Examensarbetet i Systemekonomi
A model for cost effective improvement of a raw material management in the inventory: A Case study
En modell för kostnadseffektiva förbättringar av råmateriallagrets hantering: En fallstudie
Författare: Oscar Christensen, Magnus Rosvall Handledare företag Jaroslaw Modzelewski, Emmaboda Glas AB
Handledare LNU Anders Ingwald Examinator, LNU Basim Al-Najjar Termin: VT12 15 hp
Ämne/kurskod 2SE09E
Acknowledgement
We would like to thank everyone that has contributed to this thesis in one way or another.
A special thanks to the personnel at Emmaboda Glas AB for their contributions with valuable information during our study visits. Without your support the thesis would not have been possible to complete.
We would like to thank our tutor at the company, Jaroslaw Modzelewski, for his support and contributions.
We would also like to thank our tutor Anders Ingwald for his support throughout the thesis, your guidelines and support has been very useful and valuable.
3 Abstract
The single largest expenditure in the production industry is usually the materials´ costs. In the average producing company, half of the sales revenue covers the materials´ costs. Raw material inventory aims to have the right amount of material, in the right place and at the right time, for as low cost as possible. In the raw material inventory there are often different critical items and the amount of them can be hard to handle at one time. In this thesis a cost effective model was developed for the raw material inventory management. Starting with identifying the most critical raw materials and the relationships between them and the first step in the production. It is also important to work with the information flow and the model aims to find what information each department needs and establish a suitable communication channel between the departments. In order to test the applicability of the model it was tested on a case company. The result from the model testing was new placements for the raw materials and a new communication flow.
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Table of content
Keywords definition ... 6
1. Introduction ... 7
1.1 Background ... 7
1.2 Problem discussion ... 8
1.3 Presentation of problem ... 8
1.4 Problem formulation ... 9
1.5 Purpose ... 9
1.6 Relevance ... 9
1.7 Limitations/Delimitations ... 9
1.8 Timeframe ... 10
2. Research methodology ... 11
2.1 Quantitative research ... 11
2.2 Qualitative research ... 11
2.3 Case study ... 11
2.4 Data gathering methodologies... 11
2.4.1 Data quality ... 13
2.5 Induction and deduction ... 14
2.6 Methodologies used ... 14
3. Theory ... 15
3.1 Inventory control tools ... 15
3.1.1 Inventory management system ... 15
3.1.2 Keeping track of raw material ... 16
3.1.3 ABC-analysis ... 16
3.2 Cost effectiveness in investments ... 17
3.3 Lean wastes ... 17
3.4 5S ... 18
3.5 Inventory layout ... 18
3.6 Information flow ... 19
3.6.1 Information overflow... 20
3.6.2 Information sorting techniques ... 20
3.6.3 Communication channels ... 21
3.7 PDCA ... 21
3.8 Cause and Effect Diagram ... 23
3.9 Interaction between raw material inventory and production ... 23
5
3.10 Inventory management system and cost effectiveness ... 24
4. Model development ... 25
5. Empirical findings ... 29
5.1 Company description ... 29
5.2 Description of raw material ... 29
5.3 Inventory layout ... 29
5.3.1 The new storage area ... 30
5.4 Description of the raw material inventory ... 30
5.5 Information flow of Jumbo plates consumption ... 30
5.6 Consumption sheet ... 31
6. Model testing... 33
6.1 ABC-analysis ... 33
6.2 Relationship chart ... 33
6.3 Inventory layout ... 34
6.4 Fishbone diagram ... 36
6.5 Information sorting ... 37
6.5.1 Information overflow... 37
6.5.2 Information sorting technique ... 37
6.6 Information channel ... 37
6.7 PDCA ... 38
7. Results ... 39
7.1 Results from the model testing ... 39
7.2 PDCA ... 39
8. Conclusions ... 40
8.1 Conclusions of the model testing ... 40
8.2 Conclusions regarding the models´ applicability ... 40
9. Recommendations ... 42
9.1 For the case company ... 42
9.2 For users ... 42
9.3 Model improvements ... 42
Reference list ... 43
Appendixes ... 45
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Keywords definition
Short descriptions of the definitions that are used in the report are given in this chapter.
Effective: Powerful acting, fast acting.
Efficient: With limited resources.
High runner: The high runners are the glass plates that are used the most in the production.
Jumbo plate: This is the glass plates that have the dimensions of 6000 mm times 3210 mm.
Low runner: The low runners are the glass plates that are used rarely in the production.
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1. Introduction
In this chapter the background to the problem is presented and the actual problem that will be dealt with in the report is discussed and clarified.
1.1 Background
The goal with inventory management is to have the right amount of material in the right place.
It should also be available at the right time and at as low cost as possible. But the inventory can also have the opposite effect. A poor inventory management can lead to long lead times, long queues, unsynchronized product flow and costly set ups. Everything within the inventory that there is an overflow of is considered as waste.
Problems with inventory are issues that are associated with all types of industries. It is not only profit making organizations that may have control and maintenance problems of the inventory. Inventory can be defined in several different ways, for example:
The stock of material at a given time waiting for future processing.
A specified list of all physical assets.
The value of owned material at a given time.
To determine the quantity of available material. (Tersine, 1994)
In this report inventory will be referred to as the first definition.
Inventory is necessary because it is hard to find the right balance between demand and supply.
The balance differs due to several factors such as: time, discontinuity, uncertainty and economy (Ibid).
The costs of the inventory are connected to the operations or lack of operations that is necessary for following the inventory management strategy. The costs can be divided into four categories:
Purchase cost.
Order/setup cost.
Holding cost.
