Master thesis, MScBA, specialization Operations and Supply Chains University of Groningen, Faculty of Economics & Business
Date: April 5, 2013
Mark Hofman Student number: s1835203
Schutstraat 10-31 7901 EC Hoogeveen
tel.: +31646192263
e-mail: m.hofmann@student.rug.nl
Supervisor/ university Prof. Dr. J. de Vries Supervisor/field of study
B. Blokzijl
DOC kaas B.A., Hoogeveen (The Netherlands)
2 Table of contents
1. Introduction 4
2. Research methodology 6
2.1 Objective of the study 6
2.2 The diagnostic framework 6
2.3 General research question 8
2.4 Sub questions 9
2.5 Research process 10
2.6 Research methods 11
2.6.1 Phase 1: Preceding numerical data collection 13
2.6.1.1 Illustrative example 14
2.6.2 Phase 2: Research methods for determining the performance of an 16 inventory system
2.6.2.1 Conducted interviews for defining and describing Performance objectives 16 2.6.2.2 Conducted interviews and data collection for revealing the importance of 16
the inventory system
2.6.2.3 Analyzing collected data for assessing preliminary strengths and 17 weaknesses of the inventory system
2.6.3 Phase 3: Research methods for examining the decision areas 17 2.6.3.1 Determining strengths and weaknesses of the inventory system 20 2.6.4. Phase 4: Research methods for developing an inventory management 21
concept and assessing the diagnostic framework
2.6.5 Additional research methods 21
2.6.5.1 Investigating internal reports 21
2.6.5.2 Distributing questionnaires 21
2.6.6. Sample characteristics 22
2.6.6.1 Measures 22
2.7 Determining strengths and weaknesses of the inventory system 23
3. Literature review 24
3.1 Target areas 25
3.1.1 Quality 25
3.1.2 Costs 25
3.1.3 Delivery 26
3.1.4 Flexibility 26
3.2 Decision areas 26
3.2.1 Physical infrastructure 26
3.2.2 Planning and control structure 27
3.2.3 Information architecture 27
3.2.4 Organizational embedding 28
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4. Case study 30
4.1 Results of the case study 30
4.1.1 Background of the study 30
4.1.2 Practical problem 32
4.1.3 Findings of the case study 32
4.1.3.1 Phase 1: Scope of the practical inventory problem 32 4.1.3.2 Phase 2: Performance and importance of the inventory system 34 4.1.3.3 Phase 3: Examination of the decision areas and assessment of 37
strengths and weaknesses of inventory system
4.1.3.4 Phase 4: Development of the Inventory Management Concept 42 4.2 Applicability of the diagnostic framework 43 4.2.1 Assessment of the individual phases of the diagnostic framework 44 4.2.2 Overall assessment of the diagnostic framework 45
5. Conclusion and discussion 46
5.1 Conclusion 46
5.2 Limitations 47
5.3 Practical implications 48
5.4 Further research 48
References 49
Appendix A: Questionnaire 53
Appendix B: Run time raw milk silos 55
Appendix C: Raw milk inventory 57
Appendix D: Cheese milk inventory 59
4 1 Introduction
In the field of Operations Management and Operations Research inventory control is a widely addressed topic. Concepts for inventory planning and control such as manufacturing resource planning (MRP II) and enterprise resource planning (ERP) have proven to be valuable in determining resources in a manufacturing company. During the last decade these quantitative models are being accompanied by qualitative models for inventory decision making. As a result an integrated approach is advocated (e.g. Zomerdijk and De Vries, 2003). In their article, Zomerdijk and De Vries argue that it is highly important to take the organizational context into account when a company is dealing with inventory control problems. From this perspective inventory management systems cannot be considered as isolated systems but are linked to many different areas within a company (Bonney, 1994). Extant literature (e.g. Alfaro and Tribo, 2003; Abdul-Jalbar et al., 2003) reveals that when assessing inventory control systems, inventory management holds a process, planning, information and organizational dimension. Based on these dimensions De Vries (2007) developed a framework which aims at being supportive in assessing and redesigning inventory management systems from an integrated approach. In this model, De Vries distinguished the interaction and interrelationships between the physical infrastructure, the planning structure, the information architecture and the organizational embedding. These four decision areas compose the Inventory Management Concept and are linked to the performance objectives of the company. De Vries applied the framework to ten case studies to diagnose the inventory management system. The objective of that study was
assessing the strengths and weaknesses of the inventory systems of the companies and to address main areas for improvement.
The above described study performed by De Vries is considered: “to be a first step in the process of developing practical oriented tools for diagnosing inventory management systems” (De Vries, 2007, p.71). The approach has addressed a number of important issues regarding diagnosing an inventory system but also a number of shortcomings. These strengths and shortcomings are addressed in this current in-depth and industry specific study to provide more insight into the specific context the approach is suitable for. The diagnostic framework developed by De Vries has been applied to companies operating within a wide range of industries and has focused on different types of inventory. However this framework has not been applied to companies operating in the food- processing industry holding inventory subject to deterioration. The food-processing industry is characterized by low margins and a high value of raw materials (Akkermans and Van Donk, 2008) and in this case, inventory with high risk of deterioration. Inventory items subject to a risk of
deterioration have a maximum usable lifetime (Goyal and Giri, 2001) and affect product costs, ordering costs and storage costs (Balkhi and Tadj, 2008). Deteriorating inventory models have been developed and analyzed from stochastic approach and deterministic approach (e.g. Shah, 1998;
Balkhi and Tadj, 2008; Balkhi and Zaid, 2011) and are mainly related to the assumptions of the
economic order quantity (EOQ) (e.g. Balkhi, 1998). These quantitative approaches for inventory
control have proved to be valuable in determining inventory parameters, however for diagnosing and
solving practical inventory control problems its value can be questioned. The diagnostic framework
takes more quantitative aspects and multi-dimensional views into account when improving inventory
control. However it is not tested to solve practical problems. Therefore it is interesting to test the
usefulness and applicability of the diagnostic framework in a practical situation whereby the
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company investigated is operating in the food-processing industry and holding perishable raw inventory. This company deals with capacity constraints because of a limited number of storage silos, which have to be shared by a multitude of raw products. Also do the silos have their own capacity constraint (the maximum content). The second constraint is the time storage limitation. Due to the high risk of deterioration of raw milk and cheese milk, the product has to be processed within a certain time period.
