Material Reliability Improvement and
Order Process Reengineering in VDH
Products B.V.
Qing-yi Wu
First Supervisor: Drs. G.D. Soepenberg
Second Supervisor: Dr. Jan Riezebos
Company Supervisor: Drs. Emiel J.M. van der Heide
Version: 21 January 2010
MScBA Operations and Supply Chains
Faculty of Economics and Business
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1. Introduction
VDH is a manufacturing company located in the town of Roden in the north of the Netherlands. The company was founded by Mr. van der Heide in the year 1978 as a small hand craft firm for producing thermometers and pressure gauges. Nowadays, the company mainly develops and produces mechanical and electronic devices and systems for measuring and controlling temperature, air pressure and humidity. Although the company has gone through many ups and downs in the past 30 years, by 2008 it had been developed into a medium-sized organization with 100 employees and a total turnover of 7.5 million (a growth of 3% since 2006 with a sales increase of 30%). The company primarily focuses on a reliable delivery of high quality products to the equipment installation industry.
In the past few years, VDH has experienced difficulties in delivering its products to its clients on time. This has been harmful to the image of VDH, but has also led to inefficiencies on the inside of the company. This thesis will study the order process in order to address the poor delivery performance which has been perceived by the company. In a prior research, Soepenberg, Land and Gaalman (2008) found that shortness of materials was one of the reasons why orders did not get delivered on time. This thesis revisits that finding and tests if a recent set of customer orders of 2008 obtained from VDH‟s time registration programme supports it. Building on Soepenberg et al., this thesis will then explore the causes of material unreliability in order to increase the level of delivery reliability.
considering extra-operational causes of the order process, recommendations are given for improving it.
1.1 The organisational structure
VDH has a horizontal organisational structure with short lines of communication and few hierarchical levels. Two directors form the management team which is in charge of the second layer of the organisation: the six functional departments. These functional departments are sales, after sales, research and development (R&D), business office, purchasing, and production. The third layer of the organisational structure consists of inventory, different production lines and the expedition department. The purchasing department has authority over the inventory department and the production department is responsible for different production processes and expedition. The overall organizational chart is presented in Figure 1.
Business Office Research & Development Aftersales
Sales Purchasing Production
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1.2 Products
VDH supplies a wide range of standard instruments to the equipment installation industry. It produces instruments which can be applied in the areas of: cooling and climate control, agriculture and horticulture, transport cooling, spray booths, fruit ripening and storage, bakeries, process technology, manufacturing machinery and heating and ventilation.
In total, VDH produces 22023 differentiated end products. These end products include both mechanical and electronic devices. Mechanical devices are made on a measuring gauge, while electronic devices are built based on different types of printed circuit boards (PCB‟s). Although these two types of devices sometimes serve for the same applications, the process for making the two types of devices is completely different. Finally, besides standard products, VDH has also built up a reputation for the development and production of custom-made instruments and control systems for many applications.
1.3 Order Penetration Point (OPP) and Order Process
Figure 2 indicates that the higher (further to the left) the OPP locates in the manufacturing stage, the higher the extent to which a product is customer-specified. MTS products are defined as standard designed products which are produced according to market demand forecast. ATO products leave customers varieties of choices with a relatively short delivery lead time. The customisation is usually completed in the assemble stage. MTO products are the standard designed products which are linked to specific customer orders. In the MTO case, the customisation is configured earlier in the manufacturing stage than ATO. Companies implementing this manufacturing situation will be able to offer a wide range of products and the second highest extent of customisation. The highest extent of customisation is the ETO manufacturing situation. ETO products are the completely newly designed specials which are only built and configured for specific customers.
Internally, the manufacturing situation in VDH is only categorised into ETO, MTO and MTS. For ETO products, the design and testing processes are accomplished in the R&D department. For MTS products, all the products are manufactured before orders are received by VDH. According to the concept of these three production strategies, VDH estimates that 90% of its products require a MTO production strategy. VDH can
Manufacturing Engineering Component Assembly Shipping situation manufacturing
MTS OPP
ATO OPP
MTO OPP
ETO OPP
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thus be labelled as a MTO company. In order to illustrate the manufacturing situation of VDH clearly to the reader, we insert the OPP into the basic form (Figure 3).
Figure 3: Basic Form with OPP
R&D Purchasing Production Expedition
2. Research Design
This chapter intends to identify the management problem, research question and conceptual model. First, based on several interviews and conversations which took place over a period of time with the directors, managers and operational employees, the management problem is identified. Building on a general analysis and exploration of the management problem, the research objective is then formulated. Finally, the research question is addressed according to the research objective.
In order to execute this research, a research model which divides the research into several stages is required. Next to the research model, a conceptual model is constructed. The conceptual model illustrates the research object and inter-relations between every identified factor. Based on the conceptual model, the research is further divided into a few sub questions.
2.1 Management Problem
With the increase of market competition, make-to-order (MTO) companies are forced to deliver reliable products with high efficiency (Welker, 2004). In the past years, VDH has experienced difficulty in delivering products on time to its customers. This poor delivery performance reflects negatively on the company from the perspective of outsiders, but also has negative effects on the company on the inside.1
Inefficiencies such as unnecessary control activities between sales and production, extra delivery costs due to the split of orders, urgent orders which are generated internally for making up the lost time in waiting for materials or capacity, and finally
1 VDH frequently receives customer complaints about its delivery performance. One of VDH‟s
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unnecessary walking and hand movements by operators are perceived to exist in the company.
It is thus of the great interest for the director to find out solutions to improve the poor
delivery performance.
Having defined the management problem, it is possible to move onto the next stage: defining the research objective.
