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Measurement and continuous improvement of
supply chain network performance in the innovative
machinery industry
A case study at Agrifac Machinery
Joël ZwartS2029677
MSc Technology & Operations Management
MSc Supply Chain Management
University of Groningen, Faculty of Economics and Business
j.zwart.3@student.rug.nl
June 21, 2015
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Abstract
The aim of this thesis was to develop a maturity model consisting of steps supply chain networks in the innovative machinery industry have to perform to improve the performance of this supply chain network. This industry can be characterized by a need for low (delivery) lead times and a high variety of possible complex end products and customized solutions. To facilitate this a strong supply chain network is needed. By doing a case study at a supply chain network that already made improvements on the performance of their supply chain network the maturity model derived from literature was refined. Interviews were held at both the focal company in this network and different suppliers that are responsible for the supply of different part types. The results show internal improvements are an important prerequisite before performing external improvements. Information integration, logistics integration and cooperation on product development are the three important steps to take after the internal improvements to improve the network performance. Since low (delivery) lead times and a high need for customized products is important the most important performance measures are (delivery) lead times and quality. The maturity model provides an overview supply chain networks in the innovative machinery industry can use as a guidance for performance improvement.
Keywords: supply chain management, supply chain network, innovative machinery industry,
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Content
Abstract ... 2 Content ... 3 List of figures ... 5 List of tables ... 5 Preface ... 6 1. Introduction ... 7 2. Theory ... 92.1 Measuring the performance of a supply chain network ... 9
2.2 Increase performance ... 12
2.2.1 External performance improvement... 12
2.2.1.1 Information integration ... 13
2.2.1.2 Inventory and logistics integration ... 14
2.2.1.3 Product development ... 16
2.3 Continuous improvement ... 17
2.4 Supply chain network performance measurement and improvement framework ... 18
4 5. Discussion ... 32 5.1 Information integration ... 32 5.2 Logistics integration ... 33 5.3 Product development ... 35 5.4 Continuous improvement ... 35 5.5 Performance measurement ... 36 6. Conclusion ... 37
6.1 Implications for theory ... 38
6.2 Implications for practice ... 39
6.3 Recommendations ... 39
6.4 Limitations ... 40
6.5 Future research ... 40
7. Appendix ... 41
Appendix 1: Production industry analysis 2010 till 2014 (ING, Witteveen, Koning and Woltheus, 2015) ... 41
Appendix 2: Kraljic matrix of the Agrifac supplier network (Houtsma, 2014) ... 42
Appendix 3: Interview scheme Agrifac Machinery ... 43
Appendix 4: Interview scheme suppliers ... 44
Appendix 5: Example milk-run Agrifac ... 45
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List of figures
Figure 2.1: supply chain network performance measures
(Gunasekaran, Patel and Tirtiroglu, 2001). 9
Figure 2.2: Supply chain strategy, capabilities and performance
(Morash, 2001). 10
Figure 2.3: Information sharing leads to a higher performance
(Prajogo and Olhager, 2012). 12
Figure 2.4: the milk-run concept
(Brar and Saini, 2011). 14
Figure 2.5: Maturity model of continuous supply chain network improvement
in the innovative machinery industry. 18
Figure 6.1: refined maturity model of continuous supply chain network
improvement in the innovative machinery industry. 38
List of tables
Table 3.1: Quality of the research. 22
Table 4.1: Suppliers involved in study. 24
Table 4.2: Interviews Agrifac. 24
Table 4.3: Results information integration for different supplier categories and Agrifac. 26
Table 4.4: Results logistics integration for different supplier categories and Agrifac. 28
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Preface
This is my Master thesis for my double degree Master of Science in Supply Chain Management and Technology and Operations Management at the University of Groningen. I did a study on performance improvement of supply chain networks in the innovative machinery industry by doing a case study at the supply chain network of Agrifac Machinery BV. For me this study was a good experience to combine theoretical knowledge with practical insights.
I firstly would like to thank my supervisor Prof. Dr. Ir. Slomp for the interesting research project and his support, ideas and feedback. Also I would like to thank my co-assessor Dr. Blok for her ideas and clear feedback. The feedback of my supervisor and co-assessor complemented each other very well. Furthermore I would like to thank Agrifac Machinery for providing me space and time to perform sufficient interviews and observations. Also I would like to thank the suppliers I visited during my study for their time to help me with my research. I experienced all interviews as very nice and interesting and got the information I needed. Lastly I would like to thank two of my fellow students, Tom Grevers and Stenn Westrik, for their support and ideas.
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1. Introduction
Over the past years the machinery production industry has faced an increased demand for more customized and innovative solutions within a shorter delivery lead time (Witteveen, Koning and Woltheus, 2015). To be able to react to these customer wishes and innovate continuously the relationship with suppliers is very important. The machinery production industry has shown a rapid growth over the past years of almost 10% per year (Witteveen, Koning, Woltheus, 2015, appendix 1). It can be characterized as complex due to the fact many different parts are needed and a high variety of end products is possible (Metha and Gross, 2006). Due to this complexity, the higher level of customization and the need to decrease the delivery lead times these companies need a strong supply chain network (Lockamy and McCormack, 2004). Supply chain network performance improvement and measurement are for this reason important in this industry to cope with the increasing level of customization, complexity and shorter lead times.
In the past years a lot of research has been done on performance measures of supply chain networks and ways to increase this performance. Supply chain management has been increasingly becoming a major component of competitive strategy to increase productivity and profitability (Gunasekaran, Patel and McGaughey, 2004). Prajogo and Olhager (2012) did a study about the increase of performance of a supply chain. From their study we know that collaboration within the network has a positive effect on the performance. These results are supported by the study of Cao and Zhang (2011), as they revealed that supply chain collaboration improves the collaborative advantage and also the performance of the collaborating firms.
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while improving quality and service can be linked to a differentiation strategy. Because of this the innovative machinery industry can be characterized by a need to combine these strategies. According to Fisher (1997) an important characteristic of innovative products is a high product variety and this makes the supply chain network development more complex. Because of the current lack of specific knowledge on supply chain network performance measurement and improvement in the innovative machinery industry the main question to answer in this paper is: How should companies in the innovative machinery production industry determine and improve the performance of their supply chain network?