This current research argues that the risk of deterioration and the industry characteristics play an important role when diagnosing an inventory management system and can influence the usefulness and application of the framework. By finding the strengths and weaknesses of the diagnostic
framework in this research we provide more insight into the specific context the approach is suitable for. Also, motives to start, ignore or obstruct the application of the diagnostic framework are
exposed. This means that in addition to the framework in its current form, recommendations are provided to reform the framework in a way which makes it useful and applicable for a company in the food-processing industry holding inventory with high risk of deterioration.
This thesis is organized as follows. First, we address the research methodology of the performed case study. Second, the relation between the methodology of this study and the existing literature is explained. In the fourth section of this article, we present the background and the findings of the case study, subsequently, conclusions are drawn regarding the application and usefulness of the diagnostic framework. By assessing the framework in the context described above the strengths and weaknesses of the framework are evaluated and suggestions are provided to refine the framework.
Finally, we elaborate on the implications and limitations of the research.
6 2. Research methodology
In this chapter the research methodology of this research is presented. First of all the aim of the thesis is provided in paragraph 2.1. In paragraph 2.2 the diagnostic framework is presented,
accompanied by an overview of the target areas and the decision areas integrated in this framework.
Paragraph 2.3 contains the general research question followed up by the sub questions in paragraph 2.4. The research process applied in the case study is provided in paragraph 2.5. The employed research methods are presented in 2.6.
2.1 Objective of the study
De Vries stated in his article introducing the diagnostic framework, that: “the framework is a useful starting point for analyzing inventory management systems” (De Vries, 2007, p. 64). However he advocated a more industry specific study for providing more insight into the specific context the approach is suitable for. The objective of this current study was to determine strengths and weaknesses of the diagnostic framework and demonstrate the applicability of the diagnostic framework to solve inventory management problems regarding perishable raw materials for a company in the food-processing industry. By testing this framework in practice, pro’s and contra’s of the conceptual approach were evaluated and suggestions regarding the usefulness and applicability of the diagnostic framework applied in this particular situation were made. This research is providing more insight into the specific context the diagnostic framework is suitable for and whether this approach is necessary to solve practical inventory problems.
By focusing on a broad range of issues, we run the risk of addressing too many items and not narrowing down the focus on the inventory management issues that cause the problem. A different straight forward approach may be more suitable to tackle the inventory management problem.
Revealing the strengths and weakness of the diagnostic framework for solving inventory management issues in this particular situation leads to motives to start, ignore or obstruct this approach in this situation. The results of this study can be of value as well in literature as in practice.
Therefore the contribution of this study can be viewed from two perspectives. First, this research determined the strengths and weaknesses of the inventory management system and developed an inventory management concept to solve the inventory problem. Second, diagnosing the inventory system and solving the inventory management problem by means of the diagnostic framework, revealed the strengths and weaknesses of the systemized approach in this specific context.
2.2 The diagnostic framework
The current research is based on the article of De Vries (2007) in which he advocates an approach which aims at defining an Inventory Management Concept by means of which a more integrated perspective on inventory system can be achieved. De Vries defined the Inventory Management Concept as: “a blueprint of the inventory management system and includes the physical
infrastructure, the planning and control structure, the management information architecture and the
organizational embedding of the inventory system” (De Vries, 2007, p. 64). By covering the four main
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decision area the Inventory Management Concept acts as a starting point for redesign actions regarding inventory management. Building effective linkages between the four areas is propagated by diagnosing the existing inventory situation of the company in three phases and by linking the Inventory Management Concept to both internal as well as external objectives of the company (De Vries, 2007). The diagnostic framework for the inventory management concept is presented in figure 2.1.
Source: de Vries (2007)
Fig. 2.1. Research model: Structure of an Inventory Management Concept
Starting point of the inventory management concept are the overall internal and external objectives defined by the company. External objectives relate to market requirements, internal objectives describe the internal operations which the company considers as being crucial for internal operations and do not directly link to customer requirements. Different agreements exist on terminologies and definitions of performance objectives. When defining the performance objectives this study is following Schönsleben (2007). In his book, Schönsleben distinguishes four target areas: quality, costs, delivery and flexibility. Each of these objectives relate to both internal and external
performance objectives. The target areas consist of a set of measurable indicators. An indicator is the specific characteristic to be measured for estimating the performance of the inventory system and analyzes the effect of logistic on company objective in the four target areas. Whenever possible a performance indicator gives a direct indication of the fulfillment of one of the objectives within the target areas (Schönsleben, 2007). In practice, measuring the value of the performance varies in difficulty and usually requires that particular aspects be counted.
Conducted interviews with senior management at the start of the case study, revealed the importance of each performance indicator and weighted the value of the individual performance
External performance
Performance objectives
Internal performance
Inventory Management
Concept
Information architecture Planning
structure
Organizational embedding Physical
infrastructure
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indicator. The value of the performance indicators has only meaning when the measurement of the performance indicator comparison is repeated over time.
According to Schönsleben (2007) logistics has a significant influence on the company objectives in all four target areas. Therefore logistics affect the performance of a company significantly. Since the diagnostic framework aims at being supportive in assessing and redesigning a company’s inventory management system, this research focused on the influence of the physical logistics on the company performance objectives. The physical logistics includes the moving and storing of goods and the physical control of the flow of goods, material and information that lead to the saleable product. To control these processes, automatic instruments are frequently used (Schönsleben, 2007). In order to assess the role and function of the inventory management system of the organization, the internal and external performance objectives need to be linked to questions regarding the existence of inventory, the value of inventory, the types of inventory, the location of inventory, etc.