Stock out cost. (Ibid)
The purchase cost is defined as the cost for purchase and freight costs to the inventory. Order /setup cost is defined as writing purchase orders, analyzing vendors, inspecting material, following up orders and complete transactions. Holding cost is defined as the cost for having material in the inventory such as insurance, handling, deterioration and ageing (Ibid).
When the inventory consists of various critical objects it is possible to classify them into different classes. Class A is the most critical objects that should not be running out of inventory due to the high stock out costs. Therefore a more sophisticated control system for these items should be implemented (Silver, et al., 1998).
In order to get a cost effective inventory management system it is suggested that there should be a strive for maximizing the use of the layout, protection from damages, accessibility of the
8 materials, ability to locate material, reduction of administrative costs, and the use of equipment connected to the inventory (Müller, 2003).
1.2 Problem discussion
Many organizations have problem with their raw material inventory. The goal is to have as low inventory level as possible but it is also necessary to have right amount of material in order to meet the customers’ demands that vary with time, the economic situation and uncertainty. A raw material inventory that is managed properly is often the solution for reducing unsynchronized production flow, costly set ups, long lead times and long queues (Tersine, 1994).
Within the inventory there are a lot of problems that can occur:
Substandard of raw material.
Absences of workers.
Late delivery.
Unavailable inspectors and set up persons. (Ibid)
Those points above should be considered as obstacles for the material flow (Ibid).
Holding costs are the costs relating to having items in the inventory such as insurance of the materials, handling of the materials, deterioration and ageing. Costs related to not having materials in the inventory for production is defined as stock out costs. This will lead to profit loss, lost production and delay of completing in time (Ibid).
In the inventory are usually different critical materials used and therefore it is preferable to classify the materials into different groups. Group A is the most critical and here is where a more sophisticated control system should be used for material management (Silver, et al., 1998).
To make the inventory cost effective the use of the layout should be maximized, the material should be protected from damaging itself and other factors that may affect. The accessibility should be high and the materials should be easy to find fast (Müller, 2003).
1.3 Presentation of problem
The problems to be managed in this project are the production department’s information flow with the purchase department in order to have the right material in the right time and the layout of the inventory in order to make the layout as utilized as possible which will lead to faster localization and better control of the raw material level.
The problem is important because no theories have been found that covers the entire chain from information needs to the layout of the raw material inventory.
9 1.4 Problem formulation
The problem of our thesis is:
How to plan and manage the raw material inventory in order to reduce production stoppages due to material shortages in a cost effective way?
1.5 Purpose
The purpose is to develop a model for raw material management that will reduce production stoppages through having the right amount of material on the right place in the raw material inventory in a cost effective way.
1.6 Relevance
This subject is relevant to deal with due to the costs that are connected to inventory management. With right management these costs can be as low as possible and the material flow can be synchronized to the production (Tersine, 1994). Working with the inventory management is essential for companies that want to be competitive, stay in business and gain market shares. It is established that 30-35 percent of the material value is directly related to managing the inventory (Wallin, et al., 2006). Inventory is defined as one of the seven wastes by Taiichi Ohno. It is also the one that is most visible and can represent 5-30 percent of a company’s total assets (Goldsby & Martichenko, 2005).
Due to the high costs that are connected to inventory management it is important to find a model that fits companies´ different needs for material management in a cost effective way.
The subject of this report is relevant because it brings up the chain of how to define which the most frequently used raw materials are that should be focused on, how to make cost effective improvements in the raw material inventory in order to manage them better and how to establish a communication with the purchasers responsible for keeping the stock in the right level. When literature searches have been made, no previous works have been found that cover the whole chain from finding which the most frequently used raw materials are and how to make improvements.
Most theories cover parts of the chain but the model developed in this report covers the holistic view of how to manage a cost effective improvement of the raw material inventory management.
1.7 Limitations/Delimitations
No more steps of the production line than the raw material inventory will be looked at.
Limitations will be the time frame. For this report is no more than ten weeks available for data gathering and analyzing. Due to the short time frame it will not be possible to measure the long term effects of the results.
10 1.8 Timeframe
This is the planned time frame that is set for this thesis.
Weeks 12 13 14 15 16 17 18 19 20 21
Tasks
Problem formulation
Chapter one
Chapter two
Theory
Empirical findings
Submission 1-4 12 apr
Analysis
Results
Conclusions
Submission 1-7 2 may
Recommendations
Adjustments
Submission report 23 may
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2. Research methodology
This chapter will describe the methodologies that have been used in order to perform this project.
2.1 Quantitative research
Quantitative research methodologies are e.g. based on numerical data and are suitable for measurements of different variables, error estimations and comparing information and perceptions. It is important to remember that the investigator should be impartial in relation to the research that is performed. There are different ways to perform quantitative researches.
For example can surveys and interviews, measurements and experiments be used. Surveys and interviews are tools for obtaining quantitative data from respondents but it is also possible to obtain qualitative data with these tools. The respondents can be randomly selected or be a selection from a chosen target group. The questions that are given in the research should be with given alternatives in order to be quantitative. The questions can also be divided into different categories, category questions with different alternatives, numerical questions which are answered with a number e.g. age, multiple-choice questions, ranking questions and questions with a Likert scale e.g. how much do you agree with this statement and the answer will be given on a scale from one to five (McMillan & Weyers, 2010).
2.2 Qualitative research
Qualitative researches are suitable for investigating opinions, valuations and to compare respondents’ interpretations. Qualitative researches are an investigating methodology. When questions are given to the respondents it is important to exclude questions that are limiting and leading. When the questions are properly asked in a qualitative research the probability is lower that the respondent will be guided than in a quantitative research. These types of researches are usually performed on a small target group or single subjects. These researches will give the asker a deeper understanding of the case that is investigated than a quantitative research which mostly will give answers in numbers. When performing an interview the researcher can obtain extra information from the language that the respondent uses when he answers to different questions (McMillan & Weyers, 2010).