This question is split up in the following sub questions:
1. What are good performance measures for a supply chain network in the innovative machinery production industry?
2. How to improve the performance of a supply chain network in the innovative machinery production industry?
The purpose of this study is to come up with a maturity framework consisting of stages companies in this industry have to perform to improve the performance of their supply chain network. In each stage of the maturity model important aspects that lead to improvement related to the innovative machinery industry will be described and combined with measures to measure the performance of the network.
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2. Theory
Over the past years companies increasingly understand relationships with their suppliers are important for increasing performance to react to more demanding customers (Olhager and Prajogo, 2012). An important aspect in this process is that there is not one theory suitable for all cases to improve performance (Olhager and Prajogo, 2012) of a supply chain network, as this is dependent on the environment (Joynt, 1977; Lawrence and Lorsch, 1986) and strategy of the company (Morash, 2001). Companies producing only one product and have one supplier have a less complex network than companies producing a high variety of end products and have a complex network of suppliers.
This paper focuses on the innovative machinery industry. Since it contains relatively expensive products mostly these products are not simply bought at a shop, but via dealers or representatives, or sometimes directly from the factory. Products can be ordered from a catalogue for example, and customers are able to customize the products to their own wishes to a certain amount. As already mentioned in the introduction the first step of this study will answer the question how to determine the performance of a supply chain network in the innovative machinery industry. After this the article will continue with theory on increasing this performance.
2.1 Measuring the performance of a supply chain network
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Figure 2.1: supply chain network performance measures (Gunasekaran, Patel and Tirtiroglu, 2001). The measures in figure 2.1 can be categorized into four basic categories:
- Costs (manufacturing costs, raw material costs, distribution costs, supplier cost saving initiatives, supplier pricing)
- Quality (nr of defect free deliveries, nr of customer complaints, scrap costs, waste) - Speed (cycle time, delivery time of raw material, (customer) delivery lead time) - Service (flexibility to meet customer demand, suppliers involved in problem solving)
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Figure 2.2: Supply chain strategy, capabilities and performance (Morash, 2001)
In figure 2.2 (Morash, 2001) different supply chain strategies, capabilities and performance can be seen. It is important that the relationships between these four categories are taken into account. Within the network the focus of all companies should be clear as well. Suppliers may have other strategies than the final production companies. In the innovative machinery industry a combination of cost leadership and differentiation is important to react to specific customer demand, combined with an efficient and reliable supply.
In the innovative machinery industry products are mostly custom made and product variety is high and so a high variety of parts is needed for these products (Fisher, 1997). This is the reason a differentiation strategy is needed to ensure this competitive advantage can be exploited. Responsiveness is important (Fisher, 1997). However also cost leadership is important to facilitate an efficient and reliable supply to be able to sell products for the right price. According to Morash (2001) this combination is possible as he describes this strategy in his paper as a mass customization strategy. This strategy leads to a high flexibility.
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2.2 Increase performance
An increase of performance of the network can be measured by better performances on the measures described in the previous paragraph. When a company wants to increase the performance of its supply chain network, it is important suppliers in the network also benefit from these processes, otherwise they might decide to not be involved in the project. Kuei, Madu and Lin (2001) mentioned that it is important that all members involved should take into account a customer driven culture and strive to offer its products in time for the right price. To increase the performance of the whole network with the aim to increase customer value or lower costs, improvements have to be made both internally in the production company (focal company) and externally with suppliers (Agus and Hajinoor, 2012). According to Zhao, Huo, Selen and Yeung (2011) improvements have be made first internally before external improvements can be made effectively. The focus in this study is on the performance of the supply chain network. For this reason this study elaborates on the external improvements and specific important steps for the innovative machinery industry will be described. Internally focal companies should strive for lead time reduction and flexibility (Shaw and Ward, 2007). Lead time reduction is important because customers are continuously searching for newer and more customized products with better features and functionality (Suri, 1998). How to improve this is out of the scope of this study and will not be described here. According to Koufteros, Vonderembse and Jayaram (2005) internal improvements are an important prerequisite before external improvements can take place effectively.
2.2.1 External performance improvement
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Collaboration is needed in supply chains facing uncertainties. Looking at the case of companies producing machinery, the uncertainty might be relatively high due to the highly customized products. Collaboration can be carried out on several different aspects. As already stated information sharing is a very important aspect. But also collaboration in terms of inventory control and logistics (Petroni and Panciroli, 2002) and on the development of products, parts and modules (Handfield, Ragatz, Petersen and Monczka, 1999). These three aspects will be elaborated on further to come to a maturity model. The starting point is information integration (Prajogo and Olhager, 2012).
2.2.1.1 Information integration
According to Prajogo and Olhager (2012) information integration refers to sharing key information along the supply chain network by using information technology. Prajogo and Olhager (2012) tested the model shown in figure 2.3.
Figure 2.3: Information sharing leads to a higher performance (Prajogo and Olhager, 2012).
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To increase performance information integration should be used with all suppliers (Prajogo and Olhager, 2012). Items with a high profit impact should get even more attention by improving the relationships with these suppliers or in some cases looking for other suppliers (Kraljic, 1983).
As there is high demand uncertainty due to a high variety of end products in the innovative machinery industry information sharing between the focal company and its suppliers helps improving the performance of the network. When orders that come in at the focal company are immediately visible for suppliers, they can schedule this to ensure parts are delivered at the right time which leads to lower lead times, which is one of the important performance measures. Also inventory reductions are possible at the focal company and suppliers. Important information to share is information about the parts a supplier needs to deliver for certain products and when these parts need to be delivered. The way in which this information is shared is not important, the most important is that the right information is shared to ensure low delivery times to the customer.
From the model of Prajogo and Olhager (2012) depicted in figure 2.3 can be derived information integration leads to logistics integration, which is the next stage of supply chain network performance improvement.
