ANALYZING DIFFERENT POSITIONS OF CODP AS RELATED TO INFORMATION FLOW OF DE HEUS

Transcription

1 ANALYZING DIFFERENT POSITIONS OF CODP AS RELATED TO INFORMATION FLOW OF DE HEUS 7/8/2013 Surapong Chanasettakul Master Thesis: MST Supervisor : Dr. J.H. Trienekens Co-supervisor: Dr. C.N. Verdouw Period: September - March 2013 Department: Management Studies Group

2 TABLE OF CONTENTS ABSTRACT... 4 CHAPTER 1: INTRODUCTION Introduction Conceptual Research Design Research Objective Research Question Research Framework Technical Research Design Research Strategy Research Methodology Conceptual Framework CHAPTER 2: FEED SUPPLY CHAIN Introduction Generic animal feed chain arrangement Customer Order Decoupling points (CODPs) Possible CODP in the food and feed industry Factors that impact CODPs positioning Food and feed supply chain characteristics Accidental incidents (short-term) CONCEPTUAL Factors Impact Model Conclusion CHAPTER 3: INFORMATION SYSTEM Introduction Information system structure State-independent State-dependent Decision support system Influence of factors AFFECTS on information flows Mass Customization/Modular product design on information flow of order promising Stock shortage on information flow of ordering process CHAPTER 4: SUPPLY-CHAIN OPERATION REFERENCE MODEL (SCOR) Introduction Scope of SCOR Processes Levels of process detail in SCOR Overview of existing SCOR business process diagram REFERENCE model for different production situations Process Model for different production situations CHAPTER 5: DE HEUS Introduction The European feed supply... 53

3 5.3 Feed supply in the Netherlands De Heus Feed B.V The variants of customer order decoupling points within De Heus Result & Discussion Information flows relate to variant of customer order decoupling points The Information flows relate to purchasing process The Information flows relate to the ordering process The Information flows relate to the production and production planning THE Information flows relate to the system integration structure The information flows that are impacted by an exceptional situation Modeling information flows the Information modeling and the management of Codp Conclusion APPENDICES Appendix I: Questionnaire Appendix II: Interview script Appendix III: System Integration Structure REFERENCES Page 2

4 LIST OF FIGURES Figure 1: Integration of demand and supply chain... 6 Figure 2: Research framework... 9 Figure 3:Conceptual framework Figure 4 General arrangement of animal feed company in the supply chain Figure 5 Customer order decoupling point in push/pull point of view, a triangle represents a place where an inventory is kept Figure 6: Possible product delivery strategies relate to different customer order penetration point in food and feed industry Figure 7: A model for intermediate factors affecting the positioning of customer order decoupling point Figure 8: A model for choosing the right production situation by using p/d ratio and relative demand volatility proposing by olhager Figure 9: General information system structure Figure 10: The information flow of the ordering process of make-to-stock production situation which is affected by mass customization Figure 11: The information flow of the ordering process of the assemble-to-order production situation which is affected by mass customization Figure 12: The information flow of the ordering process of the make-to-order production situation which is affected by mass customization Figure 13: The information flow of the ordering process impacted by stock shortage for MTS Figure 14: The information flow of the ordering process impacted by stock shortage for ATO Figure 15: the SCOR model Figure 16: The example of the model showing the process diagram Figure 17: The control configuration of three production strategies based on SCOR model and CODP concept Figure 18: Process model for make-to stock Figure 19: Process model for assemble-to-order Figure 20: Process model for make to order Figure 21: The main compound feed producing countries Figure 22: The diagram shows raw materials used in compound feed industry in Figure 23:The purchasing process for both make to stock and assemble to order Figure 24: The similarity of ordering process for make to stock and assemble to order Figure 25: The difference of production and production planning process for make to stock and assemble to order Figure 26: Information flows when combing ordering, production and production planning process.. 80 Figure 27: The information flows of De Heus Figure 28 : Exceptional information flow that is influenced by raw material stock shortage Figure 29:Exceptional information flow that is influenced by the out of quality of the raw material delivery Figure 30:Exceptional information flow that is influenced by invoicing of the raw material shipment 84 Figure 31: The three positions of the CODP and the factor that causes the CODP shifting within De Heus Page 3

5 ABSTRACT According to the competitive environment of the feed industry, the feed companies that have the fastest response to demand volatility are order winners. In order the achieve this, customer order decoupling point concept plays a significant role in separating the part of production which focuses on production efficiency and the other part where the main activities focus on fulfilling volatile consumer demands. In most literature researchers only focus on the broad CODP concept which sometimes is regarded as too theoretical. The main research objective of this research project is to analyze different positions of CODPs and related information flows in a case company by modeling information models for De Heus. In this thesis, the impact of different factors on the customer order decoupling point positioning and how these factors have an impact on the information flows of De Heus by using business process modeling notation and BPMN. De Heus is a company in the animal feed industry with a global leading position. The company was originated in the Netherlands and was found in By expanding from a regional feed company to a feed conglomerate, the company has activities in more than 45 countries around the world especially in Europe, Asia, Middle East, Africa and Latin America. In this study the reader will see the impact of various factors on the information flow. There are various incidental factors that can have the impact on the information flow but there is only the stock shortage of both end products and raw material can shift the position of CODP. This impact causes a change in the production lead time that directly impacts the CODP positioning by shifting its backward. Page 4