2.3 Case study
When a case is selected there are three different criteria that should be considered, if the case displays the ideal situation, if it displays the typical situation or if it is a randomly selected case. The case should be selected from the purpose, problem formulation and theory. It may be hard to generalize if only one case is used but it could be utilized in order to display qualities if the report is critically made. If many cases are used it is possible to show differences and patterns, coincidence may also be eliminated (Rienecker & Stray Jørgensen, 2008).
2.4 Data gathering methodologies
When gathering data, or doing a research, there are several different approaches. Each one of them is applicable in different situations and their value, advantages and disadvantages vary.
One of the methods might be preferable in one situation but not in the next (McClelland, 1994).
12 McClelland (1994) write that there are four different methods suitable for research and data gathering:
Survey questionnaires
Individual interviews
Focus groups
On-site observations
Survey questionnaires are commonly used as a research tool that provides cost effectiveness and reliability. The data gathered can be both qualitative and quantitative. A survey/questionnaire can give both accurate and relevant data to work with. An important thing to keep in mind is to present the produced data in a way that represents the facts just the way they were found. It is important not to, under any circumstances, try to manipulate the data (McClelland, 1994)
An individual interview is the second tool for gathering data. This tool will provide a direct contact with whoever is interviewed which will allow more possibilities than many other tools. Basically it is possible to perform an individual interview in two ways, either face-to- face or via a telephone interview (which can be seen as an alternative method). The individual interviews can also be divided into two categories depending on the structure of the questions that are being asked, they can be either structured or non-structured. Structured interviews are mostly performed when the topic/research area has been narrowed down. The prepared questions are usually much targeted and the respondent can answer only yes or no. Sometimes there is room for additional input but it should be kept short and specific. Non-structured interviews are mostly performed when the topic/research area is much more broadly defined.
The questions asked here are not as targeted as for the structured interviews (Ibid).
Individual interviews have some major disadvantages such as: they are the most expensive of data gathering methods, they are very time consuming and they most often requires an experienced interviewer. However they also have major advantages such as: they provide excellent qualitative data but also direct observable feedback which is to strive for when gathering data (Ibid).
Before performing an interview, whether it is face-to-face or a telephone interview, there are many things to plan and prepare. Depending on the size of the data gathering there should be a script made to follow how the questions are planned well in advance. Later, during the interview, there should be notes or records of the interview (Ibid).
The third tool for gathering data is to use focus groups. This is a tool that has become more popular nowadays, especially in the marketing industry as a great tool to gather information/feedback on the behavior of buyers and consumers. Even though it is a good tool it is rarely used as the only gathering method, it is mostly used together with another tool such as survey questionnaires or individual interviews. An important thing to keep in mind when working with focus groups is to understand the group dynamics in order to be able to produce and analyze data from the group setting (Ibid).
13 The last of the four tools is on-site observations which are quite often used within the industrial engineering profession. It includes time and motion studies and the data from it can be both qualitative and quantitative however it is most often qualitative. This method gathers empirical data which means that the data gathered might be proved or disproved by collecting the data once more. This is why there should be another method used to be able to analyze the data (Ibid).
A great advantage with this method is that it is possible to collect data directly from the ones who are performing the task etc. This makes it possible to gain firsthand knowledge about the area that is researched. It works best when the process researched can be observed, measured and analyzed (Ibid).
2.4.1 Data quality
When gathering the data there are many things to consider and different approaches to chose between. One of the more important things to consider is the amount of data which are collected and analyzed. Rienecker and Jørgensen (2008) write that there is a need to decide upon the optimal amount of data for the project because the wrong amount will affect the final result in a bad way. If there are too much data collected there will be a need to spend too much time for reading and analyzing the data instead of writing, while collecting a small amount of data may result in not having enough data to cover the topic (Rienecker & Stray Jørgensen, 2008).
Another thing to keep in mind is that it is not just the quantity of the data that are important, the quality is also important. Often it is better to chose a smaller amount of data and put more work to analyze and write it, than spending time on collecting a lot of data and less time on the analyzing and writing part (Ibid).
Another important thing to consider is the sources from which the data is gathered. First of all the sources need to be valid but it is also important to strive for collecting as updated data as possible since it will make the result more accurate. Therefore articles are to prefer but also books, unless they are published many years ago (Ibid).
The data gathered can also be divided into different types of data. Rienecker and Jørgensen (2008) write that there are three types of data that are relevant for a thesis.
Information and other material, such as pictures and interviews, about the case that are researched.
Literature about theories and definition used to research.
Literature about the methods used in the research.
Rienecker and Jørgensen (2008) also state that the data collection should be wide before the problem formulation is complete as the research about the topic in general. But it should then become narrower when starting to work with the specific problem formulation and gather data only closely related to it (Ibid).
14 2.5 Induction and deduction
There are two different methods to use when drawing conclusions. These are the induction and deduction models. They differ in what kind of data they use to draw the conclusions.
Induction use empirical findings to draw conclusions while deduction use logic. These two methods can also be combined which will form a third method called hypothetic-deduction.
(Thurén, 2007)
Induction is used to draw general conclusions using empirical data. Since the conclusions from this model are very general the reader need to know how the research has been carried out in order to know how trustworthy it is. Reliability and validity most therefore be considered which will assure that the researcher have researched what was meant to research and that all measurements have been carried out in a proper way (Ibid).
Deduction is based on drawing logical conclusion which will be considered as valid, and true, only if it is logically coherent. This means that it can be considered as valid even if it does not comply with the reality (Ibid).