2.2 Research Objective
VDH suffers from poor delivery performance which thus leads to internal inefficiencies, and has negative effects on the way in which outsiders perceive the company. In order to go into detail of how its poor delivery performance can be improved, I begin by defining the research perspective and objective.
A process can be defined as “any activity or group of activities that takes an input, adds value to it, and provides an output to an internal or external customer” (Harrington, 1991). With respect to the delivery reliability issue in VDH, it is of interest to this research to investigate the order process of the company to find out if there is a gap between required and actual performance. The order process is the process in which customer orders are translated into production orders, resulting in the delivery of goods according to customer requirements for quality, due date, and quantity (Welker, 2004). The order process for VDH is a major part of a general order flow. In Figure 4, the order flow and order process of VDH are illustrated.
Several departments are involved with the delivery of products. These departments are sales, R&D, purchasing, inventory, production and expedition. Figure 4 clearly shows the flow of an order between these departments.
After sales accept a customer order, it also generates a production order. On the production order, information such as quality, quantity, products combination and delivery due dates are listed. The same production order is delivered to purchasing, inventory and production departments.
Sales R&D Purchasing Inventory Production Expedition
Order process
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For the purchasing department, the production order is further translated into a purchasing order to its suppliers. The purchasing order lists all the components which need to be outsourced. In the meanwhile, based on the production order information, the Bill Of Material (BOM) is generated and attached to the original production order. All the materials which need to be prepared before production are listed on the BOM. These two files are sent to the inventory department and it is this department‟s responsibility to prepare for materials for the order. The production department needs to plan capacity for the order. Finally, the products are made and expedited to the customer. For MTO products, the R&D department can be skipped since no engineering work is needed.
In a prior research, Soepenberg, Land and Gaalman (2008) investigated VDH Products (company c) in order to form a general framework for diagnosing delivery reliability performance of MTO companies. They mainly focused on workload planning and control in the production stage. Through a quantitative diagnosis, they found out that one of the reasons for the delay of orders was the shortage of materials. I therefore argue that by investigating the order process (the process before production), especially the material preparation stage, it is possible to improve the order delivery performance.
dispatch orders which have complete materials to the shop floor. The rest of the orders should be pooled in front of the shop floor to wait for unavailable materials which still need to be delivered by suppliers.
An experiment after implementing the suggested solutions showed that the entire throughput time of orders in the production did shorten. However, another significant issue then arose in the company. Firstly, a large amount of orders with unavailable materials were pooled in front of production for a long time and were not processed. Secondly, labour and machines in the production were idle due to the lack of dispatched complete materials orders. By implementing the suggestion of Soepenberg et al., a serious shortage in material availability was revealed. I thus conclude that the order process before production should be reengineered in a way that unavailable materials are eliminated.
In order to improve the delivery reliability the following research objective can now be defined: Explore the causes of material unreliability at VDH, while giving
suggestions for reengineering the order process in order to increase the level of material reliability. It is important to clarify two issues here. First of all, since
material unreliability is perceived both in purchased on order and purchased on stock materials, both types will be under our consideration. Secondly, semi-produced materials which flow from production department back to inventory department are excluded from this study. In VDH, semi-produced materials are the standard goods stored or await final operations in the production process according to customer specifications. Thus the research will mainly focus on the order process, and the production process will not be our main concern.
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2.3 Research Question and Research Model
The research question follows from the research objective and is from here defined as:
What are the causes of material unavailability in VDH and in what way should the order process be reengineered in order to improve the level of material reliability?
In order to answer the research question, a proper research model needs to be designed for the purpose of analysing the order process. According to Wijngaard (2000), an original process analysis is formed into 4 stages. Considering the fact that VDH requires diagnosis for its poor delivery reliability as well as recommendations to improve it, an extra stage is added in the end of the process form. An overview of the modified process analysis form is displayed in figure 5:
The first step of process analysis consists of two sub-steps, (1) to determine the mixture of relative importance of performance objectives for the process, and (2) to measure the actual performance. Slack et al. (2008) distinguished the following five performance objectives: Quality, Speed, Dependability, Costs and Flexibility. The reason for taking this sub-step is that: by showing the relative importance of performance objectives, one is reminded that suggestions for reengineering the process based on the process analysis should not harm the other performance
Objectives & Performance Performance Analysis New Process Suggestions Extra Operational Causes Process Identification
objectives. Although VDH has recognised delivery reliability as the major performance issue, it is still necessary to measure the actual performance to confirm the existence of the management problem. A quantitative analysis based on data supplied by the company will be applied to complete this task.
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2.4 Conceptual Model
The conceptual model serves two functions in this research. Firstly, it gives a clear understanding of what is going to be researched. Secondly, it enables readers to understand how the research question can be answered. The factors and relative relations are shown in Figure 6.
Before exploring the factors and inter-relationship in the conceptual model, it is necessary to introduce the theoretical knowledge behind the model. In this way, readers can have a clear idea of how the conceptual model is built up.
Delivery reliability
With respect to the management problem, only the delivery reliability will be taken into consideration in this research. Delivery reliability can be defined in different ways. For convenience, one of the most comprehensive methods of measuring this indicator is taken. According to Slack et al. (2008), delivery reliability (which can also be expressed as dependability) for every single order is a straightforward concept: (Material) Due Date Assignment (Material) Due date Realisation Customer Wish Information Process Activities Process Control Material Reliability Non Value-added Activities Value-added Activities
Dependability = due delivery time – actual delivery time
Over here, dependability equals zero when delivery is on time. Positive dependability means it is early and negative means it is late. Delivery reliability performance of an organisation is measured by the percentage of orders delivered late in a certain period (Soepenberg, 2008). In our research, both measurements will be used to measure delivery reliability of VDH. The methodology and results will be presented in chapter 3.
