A flow cost model: a case study at Volvo Trucks Corporation

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(1)2006:331 CIV. MASTER'S THESIS. A Flow Cost Model - a case study at Volvo Trucks Corporation. Sandra Bengtsson Teres Sjöblom. Luleå University of Technology MSc Programmes in Engineering Mechanical Engineering Department of Business Administration and Social Sciences Division of Industrial Logistics 2006:331 CIV - ISSN: 1402-1617 - ISRN: LTU-EX--06/331--SE.

(2) PREFACE ___________________________________________________________________________. PREFACE This master’s thesis has been conducted within the area of Industrial Logistics and Production at Luleå University of Technology. The thesis is the final part in our university degree MSc in Mechanical Engineering and Industrial Management and Engineering. It was carried out during the period from April to September 2006 at Volvo Trucks in Gothenburg. Fulfilling this study was made possible thanks to the support from a range of people that we would like to thank. We wish the biggest thanks to our supervisors at Volvo Trucks in Gothenburg, Karin Sandberg and Jan-Olof Sjö for all help and support during this study. We would also like to show our gratitude to our supervisor at Luleå University of Technology, Anders Sörqvist, for his support and theoretical knowledge. Furthermore, we would like to thank the personnel at the department of Production Engineering Logistics as well as the respondent for patiently answering our questions. Without your help this master’s thesis would not have been possible to complete.. Gothenburg, September 2006. _________________. _________________. Sandra Bengtsson. Teres Sjöblom.

(3) ABSTRACT ___________________________________________________________________________. ABSTRACT This master’s thesis was carried out at Volvo Trucks in Gothenburg, Sweden. Volvo Trucks is one of the world’s leading manufactures of heavy trucks and they have always seen the value in having effective material flows in order to succeed in the highly competitive automotive market. All trucks are assembled based on the customer’s needs. This makes each truck unique, developed to meet the individual need of the customer. This is a competitive advantage for Volvo Trucks, but it also requires a lot from production where the effectiveness of the internal material handling is very important. The department of Production Engineering Logistics has today done some calculations on the handling of the internal material, but a lot of these calculations are based on old data. Since Volvo want to analyse different alternatives concerning internal material handling based on current data, a reliable cost model that can be updated is needed. The purpose of this project is to construct and present a cost model that Volvo can use to determine the costs of the different internal material flows at the production plant in Gothenburg. This task requires that the material flows are identified and mapped, therefore flowcharts of the processes in the plant was first conducted. When conducting this cost model, all components included in the total cost concept have been investigated. The total cost concept has been biased in a way that the customer is the assembly line, which contributes that the other five major cost categories is the activities that support the material handling processes. The goal with identifying the relevant activities is to uncover the costs. By identifying the activities of the flowchart and the resources that each activity consumes, the costs could be discovered. When the costs had been identified the cost model based on time studies was developed. A concept that showed the design of the cost model was built up, and the final cost model was constructed in Excel. Visual Basic for Applications was used to get a clean layout and to make the cost model easier to use. The model is based on five excel sheets where each process represents one sheet. One row in the Excel sheets represents one specific activity and the columns represent the activity time followed by the different costs that is included in the activity. The rows are arranged after activity which makes it easier to find a specific activity when for example updating the model..

(4) ABSTRACT ___________________________________________________________________________. When the cost model needs to be updated, the authors have added comments on the essential cells where a calculation has been performed. In that way, it is easier for the employees to update the model and to se how the costs have been calculated. The authors find the cost model highly trustworthy and the accuracy corresponds to the purpose with the cost model. The model is easy to use and to understand and since it is based on time studies it also contain clear and specific costs that is easy to trace. The cost model can for example be used when deciding how the material should be managed at lowest cost. The employees can compare different possibilities of transporting a specific material in order to receive the lowest total cost. The employees can for example use this model when deciding about the layout of the plant. Would it be cheaper to have the chassis line placed closer to F11, or would it be more expensive?.

(5) SAMMANFATTNING ___________________________________________________________________________. SAMMANFATTNING Detta examensarbete har utförts på Volvo Lastvagnar i Göteborg, Sverige. Volvo Lastvagnar är en av världens ledande tillverkare av tunga lastbilar och de har alltid sett värdet av att erhålla effektiva materialflöden i syfte att lyckas på den konkurrenskraftiga bilmarknaden. Alla lastbilar monteras utefter kundens behov. Detta gör varje truck unik, utvecklad att möta kundens individuella krav. Detta är en fördel konkurrensmässigt för Volvo Lastvagnar, men det kräver också mycket av produktionen där effektiviteten av den interna materialhanteringen är mycket viktig. I dagsläget har avdelningen för Produktionsteknik Logistik gjort beräkningar på hanteringen av det interna materialet, men många av dessa beräkningar är baserad på gamla siffror. Eftersom Volvo vill analysera olika hanteringsalternativ baserad på aktuell data behövs en pålitlig modell som också kan uppdateras. Syftet med examensarbetet är att utföra och presentera en kostnadsmodell som Volvo kan använda för att bestämma kostnader över de olika interna material flödena på produktionsenheten i Göteborg. Detta uppdrag kräver att materialflödena är identifierade och kartlagda och därför har först flödeskartor över de olika processerna i fabriken tagits fram. Vid framtagning av denna modell, har alla komponenter som ingår i totalkostnadskonceptet undersökts. Totalkostnadskonceptet har vinklats på det sättet att kunden är monteringen, vilket ger att de andra fem kostnadskategorierna är de aktiviteter som stöder materialplaneringsprocesserna. Målet med att identifiera de relevanta aktiviteterna är att få fram kostnaderna. Genom att identifiera flödeskartans aktiviteter samt de resurser som varje aktivitet konsumerar kunde kostnaderna upptäckas. När kostnaderna blivit identifierade kunde kostnadsmodellen som baserats på tidsstudier utvecklas. Ett koncept som visar designen av kostnadsmodellen togs fram och den slutgiltiga kostnadsmodellen byggdes upp i Excel. Visual Basics for Applications användes får att få en tydlig layout samt för att göra kostnadsmodellen lättare att använda. Modellen baseras på fem excelblad där varje process representerar ett blad. En rad på excelbladen representerar en specifik aktivitet, och kolumnerna representerar aktivitetstiden följt av de olika kostnaderna som ingår i aktiviteterna. Raderna är ordnade efter aktivitet vilket gör det lättare att hitta en specifik aktivitet när man t ex ska uppdatera modellen..

(6) SAMMANFATTNING ___________________________________________________________________________. När kostnadsmodellen ska uppdateras har författarna infört kommentarer på de celler där beräkningar har utförts. Det leder till att det blir lättare för de anställda att uppdatera modellen genom att se hur kostnaderna har beräknats. Författarna anser att kostnadsmodellen är högst tillförlitlig och att dess noggrannhet motsvarar syftet med kostnadsmodellen. Modellen är lätt att använda och förstå och eftersom modellen är baserad på tidsstudier innehåller den tydliga och specifika kostnader som är lätta att spåra. Kostnadsmodellen kan till exempel användas när det ska bestämmas hur ett material ska hanteras till lägsta kostnad. De anställda kan då jämföra olika möjligheter att transportera ett specifikt material för att nå lägsta totala kostnad. Skulle det bli billigare att placera chassi-line närmare F11 eller skulle det bli dyrare?.