The hypothetic-deduction model uses a combination of the induction and the deduction model. This model starts by creating hypotheses before creating a deductive conclusion. In the end the results are tested in order to see if they match the reality (Ibid).
2.6 Methodologies used
As Samuel B. McClelland (1994) state there are several ways to collect/gather data and their applicability vary depending on the case. In this case study a combination of the two methods that Samuel B. McClelland (1994) mentions, individual interviews and on-site observations have been used.
In order to get better understanding for the different work tasks within the inventory it has been chosen to perform several individual non-structural interviews with both the operating personnel, team leaders and the production manager. Interviews have been chosen because it will give the interviewer instant feedback from the questions asked. Since the workforce in the cutting department is divided into two shifts interviews with both shifts have been performed in order to take more perspectives into considerations.
On-site observations have also been used in order to gain knowledge of how the actual work is performed practically and how the inventory layout looks like. This also helped to find places/ways where possible improvements could be made.
In order to get statistical data for the calculations, production- and purchasing systems have been used to collect data for previous purchases, outtakes from stock, stocktaking and sales.
All the data were collected from a five months period from the first of November 2011 to the last of March 2012. To be able to compare and calculate the data everything were taken from the same five months period.
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3. Theory
In this chapter the theory that has been used for developing the model is presented regarding the raw material inventory layout and the information flow.
3.1 Inventory control tools
In the production industry the single largest expenditure is usually the materials´ costs. The average producing company spends half of their sales revenue on purchased raw material and components. Raw material in the inventory is materials that are bought from suppliers and later on used as inputs to the production process. (Tersine, 1994)
There are four different levels of business control; sales order processing, engineering, production planning and inventory control. The inventory control level organizes the day to day business. It is mainly short term planning that is relevant for this level. The focus point is to keep the right amount of material in inventory and tracking its movements. Warehouse management is the executive level. The concern is to make the best use of the resources, both material and human. To make this possible high quality data are required. Usually the warehouse management must be connected to an inventory control system. Warehousing is in first case about controlling materials physically. It is important to have an information flow that goes hand in hand with the material flow. The managers of the inventory must know the physical position of the material and he must also know all information connected to time and place. The monitoring and measurement of the inventory is about knowing everything that is useful for having an effective management of the inventory. (Ballard, 1996)
3.1.1 Inventory management system
In order to arrange a good management system for the inventory it is essential to look at the problems that are struggled with. In order to make the monitoring easier computerization is to strive for. The more exact the monitoring is and the faster the information from the monitoring is the more it is possible to utilize the inventory layout and the resources within it.
This will also lead to a reduction of errors and a higher customer satisfaction through faster lead times. With faster and more exact information from the inventory it will be easier for the managers responsible for managing the inventory to perform their job. With a good inventory management system it will not be necessary for the individuals in the information chain to have their own stand alone systems that provide them with information in order to help them perform their tasks. (Ballard, 1996)
When it is time for implementing or improving the existing system it is important to start with being sure of the information about the high runners in the production, when they are covered it is time to turn to the slower items in the inventory. Information should have a clear connection to quality and improvement thinking should be attendant. Errors should be recorded in order to map out which errors are most common. When that is established it is time to find the root causes behind them and eliminate them (Ibid).
16 3.1.2 Keeping track of raw material
In the inventory there are several different ways to measure the material level and status. The different parameters can be divided into three categories, fixed information, variable information and derived information. (Ballard, 1996)
Fixed information covers information about Stock Keeping Unit, this information will not change often. Included in this category are:
Product code.
Description.
Batch number.
Size.
Weight.
Preferred store area.
Secondary store area. (Ballard, 1996)
Variable information is information that changes all the time. It can even be changed many times during the day. This category handles information about movements, locations and quantities. Included in this category are:
Unique information about each unit load in the inventory.
Location of each unit load.
Quantity of Stock Keeping Unit in each location.
Movement of each picked item.
Load status e.g. available and hold. (Ballard, 1996)
Derived information comes from analyzes of the Fixed information and Variable information.
Included in this category are:
Movement rate connected to Stock Keeping Unit.
Inventory differences.
Utilization of the inventories space.
Productivity. (Ballard, 1996) 3.1.3 ABC-analysis
Due to the significant number of transactions that are connected to the material management it is important to have classifications of which materials that are most important to focus on. In order to help the managers to make their work easier to carry out it is preferable to sort out all information that is not important to concentrate on. The items that demand high precision should be separated from those that are less demanding. In order to gain a cost effective inventory selective material management can be adapted. It is usually not economical to have a concentrated level at all items in the inventory. Often a small percentage of the items in the inventory represent the majority of the value of all items represented. The items that are less expensive are usually more economical to buy in large quantities and to have a lower control over them in the inventory. The expensive items should be purchased in low quantities and
17 the control over them in the inventory should be carried out on tight intervals. In order to sort out which items should be controlled more or less it is preferable to classify them into three groups, A, B and C. The dollar volume is what determines which group they should be divided into. A is the most important items, B is the middle category and C is the less important items. The A-items dollar volume usually represents 75-80 percentage of the inventory’s total value while the percentages of items represented usually are 15-20. B-items represent 10-15 percentage of the value in inventory and approximately 20-25 percentages of the items. C-items represent 5-10 percentages of the inventory value and 60-65 percentages of the items in inventory. To calculate the inventory value for the items the following calculation should be performed: annual demand multiplied by the unit cost. When annual demand is used distortions from season changes will be eliminated. (Tersine, 1994) The percent limits are not fixed. When the items are accumulated in a list analyze should be carried out in order to establish the limits between the classes. The limits above are only to consider as guidelines.