2.2.1.2 Inventory and logistics integration
Just in time production and deliveries are important improving aspects (Shaw and Ward, 2007). Since a lot of performance measures focus on costs (manufacturing, sourcing, inventory for example) and speed (lead times, delivery times) these aspects should be taken into consideration in the collaboration with suppliers. As stated by Prajogo and Olhager (2012) logistics integration leads to a higher performance. Logistics integration is about the activities that coordinate the materials flow through the supply chain network (Stock, Greis and Kasarda, 2000) and ensuring the right amount of goods at the right time at the right place (Caputo and Mininno, 1998). Prajogo and Olhager (2012) defined several possibilities for performance improvement on this aspect: order quantity reductions, more frequent deliveries and vendor-managed inventory.
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idea of the concept is that the modules and parts are picked up at the suppliers frequently based on the production planning to facilitate just in time delivery and production (Shaw and Ward, 2007). In figure 2.4 (Brar and Saini, 2011) the concept is explained.
Figure 2.4: the milk-run concept (Brar and Saini, 2011)
This reduces inventories, since now only the supplier has to keep some inventory instead of both the supplier and the assembling company. When introducing this concept it is important that the supplier is involved and information about demand is shared.
In the assembly process all modules and parts come together at the moment they are needed and the product is customized to the wishes of the customer. From the studies of Domingo et al. (2007) and Brar and Saini (2011) the benefits of the milk-run concept are reduced costs by reduced stocks, reduced work-in-process and an increase in lean rate, but it also maintains flexibility and product variety. Since these are all performance measures of the supply chain network, it leads to a higher performance of the network. Brar and Saini (2011) also mentioned the environmental aspect, as the milk-run concept will lead to lower transportation distances because truckloads are combined and so not all suppliers have to deliver their parts to the focal company. As the production process of machinery is complex, the milk-runs could also be used to deliver the parts needed for a specific phase of the assembly process at once at the assembling plant at the right time. The production process at the focal company than has to be divided into several parts, and the milk-runs will deliver the parts for a certain stage of the process when this stage is carried out.
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suppliers there is also the advantage that they can decide by themselves when to produce the parts and for this reason make better production schedules and reduce their wastes. This concept should be used for parts that are always needed in production and do not need customization to satisfy customer demand.
A risk of both concepts is that there is a possibility that suppliers are not able to deliver the components in time or in case of the milk-run do not have the items on stock when they are picked up. As already stated by Claassen et al. (2008) and Prajogo and Olhager (2012) information sharing and strong relationships within the supply chain network are of high importance for a successful application of the concepts. For this reason the logistics integration stage is the next stage after the information integration stage. Vendor managed inventory could be used for simple interchangeable parts, while the milk-run could be used for modules that vary from order to order. These two concepts are important for improving the network performance in the innovative machinery industry since they focus on lead time and inventory reductions. Because a high variety of end products is possible in the innovative machinery industry it is not possible to keep every part on stock because of the high degree of customization.
2.2.1.3 Product development
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Information sharing, logistics integration and cooperation in product development are important stages that increase the performance by reducing inventories, decreasing lead times, improving quality and so reducing costs for all parties in the supply chain. Information sharing is the starting point, orders, inventory levels and due dates are important information to share. After performing these improvements logistics can be improved by introducing milk-runs and more frequent deliveries. VMI can be used for standardized components, the focal company has more time for the critical components since the supplier of the standardized components is now responsible for these standardized parts. These logistics concepts can be implemented simultaneously. After these improvements product development can be improved by using modularization to decrease the number of different parts and collaborate on product design to decrease costs, improve quality and improve the producibility. The product development concepts can be implemented simultaneously. The low inventory is important in terms of the innovativeness of the industry. When inventory is kept low, it is more easy to change (parts of) the product based on market trends.
2.3 Continuous improvement
As stated by Bullinger, Kühner and van Hoof (2002) there is not one unique way to an optimal supply chain. An important aspect for performance improvement is continuous measurement and improvement (Bullinger et al., 2002). Bititci and Nudurupati (2002) state that continuous improvement starts at performance measurement. Performance has to be measured continuously to identify areas that need improvement. By solving these problems, performance will increase by continuously eliminating non-value adding activities, which are the main point for performance improvement. Bhuiyan and Baghel (2005) define continuous improvement as “a culture of sustained improvement targeting the elimination of waste in all systems and processes of an organization.”
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minimum. Continuous improvement consists of measuring and improving by continuously eliminating the non-value adding activities.
2.4 Supply chain network performance measurement and improvement framework
The framework in figure 2.5 provides a maturity model consisting of measures and stages to improve the performance of a supply chain network. These stages consist of several aspects that are needed to improve the performance. The framework has been developed based on the literature review. The improvement aspect consists of the internal and external part, however the internal and external improvements are related to each other the focus in this paper is only on the external part. The model is a sequential model but this does not mean improvements in one phase should be completed before starting a new phase. This is also the continuous improvement aspect as improvements in all phases are continuously made. Some improvements on one phase however should be made to facilitate improvements in the next phase.
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Figure 2.5: maturity model of continuous supply chain network improvement in the innovative machinery industry. Internal improvement External improvement - information integration
- Sharing of: Point-of-sale data, orders - Inventory position - Information when a specific part is needed in the production process
External improvement - logistics integration
- More frequent, just in time deliveries - Milk-runs - Vendor managed inventory External improvement - product development - Cooperation in product development - Modularization Continuous improvement - Identify improvement areas - Improve improvement areas - Reduce non-value adding activities Goals • Lower delivery time • Lower inventories at central company • Higher product quality • Higher innovative capability due to lower inventory and lower lead times Goals • Lower delivery time • Lower inventories at supplier and central company • Higher product quality • Supplier better able to determine when to produce • Higher reliability • Higher innovative capability due to lower inventory and lower lead times
Goals
• Lower inventories for supplier and central company • Lower transportation costs (milk-run) • Higher innovative capability due to lower inventories Goals • Lower product and production costs • Higher quality • Lower variability • More easy assembly Goals • Continuously monitor performance and improve weakest links • Eliminate non-value adding activities Measures
•Inventory costs (supplier + central company) •Quality of parts/end product •Delivery time to the customer
•Delivery time of parts •Lead time •Delivery reliability •Distribution costs
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3. Method
From literature the maturity framework as shown in figure 2.5 was derived. Internal improvements are the first step of the improvement of the performance of the supply chain network, however these improvements are not included in this study. The research question of this paper was: How should companies in the innovative machinery production industry determine and increase the performance of their supply chain network? To provide an answer to this question the model as proposed in the theoretical part was evaluated and refined in practice. Sufficient literature was available on supply chain network performance measurement and improvement, however only general and not focused on specific industries (Prajogo and Olhager, 2012). In order to do this an in depth case study at one supply chain network has been used to explore and refine the conceptual model. For this reason this case study had characteristics of both an explorative and extensive study. An explorative case study uncovers areas for research and situations no earlier research has been performed yet (Voss, 2009) and is suitable because this study was performed in a new setting, the innovative machinery industry. Because there was already literature available on general performance measurement and improvement of supply chain networks the aim was to refine the theory by extending the conceptual model of figure 2.5.