6 CHAPTER 1: INTRODUCTION 1.1 INTRODUCTION At the present time, food and feed companies are operating under a complex and dynamic environment which is caused by various driving forces, such as increasing customers concerns about food safety issues, increasing volatility of consumers demands, shorter life cycle of product, intensity of the competitive environment and advances in information technology (Verdouw, 2010b). These driving forces will force the entire supply chain to corporate in order to retain the competitiveness and to gain the competitive advantage against other competitors. The feed chain is a part of the livestock production chain for the meat production. The chain may comprise of suppliers, growers, meat processors, importers, exporters and retailers. Among these stages, the main processing step is usually the transformation process which transforms raw materials into animal feed. (Van der Vorst, 2007). Since food and feed are considered to be perishable and time is one of the key factors to success because price and value of these perishable products continue decreasing after a certain time that the products are left the producers. In other words, the original good quality product can be subjected to quality decay due to the inadequate actions of partners in the supply chain for example the unorganized information exchange and mishandling of food product. A lack of information exchange may lead to quality decay due to an overproduction of products without the market demand. The products left unsold which may lead to quality decay of finished goods. The mishandling of products like poor quality packages, poor storage conditions can also lead to quality decay. A number of challenges for food and feed producers need to be taken into account such as lack of forward linkage, large numbers of intermediaries, poor transportation facility, storage condition, wastage and inadequate information (Jacob, 2008). As mentioned above, in order to gain competitiveness, any type of firm needs to align its strategy with the market requirements. The customer decoupling point (CODP) is noticed as Page 5

7 one of the most important factors in the design and operation of the supply chain. The CODP is the point in the material flow where the product is tied to a specific customer order: the variety of the CODPs are engineer-to-order (ETO), make-to-order (MTO), assemble-to-order (ATO) and the most simplest form is make-to-stock (MTS) (Olhager, 2010). In the supply chain, the upstream decoupling points are toward the suppliers, while those downstream decoupling points are toward the ultimate customers. In addition, the ultimate aim within a supply chain is to keep the material flowing from sources to end-customers and the material needs to be moved through the supply chain as quickly as possible in order to prevent local build-ups of inventories which will generate additional costs to the producer. To make this happen, it is the end-customer s demand signal that triggers the whole supply chain (i.e. the demand driven chain) to respond by sharing the end-customer s demand information across the supply chain. Information technology enables a rapid share of demand and supply data. As a consequence of integration of data, a more accurate picture is gained about the nature of business process, market and end-customer as shown in figure 1 (Alan Harrison, 2008). Material flow Information flow FIGURE 1: INTEGRATION OF DEMAND AND SUPPLY CHAIN As mentioned earlier, information technology makes the communication between different functions within the firm or supply chain much more easy. The case company, De Heus is selected to see the information exchange within the company between different production situations. De Heus is a company in the animal feed industry with a global leading position. The company was originated in the Netherlands and was found in By expanding from a regional feed company to a feed conglomerate, the company has activities Page 6

8 in more than 45 countries around the world especially in Europe, Asia, Middle East, Africa and Latin America. De Heus offers various animal feeds especially for pigs, poultries, dairy beeves and horses. The goal of this study is to look into the different variants of CODPs that can happen within the case company, how the information and CODPs are managed, and which information is required by the management team for different CODPs. This thesis also gives a deep insight about the relationship between factors such as, stock shortage, product customization that influence position of CODPs and information flows and how these factors are related. 1.2 CONCEPTUAL RESEARCH DESIGN The conceptual design deals with determining the subject and consists of research objective, research framework and research questions. The main purpose of this conceptual research design is steering which helps not only in the creation of the technical design but also in the actual implementation of the research project RESEARCH OBJECTIVE The research objective summarizes what is to be achieved by this study. This project is a practical oriented research based on a case study of the Dutch animal feed company (De Heus). Diagnostic stage of this project will focus on the background of the company. Later on, in the design phase, models of information flow are developed in order to find the answer to the research question, and finally, the conclusion can be made. The research objective is as follows: To analyze the factors that influence different positions of the customer order decoupling point (CODP) and related information flows in a feed company by designing an information model for De Heus RESEARCH QUESTION In order to achieve the research objective, the main research question is derived below. Moreover, to be able to answer the main research question, specific knowledge is required. Therefore, sub-research questions are formulated. Page 7

9 How can information modeling support management at different positions of the customer order decoupling point? The main research question is split up into the following sub-questions: 1. In what way the animal feed company arranges in general CODPs? 2. What are the factors that impact the positioning of CODPs? 3. What information flows are related to different CODPs? 4. How can different variants of CODP be recognized in a case company? 5. How can we model information flow related to these variants? 6. How can information modeling support the management of CODPs? RESEARCH FRAMEWORK A research framework is a schematic and visualized rough representation of all the steps to be taken in this thesis in order to illustrate a holistic view of what will be covered in this research. First, the literature research is conducted on several aspects. For example, the general arrangement of animal feed company provides the holistic view of how the feed chain arranges in general; furthermore, the different position of CODPs and logistics management will be studied to provide how the logistics is managed around the CODP together with information flow. Second, literature in various fields will be studied to gain more knowledge. The literature review will give a clear insight on theoretical knowledge. Then the consequences of the literature research are used to make a theoretical framework. The theoretical framework depicts the different variables which are CODPs, information flows and management of CODP and the relationship between these variable. Later on, the case company will be introduced and the data from the company will be acquired by interviewing the employees in the corporate IT and process integration department, ICT, production and quality assurance of the case company. Next, the analysis of theoretical and empirical data is made, and finally, the conclusion is given as shown in figure 2. Page 8

10 Literature on animal feed company Interview people in the company + Company data Literature on CODP +Logistics management Theoretical Framework on CODP variant Business Case Analyzing Data+ Modeling Conclusion Literature on Logistics Information Figure 2: Research framework Page 9