Material reliability
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order acceptance lead time does not affect the level of material reliability. It is thus clear that longer assigned material preparation lead time and shorter realised material preparation lead time will result in high material reliability performance, and vice versa.
Material due date assigning and realising in the conceptual model
As discussed in the previous section, due date assignment and realisation are the two components of delivery reliability. In this conceptual model, the due date assigning is directly related to the assigned material due date. By subtracting the assigned production and expedition lead time from the total assigned delivery time, the material preparation lead time is calculated (see Figure 7). Since production and expedition time in VDH are only scheduled for one week in most of the cases, the assigned material preparation due date is simply one week before the assigned due date.
Assigning Material Due Date in VDH
VDH is regarded as a differentiator which provides high quality and customer-specific products in the market place. Due to its strong market position, it is usually able to negotiate longer delivery due date with customers before or after the orders have been accepted. The assigned due date is simply a result of the negotiation between sales and customers. First of all, customers provide their most favoured delivery due dates to sales. Based on the information of material and capacity availability sales gain from purchasing and production departments, sales try to
Material Preparation Lead Time
Order Acceptance Date Material Due Date Order Due Date
Production & Expedition Lead Time=1 Week
Figure 7: Calculating Delivery and Material Reliability
negotiate a new possible due date with customers if they find out the customers‟ wishes cannot be realised. However, most of the time, Sales is not able to estimate a realistic due date and often, orders are still delivered late.
Realising Material Due Date in VDH
In order to find out how the material due date is realised in VDH, the within-process activities and control of the overall order process need to be studied. This also corresponds to the second and third stages in the research model. By studying the within-process activities, non-value-added activities will be detected in two ways. First of all, activities will be compared to the lean production criterion. Secondly, company-specific non-value-added activity may also exist in VDH. These activities may not be described in the lean concept but still don‟t have any value to customers. The diagnosis of these two types of non-value-added activities will contribute to the performance analysis stage. The other part in the performance analysis stage is the planning and control of the order process. The control of the process concerns three aspects of the order process: first of all, the sequence of within-process activities will be discussed; secondly, the rules which are taken to conduct within-process activities such as order dispatching rule will be explored; and finally function authorisation issues will also be taken into account.
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its arguments and research methods. The next section will explain the business process reengineering and lean production concept to the readers.
Concept: Business Process Reengineering (BPR)
In the early 1990s, M. Hammer introduced the idea of Business Process Reengineering (BPR) to the business world (Slack et al. 2008). BPR is defined as: „…the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical, contemporary measures of performance, such as cost, quality, service and speed.‟ In general, business processes can be divided into three types: core processes, support processes, and management processes (Davenport, 1993). BPR concentrates on core business processes and uses specific techniques such as lean concepts, process flow charting, critical examination, operations network management, Total Quality Management (TQM) to redesign the process. For an enterprise, core processes are composed of three factors: (1) the product development process, (2) the order fulfilment process, and (3) the customer service process (Lin & Shaw, 1998). In this research, the order process is a sub-process of the order fulfilment process and I will address my main focus on this sub-process. The BPR concept is used in this research to identify techniques to diagnose the core process, i.e. the order process.
Concept: Lean production
According to Schönsleben (2007), lean production is defined as the minimization of all required resources (including time) for the various activities of the company. It involves indentifying waste and eliminating it. Schönsleben defines waste as all activities in development and manufacturing within the entire supply chain, extending to and including the consumer, that are non-value-adding from the customer‟s point of view. Since VDH‟s customers require reliable deliveries, any activity which harms delivery reliability is labelled as non-value-added. In this research, non-value-added activities within the order process will be detected and eliminated in order to improve the material and delivery reliability in VDH. In the meanwhile, elimination of activities also means shortening the average lead time. Although the goal of this research is to improve the material reliability but not to shorten the average lead time, the shortened average lead time helps to improve delivery performance. Furthermore, the elimination of non-value-added activities also helps to simplify the control of the order process. In other words, the control of the order process only has to take value-added activities into account.
2.6 Sub-questions
Now that the conceptual model has been built up, several research sub-questions can be developed. These help to divide the research into several parts. Each of them are used to answer one sub-question. Collectively, these sub-questions help to answer the main research question. For this paper, the following sub-questions are applied:
1. What is the relative importance of delivery reliability with respect to the performance objectives?
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3. What are the control-related causes in the order process that lead to material unreliability?
4. What are the extra operational causes which result in material unreliability?
Eventually the main research question (what are the causes of material
unavailability in VDH and in what way should the order process be reengineered in order to improve the level of material reliability?) can be answered based on the
answers from sub questions. Once the causes of poor material reliability are identified within the order process, it is possible to reengineer the process in order to improve the material reliability performance and further the delivery performance. Discussions with employees who are involved in the activities in the sub-process, and suggestions from previous literature which concern eliminating waste and control of the order process will provide main suggestions for the reengineered process.
2.5 Data Collection
In this research, both quantitative and qualitative data need to be collected. For quantitative data, the customer orders of VDH in the year 2008 are exported from VDH‟s time registration programme. In chapter 3, this customer order data file will be used to find out the real delivery and material reliability of VDH in 2008. The qualitative data is mainly composed of interviews with the employees. The interview information is first hand data to study the actual activities in the order process.