An in depth case study gave the advantage that deeper research was possible to study the conceptual model in its natural setting (Voss, 2009). Furthermore case studies allow for answering why, what and how questions. This was important in this study as we wanted to evaluate the framework and the main research question in this study was a how question.
3.1 Unit of analysis
As this study was on measuring and improving the supply chain network performance the unit of analysis chosen in this study was one supply chain network. This fits with the choice for an in depth case study within one supply chain network.
3.2 Case selection
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3.3 Research context
The supply chain network analyzed was the network of Agrifac Machinery B.V., a producer of agricultural machinery (self-propelled and pull-behind sprayers and sugar-beet harvesters). Gross (2007) did a study on the agricultural machinery industry and showed a growth of this industry of around 5,9% of the demand for agricultural machinery in the period 2005 till 2010. The agricultural machinery industry needs continuous innovation of products and high customization to produce products based on the wishes of the customer (Gross, 2007). The choice for Agrifac was based on the effort performed by the network of Agrifac during the past years to improve its network performance. According to the study of ING (Witteveen, Koning and Woltheus, 2015) Agrifac is described because its improvements during the past years. Due to the efforts of their network the percentage of too late deliveries has decreased from 14 to 3%, inventories have been eliminated and costs have been reduced significantly in the network. Since this network already had performed steps of the model it was selected for this study.
3.4 Operationalization
The model in figure 2.5 consists of stages that lead to higher network performance. Within every stage several improvements are derived from literature. These are already operationalized in the conceptual model by the different improvements that belong to the specific stages. In practice has been analyzed if these aspects are performed. If an aspect was not performed there was asked why this specific step was not performed. Also within every stage there research was conducted if there were improvement factors missing in the conceptual model. This information was used to refine the model.
3.5 Data collection
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also different suppliers. The selection of which suppliers to perform interviews was based on a conversation with the person that has initiated the changes in the network and an analysis of the suppliers by former master student Pieter Houtsma (2014). In his master thesis titled as Vulnerability of the supply chain network of an innovative OEM: a case study of a producer of self-propelled sprayer equipment he divided the suppliers according to the Kraljic matrix in the four different categories. This matrix divides the products or components in four different categories based on its profit impact and the supply risk. The profit impact could be seen as the importance of the item for the process. There are four possible categories, leverage items (low supply risk, high profit impact), strategic items (high supply risk and profit impact), Non-Critical items (low supply risk and profit impact) and bottleneck items (high supply risk and low profit impact). In appendix 2 this analysis of suppliers is shown. Differences between suppliers in different groups can be caused by the importance of the relationship in the network and for this reason the improvements at a supplier of important components can be more significant than at less important suppliers. Interviews at Agrifac were conducted with the production manager, three purchasing managers, the operations manager and two assemblers. The interviews lasted for one to two hours and the interview scheme is shown in appendix three. Also at suppliers interviews were conducted. The determination of which suppliers were interviewed was based on the Kraljic matrix of the company. Suppliers from the different groups are selected and the interview was conducted based on the interview scheme of appendix four.
The interviews were performed by one interviewer that asked questions and wrote down keywords of the answers and if accepted the interviews were recorded. Literal transcription was used to transcribe the interviews to clear sentences. The interviewer asked questions on the different stages of the maturity model (figure 2.5) and also asked for examples and the reasons behind the things that were done to make the interview more concrete.
3.6 Quality
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Quality aspect
How assured in this study
Construct validity
Construct validity is ensured by the use of correct operational measures (Karlsson, 2009). Because the aspects belonging to the specific stages in the conceptual model are derived from literature these measures are assumed to be correct. In the interviews was determined if these aspects are used and if not, why they were not used. Furthermore the interviews were combined with observations to ensure multiple sources of evidence and verify in practice if the steps of the different stages were performed as discussed during the interviews. Internal
validity
Internal validity means the explanation of the relations between the results. Assumed is a relationship between the stages of the conceptual model. These stages can be performed at the same time but it is believed to perform logistics integration also information integration is needed (the previous stage of the model). The same yields for the internal improvements. When focal companies do not improve their internal performance the effects of the information and logistics integration will not be fully exploited.
External validity
External validity is needed to ensure general results (result will also yield in other cases), (Yin, 2014). Because the selected supply chain network already improved the performance of their supply chain network and can also be seen as an example of a well performing network due to the low percentage of late deliveries and low costs. Because of the significant improvement of the performance of this case the results will expectedly also yield in other similar cases. Here the replication logic is important (Karlsson, 2009). Literal replication, the same results in new cases, is expected.
Reliability Reliability means the extent to repeat the study with the same results (Yin, 2014). Because the stages in the conceptual model are clear the study could be easily repeated. The process of the study, consisting of the determination of a maturity framework consisting of different stages facilitate conduction of this study also in other cases (the framework might be different in another industry). Reliability will be ensured by gathering data from different parties involved in the network and also the use of interviews combined with observations.
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3.7 Documentation
After data collection the data was documented by transcribing the recorded interviews and notes. This data was than coded to be able to divide it into categories. The categories used were the different stages and improvement aspects per stage in the conceptual model. New aspects were put into a new category per stage. The conceptual model can for this reason be seen as the structure of the coding categories. During this analysis both inductive and deductive coding were used. Deductive coding in cases where information was related to theories that were already in the conceptual model, and inductive coding when new data was derived from the discussions during the interviews in which new information raised (Fereday and Muir-Chochrane, 2008). In these situations new categories were created within the specific improvement stages.