11 1.3 TECHNICAL RESEARCH DESIGN The technical research design contains two sections which are research strategy and research methodology. These aspects will provide an insight of how the research project will be carried out (Doorewaard, 2010) RESEARCH STRATEGY The research strategy means the coherent body of decisions concerning the way in which the researcher is going to carry out a research. In the first part of the research phase, desk research is performed. After literature research, insight is gained about the general arrangement of the animal feed supply chain and also the relationship between three factors which are the position of CODP, data required by management and the information flows. In the second part of the research, the case of De Heus is chosen. Then employees of the chosen company will be interviewed. The results of the first phase of this research project which is the desk research are used as a base for the interview. The interview is conducted in order to find in depth information and innovative ideas; therefore, open-end questions are used with the interviewees RESEARCH METHODOLOGY In this section, the method that used for data gathering will be discussed together with the further explanation of why the respondent or expert within the case company is chosen. Firstly, an open questionnaire is designed to point out the difference between production situations among the different product variances of De Heus. The detail business processes are indicated at level 4 of SCOR. See the example of the questionnaire in appendix 1. Gathered data will undergo the qualitative analysis to answer the sub research question four, five and six. These sub-research question will be ultimately answered the main objective of this research study. The respondents for this research are the employees that are working for De Heus. The respondents from different functions and departments within the company are chosen. In this research, the author interviewed people from different department for example, Page 10

12 corporate information technology and process integration department, Production department, ICT department, Nutritional formulation department, purchasing department and Quality assurance department. The chosen respondents are working in different departments. This means that the interviewee specializes and expert in different fields and have different perspectives of how they see the customer order decoupling point. The expert has provided a deep insight of both information technology and the business process points of view like the production processes (i.e. the basic operation processes like logistics and registration of sales and documentation). The aforementioned reasons are the reason why the experts from different departments were chosen. The experts were selected to give a clear insight of what is really happened within De Heus and also to point out the main difference and the main problem of different production situations. Later on, the expert will be interviewed to gather all of the necessary information to answer the sub-research questions that were formulated. A complete interview script of the main respondent can be found in appendix 2. After the interview, the result of the interview will be undergone the analysis. The results from the interview are then used to model the information flows of the company. The result of the interview is then modeled based on the SCOR level 4 processes by using the business process modeling notation and BPMN. Models are modeled by using Visio as a tool for modeling. In addition, the interview also point out the factor that cause a shift in customer order decoupling point. These are the factors that identify by De Heus employees. In order to see how these factors have an impact on the information flow, it is important to look into the detail of the flow of information. This qualitative research will provide a benefit in terms of a detail case study. Page 11

13 1.4 CONCEPTUAL FRAMEWORK Conceptual framework is a research outline to present a preferred approach of thought. In this research, the conceptual framework or theoretical framework is shown in figure 3. From figure 3, the arrow labeled with A is a research for different factors which can impact CODP positioning. The research information can be found in chapter two. Arrow B and D sequentially focus on how the different CODPs affect the management of order promising process and the decision support system between information system and management that will be mentioned in chapter two. Arrow C concentrates on the information system and information flows which are related to different CODPs that can be found in chapter two and three of this report. Arrow E which is the main focus of this thesis aims to investigate the factors which affect CODP positioning and how these factors impact on information flow. The dot line passing through CODP to information system represent these factors that do not directly impact the information system, but those factors affect the information system by altering the CODPs position such that the information system need to be readjusted. The result of this study can be found in chapter two, three and four. FIGURE 3: CONCEPTUAL FRAMEWORK Page 12

14 CHAPTER 2: FEED SUPPLY CHAIN 2.1 INTRODUCTION In this chapter, the specific question one and two will be answered; in what way animal feed chain arranges in general CODPs? And what are the factors that impact the positioning of CODPs? The answer to these sub-research questions are found from literature study. The main purpose of this chapter is to get a holistic view of the feed supply chain characteristics and the factors that affect the CODPs. First, the meanings of supply chain and general feed supply chain arrangement are given. Next, some characteristics of food supply chain are listed out. Then, the concept of customer decoupling point is introduced together with the possible CODPs in food and feed companies. Finally, the factors that impact the positioning of CODP in animal feed companies will be discussed. In general, if mentioning about a supply chain or a value chain, it can be defined as a sequence of (decision making and execution) processes and (material, information and money) flows that aim to meet final customer requirements, which take place within or between different stages along a continuum; i.e. from production to final consumption (Van der Vorst, 2007). Bullet points listed below are some of the characteristics of the food and feed supply chain in general (Vlajic, 2008; Van de Vorst, 2005). Unpredictable supplies due to weather conditions or soil conditions Quality variation between different producers and between different lots of products Shelf life constraints, decay of the product quality and requirement constraints regarding product freshness (The freshness quality starts deteriorating as soon as products leave producers.) Unpredictable production yields Unpredictable consumer demands High-volume production system and capital incentive machinery Long production throughput time, product dependent cleaning and processing time and seasonal production. Page 13

15 2.2 GENERIC ANIMAL FEED CHAIN ARRANGEMENT In this section, the general arrangement of the feed company in the supply chain (figure 4) is given based on research studies (Farid, 2007; Kingman, 2012c; Mulder, 2012; S et al., 2006; C. N. Verdouw, Beulens, Trienekens, & Wolfert, 2010). FIGURE 4 GENERAL ARRANGEMENT OF ANIMAL FEED COMPANY IN THE SUPPLY CHAIN (FARID, 2007; KINGMAN, 2012C; MULDER, 2012; S, ET AL., 2006; C. N. VERDOUW, ET AL., 2010). Basic product-transformation processes in the animal feed supply chain are: Raw material receiving: the production of animal feed consists of a mixture of various ingredients and additives. The main ingredients in animal feed like wheat straw or maize grain, rice bran and rice polish where all the ingredients of grain origin. The raw materials are seasonally bought from local markets when raw materials are cheap and plenty Apart from grains, the additional additives considered to be micro-ingredients are added. Examples of additives are antibiotic, vitamin, mineral, flavor and coloring agent (Farid, 2007; Kingman, 2012c, 2012e; Mulder, 2012). Crushing: After the raw materials are weighed in the right proportion, a hammer mill is used to crush the raw materials into the appropriate size so that the raw materials can be further processed in the next step where the raw materials can be pelletized effectively and smoothing (Farid, 2007; Kingman, 2012b, 2012c; Mulder, 2012; S, et al., 2006). Batching: batching is normally a process in the feed production which happens between the grinding of raw materials and the mixing of the feeds. There are normally Page 14