(7) TABLE OF CONTENTS ___________________________________________________________________________. TABLE OF CONTENTS 1. INTRODUCTION ........................................................................................ 1 1.1 1.2 1.3 1.4 1.5. 2. VOLVO FACTS ........................................................................................... 4 2.1 2.2 2.3. 3. BACKGROUND .......................................................................................... 1 PROBLEM DEFINITION ............................................................................... 1 SPECIFYING THE PURPOSE ......................................................................... 2 GOALS ...................................................................................................... 2 DELIMITATIONS ........................................................................................ 2 VOLVO GROUP.......................................................................................... 4 PRODUCTION GOTHENBURG ..................................................................... 5 DEPARTMENT OF PRODUCTION ENGINEERING LOGISTICS ......................... 6. METHODOLOGY ....................................................................................... 7 3.1 RESEARCH APPROACH ........................................................................... 7 3.2 RESEARCH STRATEGY ............................................................................... 7 3.2.1 Qualitative and quantitative method .................................................... 8 3.3 DATA COLLECTION ................................................................................... 8 3.4 VALIDITY AND RELIABILITY...................................................................... 9 3.5 WORKING STRUCTURE ............................................................................ 10 3.5.1 Literature study and interviews.......................................................... 11 3.5.2 Process documentation....................................................................... 11 3.5.3 Cost model ......................................................................................... 11 3.5.4 The structure of the cost model.......................................................... 12 3.5.5 Verification ........................................................................................ 12. 4. THEORETICAL FRAME OF REFERENCE ........................................ 13 4.1 THE TOTAL COST CONCEPT ..................................................................... 13 4.1.1 Transportation costs ........................................................................... 14 4.1.2 Warehousing costs ............................................................................. 14 4.1.3 Order processing and information costs ............................................ 14 4.1.4 Lot quantity costs ............................................................................... 14 4.1.5 Inventory carrying costs..................................................................... 15 4.1.6 Customer service levels ..................................................................... 15 4.2 ACTIVITY BASED COSTING ..................................................................... 15 4.2.1 A procedure for determining the costs............................................... 16 4.2.2 Drawbacks with activity-based costing ............................................. 17 4.3 PROCESSES ............................................................................................. 17 4.4 PROCESS DOCUMENTATION ................................................................. 17 4.4.1 A procedure for process documentation ............................................ 17 4.4.2 Flowchart............................................................................................ 19.

(8) TABLE OF CONTENTS ___________________________________________________________________________. 4.5 5. TIME AND MOTION STUDY ....................................................................... 20. EMPIRICAL RESEARCH ....................................................................... 21 5.1 THE CURRENT SITUATION ....................................................................... 21 5.2 PROCESS DOCUMENTATION ..................................................................... 21 5.2.1 Goods receiving process .................................................................... 22 5.2.2 Pallet process...................................................................................... 23 5.1.3 Sequence process ............................................................................... 26 5.1.4 Small box process .............................................................................. 26 5.1.5 Card board box process...................................................................... 27. 6. ANALYSIS AND RESULT ....................................................................... 29 6.1 THE COST MODEL .................................................................................... 29 6.1.1 Identifying the activity costs .............................................................. 29 6.1.1.1 Transportation cost...................................................................... 29 6.1.1.2 Warehousing cost ........................................................................ 30 6.1.1.3 Order processing and information cost ....................................... 30 6.1.1.4 Lot quantity cost.......................................................................... 30 6.1.1.5 Inventory carrying cost ............................................................... 30 6.1.2 Identifying the resources .................................................................... 30 6.1.3 Determining the cost driver............................................................... 32 6.1.4 Determining the costs......................................................................... 32 6.1.5 The total cost of a material flow ........................................................ 34 6.2 THE STRUCTURE OF THE COST MODEL ..................................................... 34 6.2.1 How to calculate the cost for a material flow .................................... 35 6.3 VERIFICATION OF THE COST MODEL ........................................................ 37 6.3.1 The cost driver for the verification .................................................... 37 6.3.2 Determining the costs......................................................................... 38 6.3.3 Comparison between the two calculations......................................... 38. 7. CONCLUSIONS AND RECOMMENDATIONS................................... 40 7.1. 8. SUMMARY OF THE CONCLUSIONS AND RECOMMENDATIONS ................... 40. REFERENCES ........................................................................................... 42. APPENDIX 1 – Flowchart, Goods receiving process APPENDIX 2 – Flowchart, Pallet process APPENDIX 3 – Flowchart, Sequence process APPENDIX 4 – Flowchart, Small box process APPENDIX 5 – Flowchart, Card board box process APPENDIX 6 – Flowchart, The main material flows APPENDIX 7 – Cost model, Goods receiving process.

(9) TABLE OF CONTENTS ___________________________________________________________________________. APPENDIX 8 – Cost model, Pallet process APPENDIX 9 – Cost model, Sequence process APPENDIX 10 – Cost model, Small box process APPENDIX 11 – Cost model, Card board box process APPENDIX 12 – Costs for some material flows based on historical data APPENDIX 13 – Transportation by forklift.

(10) INTRODUCTION ___________________________________________________________________________. 1. INTRODUCTION. In this chapter, an introduction to this master’s thesis at Volvo Trucks Corporation will be given. The chapter includes background, problem definition, purpose, goals and delimitations.. 1.1. Background. Logistics is about learning how to manage effective material flows. Effective material flows are necessary for companies in order to facilitate the delivery of their products to the customer in the exact right moment and at the same time keep their costs to a minimum. (Lumsden, 1998) The need of effective material flows has always been very important for companies, nevertheless has the interest changed both over time and application area. In the context of industrial companies the importance of effective material flows have increased during the last decades. The increased focus on material flows is due to the widening market orientation after World War II. The increased product variance and complexity led to problems with the control of the materials flows, which in turn increased the handling- and storage costs together with weak delivery service for the companies. (ibid) According to Lambert and Stock (2001) material handling is an activity that adds no values to the product, just additional costs. Therefore, the handling should be kept to a minimum. The objectives of material handling are to eliminate unnecessary handling and to minimize travel distance. By analyzing the handling of the internal material flows, significant amounts of money can be saved. In order to succeed, the companies must have access to a measurement system that can measure and compare material flows and their costs.. 1.2. Problem definition. Volvo Trucks is one of the world’s leading manufactures of heavy trucks and they have always seen the value in having effective material flows in order to succeed in the highly competitive automotive market. (Volvo Trucks internal webpage, 2006) At the production plant in Gothenburg, Volvo Truck’s FM- and FH- trucks are produced. All trucks are assembled based on the customer’s needs (ibid). This makes each truck unique, developed to meet the individual need of the customer. The customer has the opportunity to decide the characteristics of their truck, 1.

