lomm and Rain. At those locations, Aviko also produces fresh fries. The production of the fresh fries is not incorporated in this research and therefore those costs are excluded in the following figure.
Figure 9: Total costs of the frozen products in 2009-2010 Explanation of the costs (in figure 9)
1) The production of the fresh fries is a continuous mass production process, the production of frozen fries is more a batch production. Because the potatoes aren‟t all equal in size and quality, the efficiency on the potatoes isn‟t always constant and therefore Aviko has detailed information how much potatoes are delivered into the frozen production lines. The bought potatoes are interchangeable between the fresh and frozen production lines, and therefore the exact price Aviko paid for only the frozen potato batches isn‟t clear. Therefore the average paid price of the plant will be used to calculate the purchasing costs for the frozen products. In appendix nr.3, the delivered potatoes and the paid price for the frozen production per plant is illustrated.
2) For the production of the frozen end-products Aviko has in Steenderen and Rain a separate production line where only frozen products can be produced. In the financial report of 2009-2010 the separate costs of that frozen production line is given (see
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environmental costs, technical service costs, quality group costs and the generalproduction costs, but without the packaging costs.
3) In order to calculate the inventory cost for the specific production plants and lines, the composition of the inventory in 2009-2010 will be examined. In Steenderen, Aviko has 3 production lines (line 1, 4 and 5), line 1 is for the fresh fries, line 4 for the frozen fries and line 5 for the frozen specialities. In 2009-2010, on average 77,9% of the total stock from Steenderen comes from the frozen production line in Steenderen. This ratio is used to calculate the specific inventory costs for the frozen fries inventory from Steenderen. In Lomm on average 9,2 % of the total stock from Lomm comes from the frozen production line there. In Rain, there is one production line, and all the inventories from that location are frozen end-products and thus 100% of the total inventory costs are allocated. The costs of the personal staff in the warehouses, energy costs, maintenance costs, renting cost of warehouses and the depreciation costs of their own warehouses are included in the calculated inventory costs.
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5.4
Which factors can be influenced and how must these factors be changed by
Aviko in order to decrease the total supply chain costs?
5.4.1 Introduction of the optimal costs
In order to decrease the total costs, initially the purchasing, manufacturing and inventory costs will be discussed in detail. To find potential savings, the EPQ model (see section 5.4.2) will be used to calculate the optimal costs. The optimal costs are calculated on basis of the real
production volumes of the frozen fries and specialities in 2009-2010. The real costs are based on the produced volumes, and therefore these volumes (instead of the forecast volumes) will also be used in the EPQ model to make an accurate comparison between the real and optimal costs. With the usage of the real production volumes, which are 297.834 ton in total, the forecast difference (which was initially 292.438 ton in total) of (297.834-292.438) 5.396 ton is thus excluded. In the following sections the optimal costs per cost category will be calculated.
5.4.2 The EPQ model
The Economic Production Quantity model (also known as the EPQ model) determines the quantity a company should order/produce to minimize the total inventory costs by balancing the inventory holding cost and average fixed ordering/production cost. The EPQ model was
developed by E.W. Taft in 1918. This method is an extension of the Economic Order Quantity model (also known as the EOQ model). The difference between these two methods is that the EPQ model assumes the company will produce its own quantity or the parts are going to be shipped to the company while they are being produced, therefore the orders are available or received in an incrementally manner while the products are being produced. While the EOQ model assumes the order quantity arrives complete and immediately after ordering, meaning that the parts are produced by another company and are ready to be shipped when the order is placed. The EPQ model uses several input variables and in the next figure the input numbers are given. In the next figure the number of semi-finished frozen products and the production volumes in tons are given.
Production plant: Steenderen 4 Lomm Rain Total
Number of semi-finished products 71 24 37 132
Total production volumes in 2009-2010 in tons 165.970 24.209 107.655 297.834 Total production volumes in tons per week
(production volumes per year/52) 3192 466 2070 5728
Figure 10: Input variables (volumes) for the EPQ model
The given semi-finished products are not all unique; some semi-finished products can or have to be produced in multiple plants. If Aviko makes a forecast for a specific semi-finished product on 2 or more plants, the semi-finished product will be counted for the corresponding plant. In total Aviko have 115 unique semi-finished products which have to be produced on the 3 plants. The production volumes in tons per week per production location are an input variable for the EPQ model. Aviko has made expectations for the other input variables, such as the setup time, line costs per hour, additional costs and the inventory costs per week per ton.
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Input EPQ Steenderen Lomm Rain Average
Production line 21004 23003 28001
Setup time in hours (1) 1,00 1,5 1,00 1,13
Line costs per hour (2) * * * *
Additional costs (3) €175 €175 €175 €175
Inventory costs per week per ton (4) * * * *
Interest costs per week per ton (5) €0,81 €0,81 €0,81 €0,81
Inventory and interest costs per week per ton (4+5)
* * * *
Switching costs = Setup time x line costs + additional costs:
* * * *
Figure 11: Input variables for the EPQ model (* = censored) Explanation of the input variables (figure 11)
1) The setup-time is calculated from results from the past. The setup-time isn‟t always constant, it is dependent on the sequence of production. Changes in oil for example take more time than an average switch where an oil change isn‟t needed. The given setup-time is an average of the setup time used in the past.