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3. Objectives and Performance
This chapter describes the first step of the process analysis. In line with the research model, two separate activities are conducted at this stage. Firstly, the relative importance of all the performances in VDH will be studied. Although VDH has already decided to focus on improving delivery reliability, it is still useful to study all the performance objectives of the company, as this prevents the research from leading to conclusions on the order process which will harm other performance objects. Secondly, the poor delivery issue will be confirmed by means of a quantitative data analysis. The quantitative analysis also gives insight to the actual delivery performance of VDH to its customers.
3.1 Relative Importance of Delivery Reliability to Other Performance
Objectives
There are different methods available for analysing the relative importance of performance objectives. Over here, I take a step-wise approach to investigate their relations and map the most important performances in a picture. In order to have a clear understanding of quality, speed, delivery reliability, flexibility and cost, it is first of all important to define the measurement of the five operations performance objectives in the context of VDH. The description of the measures per indicator is shown in table 1.
Indicator Context specific objective interpretation
Quality Percentage of products which exhibit defects
Speed The time sales have accepted the customer order to the time the order has been shipped
Reliability Percentage of orders delivered late compared to the scheduled due time
Flexibility Short-term possible percentage of deviation from an
employee‟s or a production infrastructure‟s average capacity
Cost Unit cost of a product
The next step is to link the company‟s competitive strategy to these context-specific performance objectives and identify the key performance indicators. Order-qualifying and order-winning criteria seem to be the most appropriate analysis tool to address the company‟s competitive strategy. According to Slack et al. (2008), order-winning factors are things that directly and significantly contribute to winning business; while order-qualifying factors are the aspects of competitiveness where the operation‟s performance has to be above a particular level just to be considered by customers. The order winner factors are usually regarded as critical factors for a company‟s competitive strategy.
As most production companies in high labour cost countries, VDH faces fierce competition from competitors from low income countries. For these types of companies, the only way to win orders over low cost competitors is to differentiate their products to fulfil special customer needs. At VDH this differentiation strategy is represented by customized products with high quality standards. VDH also bears competition stress from direct competitors in the differentiated market. Thus, being reliable on delivery while still being able to provide reasonably priced products compared to its direct competitors (cost related) become especially critical for VDH to win market share. To sum up, the order-winning factors are reliable delivery time and cost; while the order-qualifying factors are quality, speed (in terms of a reasonable delivery time) and flexibility. Thus the company‟s competitive strategy is to reliably deliver its products while also providing a reasonable low price.
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efficiency. However, the lack of material issue which has been identified as a result of delivery unreliability, also results in people in production waiting for materials. These waiting times are subject to labour cost and therefore further add to the unit cost of a product. Thus, there is a positive relation between delivery reliability and cost efficiency. In other words, it can be concluded that the suggestions I give in the later stage of the research on improving delivery reliability by means of improving material reliability will also lower the unit cost of product. This win-win improvement can be depicted in an efficient frontier model: see Figure 8.
C
o
st
Delivery reliability
It is finally important to mention here that VDH itself mainly focuses on cost efficiency when it comes to winning orders. Even though the company seems to realise that delivery reliability is important in order to gain and maintain market share, the company still puts the priority on cost efficiency instead of delivery reliability. This can be seen as well from the fact that the company continuously measures cost efficiency, but not delivery performance.
A good example of this preference is the case mentioned in the research objectives section. In 2008, Soepenberg et al. gave VDH suggestions on shortening throughput time in production. One of their suggestions was to only dispatch orders with
complete materials to production. In an experiment, it turned out that the result of this often was that workers in production were idle due to a lack of orders to be processed in the shop floor. As idle workers in production increase labour cost and unit cost, the company decided not to adopt Soepenberg‟s suggestion. More value was attached to cost performance than to delivery reliability.
3.2 Actual Performance at VDH
Although the poor delivery performance of VDH is recognized by its manager and some of its customers, it is still necessary to find concrete quantitative proof from historical data supplied by the company so that the actual delivery performance is measured. After that, it is possible for the company to set a goal for material reliability and consequently delivery reliability.
In this sub-section, two data analysis results will be presented. First of all, the data results will show the levels of delivery and material reliability. Secondly, a further statistical analysis will test for the strength of the relation between material reliability and delivery reliability. The second result helps to identify the order process as our research object since this process mainly contributes to material reliability.
3.2.1 Actual Delivery and Material Reliability
As introduced in the previous chapter, delivery reliability is used here to measure the delivery performance in VDH. In the delivery reliability formula, reliability is calculated as scheduled delivery time minus actual delivery time. In VDH‟s data file, the scheduled delivery time is defined as the planned delivery date while the actual delivery time is defined as the production completion date.
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been grouped in sections of 7 days, ranging from -105 to +105.2 When an order is grouped among a delivery reliability of 0, it means its delivery reliability is anywhere between 0 and +7. Coincidentally this is also the range of delivery reliability which occurs most often.
0 200 400 600 800 1000 1200 -105 -98 -91 -84 -77 -70 -63 -56 -49 -42 -35 -28 -21 -14 -7 0 7 14 21 28 35 42 49 56 63 70 77 84 91 98 105 F re q u e n cy Delivery reliability
Over the entire 4460 customer orders that occurred in 2008 (including orders are not shown in above frequency graph), 73.8% orders were perceived to be late. The average delivery reliability for all the orders in the year 2008 is -14.4 days with a standard deviation of 35.5 days. The majority of late orders are within 100 days late. The high standard deviation shows that there is also a high fluctuation in the delivery performance among all the orders. We thus conclude that the poor delivery performance in VDH consists of both a high percentage of lateness and high fluctuation of days in delivery behaviour. Appendix 1 shows some further descriptive statistics of delivery reliability in VDH.