(11) INTRODUCTION ___________________________________________________________________________. instead of choosing between different module built-up trucks. This is a competitive advantage for Volvo Trucks, but it also requires a lot from production where the effectiveness of the internal material handling is very important. The department of Production Engineering Logistics has done some calculations on the handling of the internal material, but a lot of these calculations were based on old data. Since Volvo want to analyse different alternatives concerning internal material handling based on current data, Volvo need a reliable cost model that can be updated.. 1.3. Specifying the purpose. The purpose of this master’s thesis is to construct and present a cost model that Volvo can use to determine the costs of the different internal material flows. This mission requires that the material flows are identified and mapped, therefore a flowchart of the processes in the plant must be conducted. The model should include only relevant costs and it must be easy to update when changes occur.. 1.4. Goals. The goals for this master’s thesis are:. 1.5. •. To do a flowchart of the internal material flows that comprises all the activities and handling alternatives.. •. To create a cost model of the main material flows.. Delimitations. The delimitations in this study are: • The mapping and the cost model will not contain the material handling of CKD (components that are sent abroad), group components (engine, cabin, gearbox, axles) or tires. • The cost model will only include the handling of the internal material flows that are most frequent and relevant. The supervisors has decided which material flows that need to be taken into consideration. • The costs in the model will not include overhead costs such as heat and square metres as well as capital costs that have been tied up in inventory because of the aim with the cost model. 2.

(12) INTRODUCTION ___________________________________________________________________________. • The cost model will not include the information systems managing the material in the plant.. 3.

(13) VOLVO FACTS ___________________________________________________________________________. 2. VOLVO FACTS. This chapter will introduce the reader to Volvo Group and its history and business areas. Thereafter, a description of the plant in Gothenburg will be presented.. 2.1. Volvo Group. AB Volvo was founded by Assar Gabrielsson and Gustaf Larsson in 1927. One year later Volvos first truck was introduced on the market and today Volvo Group is one of the world’s leaders in manufacturing of heavy trucks, buses, construction equipment, drive systems for marine, industrial applications, aerospace components and services. The company also offers customized solutions in financing, leasing and insurance, as well as complete transport systems for urban traffic. Volvos vision is (Volvo, 2006): “To be valued as the world’s leading supplier of commercial transport solutions.” Volvo Group operates on 185 markets and has production facilities in 18 countries with approximately 82 000 employees. The company consists of eight product-related business areas, these are: Volvo Trucks, Renault Trucks, Mack Trucks, Volvo Buses, Volvo Construction equipment, Volvo Penta, Volvo Aero and Volvo Financial Services (see figure 2.1). The Volvo Group also contains of a number of business units, which are responsible for development and delivery of components, services and support to the business areas all over the world. The business areas are Volvo 3P, Volvo Powertrain, Volvo Parts, Volvo Technology and Volvo Information Technology (Volvo, 2006).. BUSINESS AREAS. AB Volvo. Mack Trucks. Renault Trucks. Volvo Trucks. Construction Equipment. Buses. BUSINESS UNITS. Volvo 3P Volvo Powertrain Volvo Parts Volvo Logistics Volvo Information Technology & Others. Figur 2.1 Organisation schedule. 4. Volvo Penta. Volvo Aero. Financial Services.

(14) VOLVO FACTS ___________________________________________________________________________. 2.2. Production Gothenburg. Production Gothenburg is part of Volvo Trucks Global Manufacturing division. The division is responsible for the production and delivery of all trucks that is manufactured all over the world. The largest plants are in Gothenburg and Umeå in Sweden, Ghent in Belgium, New River Valley, USA and Johannesburg, South Africa (ibid). The assembly plant in Gothenburg started the manufacturing year 1982 and has today 2100 employees. The factory produces Volvo FM and Volvo FH, where the FH family is developed for heavy long-haul duties and the FM family is suitable for both regional and longer-distance duties. The process of building a truck from beginning to end takes place in a number of different production areas in the factory. Each area that the components pass through brings them closer to a final truck. The different production areas are: frame member, axle, cab, engine, pre assembly, flow 1, flow 2 and delivery. Together they make the production chain, assembling 83 trucks each day. Besides assembling, the frame member production is also one of Gothenburg business areas. The frame members are the basic structure of the chassis and the plant has the capacity to build 72 000 members each year. Apart from the trucks that are built up and the frame member production, a large proportion of the production is sent abroad (CKD). One of the two markets is delivery of components for entire trucks that are assembled on site, and the other type is package of certain components as kits where the remaining parts are made locally. In average, 40 trucks are packed for different markets each day (ibid).. Figur 2.2 Overview of the plant. 5.

(15) VOLVO FACTS ___________________________________________________________________________. 2.3. Department of Production Engineering Logistics. The department of Production Engineering Logistics consists of 16 employees with different work tasks and working areas. One employee is responsible for one of each process. Among other things, they make sure that the each process is manned correctly and that the material handling is working correctly. The other employees of the department are working with CKD, deviations and packaging of material.. 6.

(16) METHODOLOGY ___________________________________________________________________________. 3. METHODOLOGY. To ensure high quality and reliable results of this study, well-established and scientifically research methods have been used by the authors. This chapter describes the research methods that have been carried out while conducting this thesis and ends with a description of the working structure.. 3.1. Research approach. According to Yin (2003) there are several methods of doing a research and each method has different advantages and disadvantages. The research approach should be determined with regard to the purpose and the type of problem of the research. According to Saunders, Lewis and Thornhill (2003) two approaches or methods can be used by the researchers; deduction and induction. With a deductive approach, the researcher develops a theory and hypothesis and then designs a research strategy to test the hypothesis. Thus, this model does not explain or develop knowledge, but rather establish a rule. With the inductive approach, the researcher collects data and develops theory as a result of the data analysis. A weakness with this method is that it rarely uses all the possible observations. This study started by reviewing existing theories within the subject. Subsequently, an empirical study was conducted, after which the empirical results were analysed based on the existing theories. Hence, this study is using an approach that is closer to deductive than induction, using relevant theories to interpret the studies.. 3.2. Research strategy. According to Saunders et al (2003) the research strategy will be a plan on how to answer the research questions that are set and it will contain clear objectives, derived from the research questions. The sources of which the researcher attends to collect data should be specified as well as constrains that inevitably exists. Yin (2003) states that a case study strategy is one of many ways of doing social science research. Other ways can be experiments, surveys, histories and analysis of archival information. Yin (2003) argues that the case study methodology is advantageous in contemporary events, but when the relevant behaviours cannot be manipulated. The case study technique includes direct observation of the events being studied and interviews of the individuals involved in the events. Furthermore, the strength of the case study technique is its ability to deal with a full variety of 7.