16 8-12 bins positioned over the mixer, in which different ingredients used in feed formulation are kept (Kingman, 2012a). The ground ingredients are weighed accurately and precisely according to the formulations. Others than the main ingredients which are mentioned earlier, the micro-ingredients are also added for variety of reasons. One of them is to stimulate the development of animals like in poultry, while some ingredients are added to realize some product characteristic; e.g. the color of an egg and the meat quality improvement for swine (Kingman, 2012a; Mulder, 2012; S, et al., 2006). Mixing: in the mixing process, it usually uses an automatic process and the feed formulation is set; i.e. the measure of dosage weight for each ground material is accomplished and controlled from the control room with a computer system. In some companies, the traditional man power is used for the mixing step. In this production step, the ground raw materials are mixed together according to the formulation before continuing to the next processing step(farid, 2007; Kingman, 2012a, 2012c). Pelletizing: the process of pelletizing consists of forcing a soft feed through a hole in a metal die plate to form compacted pellets which are then cut into determined size (Kingman, 2012d). The size and shape of the final products are resulted from the shape of the die itself. In this process, the additional liquids such as molasses or water can be added to the mixture to improve pelletizing ability or steam may sometimes be added into the process to partially gelatinize the starch content in the mixture and make the mixture more stable (Kingman, 2012c, 2012d). Storage and Distribution. There are also a number of activities involving with animal feed along and after the transformation process including receipt, warehousing, dispatching and transportation. Three basic distribution modes can be distinguished: direct delivery, delivery via intermediate storage in a distribution center (DC) and cross-docking (Kingman, 2012c; C. N. Verdouw, et al., 2010). 2.3 CUSTOMER ORDER DECOUPLING POINTS (CODPS) The concept of customer order decoupling point becomes more important in supply chain management because the customer order decoupling point is the point that indicates how deep the customer order penetrates into the goods flow. From the concept of push/pull view of Page 15

17 customer decoupling point, the CODP separates the part of the firm where management decisions are decided by customer orders (pull) from the part of the firm where production plans are planned based on demand forecasts (push) as shown in figure 5 (Trienekens, 2010; Van de Vorst, 2005; Van der Vorst, 2007). FIGURE 5 CUSTOMER ORDER DECOUPLING POINT IN PUSH/PULL POINT OF VIEW, A TRIANGLE REPRESENTS A PLACE WHERE AN INVENTORY IS KEPT (CHOPRA & MEINDL, 2010). Downstream or the right side of the CODP that directs toward the market of the goods flow is directly controlled by customer orders; hence, the main focus is on the lead time and flexibility. Upstream or the left side of the CODP is toward the supplier. The material flow is controlled by forecasting and planning, so the focus is on production efficiency and production lead time. According to Romme, the CODP is important for the following reasons (Romme, 1992). o It separates order-driven activities (pull) from forecast-driven activities (push). o It coincides with the last major stock point in the goods flow: deliveries to customers are made from the customer order decoupling point. o It generates the chance for upstream activities to independently optimize from irregularities of the market demand. o It separates two areas in which the nature of decision making is very different. For example, if the upstream is toward the CODP, the risk of stock build-up is dominant; whereas, if the downstream is toward the CODP, the risk of missed orders is dominant (Romme, 1992). This example shows that these two totally different areas of decision making need to be separated. Page 16

18 2.4 POSSIBLE CODP IN THE FOOD AND FEED INDUSTRY. The customer decoupling point (CODP) is noticed as one of the important factors in the design and management operation in a company as mentioned earlier. According to Olhager, there are four possibilities of production strategies according to different positions of CODP: namely engineer-to-order (ETO), make-to-order (MTO), assemble-to-order (ATO) and the most simplest one is make-to-stock (MTS) (Olhager, 2010). Since the characteristics of food and feed production chains, the four possible production strategies are reduced into only three which are make-to-stock (MTS), assemble-to-order (ATO) and make-to-order (MTO). Engineer-to-order (ETO) rarely occurs or doesn t exist in food and feed industry but it possibly occurs like in the electronic industry and other industry (Nizar Abdelkafi, 2008; Silveira, 2010). This due to in electronic industry, for some customers they want to get involved at early designing phase of components of their products. See figure 6. FIGURE 6: Possible product delivery strategies relate to different customer order penetration point in food and feed industry. Next, the environment of the three possible product delivery strategies which are make-tostock (MTS), assemble-to-order (ATO) and make-to-order (MTO) will be discussed. Make-to-stock (MTS) A make-to-stock environment offers a low range of product variety and often associates with less expensive products (Chetan Anil Soman, 2005). At this production situation, it is usually the point where finished goods inventories are kept in various locations such as warehouses, distribution centers or retail stores. The CODP is positioned after the production process. A make-to-stock environment is suggested to be managed according to the lean principle which focuses on production Page 17

19 efficiency and waste reduction (Ben Naylor, Naim, & Berry, 1999). In order to achieve the higher service level and lean production, more attention needs to be given to an inventory management (N. Abdelkafi, 2008; Jan Olhager, Erik Selldin, & Wikner, 2006; T. E. Vollmann, 2005a). In food industry, this kind of production situation can easily been seen such as in can foods, instant products and infant formula. For these mentioning examples, the production of these products focuses on production efficiency or lean production. Moreover, these products have a long-shelf life so products can be produced to stock. Assemble-to-order (ATO) Assemble-to-order is a production situation, in which customized product configurations are produced with standardized generic components or subassemblies. ATO is a hybrid approach because product components are fabricated to stock and the final assembly is made according to the customer order (Schroeder, 2007). For ATO, the CODP is corresponding to the inventory of the generic components or subassemblies. Customer service is controlled by this inventory of the generic components, not by the inventory of the finished products. The success of the assemble-to-order delivery strategy depends on the ability to combine a few components into many different end-product configurations (Jan Olhager, et al., 2006; T. E. Vollmann, 2005a). The example of this production situation in food industries is in the catering service or in a fast food restaurant where customers can customize their meals by allowing them to choose types of breads, types of vegetables and types of drinks. This basic components or subassemblies can be combined into various end products. This also gives alternatives to consumers. Another example is in the feed industry where a partial amount of the raw materials is bought to stock and the end products are combined according to customer orders. Make-to-order (MTO) In a make-to-order production environment, each order have been identified during or before the production process since each job in the production process is associated with the specific customer order (Schroeder, 2007; T. E. Vollmann, 2005b). An MTO production situation offers a high variety of customers specific orders, and usually, it Page 18