Once the contribution of the inventory management system in relation to the performance objectives is manifested, the way this contribution can be accomplished is defined. To accomplish this, four decision areas are distinguished: The physical infrastructure, the planning structure, the information architecture and the organizational embedding.
The physical infrastructure relates to the way organizations produce goods and to the way goods and materials are distributed from supplier to the manufacturer and from manufacturer to the customer (De Vries, 2007). The planning structure refers to the decision tasks that affect inventory and administrative logistics. The information architecture is related to the information systems and is crucial to meet the performance objectives. The organizational embedding of inventory systems focuses on the relation between the information system and the related functions, tasks and
responsibilities distinguished in the different organizational departments and units. A more extensive overview of the four decision areas is provided in the literature review in section 3.
2.3 General research question
De Vries considered the diagnostic framework: “As a first step in the process of developing practical oriented tools for diagnosing inventory management systems” (De Vries, 2007, p. 71.) In contrast to the study of De Vries (2007), this current study aims at solving an inventory management problem in a practical situation by applying the diagnostic framework instead of merely addressing the strengths and weakness of an inventory management system in a company. This way we can provide more insight into the specific context the diagnostic framework is suitable for. The specific context of this current case study involved a food-process industry holding raw inventory with a high risk of
deterioration. Findings of the case study must clarify the applicability of the diagnostic in this specific
context and the ability of solving inventory management problems. The case study regarded the raw
material inventory of a cheese manufacturer in The Netherlands. In the case of this manufacturer the
inventory management problem was reflected in the high holding times and strong fluctuating
quantities of raw milk inventory. As a consequence costs of holding these raw materials inventory
increases due to the increased risk of deterioration. Therefore the organization is in need of a
research study that leads to recommendations to avoid the deterioration of the raw and pre-
processed materials inventory.
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Since this thesis evaluated the applicability of the diagnostic framework when solving inventory problems in an organization operating in the food-processing
industry the following general research question was designed:
What are the strengths and weaknesses of the diagnostic framework when applying it to solve practical inventory problems regarding a food-process manufacturer holding raw material inventory with high risk of deterioration?
2.4 Sub questions
In order to answer the general research question the following sub questions are formulated:
What are the characteristics of the diagnostic framework?
The diagnostic framework consists of carefully selected performance indicators and decision areas. A critical look at the characteristics of these variables and their interaction leads to clear insights regarding the applicability of the diagnostic framework. Findings of the characteristics of the
performance indicators and decision areas are supported by literature and provide a comprehensive view of the selected dimensions applied in the diagnostic framework.
Which factors identify the strengths and weaknesses of the diagnostic framework?
The aim of analyzing the strengths and weaknesses is to identify the key factors that are important to achieving the objective. The factors are viewed as strengths or weaknesses depending upon their effect on the diagnostic’s objectives. In this study: Testing the applicability of the diagnostic framework in this specific context. It is important to compile the list of items that are actually
important in achieving the research objective. A strength and weakness item that generates no value for this research is not important.
What is the role of the process industry factor when managing an inventory system?
The company investigated in this study is a process manufacturer. Characterizing features of process manufacturing are the divergent product structure, a product layout for high-volume line production and a focus on maximizing capacity utilization. This study reveals the influence of these variables in managing an inventory system. Several researchers (Bolander & Taylor, 1982; Cooper, 1985; George, 1985; Kiekhaefer & Williams, 1982; Novitsky, 1984; Smith, 1985) have identified characteristics common to process industries. We expect those characteristics to influence the design of a management system.
What is the role of the deteriorating factor when managing an inventory system?
This variable will play an important role when designing an inventory management concept. The
deteriorating factor is embedded in the physical infrastructure of the company and affects all the
four decision making areas. The case study will reveal this effect.
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How does managing raw materials inventory differ from managing finished product inventory?
Managing raw material inventories may be more complicated than managing finished products because the raw material is dependent upon the demand for finished goods. The finished product inventory is managed with sales order processes and supply chain management processes and are based on sales orders or forecast. The dependent demand for raw materials is managed through MRP of ERP using a range of models and concepts. A clear answer to this question results in more insight in the applicability of the diagnostic framework and solving the inventory problem the manufacturer faces.
2.5 Research process
Defining the inventory management concept was conducted in four phases. The first three phases are based on the diagnosing process of De Vries (2007). The first phase involved a meeting with the Chief Operating Officer and the Planning and Logistics manager. During this meeting the intension of the study and the mutual expectations of the results were clarified. In addition the scope of the practical research problem is clarified. During the second phase, we described and analyzed the overall performance objectives defined by the company. In addition a strength and weakness assessment of the inventory system was performed. From this the importance of the inventory system and the contribution the inventory management system should have towards meeting performance objectives was studied. In the third phase an analysis of the relation between the performance objectives and the four decision areas was performed. The fourth phase is
concentrated on conceiving a normative inventory policy and a plan for improvement. In contrast to
the study of De Vries (2007) this Inventory Management Concept strives to solve a present inventory
problem. In addition the strengths and weaknesses of the diagnostic framework when applying it to
this case are provided. Fig. 2.2 summarizes the different steps in the research process.
11 phase 1
phase 2
phase 3
phase 4
Fig. 2.2. The research process
This overview is not illustrating the separate descriptive stage and analyzing stage regarding the inventory system. These two steps are processed in the strengths and weakness assessment of the inventory system. This is illustrated in fig. 2.3.
Fig 2.3. The describing and analyzing phases.