(17) METHODOLOGY ___________________________________________________________________________. evidence – documents, interviews and observations. Eriksson & WiedersheimPaul (2001) claims that case study is a suited approach when one or a few objects are studied in many considerations. Based on the above definitions, the case study strategy is the most appropriate methodology to use, since the analysis in this study is mostly based on an empirical investigation accomplished by interviews, documentary analysis and observations and only one object is studied in detail. 3.2.1 Qualitative and quantitative method Data can either be of a quantitative or qualitative nature, depending on how the data is studied and expressed. The approach should also be determined regarding to the purpose of the study. Qualitative studies are presented in an order that provides meaning and understanding of the studied object. In a qualitative study the researcher collects, interpret and analyse data that is soft and cannot easily be quantified and expressed in numbers. Quantitative methods can be described in terms of numbers and figures that are analysed with mathematical and/or statistical methods. However, most case studies are of a qualitative nature but exceptions exist. (Lekvall & Wahlbin, 2001) To achieve the purpose of this study, a combination of quantitative and qualitative approach were applied. The result of mapping has a quantitatively nature and is presented in figures while qualitative studies were required to analyse the costs in the cost model.. 3.3. Data collection. When conducting a study, plenty of data and information can be found to simplify the ability to make the right conclusions. It is important to separate essential between non-essential data. (Lekvall & Wahlbin, 2001) There are two general ways of collecting data: primary and secondary data collection. Primary data is gathered and assembled specifically for the current research project. The data is usually collected through observations, surveys and interviews. Since the production flow is complicated, the best way to create understanding and to avoid misunderstandings, clarify questions and ask additional questions is to conduct personal interviews. (Eriksson & Wiedersheim-Paul, 2001) Secondary data, on the other hand, is data assembled and produced for another project and can be found in journals, books, databases or in the Internet. (Zikmund, 2000) According to Zikmund (2000) secondary data can in most cases be gathered faster and at a lower cost than primary data. However, secondary data may be obsolete or may not meet the needs of the researcher because that data are. 8.

(18) METHODOLOGY ___________________________________________________________________________. collected for another purpose. Lekvall & Wahlbin (2001) claims that the right method to gather data should be carefully selected and depend on the circumstances of every individual study. To make a successful study, both primary and secondary data has been gathered and analysed. Primary data was mainly collected through interviews with employees with knowledge of the processes and through observations at the plant. The secondary data used in this study was found in libraries and on Volvo’s internal web page as well as in their internal documents. The literature used for researching secondary data was mainly found on LIBRIS, a national library system that provides bibliographic search facilities.. 3.4. Validity and reliability. To assure high quality of the research and to avoid false conclusions, attention has to be paid to two particular emphases, i.e. reliability and validity. In order to point out in the study which data is trustworthy, it is important to reflect upon which errors that could occur while gathering information. (Lekvall & Wahlbin, 2001) Validity is defined as the ability of a method to measure what is intended to be measured. It is important to examine the methods that have been used in measurements; does the measurement instrument really measure what it is intended to? (Eriksson & Wiedersheim-Paul, 2001) Reliability is defined as the degree to which measures are free from error and therefore yield consistent results. To what extent is the used method resistant to noise and accidental occurrences for instance during an interview? Would a second interview give the same answers as the first did? (Ibid) In order to assure high validity regarding the primary data, interviews have been made with the employees. These interviews have mainly been made with the operators because of their knowledge about the different processes. Personal interviews and observations were chosen as an approach to map out the present material flow so that misunderstandings could be avoided and to assure high validity. (Ibid) To increase the reliability regarding the primary data, the results from the interviews with the operators have been verified by interviewing the production engineers. The respondents have good knowledge about the different processes and they are therefore suitable to answer questions and verifying the results.. 9.

(19) METHODOLOGY ___________________________________________________________________________. The authors assumed that all the secondary data gathered through books and articles are reliable and trustworthy. Data collected from internal web pages is also assumed to be up to date as well as the information found on the company’s internal documents. To increase the reliability and the level of accuracy regarding time studies, the time required to complete each activity has been measured many times to receive a mean value with no fluctuations. It is important to point out that some of the times studied might not show the exact time. One example is if the time measured is longer than normal, this can happen if the employee is worried that the time study will be used for manning. However, the authors are convinced that the measurements in this study are reliable and suitable to use in a model.. 3.5. Working structure. Figure 3.1 The working structure during the project. 10.

(20) METHODOLOGY ___________________________________________________________________________. 3.5.1 Literature study and interviews This project started by conducting a literature study within the subject to outline the theoretical frame of reference. Thereafter, a comprehensive empirical research was done. Since one part of the purpose with this project was to map the internal material flows, a process documentation needed to be created on the basis of the empirical research. 3.5.2 Process documentation The documentation was necessary to get a better understanding about the plant and the different processes but also to use as a basis when creating the cost model. The first step of the documentation was to gather information about the different processes. To get the correct information, it was important to talk to the right people with the right knowledge. Therefore, the authors were great knowledge about the particular processes. Information was also gathered through old written documents and through the employees at the department of Production Engineering Logistics. The authors walked along the processes with the employees at the department of Production Engineering Logistics (see chapter 2.3) with good knowledge that could describe the processes. The authors also talked to the employees working at the processes discussing how the processes work. After enough information the first edition of the flowchart was created. To verify if the information gathered was understood correctly, again the authors walked along the processes to confirm the correctness of the flowchart. The flowchart was created to be used as a basis when developing the cost model. After the final flowchart was constructed the authors wanted the correctness of the chart to be confirmed. The engineers at the department and the people working with the different processes got the chance to verify the flowchart. 3.5.3 Cost model After the major logistics processes had been put on the flowchart and the chart was carried out correctly, the processes had to be broken down into activities to get a better analysis of the costs included in the processes. By developing the flowchart it resulted in a more detailed flowchart where all activities could be seen. Again, a verification of the flowchart’s correctness was made. The goal with identifying the relevant activities was to uncover the costs. However, in order to discover the activity costs, the resources that each activity consumes had to be identified. Once the resource for each activity had been determined, the costs for the activities could be identified.. 11.

(21) METHODOLOGY ___________________________________________________________________________. 3.5.4 The structure of the cost model When the costs had been identified the cost model was developed based on the analysis and the result in chapter 6. A concept that showed the design of the cost model was built up, and the final cost model was constructed in Excel. Visual Basic for Applications was used to get a clean layout and to make the cost model easier to use. 3.5.5 Verification Thereafter, a verification of the final model was evaluated. The authors discussed several aspects in order to point out possible errors that might have affected the final result. After the critical view point, the cost model was presented.. 12.

(22) THEORETICAL FRAME OF REFERENCE ___________________________________________________________________________. 4. THEORETICAL FRAME OF REFERENCE. This chapter summarizes the most relevant theories that have been used when conducting this study.. 4.1. The total cost concept. Instead of focus on each activity in isolation, the goal for each organization should be to reduce the total cost of logistics activities. Total cost analysis is the keys to managing the logistic function and management must learn to consider the total of all the logistics costs at the same time, because reduction in one cost variable can lead to increases in the costs of other components. For effective management and real cost savings it is important to view logistics as an integrated system and minimizing its total cost. (Lambert et al, 2001) Logistics costs are driven or created by the activities that support the logistics process. The major logistics costs can be categorized as customer service, transportation, warehousing, order processing, lot quantity and inventory carrying, see figure 4.1. This model and the different activities can be adapted, depending on the situation studied. In that sense, the total cost model can be used on both internal and external functions.. Customer service levels. Inventory carrying costs. Transportation costs. Lot quantity cost. Warehousing costs. Order processing costs. Figure 4.1 How logistics activities drive total logistics costs (Lambert et al, 2001). 13.