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For clarity, 1.7% of all orders, or 77 out of 4460 orders in total, have been left out of the frequency graph, as these orders fell outside of the (-105 to +105) range. 74 of these orders had delivery reliability of lower than -105 (mean: -162.1, standard deviation: 91.6), 3 of them had delivery reliability far above +105.
The material reliability is measured as the assigned material preparation lead time subtracted by realised material preparation lead time. As agreed by VDH, the assigned material preparation lead time is simply 7 days earlier than the planed delivery date. In the order data file of VDH, the material availability date is recognised as the realised material preparation time. The measurement of material reliability can be shown in the equation below:
Material reliability = planned delivery date - 7 days - material availability date
The actual level of material reliability in VDH is illustrated in figure 10. Here, material reliability has been grouped in the same way as delivery reliability, ranging from -105 to +105 and grouped in classes of 7 days.3
0 200 400 600 800 1000 1200 -105 -98 -91 -84 -77 -70 -63 -56 -49 -42 -35 -28 -21 -14 -7 0 7 14 21 28 35 42 49 56 63 70 77 84 91 98 105 F re q u e n cy Material reliability
3 For clarity, 2.3%, or 101 out of 4460 orders in total, have been left out of the frequency graph, as
these orders fell outside of the (-105 to +105) range. 98 of these orders had delivery reliability of lower than -105 (mean: -179.2, standard deviation: 91.7), 3 of them had delivery reliability far above +105.
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Compared to delivery reliability, material reliability shows a worse performance. Over the 4460 orders which took place in 2008, 96.2% of the materials were not available on time. The average material reliability is -24.5 days with a standard deviation of 39.0 days. The high percentage of material unavailability with a high fluctuation of material reliability contributes to the measurement of poor material performance in VDH. Appendix 2 shows some further descriptive statistics of material reliability in VDH.
3.2.2 Relation between Delivery and Material Reliability
Based on the result from data analysis on delivery and material reliability, we can possibly assume that there is a high correlation between delivery and material reliability. This conjecture is further proved by the statistical data analysis. We simply set delivery reliability and material reliability against each other for all orders in a scatter plot to see if there is an obvious pattern which can be perceived.
-150 -100 -50 0 50 100 -150 -100 -50 0 50 100 Ma te ri a l r e li a b il it y Delivery reliability
Figure 11 shows the relation between delivery and material reliability. A linear trend line is added. As in Figure 9 and 10, orders with values of lower than -105 or higher than +105 have been left out for the purpose of clarity. As Figure 11 shows, the
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4. Process and Performance Analysis
In the previous chapter, material reliability was identified as the main research objective. Since on the one hand, material acquisition is initiated by order acceptance, and on the other hand both order acceptance and material acquisition are the two main components of the order process, the focus now turns to the order process stage.
In this chapter, I will analyse the order process in two ways. Firstly, I will give a detailed description of the order process. Second, based on the description of the activities in the order process and according to the conceptual model depicted in chapter 2, I will distinguish the value-added as well as non-value-added activities. This is a micro-based analysis which only focuses on individual activities without linking one activity to another. Finally, I will analyse the order process as a whole from a planning and control point of view in order to identify more factors which result in material unreliability. The goal of this analysis is to provide a clear view to the readers about causes which lead to poor material reliability in VDH. In the end of this chapter, a short summary of all the operational causes which are detected by this diagnosis will be presented.
4.1 The Order Process
In order to have a deeper understanding of the order process in VDH, I here conduct an analysis called “staple yourself to the order” which is described by Riezebos (2004). In this way, a detailed description can be given of:
The activities performed (what, when)
The actor involved (who)
The resources used (where)
The signals that initiated the activity (why), and
The “staple yourself to the order” analysis can be efficiently depicted in an Actor-Activity-Diagram (AAD). Figure 12 shows the actual AAD of the order process which takes place at VDH.
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The AAD can be divided into two actor activity groups. The first group is composed of customers and sales. They are responsible for assigning the delivery due date and consequently the material due date for the entire order flow. The second group is composed of the purchasing department, suppliers, incoming goods and the inventory department. Their responsibility is to realise the delivery due date which is assigned by the customer and sales department.
4.1.1 (Material) Due Date Assigning
In the order acceptance stage, up to three activities take place between sales and customers, as listed in the work book4 of VDH‟s sales department (over here, we only consider the orders which are accepted by VDH). The first activity is the request of an order by a customer from VDH. The second activity is for sales to accept the order and negotiate further agreement on details such as product specification, price, quantity, payment and shipping methods, and delivery due date. The third activity is for sales to put the order information into the information system once all details have been determined.
As mentioned previously in chapter 2, in VDH, when the sales department is informed by the purchasing department of any unavailability of materials, they will negotiate a new delivery due date with the customer. This new delivery due date will replace the old one in the information system. These two activities do not necessarily have to happen if the purchaser did not perceive any possible delay of material delivery from the suppliers. It is also important to mention that once the due date is changed, our delivery reliability calculation is also changed accordingly. In other words, if VDH is able to meet the second agreed delivery due date for an order, that order is considered to be delivered on time.
4 The work book is part of VDH‟s ISO documents which clearly states the functionality, work flow
4.1.2 (Material) Due Date Realising
The due date realisation activities mainly show the flow of materials before production starts. Once sales have put the order information into the information system, the purchasing department is immediately notified about the new order. The material preparation stage is initiated from the moment the purchasing department gets the order information. A material preparation list shows the material availability status and according to the information on that paper, the purchaser starts acquiring unavailable materials. After the purchasing requirements are accepted by VDH‟s suppliers, purchasing orders information is input into the information system with a new purchasing order number.