2.6 Research methods
Since De Vries states in his article that: “the study aimed at developing a diagnostic tool for inventory management systems, which could be applied in a broad range of manufacturing situations” (De Vries, 2007, p.66), we tested this objective by applying this diagnostic framework in a particular manufacturing situation and determined the strengths and weaknesses of the diagnostic framework.
Therefore the empirical part of this research is founded on a case study in which the systemized approach is applied to. The case study part of the research relates to the question to what extent problems regarding inventory management systems can be solved by applying the diagnostic
Start case study
Analysis physical infrastructure
Analysis planning structure
Analysis information architecture
Analysis organizational embedding Strengths
inventory system
Weakness inventory system
Importance inventory
system Performance
inventory system
Strengths diagnostic framework
Weakness diagnostic framework Management
Inventory Concept
Describe target areas and decision areas
Analyze target areas and decision areas
Determine strengths and weakness inventory
system
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framework, taking the industry the manufacturer operates in and the product characteristics the manufacturer produces into account. This ‘how’ question consists of explorative characteristics and requires a case-study approach to perform the empirical part of this research and test the
applicability of the diagnostic framework in this specific setting. The case study part of this research also relates to the assessment of the inventory management system studied. Addressing the strengths and weaknesses of the inventory system and solving the inventory management problem in the organization included, in addition to the ‘how’ question, also many ‘why’ questions. During the case study emphasis was placed on exploring and describing the performance of the inventory system in relation with the decision areas responsible for meeting these objectives. A variety of both quantitative research methods as well as qualitative research methods were applied to answer the
‘how’ and ‘why’ questions and can be considered as fundamental for solving the practical inventory management problem and testing the applicability of the diagnostic framework and its value for the food industry.
Since this research was conducted based on the research model of De Vries (2007), the research methodology was developed by taking this research model as a starting point. Data collection as well as developing the inventory management concept was conducted in four phases. The four phases are summarized in the research process in figure 2.2. An extensive literature review was performed to support the findings obtained from the case study in which the research methods were performed.
This section merely presents the research methods applied in the case study. The results derived from the applied research methods are discussed in the case study in section 4. In this section motives to adopt particular data collecting methods to solve the practical problem are presented. In addition, we discuss which data is collected to achieve specific conclusions. For clarity reasons, first an overview of the departments and positions involved with the performance and diagnosis of the inventory system is presented:
- The Milk Collecting department; this department is responsible for processing the raw milk as quickly as possible into cheese milk and deliver this to the CM. The operators at MC are obliged to inform the shift leader in case of failing to meet the requirements complied by higher management.
- The Cheese Making department; this department is responsible for transform the cheese milk into cheese as quickly as possible and supply the Warehouse (WH) with immature cheese. In addition operators of the CM are required to report to the shift manager.
- The Technical Service department; The Technical Service department executes technical operations in case of distortions reported by MC, CM and WH.
- The Planning and Logistics department (P&L); this department is charged with the short term and long term planning and procurement of raw milk and sales of cheese. The procurement of raw milk is based on the expected sales of cheese. Determining the expected sales of cheese is also a job of this department.
- Council of Members; the council of members is the link between the organization and the farmers. The members of the council negotiate on the terms and conditions regarding the supply and demand of raw milk.
- COO; The Chief Operating Officer is in charge of the operational management of the
organization and presides over the organizations day-to-day, month-to-month and year-to-
year operations.
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- The ICT department; the ICT department supports all departments in the organization with information technology and implements information systems across the organization.
- The team leaders of all 5 shifts; the shift leaders attain information of the MC, CM and WH employees regarding production details. Subsequently the shift leaders process this information digitally and announce the specifications during a daily meeting with other departments.
- Raw materials supplier; the diary plant outsources the transport of raw milk to the
manufacturer. The Dutch raw milk is transported by 1 company, covering all Dutch farms to supply the company. The transport company operates as an autonomous party and develops routing schedules for collecting raw milk and plans delivery times at the manufacturer with little collaboration of the diary plant. German raw milk is collected and transported by 3 German transportation companies. These 3 transportation companies operate
independently from the Dutch transportation company and, similar to the Dutch transporter, operate as an autonomous organization.
2.6.1 Phase 1: Preceding numerical data collection
Prior to applying the research model (figure 2.1) for solving the inventory management problem, the scope of this problem was researched. This is embedded in the research process (figure 2.2) and performed in phase 1. For defining the scope of the problem numerical data was collected. This employed quantitative research method ascertained the relative size of this specific inventory problem. As a result the aspects of the problem were clarified before the data for solving the practical problem was collected. The assumption behind this research method is that there is an objective truth existing in the organization that can be measured and explained scientifically (Cassell and Symon, 1994). This assumption refers to the practical inventory problem. Disclosing the scope of the inventory problem and revealing an objective truth is extremely important before starting collecting data and employing other research methods when solving the practical problem. Senior management and higher management are aware of the inventory management problem regarding raw materials and strongly committed to preclude long holding times and strongly fluctuating inventory levels of raw milk. Senior management has never defined the scope of the inventory problem and therefore never conducted an extensive and comprehensive research to solve this inventory problem. However in order to limit the risk of deterioration of raw milk and cheese milk, the top management have declared that the run-time of a raw milk silo and cheese milk silo is not allowed to exceed certain standards. In addition, the aggregated amount of raw milk inventory and cheese milk inventory must comply with strict requirements. However, the company has been outside these constraints for some time, in particular during the 4 planned maintenance stops each year. The numerical data analyzed consisted of data regarding the holding times and storage quantities of 6 raw milk silos and 8 cheese milk silos during 12 weeks of production. The company operates with 3 separate decentralized databases providing deviating data regarding the registration of the holding times and production stages of the raw milk silos. For determine the actual holding times of the raw materials inventory we analyzed graphs representing historical data concerning holding times, storage capacity utilization and time utilization of raw milk silos and cheese milk silos.