(23) THEORETICAL FRAME OF REFERENCE ___________________________________________________________________________. Lambert et al (2001) also point out that what is included in the model depends on the outline of the logistics organization. Some conditions require that components need to be removed from the model, while other conditions imply that more components must be added to it. 4.1.1 Transportation costs According to Lambert et al (2001) logistics involves movement of products. A product produced will achieve its value after it has moved to the point where it will be consumed. Transportation creates place utility but it also creates time utility since it determines how fast and how consistently products can move from one point to another. The transportation costs will also vary considerably with the mode of transportation chosen. The particular mode chosen depends on the characteristics of the mode and the companies need. (ibid) 4.1.2 Warehousing costs Products need to be stored in the plant for later consumption unless the customer need them the instant they are produced. The greater the time is between production and consumption, the larger amount of inventory is needed. Warehousing is used for storing inventories during all phases of the logistics process. In general, the warehouses can be used to support manufacturing and to subdivide a larger shipment to many customers etcetera. (ibid) Warehousing costs comprise with the number of warehouses and includes costs such as, rent, heat, personnel, depreciation on investments and necessary equipments. (ibid) 4.1.3 Order processing and information costs Order-processing and information systems costs are related to for example processing customer orders, distributions communications and demand forecasting. Order-processing costs include order transmittal, order entry, order verification, order handling and also related internal and external costs such as notifying carriers and customers of shipping information and product availability. 4.1.4 Lot quantity costs The major logistics lot quantity costs are costs occuring in the context of production. Lot quantity costs vary with the changes in production lot size. The costs include for example material handling. If the company stores material until a large amount of material is ordered instead of delivering in smaller quantities,. 14.

(24) THEORETICAL FRAME OF REFERENCE ___________________________________________________________________________. the customer service may suffer as order fulfilment declines. The inventory might go down to zero and creates stock out situation in between runs. 4.1.5 Inventory carrying costs The four major logistics inventory carrying costs are: capital cost, inventory service cost, storage space cost, inventory risk cost. • Capital cost is the return that the company can make on the money that is tied up in inventory. • Inventory service cost, includes insurance and taxes on inventory. • Storage space cost, includes those warehousing space-related costs that will change with the level of inventory. • Inventory risk cost, includes obsolescence, pilferage and movement within the inventory system, and damage. Proper packaging might reduce the cost of damage and pilferage, ease movement and also help prevent product obsolescence. 4.1.6 Customer service levels Customer service costs include order fulfilment costs and costs for parts as well as service support. They also include costs associated with return goods handling. The cost of lost sales includes lost contribution of the current sale and also potential future sales. Each of the other five major logistics cost element work together to support customer service.. 4.2. Activity Based Costing. The outcome of the logistics function, customer service, involves getting the right product to the right customer at the right place, in the right condition, at the right time and at the lowest total cost possible (Lambert et al, 2001). To know the lowest total cost at a given level of customer service, a keen understanding of the logistics activities and underlying costs of those activities is paramount (Collins, Su & Lin, 2001). Activity-based costing is a method that seeks to relate all the relevant costs to the value adding activities performed (Bowersox, 1996). The idea with activitybased costing is that costs need to be assigned to the activity that consumes a resource, hence activity-based costing traces the consumption of resources back to the consuming activity and then traces those activities to a particular cost objects (Bowersox, 1996; Collins et al, 2001). A basic understanding of the logistics processes is necessary to see the relationship between the processes and the major logistics costs. 15.

(25) THEORETICAL FRAME OF REFERENCE ___________________________________________________________________________. The general major logistics costs that support the logistics process is comprised of variable and fixed overhead costs that will be traced to specific logistics activities during the activity-based costing process (Collins et al, 2001). The variable costs are direct or indirect, where direct costs such as transportation and material handling are not so difficult to trace while indirect costs such as capital invested in transportation equipment and inventory are more difficult to trace. Overhead costs are for example lighting and heat in different facilities. (Bowersox, 1996) 4.2.1 A procedure for determining the costs The first step is to analyse the function and its major processes, but before the work starts it is important to guarantee that there are people with the right knowledge involved. When the function and its processes are identified, a flowchart should be created in order to better understand the chain of processes within the logistics function. (Collins et al, 2001) After the major processes have been put on a flowchart it is time to break the processes down into activities. For a better analysis, the logistics processes should be broken down into as many as possible well defined activities. One goal is that a major process should be broken down until the cost of the activity is irrelevant. When all the relevant activities have been identified it is time to identify the resources that are consumed when the activities are performed. In most companies the resources can be divided into the following categories: labour, materials, equipment, facilities, property and capital. (ibid) Once the resource for each activity has been identified, the cost for the activities could be identified. Some costs will be easy to trace direct to a specific activity, while others will require more work. In activity-based costing every activity has at least one cost driver. A cost driver is the factor that causes or influences the costs. Some costs can have a lot of drivers, but only the most relevant driver or drivers should be used. The cost driver should have a direct relationship with the amount of effort required to perform the task. (ibid) Usually a cost driver is expressed on a cost per unit basis. When the cost for performing each activity is determined, it is easier to understand the profit potential of the cost object. The ability to trace costs to specific cost objects has unmeasurable benefits in corporate decisions making. Although activity-based costing provides critical cost data for specific logistics activities, management must not focus at individual activities alone. Instead, the goal should be to reduce the total cost of the logistic activities in the entire function and its major. 16.

(26) THEORETICAL FRAME OF REFERENCE ___________________________________________________________________________. processes instead of reducing just the individual activity costs. (Collins et al, 2001) 4.2.2 Drawbacks with activity-based costing A drawback with activity-based costing is the lack of perfect cost data. Normally, no cost accounting system is perfect and that includes even activitybased costing. The reason is the near impossibility of tracking and attaching every resource cost to a particular activity (Collins et al, 2001). In corporations, a lot of activities take place every day and some of the activities may not be identifiable or measurable without a significant amount of effort. Consequently, these costs may not be calculated for pragmatic reasons. The managers should keep this in mind when making business decisions.. 4.3. Processes. A process is any group of activities that takes an input, adds value to it, and provides an output to an internal or external customer (Harrington, 1991). According to Ungan (2006) empirical research has shown that understanding how a process operates is very important for organizations before attempting any process related initiative.. 4.4. Process documentation. Organizations usually document and map their processes in the purpose of describe, analyse and improve their processes. Process documents can be classified into two: Process flowchart and process map. They are both basically serving the same purpose. When developing process documentation, some steps must be followed both for the success of the documentation and the effective use of resources (Ungan, 2006). 4.4.1 A procedure for process documentation The first thing to do when document a process is to select the process that should be documented. The objectives must be clearly stated why this process should be mapped, is it just for describing the process or is it for improving the process. After this, it is very important to determine the level of detail. Many authors indicate that a process map should not be to long and complicated because such maps are difficult to comprehend. On the other hand the process must be documented in sufficient detail to allow substantial improvements. It is important to get the right depth of the process map. A detailed map is necessary if a deep description of the process is needed. If only an overview is needed, then the map should not be detailed. (Ungan, 2006). 17.