2) The line costs per hour are the sum of the expected costs of personnel at the production and packaging lines, the energy costs, other operating expenses and costs passing to or from another department. The maintenance and depreciation costs are not included in this number. In appendix nr. 4 a detailed overview of the calculation of the line costs per hour are given.
3) The additional costs exist because Aviko has a material loss and a less utilization rate of the capacity if they do a production change. Aviko makes on basis of the past an
expectation for those additional costs.
4) On the other hand, holding inventory on stock costs also money, Aviko uses the inventory and interest costs in order to calculate the cost of holding inventory. The inventory costs per week per ton are the expected costs for inbound, outbound, stocking, and interwarehouse costs.
5) The interest costs comes from an expected average value of 350 euro per ton and a return on investment (ROI) of 12%, this results in €0,81 per week per ton interest costs (350 x 12% / 52 weeks).
On basis of these given numbers the switching costs of a switch and the inventory costs can be calculated. With the usage of these input numbers and the weekly semi-finished forecast the EPQ model can calculated for every semi-finished product the optimal run length.
5.4.3A The optimal run lengths per plant
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Some finished products have a higher forecasted demand, that means that thosesemi-finished products have to be produced more often, but those products do not count heavier in the optimal run length in the previous method. To get a more accurate number it is a better to include the yearly forecast of the different semi-finished products. In this method, firstly all separate optimal run lengths have to be multiplied by the yearly forecasted demand for that corresponding semi-finished product. The second step is to count up the total yearly forecasted demand for those products at the specific production plants. The last step is to divide the total sum of EPQ times the corresponding forecast by the total sum of forecast. As a result the weighted EPQ per
production plant is calculated (2). In the appendix (nr. 5) a detailed example for both methods for Lomm is given. In the next figure the optimal run lengths for both methods is given per
production location, and also the overall weighted run length.
Production plants: Steenderen Lomm Rain Weighted
Average optimal run length (1) 122 92 182
Weighted optimal run length (2) 285 192 342 293 Figure 12: Weighted EPQ in tons per production plant
The given run length numbers, are based on the long-term forecasted demand, the quality buffer products are also included and Aviko made the assumption that the demand is deterministic and stable.
5.4.3B The real obtained run lengths per plant
Afterwards, Aviko has detailed information about the real run length for the produced batches in the weeks 1-43 in 2010. Of course the demand and the produced batches is different than
forecasted, and also the following run lengths are based on those 43 weeks and not on the 52 weeks of forecast (in the optimal situation). For those produced semi-finished products in 2010 the average EPQ is calculated. In the table below the average EPQ is compared to the real obtained average run length.
Production plants: Steenderen Lomm Rain Total
Average EPQ of produced
semi-finished products in 2010 198 126 238 562
Real obtained average run length 184 75 168 427
Real obtained average run length
/ EPQ (% of deviation) 93% 60% 71% 76%
Figure 13: Real vs optimal run lengths in tons per production plant
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To find reasons for the lower run lengths several opportunities will be discussed. Aviko had for example in 2010 capacity problems, most of the time they had a high load on the plants and as a result Aviko had to produce for some specific semi-finished products smaller batches, and more often in order to fulfil the demand of their customers. To get a deeper insight in the run lengths, and hopefully to explain the difference in run lengths, Aviko wants to compares every semi-finished products EPQ against the average run length of all corresponding produced semi-semi-finished products. If for example a semi-finished product is 35 times produced in 2010, Aviko wants to know what the average run length of those 35 batches was and to compare that average run length to the EPQ of that corresponding semi-finished product.Another reason for making a different calculation is because of the quality buffer products. Quality buffer products, are semi-finished products which cannot be produced the whole year, because the needed potato varieties are limited available. Because the limited availability, those semi-finished products have to be produced in a given period and cannot produced equally in a year. The EPQ model uses the yearly forecast and doesn‟t take into account the production period, and therefore the quality buffer products could lead to a distorted representation and will be excluded from now on in this part. The outcomes of that new calculation are given in the following table.
Production plants: Steenderen Lomm Rain Total
Real obtained run length / EPQ
length (per SF -product) 112% 74% 75% 86%
Figure 14: Real vs optimal run lengths per SF-product per production plant
As a result, Aviko‟s total run lengths are improved, the real obtained run lengths are with this method 14% lower than the optimal length. That is an improved of 10%.
Another explanation can be found in the relation between the planned volumes and the produced volumes. Several problems in the manufacturing process can lead to lower produced volumes than was planned. In the table below the produced volumes will be divided by the planned volumes. 100% means that the manufacturing department was able to produce exactly the planned volumes, a percentage lower than the 100% means that the production department produced fewer products than was originally planned.
Production plants: Steenderen Lomm Rain Total
Produced volumes/planned
volumes 97% 100% 93% 97%
Figure 15: Produced volumes vs the planned volumes per production plant
The conclusion which can be made based on these numbers is that the production department are on average not being able to produce the planned volumes. The produced volumes are in total 3% less than was originally planned.