20 is associated with more expensive products. The production plan focuses on the order execution and the performance measurements are order-oriented; e.g. the average response time and the average order delay. The competitive priority is shorter delivery lead-time. The main operation issue are capacity planning, order acceptance or rejection and high due-date adherence (Chetan Anil Soman, 2005). Most literatures suggested that the decoupling point of make-to-order should be placed prior to the beginning of the production process. In other words, the product can be customized according to the customer requirements. The decoupling point where the customer penetrates can be the raw material inventory or even supplier (Nizar Abdelkafi, 2008; Jan Olhager, et al., 2006). The example for this make-to-order production situation is in the make-to-order Sailboats, a combination of custom and standard parts (Chetan Anil Soman, 2005). For this production situation, the manufacturers might require longer production lead time. 2.5 FACTORS THAT IMPACT CODPS POSITIONING. This part of the research will discuss some of the significant factors that impact the position of customer order decoupling point within food and feed companies. The factors can be categorized into two categories; i.e. based on the food and feed supply chain characteristics and based on accidental incidents. Firstly, the food and feed supply chain characteristics which affect the positioning of CODP will be mentioned following by the accidental incidents that have the impact on positioning of CODP in food and feed companies FOOD AND FEED SUPPLY CHAIN CHARACTERISTICS As mentioned earlier about food and feed supply chain characteristics, there are a number of factors that can impact on the position of CODP. In this research project, the factors based on food and feed supply chain characteristics can be divided into three sub-categories related to product, production and market characteristics (Olhager, 2003). Page 19

21 PRODUCT RELATED FACTORS Modular Product design: this factor is usually a response by a manufacturer to create choices for customers, and this factor moves the CODP toward the supplier which typically relates to the assemble-to-order (ATO) product delivery strategy (Can, 2008; Olhager, 2003). For example, customers can personalize colors, shapes or ingredients of snack such as My M&M s custom candy (Mars, 2008). Customization opportunities: the manufacturers provide a customization opportunity or in other words, they provide a wider range of products for customers. If the manufacturer offers a wide customization in the early stage of production, a make-to-order (MTO) policy is necessary. In contrast, if the customization enters at late production stage, assemble-to-order (ATO) may be more appropriate (Olhager, 2003), while the good example of the mass customization opportunity in food and feed industries, the good example for this is the fast food industry. Fast food industry is a paradigm of a mass production (MTS). Anyway, with the change in the definition of customer where a today customer must be considered as an individual with a specific need, the companies like Burger King, McDonald s and Subway have been forced to embrace the principle of mass customization in order to survive in the market (Mok, Stutts, & Wong, 2000). If going into more details, the goal of the mass customization is to provide a sufficient variety in products and service so that every customer is able to purchase a customized product for a price as near as that of a mass-produced item (Duray & Milligan, 1999). In other words, mass customization is to exactly give customers what they want at the price and time they want it (Duray & Milligan, 1999) PRODUCTION RELATED FACTORS Production lead time: this is the main factor to consider with respect to delivery lead time. If the production lead time of the product is short, it is possible to move the CODP toward the left side of the continuum like maketo-order (MTO). On the other hand, if the product has a long production lead Page 20

22 time, it is more appropriate to use the make-to-stock (MTS) delivery strategy. It is suggested that the way to choose the right CODP is to use the P/D ratio. The P/D ratio is the ratio of the production lead time to delivery lead time (Nizar Abdelkafi, 2008; Olhager, 2003). The production lead time of animal feed company can influence the positioning of CODP. Since feed is noticed to be an imperishable product which has a long shelf life and short production lead time, so it is possible that the positioning of CODP is toward MTO. However, if there is a constraint with the efficiency of the machine that will make the production lead time longer, the company tends to shift from MTO to MTS (Soman, Donk, & Gaalman, 2004). Flexibility: For any food company, the flexibility of the company is directly related with the production lead time. For example, short setup time for the machine is required to make the production process more flexibility. If the production process is flexible, the position of CODP tends to move toward the left side of the continuum that suit the production situations or delivery strategies like assemble-to-order (ATO) and make-to-order (MTO) On the other hand, if the production process is not flexible, make-to-stock (MTS) is a better option (Nizar Abdelkafi, 2008). Flexibility is a significant factor which determines an order winning company(olhager, 2003). The position of the bottleneck of the production process: In terms of optimal resource utilization, it is advantageous to position the bottleneck upstream of the CODP, so the bottleneck does not have to deal with demand volatility (Can, 2008; Olhager, 2003). While in terms of the just-in-time principle of waste elimination, it is better to position the bottleneck downstream of the CODP so that the bottleneck only needs to work on the product for which the manufacturer has a customer order (Can, 2008; Olhager, 2003) MARKET RELATED FACTORS Delivery lead time: this factor is the requirement set by the market that limits how far the CODP can be positioned. The delivery lead time is also a benchmark for production lead time improvement in order to make the delivery Page 21