3.8 Analysis
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4. Results
In this section the results of the interviews confirmed at different suppliers and Agrifac are presented. In table 4.1 the different suppliers are numbered and also their importance and supply risk are indicated. The supply risk is determined based on the number of potential suppliers, the substitution possibilities, the switching cost to new suppliers and the product availability (Kraljic, 1983). In total Agrifac has around 200 suppliers (appendix 2). This number is changing over time because the products continuously change. In table 4.2 the interviews at Agrifac are listed.
Table 4.1: Suppliers involved in study.
Table 4.2: Interviews Agrifac.
As stated in the theoretical background internal integration is the first step of the maturity model for performance improvement. At Agrifac also internal improvements have been made. According to the interviewees of Agrifac the layout of the plant has been changed to facilitate in line production. However there are currently no work instructions and also the production planning is not followed up always. Furthermore there are no fixed lead times related to the work the workers have to do so internal lead times cannot be effectively controlled.
4.1 Information integration
Information integration is seen as an important first step in supply chain network improvement after internal integration. An information sharing system, forecasts, orders with
Supplier Part type Importance Supply risk
1 Standardized parts Low Low
2 Cylinders High Low
3 Welded assemblies High Low
4 Tanks Low High
5 Chassis High High
6 Frames High High
7 Engines High High
Agrifac – purchaser 1 Agrifac – purchaser 2 Agrifac – purchaser 3
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a delivery lead time and supplier meetings were mentioned as important. Workers of Agrifac mention the introduction of an information sharing system as important. Purchaser 1 states “a clear information sharing process was needed. We make use of an MRP system to facilitate this. We are now able to search old orders to suppliers and the prices we paid for specific components.” At this moment 72 suppliers are included in this system, while 99 were invited. According to purchaser 2 not all suppliers are included because “not for all suppliers it is needed to share all orders since a part of the suppliers only supplies a few parts per year, and some suppliers indicated they do not want to work with this system since it is not compatible with their own systems. Next forecasts are mentioned by all interviewees. Suppliers use this forecast to schedule its workers for Agrifac. Supplier 6 states: “Furthermore forecasts have been introduced based on which we can plan our workers and materials. The forecasts are used to schedule workers and materials by average for the Agrifac products.” Forecasts are shared with suppliers with a high supply risk. All suppliers mention that it is important that the forecasts are correct, some suppliers of critical components mention that the number of forecasted products always differs from the actual number of orders.
Also orders are named as important information to share. Both Agrifac and all suppliers mention that these orders have a fixed delivery due date and this is important information to share. Also it is important to immediately translate a customer order into purchase orders to suppliers, so they have enough time to produce the parts. Supplier 1 mentioned empty part boxes as an extra way of information integration. This supplier is responsible for refilling these boxes with standardized small parts and this supplier gets its information from empty boxes that need a refill.
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Table 4.3: Results information integration for different supplier categories and Agrifac.
4.2 Logistics integration
Just in time deliveries, vendor managed inventory, milk-runs and complete kits were named as aspects to improve logistics integration. Vendor managed inventory (VMI) is mentioned by supplier 1 that supplies standardized components and several workers of Agrifac. The workers of Agrifac mention they now need less work for the purchasing process of these parts, since the supplier is responsible for the inventory of these parts. The supplier itself states: “For Agrifac this saves time since these are not critical parts, for us it gives the advantage that we better know how much inventory we need.” All interviewees state VMI is a useful concept for
Category Information integration Why? Related to what
performance
Forecasts Schedule workers Delivery lead time
Orders What to produce? Delivery lead time
Delivery lead times Determine planning Delivery lead time Supplier meetings Share information,
cooperate
Costs, quality, delivery lead time
Forecasts Schedule workers Delivery lead time
Orders What to produce? Delivery lead time
Delivery lead times Determine planning Delivery lead time Supplier meetings Share information,
cooperate
Costs, quality, delivery lead time
Orders What to produce? Delivery lead time
Empty VMI boxes Determine planning when to refill
Delivery lead time
Forecasts Schedule workers Delivery lead time
Orders What to produce? Delivery lead time
Determine planning
Forecasts Give suppliers idea
about future
Delivery lead time
Orders Ensure parts are in time at the plant
Delivery lead time
Delivery lead times Ensure parts are in time at the plant
Delivery lead time
Supplier meetings Communicate on results, future and facilitate cooperation of the network
Delivery lead time, quality, costs
Delivery lead times Delivery lead time
Agrifac
high importance, high supply risk (3 suppliers)
low importance, high supply risk (1 supplier)
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standardized and simple parts that are not very expensive. Both suppliers of standardized components like bolds and screws make use of the VMI concept.
Suppliers 5, 6 and 7 name the milk-run as important. According to purchaser 2 of Agrifac “Milk-runs have the benefit that transportation is more efficient.” The workers of Agrifac mention the inventory reduction and the fixed arrival moment of parts as the benefits, all suppliers mention the fixed pickup moment as a benefit. Supplier 7 states: “The milk run has led to fixed delivery due dates. It is easier to plan the work now since the parts are picked up at fixed moments.” Supplier 6 adds: “The milk-run also picks up parts at our plant and brings them to another plant that does the coating work, and then the same milk-run is used to deliver these parts to Agrifac, this saves transportation costs.” This means trucks are more efficiently used and costs are lower for all parties in the network. At this moment five milk-runs are in use, in which 20 suppliers and three suppliers of suppliers are included. Ten of these 20 suppliers are supplying strategic components (high supply risk and high importance). In appendix 5 an example of one milk-run can be seen in which 10 suppliers are included. This milk-run has a total distance of around 600 KM. When all suppliers would deliver their parts individually to Agrifac the total travel distance would be 2524 KM.
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Table 4.4: Results logistics integration for different supplier categories and Agrifac.