Even though the AAD above does not show a difference between purchasing orders, it is still important to recognise two separate types of purchasing orders in the information system of VDH. One is purchased for the materials on stock and the other one is for the materials on order. Materials which are purchased on stock have two purposes. The first purpose is to acquire materials for MTS orders. The second purpose is to purchase materials on stock which are needed for manufacturing semi-produced products in the MTO situation. In this research, we only take purchase on stock for the second purpose and purchase on order into account since our research focus is on MTO manufacturing situation. The purchasing order contains information such as product types, quantity, price, and delivery time. If the purchaser detects any possible delay of any material arrival, he is supposed to notify the sales department. This activity does not have to happen if purchaser did not detect any delay of materials.
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materials are combined into one activity due to the fact that these two types of purchasing orders are indifferent to suppliers. However, it‟s still important to distinguish them internally since these two purchasing activities are not initiated by the same incidents: the purchase on order activity is initiated by a new customer order request while the purchase on stock activity is initiated by empty stock in inventory.
In the incoming goods and the inventory department, materials purchased on stock and on order are also dealt with separately. When materials arrive in the company, the employees responsible for registering the material information have to distinguish the purchasing order type and register it accordingly. Incoming goods and inventory department has the responsibility to prepare materials on order and deliver them to the shop floor. The material dispatching activity happens multiple times depending on the material availability time. In other words, people in this department have to walk to shop floor for multiple times to deliver the materials for an order which has already started in production. Materials of an order which are still unavailable after the production has started are labelled as “manco” in VDH. It is interesting to mention here that when “manco” materials exist for too long for an order and the order becomes urgent according to the assigned delivery due date, production is allowed to “borrow” materials assigned for other less urgent orders in order to complete the current one.
4.2 Diagnosing the Order Process
section, readers should have a clear image of the value-added and non-value-added activities in VDH. The second way is to diagnose the process as a whole. A planning and control perspective will be the pillar to support the analysis of the entire order process. Perspectives which will be taken into considerations are mainly the sequence of activities and responsibilities of actors in the order process.
The lean production criterion is widely regarded as the tool for eliminating waste in the supply chain to improve speed and efficiency. Thus our action of eliminating non-value-added activities does not directly contribute to the improvement of material reliability. However, it does ensure us that all the activities in the order process which are being controlled are value-added. After all the value-added activities are identified, it is important to control these activities so that the entire order process could run smoothly.
4.2.1 Non-value-added Activities for (Material) Due Date Assigning
Higgins et al. (1996) determined that one of the most important issues for companies is to be able to assign accurate delivery dates to customers. Thus the delivery due date assigning must be based upon the planning constraints facing the company (Rudberg et al. 2004). Generally speaking, these constraints are categorized into two terms: material constraints and capacity constraints. Since the focus of this research is on material reliability, only material constraints are considered. Material constraints are those related to limited availability of material such as raw materials, modules, finished products, etc.
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initial due date assigning activity directly leads to delivery unreliability. It is also shown in the AAD in Figure 12 that the sales department is able to discuss a new delivery due date with customers when new material availability information is provided by the purchasing department. From that I conclude that only the second discussion on delivery due date is final to customers and thus labelled as value-added. In other words, the delivery due date assigning activity without considering the material constraints is not value-added and should consequently be eliminated from the order process.
4.2.2 Non-value-added Activity for (Material) Due Date Realising
Literature on lean production provides a framework for describing various types of non-value-added activities (described as waste or inefficiency) found in processes. Waste includes unnecessary inventory, wait times, moving activities, and physical work not suited to human beings (Schönsleben, 2007). In the order process of VDH, non-value-added activities which we are able to detect are mainly unnecessary moving activities.
In the (material) due date realising stage, the multiple moving activities taking place in the incoming goods and inventory department account form the most obvious waste. The first activity which is identified as multiple moving activity happens at the incoming material stage. Employees who are responsible for registering incoming goods have to register materials delivered from suppliers of an order for multiple times.
creates a longer handling time. It thus becomes non-value-added, and it is therefore necessary to eliminate the extra registering activities for incoming materials of orders. Furthermore, as Lin et al. (1998) stated, production requires the arrival of different materials from different suppliers in the bill of materials to be planned in order to reduce time and cost. Rivera et al. (2007) also confirmed this point of view by stating that the flow from a lean supplier to a lean customer may not be lean if the two parties are not synchronized. From this point of view, this inefficient way of dispatching materials also increase inefficiency in production. Even though production process is not the focus of this research, it is still important to mention that the multiple-dispatching activity has a negative effect as it creates waste for both the order and production processes.
The last non-value-added activity is detected in production. Even though production is excluded from the order process in VDH, the non-value-added activity which is going to be identified is a direct consequence of material unreliability. Since “manco” materials have a high level of existence for orders which have been dispatched to production, workers in production have to wait for materials to arrive. This waiting time accounts for waste according to the lean concept. In order to eliminate this idle time, VDH has the policy to allow workers to borrow “manco” materials from other orders which have a less urgent delivery due date. However, this borrowing activity leads to other orders having “manco” materials and does not solve the issue of waiting time for materials in general. Consequently, more customers are affected by it. Thus the borrowing activity should also be eliminated.
4.2.3 Planning and Control in the Order Process
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According to Schönsleben, for companies in this group, long- and medium- planning have a medium to low importance. However, short term planning and control by means of control of operations are still necessary in the order process in order to improve the material reliability in VDH. Schönsleben (2007) stated that the term “control” indicates regulation or even just coordination. In this thesis, I translate regulation to work flow and rules, responsibility and functionality of an actor in the order process. Coordination is defined as the sequence of activities in the order process and order information exchange between actors. In the coming section, I will analyse the entire order process in departments.