23 speed faster (Olhager, 2003). If the delivery lead time is short, the CODP will move toward the supplier, while a long delivery lead time will move the CODP toward customers (Donk, 2000). It is mentioned that in food and feed industries, the standard product with a narrow range of variety wins on price; whereas, the key production task is to focus on the low cost production which is suitable for the MTS production situation. In contrast, special order products in wide range of variety win the order base on a delivery speed and an unique design capability; therefore, manufacturing has to meet specifications and delivery schedules which also require high flexibility and suits the make-toorder production situation (Hill, 2000; Olhager, 2010). Demand volatility: this factor indicates to what extent it is reasonable to make product to order (MTO) or to stock (MTS). Low demand volatility means that the product can be forecast-driven and delivery strategy can be placed toward customers like make-to-stock (MTS). However, high demand volatility makes the demand forecasting more difficult, so the product typically need to be produce to order (MTO). In food and feed production company, the demand volatility is consider as a major factor that causes a bullwhip effect (Hau L Lee, 1997). The demand of consumer in food and feed industries changes all the time, so many food and feed companies focus on product development to respond and fulfill consumers needs in order to survive in the market. This factor also shortens the life-cycle of the product and it can be concluded that low demand volatility of the production leads to MTS as a delivery strategy, and the efficiency of the production process will be focused. If the demand volatility is high, it can make the demand forecasting for food and feed production planning harder, so make-to-order may be a better option like in meat supply chain (Rijpkema, Vorst, & Rossi, 2010). In meat industry, they solve the high demand volatility and a quality unconformity by producing the product based on order. Manufacturers allow their customer to order a specific quality of the meat that they ordered, such as, lean meat ratio and fat layer thickness (Rijpkema, et al., 2010). Product volume: this is a factor related to demand volatility. For a high product volume, the demand volatility is low. Since one of the characteristics of food Page 22

24 and feed industries is that the profit per unit sold is less, but if the volume is high, more profit can be generated. For every food and feed commodity, a demand volume of a product increases during the early stage of the product life cycle. At some point in time, the product may be regarded as a common commodity and the product volume becomes stable. At the end of the product life cycle, the product volume goes down. The high product volume is known as a characteristic of the food and feed supply chains aiming at production efficiency, and the appropriate CODP strategy is make-to-stock (MTS). Customer order size and frequency: This factor somehow closely relates to product volume. Large number of customer order sizes are typically associated with high demand volumes. Moreover, high order frequency leads to repetitive demands making demand forecasting easier(olhager, 2003) ACCIDENTAL INCIDENTS (SHORT-TERM) Shortage of stock: the incident of unexpected out-of-stock can impact the positioning of CODP. The position of the CODP depends on the availability of the products in stock. For example, for make-to-stock delivery strategy, when an end product is not available, a quantity of the replenishment order in production will be reserved for the customer and the CODP will move to the left of the continuum (Giesberts & Tang, 1992). In this situation, the decision maker should make up the decision to pay for an inventory cost or a stock-out cost. Product seasonal demand: Olhager mentioned that it may be uneconomical for the manufacturer to respond to all coming demands (Donk, 2000; Olhager, 2003). As a result, the manufacturer may choose to produce some products to stock (MTS) during the period of low demand in anticipation of peak demand. Thereby, the plant utilization and production efficiency increase. The position of CODP may shift between make-to-stock (MTS), make-to-order (MTO) and assemble-to-order (ATO) depending on the seasonal demand (Donk, 2000). Incidental factors: all kinds of coincidental factors influence the position of CODP. For instance, the orders in the assemble-to-order (ATO) situation have Page 23

25 to be cancelled when the (customer-specific) product has already been in production. Then, the product must be reworked or discarded. 2.6 CONCEPTUAL FACTORS IMPACT MODEL. There are many factors that can possibly impact the position of customer order decoupling point as mentioned in section 2.5. However, these factors are interrelated as illustrated in figure 7. This configuration was studied and modified based on Olhager model (Olhager, 2003; T. E. Vollmann, 2005a). Figure 7: A model for intermediate factors affecting the positioning of customer order decoupling point From figure 7, it can be realized that all of the factors are interrelated; for example, the customization opportunity can interact with market expectation resulting in the delivery lead time that the customer requires with respect to the product offering (Olhager, 2003). These Page 24

26 factors can also be interpreted in terms of lead time regarding the operation which needs to be performing at each level. The relationship between production lead time and delivery lead time is a major determinant of the position of customer order decoupling point. It is important to study the impacts of the interrelation between production lead time and delivery lead time on the information flows in various production situations. Based on the literature study, two major factors that affect the positioning of CODP are the ratio between production lead time to delivery lead time (P/D ratio) and the relative demand volatility (Olhager, 2003). The separation point of P/D ratio takes place at the value of one. The value is linked to the question whether a customer order of food and feed products can be anticipated before production activities start or not? If it is not possible, some production activities must be conducted based on forecasts. It is suggested that if the P/D ratio is lower than one, the maketo-order production situation is possible. However, if the P/D ratio is larger than one meaning to obtain the economy of scale for the common item that can be produced by a forecast, these items can be produced to stock. Another factor that can impact the choice of production situation is the relative demand volatility (Olhager, 2003). It is suggested by Olhager that if the relative demand volatility is low, some parts of the product can be produced to stock which possibly leads to the assemble-to-order production situation. At the same time, if relative demand volatility is very low, the make-to-stock production situation might even be possible. This means that even the P/D allows the company to go for the make-to-order production situation, the food company may try to go for make-to-stock since they want to gain the economy of scale and high production efficiency (Olhager, 2003; T. E. Vollmann, 2005a). In contrast, if the relative demand volatility is high, make-to-order is a common choice. If the P/D ratio is larger than one meaning that the product has long production lead time which makes the make-to-order production situation impossible, the production situation should be either assemble-to-order or make-to-stock instead. However, in the high demand volatility situation, it makes no sense to use the make-to-stock production situation since this can lead to excessive costs and inventories. Hence, the only remaining option is to produce a product according to the assemble-to-order production situation, as shown in figure 8. Page 25