In addition the total quantity of raw milk and cheese milk stored at the company on a particular
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moment was analyzed. This analysis was conducted during the 4 research periods, every day at 06.00 hours. The analysis was conducted at 06.00 hours due to the fact that the information system
automatically generates an overview in Excel of the raw milk storage levels and the cheese milk storage levels every day at 06.00 hours. The shift leaders are required to document the quantity level and holding times of inventories of raw milk and cheese milk in storage at the end of their shift.
However this is not documented in most cases. Therefore we merely used the stored quantity data automatically generated by the information system. As a result we gained clarity in the relation between the received quantity and stored quantity of raw materials and the holding times of raw materials. A raw indication of the accomplished guidelines regarding the storage levels and holding times of raw milk and cheese milk was the result. An illustrative example is presented consecutively.
2.6.1.1 Illustrative example
An example is presented in figure 2.4. The blue line represents the storage level of the raw milk silo.
This example addresses the capacity constraints and the time constraints for storing raw materials.
For instance, a mobile milk collecting (MMC) vehicle unloads at 06.00 hours and fills the silo, with a maximum capacity of 480 tons, up to 50 tons of milk until 07.00 hours. Subsequently the second MMC vehicle unloads at 10.00 hours and fills the silo up to 80 tons of raw milk. This iterative process ends at 18.00 hours, when the silo is empty and prepared for cleaning. The red line represents the temperature. The average temperature of milk is 6 degrees Celsius during the filling stage. During the storage period the temperature of the milk slightly fluctuates due to the external temperature.
However due to the addition of hot water and lye during the cleaning in process (CIP) phase, the temperature of the silo increases up to 60 degrees. After the lye phase, the temperature of the silo decreases and adapts to the external temperature. At 20.00 hours the filling process starts again and comprises of the same filling stage performed prior to the CIP phase. Determining the holding times and storage levels of raw materials by means of analyzing the quantity lines and temperature lines, we accurately defined the scope of the inventory problem.
Figure 2.4. Example of holding time and storage level of raw milk
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The example regarding the storage process of raw milk depicted in figure 2.4 is analyzed in practice for 12 weeks. The 12 weeks are divided in 4 research periods of 3 weeks:
- Period 1: Weeks 8-10 - Period 2: Weeks 22-24 - Period 3: Weeks 36-38 - Period 4: Weeks 49-51
The reason for selecting and analyzing historical during these particular weeks is the planned maintenance in week 9, 23, 37 and 50. There were indications that the risk for long holding times of raw milk increased and storage levels strongly fluctuated in particular during periods of planned maintenance. Analyzing the inventory data of these particular time slots revealed trends in holding times and storage levels during the week prior to planned maintenance, during the week of planned maintenance and during the week after planned maintenance. Figure 2.4 reveals that a variety of MMC vehicles unload subsequently into the same raw milk silo. In this example CIP occurs after 12 hours of production and 5 unloading events. A CIP is required at least after 24 hours of production time or when the manufacturer must separate collected German milk and Dutch milk. A clear loading schedule of the example case is presented in figure 2.5. In this example case a variety of reasons exist for cleaning the silo after 5 unloading events and only use the silo for 12 hours. Motives and
consequences for occupying the tank for only 12 hours and not utilizing the potential storage capacity is studied in the following phases. In summary, this example provides reliable information regarding the holding times, the storage levels and the capacity utilization of the raw milk silo and therefore is crucial for defining the inventory problem.
Time End of running time
Storage Cleaning in process Storage
Product 1 Product 3 Product 5 Product 7 Product 9 Product 11 Product 2 Product 4 Product 6 Product 8 Product 10
Figure 2.5. Loading schedule for example case
In addition to the analyzed holding times and storage levels of raw milk silos, similar research methods were employed for defining the scope of the inventory problem regarding the storage of cheese milk. Aggregated data obtained from these graphs is converted from the information system to Excel and translated into clear graphs and tables to summarize the actual holding times and storage levels of raw materials. Results of these analyses are discussed in section 4. The research methods embedded in phase 1 are successfully employed and additional research methods
embedded in phase 2 are employed to gain information regarding the performance of the inventory
system.
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2.6.2 Phase 2: Research methods for determining the performance of the inventory system The performance of the inventory system is determined by employing a set of carefully selected research methods. This section presents the research methods employed to define and assess the performance objectives defined by the company and the importance of the inventory system in meeting these performance objectives.
2.6.2.1 Conducted interviews for defining and describing performance objectives
Conducting semi-structured interviews with top management and higher management clarified the definition of the performance objectives. A reason for conducting semi-structured interviews with top management and higher management is that the performance objectives are derived from strategic goals as well as marketing objectives. The strategic goals were defined by top management and higher management and therefore interviewing the Chief Operating Officer (COO) and the Planning and Logistics (P&L) manager yielded important information regarding the definition of the performance objectives. More specific reasons for conducting interviews during this phase is that: 1) more detailed data is gained due to the more in depth way of investigating. More detailed questions were asked and ambiguities were clarified; 2) it discovered the thoughts and opinions of top
management and higher management for defining particular performance objectives; 3) more questions are followed up in case of incomplete answers. Due to the semi-structured form of the interviews, a framework of themes is explored and new ideas are brought up during the interviews.
The questions asked are related to the groups of performances objectives which are essential when developing an inventory management concept. These groups consist of internal and external
performance objectives, to name: quality, costs, flexibility and delivery. The clarity regarding the definition and motives to set specific standards of the performance objectives are the basis for consecutive research referring the importance of the inventory system in achieving the performance objectives and determine the strengths and weaknesses of the inventory system. By means of the conducted interviews a description of the performance objectives is defined. In addition to the conducted interviews numerical data regarding the production process is gathered. This information mainly consists of inventory and production specific data. This quantitative data refers to the
performance objectives in terms of quality, costs, flexibility and delivery. This numerical data was collected by interviewing experienced operators of the MC and the CM and associated product processing records. By analyzing the gathered quantitative data and the qualitative data we gained insight in the distinguished performance objectives and their characteristics.