Sales department
The value-added and non-value-added activities diagnosis in the previous section revealed that only the second discussion on delivery due date with customers is value-added. However, this activity is not a formal procedure in VDH‟s sales department‟s work book. Therefore the sales department only contacts customers to discuss a new delivery due date based on material availability when there is time to do so.
Purchasing department
As mentioned in the previous section, registering incoming materials of an order multiple times is regarded as a non-value-added activity. This non-value-added activity in the incoming goods and inventory departments is initiated from the purchasing department. It is the purchaser‟s responsibility to come to an agreement with suppliers about material arrival times in order to synchronise the material flow. The synchronisation of material flow incurs minimal inventory and less delay (Lin & Shaw, 1998). This statement is only valid for purchasing on order materials.
During the interviews held with employees who are responsible for purchasing activities, it was often mentioned by employees that there is a lack of materials which are purchased on stock for MTO customer orders. By further investigation, it is found that VDH only replenishes its purchased on stock material once the last piece of material is assigned to an order. In other words, the reorder point for the purchased on stock materials is simply at the stock quantity of zero and no safety stock is hold by the company. Since it takes time for suppliers to deliver the purchase order, this purchasing behaviour leads to a possibility of material on stock unavailability for orders which are accepted after the last one. The unavailability of materials which should be on stock for MTO customer orders directly harms the material reliability of VDH.
Incoming goods and inventory department
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4.3 Summary of Operational Causes
The causes which result in material unreliability will be summarised in the table below.
Actor/Department Non-value-added Activities Lack-of-control Process
Sales - Agree on delivery due date when material information is not provided.
- Sales are not fully engaged into assigning a reliable due date.
Purchaser X - No synchronised (purchase
on order) material delivery date
- Reorder point for purchased on stock materials is too low. Inventory - Multiple times of registering
incoming goods. - Multiple times of dispatching materials to production.
- Materials are not prepared according to delivery due date
Production - Borrowing Materials X
5. Analysis Extra-operational Causes
Before suggestions are given on redesigning the order process in VDH, we have to understand why the order process is designed in the current way. As mentioned in the research model, many causes can result in inappropriate process design. This inappropriate process design usually occurs in the information systems available for planning and control, the educational level of employees, organizational structure and communication systems, etc. In this section, we mainly focus on the information system VDH is using.
5.1 Information System
As the smoothness of the information flow inside of a business has become more and more important nowadays, implementing an appropriate information system has become a necessity. Arguably, the most significant system is Material Requirements Planning (MRP) based (Slack et al. 2008). Enterprise Resource Planning systems are developed based on MRP and they are used to manage vast amounts of information generated, not from the operations function, but also from all the other functions of the business.
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5.2 Current Information System of VDH
Instead of having one integrated ERP system, VDH at this moment is using an ERP system which consists of three separate elements. They are the accounting system, a material resource planning (MRP) system and the capacity registration system. The MRP system has been used by VDH for more than 20 years. The operating interface is still under the Microsoft DOS environment. Since this system does not register and plan capacity for production, VDH decided to implement a new capacity registration system in 2006. It has been fully functional since 2008.
Since this research has the goal to improve material reliability before production starts and only the order process is considered to be our research objective process, only the MRP system is relevant to be investigated. In the next section, our focus will therefore only be put on the MRP system of VDH.
(Material) Due date assigning
An efficient information system should be able to provide sales information such as availability of materials and capacity at the stage of order acceptance. However, as mentioned in previous chapter, sales do not get the information of material availability when they first assign delivery due dates to customer orders unless they get noted by the purchasing department. Unfortunately, sales themselves do not have the possibility to acquire material information from the MRP system. The system only authorises the purchasing department to get the material availability information. This system-related defect directly leads to unreliable delivery due dates to customers.
(Material) Due date realisation
products on the Bill Of Material. People working in the purchasing department must enter multiple times the item number to investigate which sub-components are not available. This system defect leads to tedious work on searching for material availability information. Secondly, it is also mentioned that the purchasing department does not hold a safety stock for materials which are purchased on stock for MTO customer orders. The reasons for this are twofold. First, VDH simply does not implement the safety stock inventory method. Second, the MRP system does not have a function which allows purchasing to set a safety stock line.
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6. Suggestions for Reengineering the Order Process
This final chapter has two functions in this thesis. Firstly, based on the cause diagnosis which has taken place in the previous chapters, I shall provide corresponding suggestions to improve those causes, both operational and extra-operational. This completes the last step in the research model which I presented earlier. Secondly, this chapter also serves as the conclusion for the thesis.
In the next sections, I will firstly give suggestions on implementing a new information system. With the support of an appropriate information system, I will then depict a new AAD which illustrate my suggestions on eliminating non-value-added activities and adding new value-added activities for different actors. The reengineering of the order process is completed by giving suggestions to work flow, rules, and responsibilities.
6.1 Suggestions for the Information System
As introduced in the previous chapter, VDH does not have a sophisticated enough system to provide all the information which is necessary for due date assigning and the due date realising stage. In order to improve the material reliability, VDH should search for a new ERP system which provides the following functions:
1. Sales people are able to see material availability when a new customer order arrives.
2. The system allows using the order point technique5 to trace and order materials which are purchased on stock for MTO customer orders.
3. The new system records the arrival time of all the materials and enables VDH to adjust its purchasing strategy accordingly.