(Mattsson & Jonsson, 2003)
3.2 Cost effectiveness in investments
Cost effective means that the investor gets profit back from the investment that is made. It can however be hard to calculate how much an investment will pay back in some scenarios. For example as Williams writs: “£10 paid for a bottle of penicillin on behalf of a person with pneumonia would probably bring benefits (physical and financial) infinitely greater than the outlay” (Williams, 1996, p. 26). In this case it is only possible to establish how much the cost is but the benefit from it is not measurable. There are also many examples of when an extra expenditure in facilities planning can give back enormous value to the investor, for example professional space planning and energy management from which it can be hard to define the actual amount of pay back (Williams, 1996).
Return On Investment (ROI) has for many years been the tool for calculating the value on the payoff from investments. The tool is applicable on all types of investments not only capital. If a ROI calculation shall be of use it has to take many aspects in consideration in order to be trustworthy, such as credibility, soundness and simplicity (Phillips & Phillips, 2009).
3.3 Lean wastes
The seven wastes within lean are considered as consumers of time, money and people without giving any extra value to the customer. The first and most common waste is over production which will lead to tied up capital and space within the inventory. The second is excess inventory which is caused by over production. The third waste is waiting, materials that are waiting for value adding processing or workers waiting for to start processing. The fourth is unnecessary movements of products that travel between work stations. The fifth is unnecessary movements of workers that have to move around in the factory to find tools and parts necessary for processing. The sixth waste is unnecessary or incorrect processing which can be people that are monitoring machinery that can monitor themselves. The seventh is waste which leads to scrap, rework of the faulty product or repair (Arthur, 2007).
18 In order to reduce the five first wastes lean thinking can be applied and for the last two, six sigma can be a part of the solution. 5S in a tool that will help to reduce the wastes through reorganizing work in order to simplify, make more visual and straight forward (Ibid).
3.4 5S
5S is a philosophy, or even a system, widely used within the lean concept and it is often one of the tools companies choose to implement first when they start to work with lean. It is used in order to reduce waste and optimize productivity and quality. This is done by establishing, and maintaining, an orderly and well sorted workplace where everything has its place. This can be done by using visual cues which strives to give better and more consistent operational results. The 5S philosophy put a lot of focus on establishing routines for the everyday work tasks. By establishing routines that maintain organization and order, efficient flow of activities will be enabled. There is a definition of the 5S below (Bayo-Moriones, et al., 2010).
Sort – Oversee the workplace and try to eliminate unnecessary items that will not be used in the operations that are performed.
Set in order – Establish methods for storing items as effective and efficient as possible so that they are easy to find and use. This may involve labeling the items. Place the most frequent used items nearest to the user.
Shine – Clean the workplace so that it is clean and fresh. Strive to clean every day to maintain a clean workplace. (Arthur, 2007)
After implementing these three first 5S the work continue with the remaining two which focus on sustaining what have been accomplished so far. This is done in order to make sure that the work will be performed in the same way instead of going back to the way it used to be (Bayo- Moriones, et al., 2010).
Standardize – Take the best way to perform a specific task and standardize it so that everyone will do it the same way.
Sustain – This is probably one of the hardest S to implement. Work with the workers´
behavior and try to change the habits on how to perform the tasks. This is important to prevent the workers from going back to the old way of performing the task. Changing the habit will make sure that the task is performed in the right way in the future which is essential in order to get better results. (Arthur, 2007)
5S has quite a broad focus as it considers a lot of things such as the values of: organization, standardization, a clean and neat workplace as well as discipline. It aims to do this without changing the current set up of the workplace which makes it applicable to most factories (Bayo-Moriones, et al., 2010).
3.5 Inventory layout
The facility is often the most expensive asset a company has and therefore a high utilization rate is to strive for. When planning an inventory layout there are several points to account for in order to have a sustainable layout that can be changed over time. The layout should be designed in an order that helps to save time in the production. It is important to have a
19 inventory layout that is flexible for adjustments when it comes to rapid market changes. New products should be easy to implement into the inventory layout when demand changes. The layout should be optimized for a small amount of items. A small number of managers should be involved in order to get a smooth decision making (Kerns, 1999).
Before planning the layout of the different items in an inventory it is important to define the relationships between them. There is a scale on which the relationship can be evaluated.
A - Absolute important to have departments connected.
E - Especially important to have departments close.
I - Important to have departments nearby each other.
O - Ordinary departments should be conveniently near.
U - Unimportant if departments are apart
X - Indicates that it is preferable to have departments apart.
XX – Indicates that it is important to have departments apart. (Kerns, 1999)
In Fig 3.5 Activity relationship chart should the departments be placed on the rows and in the squares should the letters from the relationships above be filled in. This will help to graphically show which departments should be near each other and which should be separated. (Tomkins, 2010)
Fig 3.5 Activity relationship chart.
In the next step, after the relationships have been established, an evaluation of how much space is required for each department is made. It is important to consider growth in the future when space requirements are established. It is also important to think of the limitations that the building has when it comes to shape and available sqm. (Ibid).
3.6 Information flow
Information flow is an important part in every producing company. A company uses resources, materials and components etc. to produce their final products. To be able to utilize and combine all these activities in the right way, a managed information flow is needed.
Almost everything a company does involves some kind of information that needs to be sent between different actors (Mattsson & Jonsson, 2003).
The information flow can be seen as a management tool to control what happens in the factory. For example, when an order is placed the information about the order is sent to the
20 next step. When ordering raw material the information is sent to the supplier who later confirms the order and sends the goods. The information that is send will contain specifics about the order such as what product was ordered, what quantity and delivery specifications etc. In this way the information sent controls what will be delivered (Ibid).
Information can also flow in multiple ways, for example between a producing company and its suppliers, or between the company and its customers. In these cases information needs to be sent both from and to the company. When purchasing raw material from suppliers information needs to be sent from the company to their suppliers about orders and quantity etc. As well as from the supplier to the company in form of order confirmations and delivery details etc. The information flow between the partners described above can further be categorized into two information types, demand and availability (Ibid).