2.6.2.2 Conducted interviews and data collection for revealing the importance of the inventory system Additional semi-structured interviews were conducted with senior management and the planning department to clarify the importance of the inventory system in meeting performance objectives.
The first interviews were mainly conducted for revealing the definition of the performance objectives
and placed less emphasis on the importance of the inventory system in meeting these performance
objectives. Questions linked to the consequences of a failed or successful inventory system were
asked. The internal and external objectives are linked to question that reveal the value of the
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inventory, the types of inventory present in the company, the reason why inventory is needed, the quality requirements of the inventory, the relation the inventory system has with the performance objectives and how the performance objectives are weighed. Identifying the contribution of the inventory systems as well as assessing the importance of the inventory system is a complex process.
In addition, analyzed data regarding the scope of the inventory problem made clear that controlling the capacity constraints and time constraints is crucial for achieving company goals. By conducting the interviews and analyzing the scope of the inventory problem the weighing of the performance objectives were discovered. An assessment of the impact of the inventory system in achieving the strategic goals was performed at the same time the preliminary strengths and weaknesses of the inventory system were determined.
2.6.2.3 Analyzing collected data for assessing preliminary strengths and weaknesses of the inventory system
The preliminary strengths and weaknesses of the inventory system were assessed by analyzing the information obtained from the first and second conducted interviews concerning the achievement of the performance objectives and the conclusions extracted from the data accumulated during the assessment of the scope of the inventory management problem. As discussed in the previous section, the importance of the inventory system reveals how the inventory system contributes in achieving performance objectives. In addition, the information obtained in phase 1 addressed quantitative data. This data presents objective findings and is related to the internal and external performance objectives. Therefore numerical data regarding the scope of the problem and the semi- structured interviews regarding the importance and the contribution of the inventory system in achieving performance objectives revealed the tentative strengths and weaknesses of the inventory system. These assessments of the strengths and weaknesses of the inventory system can be
considered as input for studying the addressed decision areas. A detailed assessment of the strengths and weaknesses of the inventory system is classified by means of the addressed decision areas. As presented in figure 2.3 we first described the decision areas followed up by an analysis of these decision areas. This analysis explored the relation between the target areas and the decision areas and resulted in a final assessment of the strengths and weaknesses of the inventory system.
The employed research methods for describing the decision areas and analyzing the relation between the target areas and the decision areas are presented in the following section.
2.6.3 Phase 3: Research methods for examining the decision areas Based on the outcomes of the second phase, a variety of research methods is employed to examine
the decision areas and the relation between the target areas. Since the decision areas comprise of 4 dimensions, all 4 dimensions are described and analyzed in order to develop a management
inventory concept and to assess the applicability of the diagnostic framework for this specific setting.
The research methods adopted during this phase gathered data revealing the mechanisms behind
the preliminary strengths and weaknesses of the inventory system. This section discusses each
individual use of the research methods and reveals the motives to adopt a particular research
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method. The research methods employed for investigating the decision areas are discussed individually:
1. Physical infrastructure
Research methods for examining the physical infrastructure were aimed at clarifying the product system of the company. By first observing the production process, stock points, lot-sizes and operation times were revealed. The reason for first observing the production process is to obtain a global understanding of the physical infrastructure. Conducted interviews with the COO revealed the motives for maintaining the current physical infrastructure in global terms. Interviews with the P&L manager clarified the need for holding raw materials and provided information regarding the company’s suppliers and buyers. A strong focus was on the raw materials suppliers, because this party delivers the raw materials and this study is focused on the raw material inventory. Finished product inventory also play a role in developing the physical infrastructure. However in this company the finished product inventory is not that strongly subject to deterioration and the holding costs for holding this inventory are not that significant as the costs of holding raw material inventory.
Although the delivery dates are not very flexible, the end product can be derived from the company by the buyers before the end of the ripe period. Due to the different products collected by the company (Dutch milk and German milk) tables of data regarding the actual raw milk collecting times during the 4 research periods were analyzed. This data provided valuable information in terms of
‘when’ and ‘what’ type of raw materials were delivered to the company. Conducted interviews with the raw materials suppliers, shift leaders and operators provided detailed information regarding their experience with the current production system and in which way this production system relates to implications in managing the present raw inventory. The accumulated information regarding the physical infrastructure gained from the interviews and observations provided clarity on how the physical infrastructure is going to accomplish the internal and external goals. In addition a
questionnaire is distributed among the operators to obtain more information on how the operators perceive the established production system and the extent to which the physical infrastructure accomplishes the internal and external objectives. A detailed argumentation for distributing the questionnaire and the embedded questions is discussed later in this chapter. The questionnaire is summarized in Appendix A.
The industry specific characteristics must be taken into account when assessing the production
system and the applicability of the diagnostic framework. Therefore, at the same time when
performing the case study, supporting literature was analyzed regarding this topic. The theoretical
review concerning this topic is presented in section 3. The industry characteristics did not influence
the selection of the employed research methods. However the industry characteristics may influence
the research itself and therefore influence the applicability of the diagnostic framework. Dealing with
significant storage capacity constraints and time constraints the production system adopted in
studied company differs from a production system applied in a company operating in the discrete
industry. Therefore focus during the practical study in assessing the physical infrastructure was to
disclose the way the company deals with these characteristics and how the interaction with these
characteristics contributes to the practical inventory problem. While conducting research to the
physical infrastructure a partial value of the diagnostic framework was tested. The other dimensions
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still needed to be researched and therefor an overall value of the applicability of the framework is determined after completing all research phases and the corresponding research areas.