5 The order point technique or order point system is used for items with stochastic demand that is
After an appropriate ERP system is implemented, further changes can be made on activities, work flow, working rules and responsibilities.
6.2 Suggestions for Activities
Before the suggestions for activities within the order process are presented, I will first illustrate the new ADD. This is shown in Figure 13.
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During the (material) delivery due date assigning state, one major improvement is that sales will agree on a delivery due date with the customer based on material availability information provided by the new ERP system. Compared to the current situation which was depicted in chapter 4, delivery due date is no longer assigned immediately after the order has accepted. Instead, this due date promising activity is initiated by the notification of material availability information. The material availability information helps sales to assign a reliable delivery due date so that material reliability is improved.
The second improvement is that multiple moving activities in the inventory department are eliminated. Arrival of materials for both purchased on order and on stock for MTO customer orders will be registered for less times since purchasing orders are synchronised. Another eliminated activity is the order dispatching activity. Only orders with complete materials are allowed to dispatch to production. This suggestion is consistent to Soepenberg et al. (2008)‟s suggestion earlier. After the order process reengineering, the effect on delivery reliability of this suggestion will be stronger.
Finally, the borrowing “manco” activity in production is also eliminated. In this thesis, I stated earlier that even though activities in production do not belong to the order process, this borrowing behaviour is initiated by material unreliability. In order to fully eliminate this non-value-added activity, more control method should be used in production. The manager in the production may start a rewarding system with the goal of diminishing borrow “manco”.
6.3 Suggestions for Planning and Control
In the (material) delivery due date assigning stage, responsibilities of assigning
by two sides. First of all, sales is able to access material availability status before delivery due dates are assigned. Secondly, as the most important information of a customer order - delivery due date hasn‟t been assigned, sales are obliged to contact customers and assign delivery due dates after material information is available. This two-sided effort automatically assigns more responsibilities to sales on assigning delivery due dates.
In the (material) delivery due date realising stage, synchronising material arrival can be realised by adopting a new purchasing strategy. I suggest VDH to adopt a Vendor Managed Inventory (VMI) approach for purchased on order materials. Operating VMI, “management of the stock of an item at a customer site is left entirely to the supplier” (Baudin, 2004). The responsibility for keeping enough incoming materials is transferred from the customer to the supplier as well as the ownership of the unused materials (Rivera et al. 2007). This new purchasing strategy has two advantages for VDH. First of all, it allows the purchaser to synchronise arrival of materials since it‟s known that materials purchased on order are stocked at suppliers‟ sites. Secondly, by adopting VMI, the information flow between VDH and suppliers is increased. This increased communication and understanding also provides suppliers with better knowledge of the actual demand of their products (Taylor, 2004). Eventually, with certain forecasts of VDH‟s demand, it is easier for suppliers to delivery more purchasing orders on time and consequently the material reliability of VDH will also be improved.
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lead time (Schönsleben, 2007). This technique has two benefits for material reliability. On one hand, it guarantees the availability of materials which are purchased on stock for MTO customer orders since material replenishments have started before stocks are at the level of zero. On the other hand, by setting the safety stock, it also buffers out the fluctuations in replenishment lead time and in the demand during the lead time
In the end, I suggested to the inventory department to dispatch orders which have the closest delivery due date to production first. Instead of organising customer orders according to production line, inventory should list orders according to delivery due date. In this way, orders of the closest delivery due dates are ensured to be processed first in production (assuming capacity is flexible between production lines). Consequently, both material and delivery reliabilities are improved.
6.4 Summary for Suggestions
Actor/Department Non-value-added Activities Suggestions for Activities Lack-of-control Process Suggestions for Control the Process Sales - Agree on delivery due date when material information is not provided. - Only after material availability information is provided, it is possible for sales to assign material delivery due date.
- Sales are not fully engaged into assigning a reliable due date.
- Sales are obliged to assign reliable due dates for customer orders. Purchaser X - No synchronised (purchase on order) material delivery date - Reorder point for purchased on stock materials is too low. - VMI approach is implemented. - Order point technique is implemented.
Inventory - Multiple times of registering incoming goods. - Multiple times of dispatching - Times for registering incoming goods are reduced. - Materials are not prepared according to delivery due date
50 materials to production. - Orders are only allowed to dispatch when all the materials are available. Production -Borrowing Materials -Borrowing “manco” activity is strictly banned. X
7. References
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Goods. Productivity Press, New York.
Davenport, T. 1993. Process Innovation: Reengineering Work through Information
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Higgins, PL, Le Roy, P., & Tierney, L. 1996. Manufacturing Planning & Control:
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Lin, F., & Shaw, M. 1998. Reengineering the Order Fulfilment Process in Supply Chain Networks. The International Journal of Flexible Manufacturing Systems, 10: 197-229
Milgate, M. 2001. Supply chain complexity and delivery performance: an international exploratory study. Supply Chain Management: An International
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Olhager, J. 2003. Strategic positioning of the order penetration point. International
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Rudberg, M., & Wikner, J. 2004. Mass customization in terms of the customer order decoupling point. Production Planning & Control, 15(4): 445-458
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Schönsleben, P. 2007. Integral Logistics Management. Third Edition, Auerbach Publications
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Economics, 90(2): 223-235.
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8. Appendix
8.1 Appendix 1: Descriptive statistics of delivery reliability
Descriptive statistics of Delivery Reliability Descriptive statistics of Material Reliability
Mean -14,4 Median -6,7 Mode -6,7 Standard Deviation 35,5 Kurtosis 183,4 Skewness 3,5 Range 1239,1 Minimum -479,6 Maximum 759,5 Count 4460