Many of the activities within a company are initiated by an information flow. For example when money transactions are carried out, they always start with information being sent between different actors. If there is an error somewhere in the information flow the money transactions will not be carried out in a proper way, in this meaning it is very important to control and manage the information flow but also try to optimize it by finding new ways to make it more effective (Ibid).
3.6.1 Information overflow
In organizations today there is often a problem with too little information but it can be just as faithful with information overflow. According to researches three different scenarios can be reached. The first scenario is that the search for information will be superficial and important information will not be found. The second is that the criticism of the information will be lighter and the analysis will be superficial. This can lead to misinterpretations of the information. The third scenario is that the information will be untouched until someone demands that the receiver uses it. In this case important information can be untouched for a long time. (Jacobsen & Thorsvik, 2008)
At the same time an information overflow can lead to individual problems like stress, losing control of the daily activities and losing the holistic perspective. Therefore it is important to establish a communication with the right amount of information for controlling the activities that should be treated and in the same time not losing control due to too much information (Ibid).
3.6.2 Information sorting techniques
Today managers are overwhelmed by available information on which to base decisions on. It is important that unnecessary information is sort out in order to let the manager work effectively. Harwood (1994) describe John F. Rockarts list with five different approaches of how to manage an information flow.
By-product technique: The information that is gained from this technique comes from the systems that are required for the daily work and the routines of processing information and papers. The disadvantage with this technique is that the requirements from the mangers might not be defined or obtained.
21 Null approach: State that managers ignore information from formal structured sources and instead rely on soft information sources which have to be developed and taken care of.
Key indicator system: A selection of key indicators should be done on which managers can run the business. A system for highlighting indicators that are outside the parameters that has been stated should be attendant. This will let managers focus on the key indicators and just processing the other indicators when something is happening.
Total Study Process: A “top down” analyze. Managers and staff are interviewed in order to find their environment, goals, important decisions and their information needs.
Critical Success Factor approach: A combination of the methods mentioned above. Interviews with managers are necessary in order to establish which areas in the organization that is essential so they always go right. When these areas have been established quality information from these areas must be provided in order to let the managers have their focus here. There are similarities with this approach and the Key indicator system but the Key indicator system is more focused on financial figures. The Critical Success Factor approach supports managers´ need for soft information. (Harwood, 1994)
The CSF approach is not only suitable for top management it can also be applied for department managers in order to support their goals. This approach will be beneficial for the information flow because it lets the managers concentrate effectively on the information that they need for their tasks (Ibid).
3.6.3 Communication channels
Depending on the information that is sent various requirements are needed. There are three points to account for: The channel might be inappropriate for the information that is sent and important information can fall out. The channel can limit the ability to state a two way communication which can be needed. If many actors have access to the channel manipulation and alteration of the information might occur. This is occurring in vertical information channels where the information travels between different levels of hierarchy (Jacobsen &
Thorsvik, 2008).
3.7 PDCA
The PDCA cycle, or Plan-Do-Check-Act, is a working methodology developed by W.
Edwards Deming who was a great contributor to the field of quality and quality improvements (Foster, 2007).
The PDCA concept has its roots in statistical process control (SPC) and was developed to fill the need for improving product quality. It is based upon Walter A. Shewhart´s method called
“The Shewhart cycle”. Just like Deming´s PDCA this was a method for improving product quality. However the Shewhart cycle consisted of a six steps process while the further developed PDCA consists of only four. The definitions of the four steps are shown below:
Plan – This stage is supposed to determine all the objects and processes that are needed in order to meet both the customer´s and the company´s requirements.
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Do – Work with implementation of the processes.
Check – Monitor and measure the processes and compare them with the objectives and requirements that were set in the first step. The results are then reported.
Act – Take the actions needed to maintain continuous improvements of the performance. (Manuele, 2008)
Fig 3.7 PDCA cycle
In Fig 3.7 PDCA cycle above shows how the four steps of the PDCA cycle are connected. As the PDCA is a method for continuous improvements it is important to keep working with it all the time. Good results will not be reached if only one PDCA cycle is performed. What to do is to perform a PDCA cycle and then keep working with the improvements by performing another cycle after the first one is finished. As things may change new things to work with may be discovered when performing the second cycle, things that were not seen the first time.
Therefore it is important to perform the PDCA cycle repeatedly, remember that quality improvement is a never ending cycle (Pascal, 2007).
An important thing to keep in mind while working with quality improvements is never to take anything for certain. Things are not always exactly as they appear to be. Therefore you need to ask yourself the right questions and check everything thoroughly to get a valid picture of the situation. This counts for all the stages in the method. For example in the “check” phase there are several questions to overlook. For example: whom to check with, what to check, when to check, how frequently to check and in what manner to check (Ibid).
Later on Deming decided to change the PDCA cycle to the PDSA cycle where he changed the
“check” act to a “study” act. This was made because he felt that the word “check” seemed more related to someone standing next to the process and checking it than actually studying and monitoring it. Anyhow the main concepts where kept and the cycle is carried out in the same way as before (Manuele, 2008).
Plan
Do
Check
Act
23 3.8 Cause and Effect Diagram
Cause and effect diagrams or better known as Fishbone diagrams is a tool for starting problem analyzes behind root causes. This is a good starting point for further analysis. When using this tool it will be easier to narrow down the problem. There are different categories to consider when finding the causes behind the problems that are analyzed. The categories are people, process, technology, equipment, material and environment. As an input to the diagram there should be a question e.g. why do we have a problem with...? As shown in Fig 3.8 Cause and Effect Diagram. From this question possible reasons behind the problem will occur. On each category there are lines on which causes should be written. It is important that the members of the discussion have a good imagination in order to populate the diagram. Important to remember is that the causes found from the analysis are not always the real root causes behind the problem that was discussed (Goldsby & Martichenko, 2005).