(27) THEORETICAL FRAME OF REFERENCE ___________________________________________________________________________. Different approaches can be used when collecting information for the documentation. Two different approaches are interviewing and team methods, where both the interviewer and the team members should have a great familiarity and knowledge about the process. Interviewing is suitable for uncomplicated processes with few participants and limited scope. On the other hand, interviewing is not suitable when the process is large in scope and complex. If the objective is to describe the process, then the depth of the description will be determined whether a team or interviewer will be used. (ibid) Other approaches when gathering information are observations and translating old written documents. After all information has been collected and before starting to do any improvements, a clear definition of the process must be made. Input, output, customers and suppliers of the process should be listed, and the boundaries of the process must be determined. To see how well the current process is performing it is also important to identify the process measures, which differs depending on application area. The information is collected from the one who has the most knowledge about the processes. When enough information has been gathered, the interviewer walks down the process with a “process master” to see if the information is correctly understood. When the interviewer or the team members agree with the process master, the concepts are written down. Before the final mapping is published the interviewer or the team members should a last time agree on the final form of the map. (Ungan, 2006) The different steps that are important to follow during the process documentation can be seen in figure 4.2.. 18.

(28) THEORETICAL FRAME OF REFERENCE ___________________________________________________________________________ Select a process. State the objektives. Determine the level of detail Form a team or select an interviewer Define the process. Identify the performance measures Acquire the knowledge of process participants and document it Figure 4.2 A Step-by-step procedure for process documentation (Ungan, 2006).. 4.4.2 Flowchart Harrington (1991) claims that one way to document or map a process is by creating a flowchart. A flowchart is a method that graphically describes an existing process or a new process by using simple symbols, lines and words to pictorially display the activities and sequences in a process. Just like a map represents a particular area, a flowchart graphically represents the activities that build up a process. There are some advantages using maps and flowcharts, they both show for example how the different elements fit together. Standard symbols are often used when constructing a flowchart, the most used and common ones are:. 19.

(29) THEORETICAL FRAME OF REFERENCE ___________________________________________________________________________. Operation: A rectangle symbolize when a change in an item occur. It is simply used to denote an activity of any kind, and is a correct symbol to use when no one else is appropriate. A short description of the activity should be included in the rectangle. Movement/transportation: A fat arrow should be used to indicate a movement, for example sending parts to stock etc. Storage: A triangle is used when a controlled storage condition exists. Direction of flow: A thin arrow should be used to denote direction of the work flow and is used to represent the connection between two activities. Boundaries: An elongated circle should be used to show the beginning and the end of a process.. Krajewski and Ritzman (2002) point out that except for symbols, colours and shadings can also be used to call attention to different types of steps, particularly when the process complexity is high.. 4.5. Time and motion study. Time study is an analysis of the time spent in going through the different motions of a job or a series of jobs. The time study is used to map the work flow, and is a common tool used in manufacturing industries. Each operation is studied minutely. (Nationalencyklopedin, 2006). 20.

(30) EMPIRICAL RESEARCH ___________________________________________________________________________. 5. EMPIRICAL RESEARCH. This chapter presents the material handling processes. The description is based on observations and personal interviews conducted with the employees involved in the processes.. 5.1. The current situation. Today, it does not exist a cost model for the internal material handling at the production plant in Gothenburg that the employees can use when calculating the costs. The department of Production Engineering Logistics has done some calculations on the handling of the internal material, but a lot of these calculations were based on old data.. 5.2. Process documentation. To create a useful and correct cost model, a deep understanding about the material flows in the plant is needed. To get this understanding flowcharts have been created to document the material flows and to faster get a general view of the flows. Each flow chart represents one process, but to see the connections between the processes, a flow chart containing all processes was also created. The flowcharts are based on the interviews and observations and created from the theories described in chapter 4.4.2. The authors wanted the flowcharts to be describing, easy to follow as well as easy to understand. The flowcharts’ depth of detail was chosen regarding to the purpose of the charts. The purpose was to increase the authors’ knowledge about the plant and the different processes and also to see the connections between the processes and its activities. These flowcharts were also created to be used as a basis when developing the cost model. The standard symbols described in chapter 4.4.2 were used in the flowcharts to symbolise different activities. The only symbol not used in this flowchart is the sign for movement/transportation. The flowcharts consist of mostly transportations and therefore it is clearer to use the rectangle that symbolise an operation. Harrington (1991) claims that the rectangle can be used when no other symbol seems appropriate. It is also more difficult to write a clear description in the fat arrow than in the rectangle. The material flows in the plant is built up by five main processes; goods receiving process, pallet process, small box process, card board box process and sequence process. The different processes have the responsibility to provide external goods receiving, loading, unloading, stocking, handling and. 21.

(31) EMPIRICAL RESEARCH ___________________________________________________________________________. transportation to customer. The different colours on the flowcharts symbolize the different processes. Grey is goods receiving process, blue is pallet process, orange is small box process, green is card board box process, yellow is sequence process, pink is deviation process and dark grey is symbolizing material flows that are not included in our study. To easier understand the different processes described next, a picture that shows the plant and its divisions are shown in figure 5.1.. Figur 5.1 The production plant in Gothenburg. 5.2.1 Goods receiving process The goods receiving process main task is to unload the goods from the trucks and deliver the material to other material handling processes. It also includes transportation of empty packaging to a defined area. The goods receiving process start its work when the truck arrives to the plant. As a first step, the truck driver reports its arrival in the LX gate (see figure 5.2). The truck driver will here be allocated an unloading place where the goods will be unloaded. The staff in the LX gate will also print out an unloading list and check if the goods are pre advised.. 22.

(32) EMPIRICAL RESEARCH ___________________________________________________________________________. Figure 5.2 LX gate. The different unloading areas are: LA3, LA4, LA5 and LB. The allocated area depends on type of material. When the truck is parked and the driver has opened the truck and removed transportation arrangement, a forklift belonging to the goods receiving process starts to unload the goods. When all the collies are unloaded the transportation documents will be signed and the amount of collies will be controlled against the unloading list. From the unloading area the goods will be transported further on by forklifts, trolleys, carriers or conveyers to other places depending on what material it contain and depending on what kind of packaging the material is placed in. The material arrives in many different types of packaging. The most common is K-pallet and L-pallet but other packaging are also used. Large materials come in racks and small material come in blue small boxes placed on pallets. All empty packaging that arises when for example assembling and pre assembling is by the pallet process and the sequence process placed on trolleys. Trolleys are sited on intended places, inside and outside the plant. The goods receiving process is responsible for transporting these trolleys to a defined area next to LA3. The flowchart of the goods receiving process can be found in appendix 1. 5.2.2 Pallet process The pallet process is responsible for the material handling in the warehouses and to transport material and empty packaging inside the plant.. 23.