27 Figure 8: A model for choosing the right production situation by using p/d ratio and relative demand volatility proposing by olhager (Olhager, 2003). Next the attention needs to be gained for the upper right corner of figure 8 where the situation is the least desirable: the high production and delivery lead time ratio and high relative demand volatility. The assemble-to-order in this case can be viewed as the combination of make-to-stock before the customer order decoupling point and make-to-order after the customer decoupling point. Therefore, it is suggest that in assemble-to-order, the production situation should be separated into the part before the CODP where the production situation can be done based on forecasting and the part where all of the activities are driven by customer ordering. 2.7 CONCLUSION The aim of this chapter is to answer specific question one and two; in what way the animal feed chain arranges in general CODPs? and what are the factors that impact the positioning of CODPs? For the first specific question, the general CODP of animal feed chain can be categorized into three most common production situations which are make-tostock (MTS), assemble-to-order (ATO) and make-to-order (MTO) (N. Abdelkafi, 2008; Silveira, 2010; Trienekens, 2010; Van de Vorst, 2005; Van der Vorst, 2007). For the second specific question, there are various factors that impact the CODP positioning, but it can be grouped into two main categories which are food and feed supply chain characteristics (product, production and market related factors) and accidental incidents (Donk, 2000; Page 26

28 Giesberts & Tang, 1992; Olhager, 2003; Paul M. J. Giesberts & Tang, 2001). The intermediate factors: delivery lead time and production lead time are the important factors that are worthy for studying the impact on the information flows which will be introduced in the next chapter. Moreover, in order to choose the right production situation, Olhager suggested to use the production lead time and delivery lead time ratio and relative demand volatility as a potential tool as shown in figure 8 (Olhager, 2003) Page 27

29 CHAPTER 3: INFORMATION SYSTEM 3.1 INTRODUCTION In this third chapter, the specific question three will be answered; what information flows are related to different CODPs? The answer to this third sub-research question is found in literature study as mentioned in chapter 1. The aim of the third chapter is to provide a deep insight into the relation of information flows and different CODPs. Firstly, the definition of information system is given together with the main characteristics of the information that makes it useful in decision making. Secondly, the general structure of information system will be discussed, and finally, the influences of factors affecting CODP positioning on information flow will be mentioned. Information system can be defined as data flow management within an organization and between its external partners in a systematic, structured and effective manner, to assist in planning, implementing and controlling all of the involved process (Companies, 2012). If talking about the information alone, it is considered as a key company driver because it enables management to make decision over a broad scope crossing both functions and companies. As mentioned earlier, information is used to make a wide variety of decisions in the company according to Chopra as following (Chopra & Meindl, 2010); Facility: Determining the location, the capacity and the schedule of facility require information on the trade-offs between efficiency and flexibility, demand, exchange rates and taxes. Inventory: Setting the optimal inventory policy requires information that includes demand pattern, inventory cost, stock-out cost and ordering cost. Transportation: Deciding on transportation networks, routings, modes, shipments and vendors requires information which includes cost, customer location and shipment size to make a good decision. Sourcing: Information on product price, margin quality and delivery lead time are important in making a sourcing decision. The given sourcing decision deals with interenterprise transactions, so there is a wide range of transactional information that must be recorded in order to execute the operation Page 28

30 Pricing and revenue management: To set pricing policies, one needs information on demand; i.e. both its volume and various customer segments willingness to pay, as well as many supply issues, such as the product margin, lead time and supply availability. Using this information, a company can make an intelligent pricing decision to improve its profitability. Next, there are some main characteristics that information must have in order to be useful when making a managerial decision (Chopra & Meindl, 2010). Information must be accurate: information needs to give an actual picture of the state of the company. It is very difficult to make a good decision without accurate information. Information must be accessible in a timely manner: usually, by the time accurate information is available, it may have been out-of-date, or if it is current, it may not be in an accessible form. In order to make a good decision, a manager needs to have upto-date information that is easily accessible. Information must be of the right kind: managers or decision makers need information that they can use. Often, companies have a large amount of information that is not useful in making a decision. The companies must think about what kind of information should be recorded so that valuable resources are not wasted collecting meaningless information while significant data go unrecorded. Information must be shared: a company can be effective only if all the stakeholders within the company share a common view of information to make a business decision. 3.2 INFORMATION SYSTEM STRUCTURE In general, there are different types of information system involved in a company. In this research project, the researcher focuses on the information system dealing with production and inventory control. In describing information systems for inventory/production control structures, system software, a state-independent, a state-dependent and a decision support system are distinguished (Wortmann, 1995). See figure 10. The system software is in the core of the information system which is not a main focus of this research, so it will not be Page 29

31 mentioned. Other parts of the information system structure will be discussed below together with the effects of production situations (CODPs) on the information system. Figure 9: General information system structure STATE-INDEPENDENT State-independent is the second layer of the information system recording all data which does not depend on the order and the material flow (Paul M. J. Giesberts & Tang, 2001). The term state-independent requires some elaboration: the word state implies both the flow of order and the flow of materials and other resources. Therefore, the term stateindependent constitutes of all kinds of indirect supportive recording about products, technologies and capacities relating to the recording of order and material planning. In other words, it refers to the relation between bill-of-materials (BOM), product routing, capacity type and standard lead-time (Giesberts & Tang, 1992; Wortmann, 1995). A bill-of-materials for a product is a list of ingredients or components required for the product or the parent item, while routing of an item is an ordered list of normative operations required for the item manufacturing out of its components. For make-to-stock (MTS) situation, the assortment consists of a limited number of the end products. All of these products and all of the lower level items in the product structure of these end products are specified in item records. Relations between items are also specified in a single level of material (BOM). Moreover, all item routings are specified, so the sequence of the production operations can be determined. Usually, food and feed companies have a file in which all standard items are represented in a single record. There are several state- Page 30