Fig 3.8 Cause and Effect Diagram
3.9 Interaction between raw material inventory and production
In order to get a cost effective raw material inventory management system there should be a strive for maximizing the use of the layout, protection from damages, accessibility of the materials, ability to locate materials, reduction of administrative costs, and the use of equipment connected to the raw material inventory (Tersine, 1994).
The faster and the higher quality the information has from the production department the higher can the utilization grade be in the inventory. With adequate and up to date information the purchaser can control the levels in the raw material inventory. This will minimize the risk for errors and material shortages (Ballard, 1996).
In order to obtain a cost effective inventory management the holding cost should be as low as possible. This means that the insurance-, handling-, deterioration- and ageing cost should be minimized (Tersine, 1994).
24 The stock out cost is also connected to the inventory cost effectiveness. When stock out occur the production department cannot continue the production which leads to profit loss from lost production and delay of completing (Ibid).
3.10 Inventory management system and cost effectiveness
When working with improving the inventory management system a company should strive to utilize the inventory, as well as the resources, in the best way possible (Ballard, 1996).This is done in order to increase its cost effectiveness which will save money. By looking over the existing inventory layout it might be possible to find ways to improve it with professional space planning in order to increase the utilization rate while still using the same resources which will lead to a greater profit. The resources necessary to carry out the work might already be in place, but the utilization rate may be low. In order to increase the inventory’s cost effectiveness, maximizing the utilization of the resources is to strive for (Williams, 1996).
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4. Model development
In this chapter the model is presented and there is a description of what was used in order to develop the model. There is also an explanation of the different steps and why they have been chosen.
Fig 4 Raw material inventory management model
The model that has been developed is showed above in Fig 4 Raw material inventory management model and consists of six steps.
At many companies there are many different raw materials used and most of them are stored in a raw material inventory. There are often different critical items in the inventory and there can be an amount of items that can be hard to handle at one time. Therefore a method for sorting them will be required. The ABC-analyze has been chosen as the tool for sorting the different items in the raw material inventory. With this method knowledge of which items should be focused on first will be available. This tool will also be used after the model´s first cycle is finished in order to find season variations. At different seasons or in the future the demand can change. Therefore can the ABC-analysis find if the right items in the raw material inventory still should be in the A-group or if new items should be placed there instead.
The ABC-analyze will not give enough information for starting to find places in the raw material inventory. It is not only important to know which the most important items are, it is also important to establish the relationship between the items in the raw material inventory and also the relationships to the next step in the production that the items are going through.
When all the relationships are established between the items that are processed in the model the placement can start. The tool chosen for establishing is the relationship chart. It has been chosen due to that it can handle different degrees of interactions and with this knowledge it is possible to prioritize the items against each other in order to find which items should be
26 placed nearest each other. In this step it is possible to see the connection with the 5S strategy where each item should be set in order and stored so they are near the user and easy to find.
The fishbone diagram has been chosen as a tool to identify possible causes of errors within the information flow. Different causes that the diagram process are related to people, technology, environment, material, equipment and process. This is done in order to find what is missing and what to focus on when making improvements in the information flow.
In order to have control over the raw material inventory it is not enough with a time efficient layout. It is also important to have control over the inventory levels of each item. Therefore the purchaser must have information about the levels in the raw material inventory. If the purchaser misses something in the process it is preferable to have a method for support in order not to run out of stock. In the theory are different approaches for sorting information mentioned and the ones that are chosen are the Total Study Process and the Key indicator system. Total Study Process has been chosen in order to find the right information necessary for the purchaser in order to fulfill the functions connected to the role. The Key indicator system is chosen in order to let the production department support the purchaser. The production department has experience of which items in the raw material inventory that never should run out of stock and when they see that the levels are below regular the purchaser can be contacted.
In order to fulfill the needs for the information flow it is not enough to sort out which information should be used. The right communication channel is also important to find in order to let the information travel fast between the departments. The risk of old information, manipulation and misinterpretations has to be minimized. In order to minimize the risks the receiver should be able to choose the information channel.
The model should be an ongoing process due the changes of the product demand that happens over time. In order to ensure that the right items in the raw material inventory are in the A- group the PDCA-cycle has been chosen. This is shown in Fig 4 Raw material inventory management model with an arrow from step six to step one.
The connection to the 5S strategy is made on two additional points than what is account for above in the text. With the model will the work for raw material inventory improvements be standardized and the description gives the possibility to perform the task in the same way independent if it is the same personnel that performs it at different times. When the cycle of the model is made time after time it will help to sustain the improvement that has been made and even more improvements can be found.
As shown in Fig 4 Raw material inventory management model the model consist of six steps where an analysis has to be made in each step.
In the first step the most important items in the inventory which contributes to the material flow have to be found. The focus is put on material flow and not on the value of the items since the purpose of the model is to optimize the layout and the material flow in the raw material inventory. With help from the ABC-analysis it is possible to find the most important
27 items and they will be placed in group-A. The items and the consumption of them should be in an accumulating list. This will make it easy to see the items and how much they contribute to the flow in relation to each other. In the case of the report the limit of 80 % of the material consumption have been set for group-A, important to remember is that this limit is not fixed.
In some cases 80 % might not be enough due to the number of items in stock. For example if the result of the ABC-analysis will be a small number of items it is suitable to raise the limit in order to optimize the layout and flow for more items. With too many objects it will be hard to overlook the connections between all the items and the machinery that they are connected to, try not to involve all of the items.