(33) EMPIRICAL RESEARCH ___________________________________________________________________________. Figure 5.3 ID-station. One of the working areas managed by the pallet process is the ID-station (see figure 5.3). All the material that the goods receiving process has unloaded from the truck at LA3 and then placed on conveyers for a further transportation into the plant, passes the ID-station on carriers (AGV). At the ID-station, the pallet will be weighted to confirm that it contains the right amount of articles. It is also here the pallets get its identity. The identity is a label with a unique number that every pallet carries. The identity is among other things necessary in order to trace the pallet in the plant. After the pallet has passed the ID-station, it will be transported with a carrier further on to different addresses depending on the article number, for example warehouse 11 (F11). Warehouse 11 (F11) is an automatic warehouse that stocks K- and L-pallets after they have passed the ID-station. It consists of eight cranes that load and unload the pallets. Material that is ordered by the assembly line or pre assembly line can be delivered as a full pallet or just in a certain amount. The material that is repacked in smaller amounts are low frequent articles and will be transported from F11 on carriers to a picking station before it continues to the pull out shooters or to LA3 out shooters. At the picking station the articles will be counted and repacked before it is further transported. The pull-out shooters are three leaning conveyers where pallets are left off for a further transportation to assembly line (Pull) or to a material buffer zone (Push), (MHO) (see figure 5.4). When an order has been placed, a pallet with that certain material arrives to the pull-out shooters on a carrier. The material that passes the pull-out shooters arrives from F11, the picking stations or direct from the ID-station. 24.

(34) EMPIRICAL RESEARCH ___________________________________________________________________________. Figure 5.4 A forklift picking a pallet from one of the pull out shooters. The pallet process is also responsible for the handling of the material in F33 and F35. The material is handled differently depending on what type of material it is and in what amount it is ordered. Thereafter, the pallet will be placed on a buffer zone depending on where in the plant the material will be delivered. The material handling of the cross members in F36 is also one of the pallet process responsibility. The handling of the pallets depends on the type of order. Pallets can either be internal sequenced or transported direct to the customer. The sequence process is responsible for the transportation of the cross members from F36 to assembly line. The pallet process is also responsible for the material handling of fifth wheels in F38. The fifth wheels are internal sequenced and placed on racks before they are transported to the customer. Depending on chassis, some fifth wheels need to be preassembled before they are transported to the customer. The empty packaging that arises are transported to trolleys. The goods receiving process unload the springs from the truck at LA4 and place them in an outside warehouse, F56. The pallet process transports the pallets from F56 to a station where the springs are internal sequenced to racks before they are transported further on by the sequence process. The empty packaging that arises from this station is transported to a trolley. The empty packaging that occurs all around the plant are transported to trolleys by the pallet process and the sequence process. The pallet process picks up the packaging from either the customer, different buffer zones or from the material buffer zone in LA (MHO 31/32/33/71/72/73/74) and transports it to the trolleys.. 25.

(35) EMPIRICAL RESEARCH ___________________________________________________________________________. The flowchart for the pallet process can be found in appendix 2. 5.1.3 Sequence process The sequence process is responsible for transporting and delivering material to the assembly- and pre assembly line and also to transport empty packaging to trolleys. The sequence process is most often the process that works closest to the assembly line and the preassembly line by transporting and delivering material and also by returning empty packaging. The material that arrives to the material buffer zone (MHO) will in the next step be transported to the assembly line or to the pre assembly line by the sequence process. The pallet process transport material from the pull out shooters to the material buffer zone in both LA and LB. The goods receiving process transport the remaining material (sequence material and material from F33 and F35) to the material buffer zone in LA (MHO 31/32/33/71/72/73/74) while in LB the sequence process transport material (sequence material, internal sequenced material, material from F33 and F35) to the material buffer zone (MHO 11/12/13/21/22) from a trolley or a buffer zone. The sequence process task is also to transport the empty packaging from the customer or the material buffer zone in LB (MHO 11/12/13/21/22) to trolleys outside. Depending on material, the pallet process sometimes also transport empty packaging from the material buffer zone in LB to trolleys in LA. Except the material buffer zones (MHO), the sequence process also work outside the plant at LB by delivering material (cooler, fuel tank, anti-roll bar, air filter) from a buffer zone outside into the assembly line or the pre assembly line. They also return empty racks to a buffer zone outside. In LA the sequence process transport internal sequenced material (cross members, springs) and ordered material ( prop shaft, cross bars, T-rides) to pre assembly line and they also return empty packaging to the material buffer zones (MHO) and to trolleys. The flowchart for the sequence process can be found in appendix 3. 5.1.4 Small box process The small box process main task is to be responsible for all the internal handling of the blue small boxes that enter the plant. The reason why small boxes are used as packaging is because of lack of space in the plant and also because it is an adequate amount. The small box process order material to the. 26.

(36) EMPIRICAL RESEARCH ___________________________________________________________________________. assembly and pre assembly line, handle, transport and deliver the material to the customer. They are also responsible of storing the small boxes in warehouse 15 (F15).The process also return empty packaging to a nearby trolley. The goods receiving process load the pallets on the conveyer at LA3 and are then transported further on with carrier direct to the in conveyer at F15. The pallets are separated from the boxes since only the boxes are stored in the warehouse. Before the boxes are automatically separated from the pallet, an ID control similar to the ID-station is done. F15 is an automatic warehouse that consists of 3 cranes that stores small boxes. It can maximum hold about 11 500 boxes and today 60% of the capacity is used. High frequent articles are ordered as full boxes containing the same article while low frequent article are ordered in a certain amount. When a certain amount of an article has been ordered, the employees’ of the small box process has to count the articles and repack the material before it can be delivered to the customer. The empty boxes that occur are placed on an L-pall, bundled up and then transported to a nearby trolley. The flowchart for the small box process can be found in appendix 4. 5.1.5 Card board box process Some of the pallets arriving to the plant contain card board boxes (see figure 5.5). The card board box process has the responsibility for all the internal handling of the card board boxes. The pallets arriving to the plant are by the goods receiving process loaded on conveyers at LA3 and are then transported via the ID-station on carriers to F11 or F20. The material ordered from the customer will be delivered once a day to the assembly line or the pre assembly line. The pallets delivered to the customer are never a full pallet containing the same article. The card board boxes addressed to the same material area will be packed in the same pallet.. 27.

(37) EMPIRICAL RESEARCH ___________________________________________________________________________. Figure 5.5 Card board boxes packed in a K-pallet. Some of the material is ordered as full pallets, and is delivered to the customer without anyone placing an order. This material are handled and delivered by the employees at milkround. Their work task is to make sure material at the customer is never empty. In that sense, the forklift driver is regularly driving around in the plant filling up the material that is almost empty. Milkround has a buffer zone where the material will be stored before and after the shelves are filled up. The material arrives to milkround from F11 and is transported from the pull out shooters to the area by the pallet process. The pallet process also transports the empty packaging and transports from the area to a trolley. The flowchart for the card board process can be found in appendix 5.. 28.