4.3 Product development
Standardization, modularization and cooperation in product changes were indicated as important in terms of product development. Supplier 3,4, 6 and 7 mentioned they are involved in product development and their ideas are welcomed by Agrifac. According to supplier 6: “when we have an idea about more easy production processes or materials or possibilities to decrease the lead time we mention this to Agrifac and in cooperation with them the product is being changed when this is possible.” This doesn’t yield for suppliers of simple parts. Both workers of Agrifac and suppliers mention that mostly changes in the product come from the
Category Logistics integration Why? Related to what
performance
Milk-run Lower transportation costs, fixed pick-up moments
Delivery lead time, costs
Just in time deliveries Schedule work Delivery lead time Complete kits Less inventory at focal
company
Delivery lead time, quality
low importance, high supply risk (1 supplier)
Just in time deliveries Schedule work Delivery lead time
low importance, low supply risk (1 supplier)
VMI Supplier responsible for
inventories and able to determine its own planning
Costs
Just in time deliveries Schedule work Delivery lead time
Kits Less inventory at focal
company
Delivery lead time, quality
Just in time deliveries Ensure parts are in time Delivery lead time Milk-run Lower transportation
costs, fixed pick-up and delivery moments
Delivery lead time
VMI Supplier responsible for
inventories, more time for important
components
Delivery lead time
Complete kits Assembly worker has all parts needed on hand, less inventories
Delivery lead time, inventory levels, costs
high importance, high supply risk (3 suppliers)
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development department of Agrifac. According to supplier 7: “Also modularization is important, so some parts can be used for different end products.” This opinion is shared by supplier 1, 2, 3, 6 and 7 and Agrifac as well. Assembly worker 2 of Agrifac mentioned standardization is important since “more parts are the same for different products. This makes our work easier and we need less inventories now.” Supplier 5 adds: “Over the past years we standardized many parts to ensure more easy production and assembly processes.” Important reasons to cooperate on product development are according to the interviews lead time reductions, cost reductions and inventory reductions. In table 4.5 the results in terms of product development are summarized.
Table 4.5: Results product development for suppliers and Agrifac.
4.4 Continuous improvement
According to different workers of Agrifac from different departments continuous improvement is done always and has to do with all steps described before. The delivery lead
Category Product development Why? Related to what
performance
Standardization Less parts, less inventory
Delivery lead time, costs
Modularization Less assembly work at focal company
Delivery lead time
Product changes Benefit from supplier knowledge
Quality, costs
Standardization Less parts, less inventory
Delivery lead time, costs
Product changes Benefit from supplier knowledge
Quality, costs
low importance, low supply risk (1 supplier)
Standardization Less parts, less inventory
Delivery lead time, costs
Modularization Less assembly work Delivery lead time, quality Standardization Less parts, less
inventory
Delivery lead time, costs
Product changes Benefit from supplier knowledge
Quality, costs
Modularization Less assembly work Delivery lead time
Standardization Less inventories Delivery lead time, costs, quality
Product changes Benefit from supplier knowledge, improve working methods
Delivery lead time, quality, costs
low importance, high supply risk (1 supplier)
high importance, low supply risk (2 suppliers)
Agrifac
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time is most important in determining which supplier needs more attention next to the type of parts they supply. According to purchaser 2: “The importance of their components is key in determining the degree of cooperation with a supplier. Suppliers that are not able to deliver in time get more attention.” According to workers of Agrifac the suppliers that need help are provided with knowledge or forecasts. Agrifac is leading in the continuous improvement process and suppliers and improvements are introduced by Agrifac. Sometimes is switched from supplier, but this is rarely done since the relations in the network are good.
4.5 Performance measurement
The delivery lead time is mentioned as most important performance measure. Purchaser 3 of Agrifac states: “The delivery lead time is an important competitive advantage and so an important measure. This yields both for the time the finished product is ready to ship to the customer as well as the delivery times from suppliers to Agrifac”, where purchaser 1 adds: “Lead times are more important to us than costs (until a certain degree).” In congruence with the delivery lead time also delivery reliability is mentioned as a performance measure. In the information sharing system the delivery reliability of suppliers can be seen and suppliers can also see the delivery reliability of the network. To measure the delivery reliability Agrifac uses the number of backorders per supplier as a performance measure. Agrifac gives more attention to firms with a high number of backorders to improve their performance and so the performance of the network. Also the lead time is important in the production process. To ensure the finished product is delivered in time to the customer the lead times have to be measured. At this moment the lead times are not met and products are delayed. According to the manager operations this is due to the fact there are no clear work instructions and related times. Also quality of the product is mentioned as an important measure: “Furthermore the quality of the product is important. We make use of good quality parts and modules to ensure our end product has a good quality.”
According to both the interviewees of Agrifac and the suppliers Agrifac measures the performance of the delivery lead time and quality and communicates this with its suppliers when they are not performing well.
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introduction of new technologies for example. The inventory levels can be related to costs since inventory costs money.
4.6 Maturity model
According to interviewees of Agrifac internal improvements were made first. The layout of the plant was changed to create a line layout. After this step the information system was introduced and forecasts were developed. Orders were always communicated with suppliers, combined with the delivery lead time. After these steps were carried out the milk-run was introduced, and at the same time kits were developed and the VMI was introduced. Also more modules were implemented in this same period.
5. Discussion
As already described in the theoretical background internal improvements are needed before external improvements will be effective. In the case analyzed internal improvements are not fully finished since work instructions and lead times workers have to achieve are missing. This leads to delays which might lead to unsatisfied. According to Miltenburg and Sinnamon (1989) just in time production requires producing the necessary items at the necessary times. Since the production schedule is not always followed up and there are no clear internal lead times for all stations the internal integration stage is not yet fully fulfilled.
From Prajogo and Olhager (2012) is known information integration is needed before logistics integration can be effectively performed. This is confirmed by the interviews performed at Agrifac and the suppliers that were visited. For cooperation on product development also information integration is seen as an important prerequisite, but logistics integration is not. The reason for this is that logistics integration and product development are two separate issues that are not related to each other according to Agrifac and its suppliers.
5.1 Information integration
From the theoretical part is known important aspects in information integration are sharing point-of-sale data, orders, inventory positions and information on when a certain part is needed in the production process. All these aspects are confirmed in the interviews at Agrifac and its suppliers.