The facility is one of the most expensive assets companies have, a high utilization rate is to strive for. In order to utilize the inventory layout as much as possible the second step of the model has to be made. In this step the connections between the items in the inventory and the machinery that are in the first step of the production should be established. In order to make this easier to analyze and overlook, the Activity relationship chart has been chosen as the tool to help. In this case the machines have been placed on the top rows of the chart and afterwards come the items from group-A in the ABC-analysis. The items are not only connected to the machine that they are going through but also to the other items in the inventory. The items that have the same machine in common should also stand close to each other in the inventory in order to make it easier for the operators to find them. In this case it was also possible to consider more than one machine for the items in stock. Due to that it is possible to cut some of the glass types in more than one machine if necessary. This is important to take in consideration if a breakdown will occur or if the preferable machine is overloaded with work.
Then it is preferable if the machine is reachable even for the other materials.
The following relations are based on the theory in part 3.5 Inventory layout. The connection between the item and the machine is given an A due to that this connection is more or less what makes the material flow efficient. The connections between the items that have the same machine is given an I because they should stand close but it is not as important as the A classification. It is possible to ignore this connection if the inventory will not make it possible to place them nearby. U is given those items that do not have any connection between each other or to the machine.
In the third step a layout of the raw material inventory is made with respect to the relationship chart. The glass plates with the same glass codes should stand together in order to let the operators find them easy and to let them see the inventory level of each glass code. If the operators see that the inventory level is lower than preferable they can contact the purchase manager in order to highlight that glass code. In this step it might be necessary to revaluate the position if the inventory will not allow different items to stand nearby each other.
Although the items that have been given the A classification in the relationship chart should stand nearby in order to make the model work. If not possible to place those according to the relationship chart, common sense has to be used in order to find a possible layout for the items that have constraints with the buildings´ layout.
28 In the fourth step should a fishbone diagram be made in order to identify errors and flaws in the information flow. These errors and flaws are then treated further in step five and six. All the actors in the information flow should be present while performing the diagram in order to get as many perspectives as possible.
In the fifth step the purchase manager and the inventory manager should be interviewed in order to find out which information is necessary for them to accomplish their work.
Remember that too much information is just as bad as too little. The tool that is used in this step is the Total study process. In this case the product code of what has been consumed and the size/quantity has been chosen. In other cases it might be necessary to have more or different information sent from the inventory manager to the purchase manager. If possible the inventory manager can help the purchase manager by implementing a Key indicator system in which the inventory manager will contact the purchase manager when one of the items fall outside of the parameters that have been set for the levels in the stock.
In the sixth and last step the best suited communication channel should be found. Try to let the information travel through as few hierarchy levels as possible due to the risk of alteration and manipulation. The channel should be fast and on a two way communication basis so the receiver fast can contact the sender in order to minimize the risk of misinterpretations. The receiver should be the one who has the last word when it comes to decide which channel to use.
In order to sustain the improvements that have been obtained by the model it is important to work with the PDCA approach. The idea is not that the steps should be repeated continuously without interruption but instead when new raw materials have been added to the list of raw materials or when the customer demands have changed to other raw materials, then it is appropriate to start with step one in order to find out if there have been any changes. If there were changes the other steps should be made again in order to find the most effective inventory layout. Step four to five may not be necessary to carry out each time but they can lead to find flaws in the information flow that has been established. It depends on if the new raw materials are of another character that demands special information to flow between the inventory manager and the purchase manager.
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5. Empirical findings
In this chapter there is a presentation of the case company used. The data used for testing the model is also shown and explained in the chapter.
5.1 Company description
The case company that has been used for the case study is Emmaboda Glas AB. The company was founded 1919 under the name Emmaboda Fönsterglasbruk in Emmaboda. In 1974 the company was bought by the Saint Gobain group. The number of employees is approximately 225 and the turnover is 400 million SEK. The product that they provide is refined glass mainly from the Saint Gobain Group. Mostly plain glass is provided. The treatments that are made are cutting into different sizes and shapes, grinding, painting and the main products are fire protective glass solutions made by injecting gel between different glass layers.
5.2 Description of raw material
The raw material that is used in the production is glass plates in different sizes. The sizes that are covered in this report are the ones that are called Jumbo plates. The dimensions of these plates are 3210 mm times 6000 mm. Today approximately 250 different types of plates are used. The plates vary in thickness, transparency, color and other properties.
In the cutting department there are four different cutting tables of which three are used. The fourth is going to be sold which will give extra room for inventory. The tables are cutting different types of glass. Cutting table number one cuts the glass types which are five and six millimeters thick. Cutting table number two cuts laminated glass types and the third table cuts the remaining glass types, which includes all glasses from three to fifteen millimeters thick except the five and six millimeters as well as the laminated glasses.
5.3 Inventory layout
The plant consists of two buildings, one office building and one building where the production is located. The production building, which includes loading bays, covers the majority of the plants area. This is the building where all the glasses are delivered, processed and all the finished products are shipped out.
In Appendix 1 is the layout displayed for the cutting department and the raw material inventory. The scale on the different objects is not correct therefore it seems hard to fit the objects that are marked in the picture. In the upper left corner are the cutting planner’s office and a storage place for seventeen trolleys, they are not placed on the picture due to the scale.
The trolleys can be seen in the upper right corner were the incoming goods arrives. They are market as yellow in the picture. There are three cutting tables with different appearances, the cutting table for five to six mm glass plates is placed to the right and it is marked as red with a yellow loading part, the cutting table for laminated glass plates are the one in the middle which is marked as green and to the left is the cutting table for three to fifteen mm glass plates which is marked as red. When the cutting tables are running there are place for two trolleys on which the glass plates are loaded before they enter the cutting table.