2. Planning structure
Since the planning structure refers to the decision tasks that affect inventory and administrative logistics, the research methods employed for diagnosing this dimension were aimed at revealing the contribution the planning and control structure made to accomplish the internal and external objectives of the company. During the interview with the P&L manager questions regarding the volume decision and the when to order decision were asked. Information obtained from this
interview was compared with actual supplying records. This numerical data contained information of supplying patterns and recurrent adjustments made in daily planning schedules. By comparing the information gained from the interview and the actual supplying records an assessment of the planning performance regarding the supply of raw milk was made. Also the control framework the P&L department adopts is analyzed. The methods and techniques, the planning procedures and the information systems to be used in a specific situation are considered as the underlying rational for the planning system. Therefore these variables were studied while being a part of the company and not by merely observing. By working with these planning methods, techniques and information systems and taking the scope of the inventory problem into account we gained a clear understanding of the control framework and the overall strengths and shortcomings for achieve the internal and external objectives. The questionnaire distributed among the process operators included questions related to inventory planning. A detailed discussion of the related questions included in the
questionnaire is presented separately later in this section. As addressed in the previous paragraph, this questionnaire is summarized in Appendix A.
Similar to the physical infrastructure, the industry the company operates in may influence the applied planning structure. The focus was on investigating to what extent the characteristics of the food-process industry influence the planning structure and how the company deals with these characteristics. To what extent this planning structure is influenced by the process industry
characteristics is discussed in the case study results section (see section 4.4). Like with assessing the physical structure a partial assessment of the applicability of the diagnostic framework is performed during investigating the planning structure in this specific context.
3. Information architecture
As discussed in the previous paragraph the researcher was part of the company during the research
period and therefore gained accurate insight into the adopted information systems. The focus for
analyzing the information systems was on determining information processes and the application of
the different platform technologies throughout the company. Insight in these aspects is important
due to the fact that these variables are considered as the main factors for malfunctioning of an
inventory system. Questions raised by experiencing the implemented information system, were
asked during interviews with the ICT manager. Questions asked during the conducted interviews
revealed motives for applying particular information technology to support operations and
management processes. Statements regarding the information sharing and usefulness of the
information sharing were included in the questionnaire distributed along the persons experiencing
the information systems. The questionnaire is presented in Appendix A. The applied research
methods assessed the contribution of the information systems towards achieving internal and
external performance objectives.
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Investigating the applied information system and the supporting literature (see section 3) revealed the importance of an information system adopted in a process manufacturer. In this practical study the characteristics of the process industry influencing importance and format of the information system for inventory planning and control were investigated. Results of this analysis were an important factor for redesigning actions embedded in the inventory management concept. By performing research concerning this dimension an additional part of the applicability of the framework is tested.
4. Organizational embedding
To assess the relation between the inventory system and the related functions, tasks and responsibilities distinguished in the different organizational departments and units, first the
company’s Tasks and Responsibility Manual (TRM) was consulted. This manual comprises a list of all the positions, tasks and responsibilities existing in the company. Based on this list the interviews were conducted with persons dealing with the inventory system and (inventory) planning and control. These persons were employed in the following departments: P&L, Production (MC, CM and Shift Leaders), ICT, raw material supplier and the Counsel of Members. The reason for conducting interviews is that issues regarding this decision area can be investigated in an in depth way and the opportunity of reacting to each other. Due to the fact that semi-structured lists are used, the researcher had to formulate questions during the interview and therefore needs to concentrate carefully on the questions to be asked. As a result this interactive nature of the interview led to dialogues revealing the opinions of the interviewee and led to a deeper understanding of the topic. A main part of the questions asked were covered during the conducted interviews concerning the topics embedded in this research phase and in the other research phases. The results produced by the conducted interviews gained more insight in how the concerned positions, tasks and
responsibilities regarding inventory planning and control are completed. Next to the assessment of this decision area, the applicability of the diagnostic framework in this specific setting was partially tested. During the investigation of this dimension characteristics of the food-process industry were encountered. These characteristics were taken into account when assessing the organizational embedding and the usefulness of the diagnostic framework in this specific setting.
2.6.3.1 Determining strengths and weaknesses of the inventory system
The most interesting findings of the case study were determining the final strengths and weaknesses of the inventory system. This way it was clear which decision areas are the main triggers for strengths and weaknesses of the inventory system and responsible for achieving internal and external
objectives. In summary the performance of the inventory system was related to the decision areas
and an overall analysis of the inventory system and the mechanisms behind this system was
executed (see figure 2.3). The final strengths and weakness assessment can be considered as input
for the development of the inventory management concept.
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2.6.4 Phase 4: Research methods for developing an inventory management concept and assessing the diagnostic framework
By carefully analyzing the strengths and weaknesses of the inventory system of the company an inventory management concept was developed. This inventory management concept comprises an action plan and recommendations for maintaining the strengths of the inventory system and
improves the weaknesses (see table 4.4). At the same time when applying the different phases of the diagnostic framework, the applicability of this framework in this specific setting was tested. This means that particular characteristics of the research problem were taken into account. The variables influencing the usefulness of the framework are the problem solving ability, the industry specific characteristics and the product specific characteristics. These factors were encountered during the case study and were mainly supported by literature. The assessment of the diagnostic framework resulted in summarized strengths and weaknesses (see table 4.5). Assessing the diagnostic
framework in this setting is important for refining the practical oriented tool and support companies dealing with inventory problems in a similar setting for applying the diagnostic framework or ignore this approach and adopt a more direct straightforward approach to tackle the inventory problem. In this last stage the added value of the diagnostic framework for the food-industry was revealed.
2.6.5 Additional research methods
Next to the research methods employed during the specific phases, two additional research methods were applied. It concerns the investigation of internal reports and the distribution of a questionnaire survey. This section discusses these two research methods and the added value for solving the inventory problem.