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suppliers is important to ensure the end products can be delivered in time to the customer. Low inventories are important to be able to implement new parts in the product as fast as possible when the market demands this. 72 suppliers are included in an information sharing system, in which orders can be shared and suppliers can indicate if they are delivering in time or not. This number could be increased. Also the delivery performance of the network can be seen in this system.
Forecasts were also mentioned in the interviews but not described in the theoretical background. Since firms in the innovative machinery do not know what the customer is demanding in the future, it is difficult to provide suppliers with a correct forecast. Agrifac also mentioned it prefers to not provide a forecast. Most suppliers however indicate they need a forecast to schedule time for the production of the parts for Agrifac. Since it is difficult to provide a forecast because of the high variety of end products Agrifac only forecasts the number of machines it expects to produce in a certain week. This forecast is based on experiences and information from its sellers. According to Fisher (1997) the margin of error of forecasts in the innovative industry is around 40 to 100%. Because of this high possibility of errors suppliers should strive to decrease their lead times to be able to deliver in time. Suppliers can use this forecast to schedule time for products for the focal company. Suppliers of Agrifac confirm this way of working with the forecasts. For this reason, forecasts on the number of products expected to produce is added to the model.
Lastly supplier meetings were mentioned as important in terms of information sharing. On these meetings suppliers and the focal company can discuss problems they face and help each other to solve these problems and so increase the performance of the network which is dependent on the performances of the companies in the network.
5.2 Logistics integration
In the theoretical part just in time deliveries, milk-runs and vendor managed inventory were described as important aspects for performance improvement of a supply chain network in the innovative machinery industry. Before implementing these aspects first the information integration stage should be finished.
milk-34
runs is described as helpful in this case. The milk-run was mostly mentioned by suppliers of important components. The reason for this is these important components are large components and fixedness is important for these suppliers to plan their operations. This fixed pickup moment is an important aspect of the milk-run since suppliers can base their planning on this fixed pickup moment. Another driver for the milk-run is a decrease in transportation costs and less unloading work at the focal company. These benefits are also described by Domingo et al. (2007) and Brad and Saini (2011). The fixed pickup moments are added to the model since all interviewees that mentioned the milk-run came up with this aspect. Currently 20 suppliers are included, but the milk-runs are changing over time. When a new supplier is contracted for new parts for example these can be included in one of the milk-runs. The example described in the results section saved over 75% of transportation distance. Furthermore a benefit is that only on truck has to be unloaded instead of all individual trucks from different suppliers. The frequency the milk-runs are running depends on the number of products Agrifac needs to produce in a certain week. To stay innovative and implement new parts in a short time also the milk-run has to be up to date all the time to be efficient.
Vendor managed inventory was described by the focal company and the suppliers of standardized components. The focal company named the fact they do not need much attention for these parts anymore as important, since they now can focus more on the important components. The supplier named as advantage they can now schedule their selves the refill moment. Also they are better able to manage their inventories. These benefits are also described in earlier research from Yao et al. (2007). Yao et al. (2007) also indicated a higher customer service level as a benefit of the VMI. Since the focal company indicated they now have more time for other work and do not have to give attention anymore to the parts supplied by the VMI concept, this can be seen as a higher service level and also this benefit is confirmed by the case. Currently Agrifac has two large VMI suppliers that deliver all small standardized components.
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look for all specific parts, but get a kit in which all these parts are included. This was confirmed in the interviews. Incompleteness is indicated by the workers as a disadvantage, since it costs a lot of time to find the needed parts when the kit is not complete. Currently Agrifac makes use of 34 basic kits. This number is however changing over time and depends on the products that are changing over time. Next to the product also the costs are important in the decision to make use of kits or not. In the case of Agrifac the financial (dis)advantages are not known exactly and not taken into account. According to Limère, Landeghem, Goetschalckx, Aghezzaf and McGinnis (2012) costs are an important measure to take into account when deciding between using kits or stock. Even when low inventories are preferred like in the innovative machinery industry the costs should also be considered.
5.3 Product development
In the theoretical part modularization was described as an important aspect in terms of cooperation on product development (Hsuan, 1999). Inventory reductions and more standardized processes were described as benefits (van Hoek and Weken, 1998). In the interviews was indicated only suppliers of important components are involved in product development. The most important aspects mentioned were modularization and standardization. Inventory reductions and more standardized processes to facilitate lower lead times were mentioned as important reasons to do this. Furthermore two suppliers of important components mentioned an example on the use of new materials. The reasons for these improvements were lead time reductions and quality improvements. Suppliers of standardized and small components are not involved in product development because their parts are interchangeable and can be bought from many different suppliers. The cooperation on product development consists of three aspects: modularization, standardization and product changes. The goals of doing this are inventory reductions, lead time reductions and quality improvements.
5.4 Continuous improvement
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network. Also suppliers of important components get more attention. Mostly these suppliers are also the suppliers that have difficulties with the standards in terms of delivery lead times.
Furthermore workers of the focal company indicate improving improvement areas as important aspect in terms of continuous improvement. This can be done on product development, logistics integration and information sharing. Improvements are made continuously on all aspects described. Quality improvement, cost reductions and lead time reductions are important in case of improving improvement areas. Continuous improvement is the last step of the maturity model, but it has to do with all earlier steps.
5.5 Performance measurement
Quality measurement, lead times, delivery time and the ability to meet specific customer demand were described as most important aspects in terms of performance measurement. In the interviews the delivery lead time was indicated as most important measure for supply chain networks in the innovative machinery industry. As indicated earlier the internal lead times at Agrifac should be measured and controlled together with a fixed production schedule. These internal improvements have not been made yet.
Next to the delivery lead time also the delivery reliability, which was defined as the ability to deliver in time, was indicated as important. To measure the reliability the number of backorders is used. A high number of backorders means a low reliability. Gunasekaran, Patel and Tirtiroglu (2001) also indicated the delivery reliability as a performance measure. Measuring backorders is a way to measure this reliability. The ability to meet specific customer demand was not mentioned as a measure. This was indicated as a characteristic of the innovative industry since innovations are continuously made and an ability is difficult to measure. Quality however was mentioned as measure. When suppliers deliver parts that do not have the right quality this is communicated with them. Suppliers itself also perform quality checks to ensure good quality parts. This means this measure is used at both the suppliers and the focal company.