The next question is of the planning department makes a good planning. Do they plan the optimal volumes, or can the difference be explained by the planning department? The planning
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Production plants: Steenderen Lomm Rain Total
Planned volumes per batch/ EPQ
volume 115% 73% 81% 90%
Figure 16: Planned volumes vs the optimum volumes per production plant
100% means that the planning department plans the optimal EPQ volumes, a percentage lower than 100% means that the planning department gives on average a lower plan to the
manufacturing department than the optimal EPQ volume. Conclusion here is that the planning departments for Lomm and Rain plans lower volumes than was calculated as the optimum volume. A big proportion of the total difference between the optimal and real obtained run length can be explained by the made planning. The planning department plans on average a 10% less than the optimal volumes per semi-finished product.
Especially the planned volumes are significantly lower than the optimum volumes and explains a big proportion of the lower run lengths. These finding are discussed with the planning manager of Rain and he indicates that they only plan batches bigger than 125 tons and for those planned batches they mostly uses the bigger fries. As a results only the biggest potatoes can be used for those planned semi-finished products, and the smaller fries and the leftovers of the bigger potatoes are used for the by-products which are simultaneously produced on the production line. Those by-products aren‟t planned, but are included in the previous calculation method. The manager was interested in the run lengths without those by products, and therefore semi-finished with a smaller planned volume than 125 tons (36% of EPQ) are excluded for Rain. For
Steenderen semi-finished products with a lower average planned volumes of 100 tons (35% of EPQ) are excluded and for Lomm planned batches lower than 70 tons (36% of EPQ) are excluded. This adjustment results in the following numbers.
Production plants: Steenderen Lomm Rain Total
Planned volumes / EPQ volume 113% 111% 94% 106%
Figure 17: Planned volumes vs the optimum volumes per production plant with minimum planned volume filter
As a result, especially the planned volumes in Lomm and Rain are closer to the optimal run lengths. This filter doesn‟t have a huge impact for Steenderen. This last calculation can be useful for the planning departments of Aviko, because it gives a good overview of the average planned volumes in relation to the optimal run lengths. The numbers in figure 16 gives a better insight for Aviko as a whole, because in that calculation all semi-finished products are included. The obtained run lengths has an impact in the inventory costs and these costs will be discussed in the following section.
5.4.4 Optimal operational inventory costs
Aviko has in total 5 different stock types, the important and biggest one is the operational inventory. Therefore firstly the optimal operational inventory cost will be discussed and later in section 5.4.6 the other stock types will be discussed.
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To calculate the weighted optimal inventory per week per production plant in tons, the following formula will be used: number of semi-finished products at plant X * (1/2 * weighted optimal run length at plant X). The formula calculates that the total optimal operational inventory is 15.042 ton per week. In the next table an overview of the total inventory and interest costs per production plants is given.Production plants: Steenderen Lomm Rain Total Weighted
Weighted optimal run lenght per production plant 261 202 336 279
Number of semi-finished products per plant 64 18 29 111
Optimal inventory in tons per week (weighted) 8.352 1.818 4.872 15.042
Inventory and interest costs per week per ton * * * *
Total optimal inventory and interest costs in a year * * * *
Figure 18: Total optimal inventory and interest costs (* = censored) 5.4.5 Optimum order interval per plant
The next step is to calculate the optimum order interval, which is the optimum period of time for which future demand should be covered. To calculate the optimum order interval, all the product EPQ‟s will be divided by the corresponding weekly forecast first. The weekly forecast isn‟t always the same as the yearly forecast divided by 52. Some semi-finished products cannot be produced the whole year, and therefore the yearly forecast will be divided by the number of weeks a semi-finished products can be produced. As a result, the weekly forecast of those specific products will artificially be increased. In figure 19 the average optimum order interval in weeks is illustrated, in the appendix (under nr 6A) a more detailed overview of the calculation of the optimum length order interval is given.
As discussed in the previous section, the semi-finished products with a higher forecasted demand, do not count heavier in the optimum period of time for which future demand should be covered. To get a more accurate number it is a better to include the yearly forecast of the different semi-finished products. In this method, firstly all separate optimum order interval have to be multiplied by the yearly forecasted demand for that corresponding semi-finished product. The second step is to count up the total yearly forecasted demand for those products at the specific production plants. The last step is to divide the total sum of the optimum order intervals times the corresponding forecast by the total sum of forecast. As a result the weighted optimum order interval in weeks per production plant is calculated, the findings of both methods can be found in the next table. In the appendix (by nr 6) a detailed example for both methods for Lomm is given. The semi-finished products which are characterized as a quality buffer are excluded in this calculation, because Aviko has a separate target for those quality buffer products. In the next section more about the quality buffer products.
Production plants: Steenderen Lomm Rain Average Weighted
Average optimum order interval (in weeks) 12,8 7,6 11,9 11,8
Weighted optimum order interval (in weeks) 2,8 4,7 3,1 2,9
Figure 19: Optimum order interval per plant 5.4.6A “Other” stock types and targets