2.6.5.1 Investigating internal reports
In addition to the applied research methods concerning the particular phases, internal reports regarding the inventory management problem were investigated. Internal reports clarify the actions that are taken in the past to communicate the occurrence of the problem and actions that are
considered to solve the problem. These reports consist of day-to-day evaluations addressed by 1. The team leaders of the shifts, 2. The operators of the Milk Collecting department (MC), 3. The Cheese Making department (CM) and 4. The Technical Service department. These internal reports are compiled by the shift leader and digitally processed. In addition we have investigated reports regarding the occurred planned preventive maintenance stops and forthcoming planned preventive maintenance stops.
2.6.5.2 Distributing questionnaires
Among the operators of the Milk Collecting department, a questionnaire was conducted. Due to the
fact that this department is responsible for processing the raw milk and maintaining the storage
quantities of raw milk and cheese milk on an acceptable level it was decided to merely include this
production department at this research stage. The CM department does not contribute in meeting
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requirements regarding the storage of raw milk and cheese milk. The department is involved with the inventory system and therefore it was decided to conduct an interview with 1 operator of each shift. This is discussed in section 2.5.3. By conducting these questionnaires among the operators of the MC we gained insight in the perception of the inventory problem by these persons. An important factor in this phase was finding the discrepancies regarding the perception of the inventory
management problem between higher management, P&L and the people on the working floor. By means of the conducted questionnaire survey we determined possible bias between the defined goals by higher management, the executed actions of the employees to meet these goals and the collective steps to preclude potential bias and meet the performance objectives. The reasons for conducting a questionnaire survey is that: 1) since there are 15 process operators employed at the MC potential information is obtained from a large number of operators; 2) responses are gathered in a standardized manner, this way the questionnaire is an objective research instrument; 3) the data collected from distributing a questionnaire produce a generalized value among the operators instead of a single operator’s opinion. The questionnaire in Appendix A presents the 17 items using a five- point Likert scale.
2.6.6 Sample characteristics
The questionnaire was delivered to 15 process operators employed at the MC and responded to in operating time. Therefore a 100 percent return rate was realized. Due to explanation of the statements and collecting the questionnaire directly after completing a 100 percent valid response rate was realized. A summary of the response rate is presented in table 2.1.
Respondent Process operator Milk Collecting Department
No. of questionnaires sent 15
No. of responses 15
Response rate 100%
No. of valid responses 15
Valid response rate 100%
Table 2.1. Summary of response rate questionnaire survey
2.6.6.1 Measures
The conducted questionnaire originally consisted of Dutch questions. These questions were
translated to English for the purpose of the thesis. The questionnaire contained two parts. The first
part is related to the production system. The reason for measuring items regarding this topic is that
operators experience the inventory system and do not develop this system. The operators are a link
in the company for processing the raw materials into end products. The initial production process
starts with the process operator and since the operators is responsible for monitoring and controlling
the present inventories of raw milk and cheese milk, it is extremely important that the operator is
familiar with the guidelines the company has set regarding controlling raw material inventory. The
first part contains a 14-item scale. Respondents assessed the extent of agreement for each
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statement on a five-point Likert scale, ranging from 1 (strongly disagree) to 5 (strongly agree). The scale has a Cronbach’s alpha value of 0,941
The second part is related to information systems. The process operators need accurate production information on the right time, in the right context. Ambiguous information regarding expected supply of raw materials, production process progress and cheese production planning can lead to significant inventory problems regarding the storage levels and holding times of raw milk and cheese milk. Operating with different platform technologies throughout the company may cause inaccurate information. Therefore it is extremely important that data input by P&L leads to reliable and accurate information at the working floor. This leads to a virtuous circle because the information the
operators on the work floor insert needs to be as reliable and accurate as the information the operator receives. The perception of the operators regarding the quality of the information system is tested on a 3-item scale. Similar to the first part of the questionnaire, the operator assessed the extent of agreement for each statement on a five-point Likert scale, ranging from 1 (strongly disagree) to 5 (strongly agree). The scale has a Cronbach’s alpha value of 0,935. A summary of measures is presented in table 2.2.
Topic No. of items in
questionnaire
Content of items Cronbach’s Alpha
Production system 14 Guidelines awareness,
procedures, raw inventory, maintenance
0,941
Information system 3 Reliability of data,
usability of
information system, instructed to find data
0,935
Table 2.2 Summary of measures
Since this research is not testing hypotheses we merely analyzed the answers to the items by means of averages. Significant results concerning a particular statement are selected and taken into account when developing the inventory management concept.
2.7 Determining strengths and weaknesses of the inventory system
The most interesting findings of the case study were determining the final strengths and weaknesses of the inventory system. It was clear which decision areas are the main triggers for strengths and weaknesses of the inventory system and responsible for achieving internal and external objectives. In summary the performance of the inventory system was related to the decision areas and an overall analysis of the inventory system and the mechanisms behind this system was executed (see figure 2.3). The final strengths and weakness assessment can be considered as input for the development of the inventory management concept.
24 3. Literature review
This section focuses on reviewing the literature that closely relates to this research, including the dimensions that form the basis of the diagnostic framework. Due to the fact that this research tested the usefulness of the diagnostic framework in a specific context we could not view the dimensions in the diagnostic framework in isolation. Therefore this section provides a theoretical background regarding the influence of the process industry and the risk of deteriorated inventory on the dimensions distinguished in the diagnostic framework. Specific characteristics of food-process manufacturers holding perishable inventory are embedded in the literature review regarding the target areas and the decision areas. First we present a literature review of the selected target areas followed up by a literature review of the decision areas taking this research specific context into account. Information gained during the literature review resulted in the identification of measurable performance indicators and focus points regarding the decision areas in relation to the specific context this research focused on. Finch (1988) has identified characteristics common to process industries. This is summarized in table 3.1.
Source: Finch, (1988).
Table 3.1. General characteristics exhibited by process manufacturers