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The (delivery) lead time, the quality of the parts and finished product and the costs are important measures for the performance of the network. Next to these network measures suppliers and the focal company can have individual measures for their internal performances. Suppliers indicated to use different measures for different products. For products for the focal company they also focus on the delivery lead time, as the focal company also does.
The fact the delivery time is important is mainly because of the innovativeness of the industry. To be able to react fast to customer wishes it is important to have a low delivery lead time of parts. Suppliers always need to be able to react to changes in the product. After the delivery lead time also the quality and costs are performance measures.
6. Conclusion
In this chapter the main research question will be answered:
How should companies in the innovative machinery production industry determine and improve the performance of their supply chain network?
From a theoretical study the model displayed in figure 2.5 was derived. By a case study at a supply chain network in the innovative machinery industry this maturity model was tested and refined. In the results and discussion sections the results of the case study were discussed.
As described the sequence of the steps in the model is different since cooperation on product development is not necessarily performed after logistics integration. Also in the different steps some aspects were added. To the information integration step forecasts and supplier meetings are added. These forecasts are used by suppliers to schedule time for the production of products for the focal company. Since the delivery lead time is the most important performance measure, it is important to finish the parts in time. Forecasts help in scheduling the work. In supplier meetings suppliers and the focal company can discuss problems with each other and help each other.
To the logistics integration kits are added. Important is that the kits are complete. The milk-run, just in time deliveries and VMI were already included in the model. The VMI is however only useful for standardized and simple parts that the focal company needs to have on stock.
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product development with these suppliers is higher. Standardization, modularization and product changes are the three important aspects in terms of cooperation on product development. In figure 6.1 the refined model based on the case study is proposed. Aspects that are added to the model are italicized.
Figure 6.1: refined maturity model of continuous supply chain network improvement in the innovative machinery industry.
6.1 Implications for theory
The maturity model proposed in figure 6.1 shows steps supply chain networks in the innovative machinery industry have to perform to improve their performance. The main goal is to ensure a low delivery lead time to the customer. To do this low lead times are necessary. To be innovative however also low inventories are necessary to ensure new parts can be implemented immediately when the market demands this. The main implication for theory is
Internal improvement External improvement - information integration - Orders - Forecasts - Inventory position (empty VMI boxes) - Information when a specific part is needed in the production process
- Supplier meetings
External improvement - logistics integration
- More frequent, just in time deliveries - Milk-runs - Vendor managed inventory -Complete kits External improvement - cooperation in product development - Modularization - Standardization - Product changes Continuous improvement - Identify improvement areas related to earlier stages
- Improve improvement areas
- Reduce non-value adding activities Goals • Lower delivery time • Lower inventories at central company • Higher product quality • Higher innovative capability due to lower inventory and lower lead times Goals • Lower delivery time • Lower inventories at supplier and central company • Higher quality • Supplier better able to determine planning Goals (logistics integration) • Lower inventories for supplier and central company • Lower transportation costs (milk-run) • Supplier better able to determine planning Goals (product development) • Lower product and production costs • Higher quality • Lower variability • More easy assembly • Lower delivery lead time Goals • Continuously monitor performance and improve weakest links • Eliminate non-value adding activities Measures
• Delivery lead time from focal company to customer and supplier to focal company • Delivery reliability (number of backorders)
• Quality of parts and end product • Costs
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that companies active in the innovative machinery industry (as a supplier or focal company) are likely to make use of aspects proposed in figure 6.1. Another implication is the fact internal improvements are an important prerequisite for network improvements. Unsuccessful network improvements might be due to the fact internal improvements have not been performed well. Also the linkages in the model are important. Introducing a milk-run without a clear way of information sharing will be less effective, but also the internal operations need to be aligned with the delivery moments of this milk-run for example.
6.2 Implications for practice
The steps to improve the performance of a supply chain network in the innovative machinery industry are clarified in figure 6.1. An important implication for practice is that companies in this industry first have to make internal improvements before external improvements can be fully effective. The most important internal improvements are at the focal company where the final assembly takes place. Furthermore it is important to follow the sequence of the maturity model. Information integration is needed before logistics integration or cooperation on product development can take place effectively. Information integration is extra important in this industry because of the market that is changing over time. For this reason also supplier meetings are important, to discuss the future and problems. These meetings can facilitate knowledge sharing within the network.
6.3 Recommendations
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6.4 Limitations
The main limitation is the fact not all suppliers have been visited due to the limited time. A selection of suppliers was made based on their importance and supply risk. There was tried to visit suppliers of each category of the Kraljic matrix to get a broad view of differences between suppliers. There however might be suppliers that show different results than other suppliers of the same category.
6.5 Future research
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7. Appendix
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Appendix 3: Interview scheme Agrifac Machinery
Subjects to discuss in the interview:
How has the supply chain network of Agrifac Machinery been improved over the past years?
How is the performance of the network being measured?
How has this performance been improved by the changes of the past years?
What improvements could or should be made in the future?
How does the information sharing process with suppliers work?
What is important for logistics integration?
How are suppliers involved in product development?
How is the optimal strategy to cooperate with a certain supplier determined?
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Appendix 4: Interview scheme suppliers
Subjects to discuss in the interview: Improvements
What kind of supplier are you for Agrifac?
What was the influence of the developments at Agrifac over the past years at your company?
What consequences did the improvements at Agrifac have for you as a supplier?
To what extent have you been involved in these improvements? Information sharing
What information is shared from Agrifac to your company? (orders, forecasts, etc.)
What information should you need more or should be helpful to further improve?
What could be improved in terms of information sharing? Logistics
In what way are the logistics processes with Agrifac equipped and way in this way?
What are the consequences of this?
What could be improved in terms of logistics? Product development
Are you involved in product development?
What is the reason of this extent of involvement?
Which concepts are most important in terms of collaboration in product development?
What could be improved in terms of collaboration on product or part development between Agrifac and your company?
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