(38) ANALYSIS AND RESULT ___________________________________________________________________________. 6. ANALYSIS AND RESULT. In this chapter the authors will analyse and draw conclusions regarding a cost model that can account the internal material handling costs. This chapter will also present the result of the work when developing the cost model.. 6.1. The cost model. To develop a cost model that was useful, it demand that data included had to be accurate and up to date. Due to the theories described in chapter 4 together with the empirical research in chapter 5, conclusions could be drawn that there were two ways to put costs on the internal material flows and its activities at the production plant in Gothenburg. The two specific ways are; based on time studies and based on historical data. Time studies resulted in costs where only the effective time for the activities were included, while costs based on historical data also included time that could not be covered due to variation peaks, waiting times and so on. Lack of historical data resulted in a decision that the cost model should be based on time studies. Hence, historical data should be used to verify the cost model based on time studies. 6.1.1 Identifying the activity costs When conducting this cost model, all components included in the total cost concept presented in figure 4.1 have been investigated. The total cost concept has been biased in a way that the customer is the assembly line, which contributes that the other five major cost categories is the activities that support the material handling processes. The goal with identifying the relevant activities is to uncover the costs. 6.1.1.1 Transportation cost According to Lambert et al (2001) transportation costs can be lowered if the material moves faster in the plant. The transportation cost depends on the distance to the customer, a longer distance will take a longer time to reach and will lead to a higher cost and vice versa. The transportation cost also depends on what kind of transportation that has been chosen for the movement. Different means of transport used in the plant to move materials are carrier, conveyer and forklift. They make sure that the materials reach the customer in the right time and at the right place. These means of transport contribute to different costs and have therefore taken into account when conducting the cost model. The direct costs are monthly rent on forklifts and the employee’s monthly salary. The. 29.

(39) ANALYSIS AND RESULT ___________________________________________________________________________. indirect costs are maintenance cost on forklifts, conveyers and carriers. Another indirect cost is service cost on forklifts. 6.1.1.2 Warehousing cost Warehousing costs is varying from warehouse to warehouse in the plant depending on if it is a manual or automatic warehouse. The automatic warehouse costs differ from the manual costs because of the cranes and employees working at the warehouses. The automatic warehouses consist of only cranes while the manual warehouses are managed by employees. Hence, these two warehouses contribute to different costs. The automatic warehouses only contribute to indirect costs which in this study is maintenance costs including the personnel administrating the warehouses. Because of the depreciation of the cranes has been written off a long time ago, they are not contributing to an indirect cost. The costs for the manual warehouses located in the plant contribute only to a direct cost, the employee’s monthly salary. 6.1.1.3 Order processing and information cost One manual material handling activity is the ID-station. This is where the pallets receive their identity. This is a station where only one employee is working with for example checking the pallets weight and adding labels on the pallets. The ID-station is controlled by an information system but this cost has been excluded in this project. In fact, all information systems in the plant contribute to costs that have been excluded because of the purpose of the project. Hence, ID-station is only contributing to a direct cost, the employees’ monthly salary. 6.1.1.4 Lot quantity cost When the customer has ordered a specific quantity of a material, it must be repacked at the picking stations before it can be delivered. Referring to the theories in chapter 4.1.4, lot quantity costs vary with the changes in production lot size. The pallets that have to be repacked before they are delivered to the customer generate a lot quantity cost. The lot quantity cost consists of the employees’ monthly salary. 6.1.1.5 Inventory carrying cost The inventory carrying costs such as tied up capital in the inventories, insurance and taxes and space-related costs has not been taken into consideration referring to the delimitations and the purpose with the cost model. 6.1.2 Identifying the resources In order to discover the activity costs, the resources that each activity consumes have to be identified. The resources can be defined into these categories: 30.

(40) ANALYSIS AND RESULT ___________________________________________________________________________. • • • •. Labour Equipment Maintenance Service. Collins et al (2001) claims that no matter how great or small the resource consumed is, it should be included in the study. Transportation by forklift uses obvious resources. The labour is the forklift driver’s compensation and the equipment stands for the truck’s monthly rent. The maintenance resource is used when the forklift need to be repaired which results in an employee’s compensation as well as repairing tools and finally the service resource contribute to service equipment and the employee’s compensation. Transportation by carrier uses only the maintenance resource. The carriers are very old which implies that they have already been written off. The service resource is not used which implies that the only resource used is maintenance. Transportation by conveyer uses only maintenance resource. There are conveyers existing at different places in the plant but the only conveyers that are included in this calculation are nine conveyers at LA3. Hence, they are the only ones that contribute to large costs therefore the other conveyers are negligible. The manual material handling activity such as ID-station and picking station, only uses labour resource since the handling of this activity is carried out manually. In that sense, the equipment, maintenance and service resource is not used. The warehousing activities, drifted automatically by eight cranes in F11 and three cranes in F15 are only using the maintenance resource. In the maintenance resource, the personnel administrating the automatic warehouses are included. The depreciations of the cranes have been written of and no service is issued on the cranes. The manual warehouses are using labour resource since it is managed manually. A forklift is used to load and unload the collies, therefore maintenance resource, service resource and equipment resource are included in the manual warehouses.. 31.

(41) ANALYSIS AND RESULT ___________________________________________________________________________. 6.1.3 Determining the cost driver According to Collins et al (2001), a cost driver is used to identify the factor that causes or influences the costs. The cost driver has a direct relationship with the amount of effort required to perform a task. The cost driver is basically the time spent on each activity. To allocate the cost to an activity, each activity time or fraction spent on a particularly activity must be determined. 6.1.3.1 Activity time In order to calculate the costs for the time studies, extensive time measurements for each activity has been compiled. The employees have performed the tasks included in each activity, handling only one pallet, rack, small box or card board box, while the authors have measured the time with a stopwatch, measured in minutes. The measurements have been conducted through several time studies on each activity to receive a mean value. In that way, disturbances and deviations can be avoided and a reliable as possible result can be achieved. 6.1.4 Determining the costs The costs included in each activity are calculated based on the cost driver determined in chapter 6.1.3.1. The resources generating the costs are labour, equipment, maintenance and service. 6.1.4.1 Labour cost The hourly wages for the employees managing the internal material handling have in this study been received by the responsible employee at the department of economics. The cost is calculated as an average hourly wage which includes sick pays and labour contributions and is used in all calculations. The table below identifies the hourly wage for the employees. Day. Evening. 237,82 312,74 Table 6.1 The employees’ hourly wages. Hourly wages (SEK/h). The employees are working 8,6 hours on a day shift and 8,4 hours at the evening shift. According to the agreement between Volvo and the union, 9% or 13% of the working hours cannot be covered because of toilet visits, planning and so on. This time is called; allocation time. The employees belonging to the internal material handling processes have all the same allocation time, 13%, except the sequence process. They have an allocation time of 9%, because planning time is not included in their work time. In that sense, the hourly wage in table 6.2, has to be multiplied by the allocation time since only the effective time is used in the cost model. 32.

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