32 independents of the items, such as identification number and description, classification code, commodity type, safety stock, standard lead time (SLT), reference to vender and various cost attributes (Giesberts & Tang, 1992; Rudberg & Wikner, 2004). Moving from the MTS production situation to the ATO or to the MTO production situation, the product and routing data become more dependent on the customer order. This order dependent product data can be seen as a transition from state independent to state dependent data (Wortmann, 1995). In the assemble-to-order situation, a large variety of end products exists. Therefore, recording of all possible end product variants per family with their product structure and routing would result in excessive computer storage usage and considerable effort to maintain all information. In this situation, the proposed solution is to use generic items, generic bill-ofmaterial and generic routing (Kern & Guerrero, 1990; Veen, 1992). A family of products with similar possible variants of the end products is considered as one of generic items, which can be characterized by a set of feature such as size, color and length (Giesberts & Tang, 1992). In the MTO environment, the formal requirements for the data in the database are less strict: these data serve as a configuring tool, and certain attributes are deliberately left blank. This blank can be used to emphasize the fact that these attributes should receive their proper values only when the customer order is received. Therefore, the state-independent data of the MTO production consists of partially complete products, projects, routings and resources. This information is called reference products and reference projects in order to highlight their incomplete natures. The projects consist of many tasks. Each task may be decomposed into a few activities, which may remain unknown until the beginning of a task Giesberts & Tang, 1992; Rudberg & Wikner, 2004). Page 31

33 3.2.2 STATE-DEPENDENT The third layer of information system is state-dependent. The registrations of statedependent information for both material flow and order flow of three production situations which are MTS, ATO and MTO merely differ in the identification of production, stock and order. For the make-to-stock production situation, most of the end products are manufactured according to a forecast. Hence, all material and order state information is identified by using the information on the items (Giesberts & Tang, 1992). In the assemble-to-order situation, the information of materials and orders located upstream of the CODP are also identified by using the information on the items. However, the order for the customer-specified variant and the resulting customer specified work-in-progress and stock are identified by customer orders. This is essential because in this part of goods flow, the standard items do not exist (Giesberts & Tang, 1992; Wortmann, 1995). The specified components and bill-of-materials are produced from a generic structure. The customer order can be monitored if materials and work orders are identified by customer orders. In the make-to-order environment, the detailed network and activities for work orders, purchase orders and materials are identified by customer orders. There is an extra requirement for the MTO production situation because the aggregate task and the aggregate network entitle are defined. The information system needs to be able to relate the detailed activities to the task from which the activities are derived in order to monitor the progress of the total project at an aggregate level (Paul M. J. Giesberts & Tang, 2001) DECISION SUPPORT SYSTEM As mentioned earlier, the decision support system is a part of the information system for various production situations Thus, the level of decision making should be differentiated (Bertrand, Wortmann, & Wijngaard, 1990). For food and feed companies at the shop-floor control level, work orders are released and assigned according to capacities. Afterwards, the Page 32

34 progresses of the orders are observed. At the higher level, the work orders for production and purchase orders are determined by the material planning function. On the highest level, production and sales are coordinated (Bertrand, et al., 1990; Paul M. J. Giesberts & Tang, 2001; Veen, 1992). The variances between the make-to-stock, the assemble-to-order and the make-to-order production situation in the requirements of decision-support information system are mostly presented at the material planning level and at the level where the sales department and the production department are coordinated. Therefore, this research will only discuss these two specific levels (Paul M. J. Giesberts & Tang, 2001). In the make-to-stock production situation, the co-ordination between production and sales is concentrated on demand forecasting of the end products and production plan determining with regards to the capacity availability. The customer orders are accepted based on the current available stock (Paul M. J. Giesberts & Tang, 2001). The information system should support the forecasting, the preparation of the production planning, the capacity check of the production plan and the acceptance of the customer orders using an available-topromise logic (Everdell, 1984). In case of the feasible production plan, the material planning can directly determine the order of the lower level items from the production plan. It is possible because the average lead time and the constant capacity utilization are achieved (Paul M. J. Giesberts & Tang, 2001). The assemble-to-order production environment can be divided into a forecast-driven part and a customer-order-driven part. For the forecast-driven part, requirements on the decision support system of the information system are similar to the MTO production situation. An extra requirement in the assemble-to-order situation concerns the co-ordination of the forecasts among the sub-assembly items (T. Vollmann, Berry, & Whybark, 1997). For the customer order-driven part, order acceptance results in the co-ordination between production and sales. If requested order of customers is received and a specific bill-ofmaterials is generated, the availability of the sub-assembly items and the assembly capacity need to be observed such that the order is completed on time (Paul M. J. Giesberts & Tang, 2001; T. Vollmann, et al., 1997). The information system should be able to provide the timephased availability of each sub-assembly item used in the ordered product configuration (Paul M. J. Giesberts & Tang, 2001). In addition, according to Giesbert & Tang (2001), the information system must be able to check the capacity availability of the customer order- Page 33

35 driven part within the production system (Everdell, 1984). The information system needs to be capable of supporting a multi-phase final assembly scheduling and a monitoring process of customer s order progress (Paul M. J. Giesberts & Tang, 2001). In the make-to-order production environment, the co-ordination between production and sales is focused on the acceptance of customers projects (Bertrand, et al., 1990). After an aggregate task network of a product is made, the aggregate network is scheduled forward by tasks considering permitted floats within and between tasks, capacity availability and already accepted project (Bertrand, et al., 1990; Paul M. J. Giesberts & Tang, 2001). Rescheduling of tasks of other projects can be done as long as the due dates of those projects are not changed. In food and feed companies, each customer s order consists of product type, quantities and specified product types. Furthermore, each order requires a specific delivery date. The latest permissible end date of the last task is used to determine the due date of the project (Park, Song, Kim, & Kim, 1999; Paul M. J. Giesberts & Tang, 2001). The decision support system which is a section of the information system for the make-to-stock (MTO) production situation needs to be able to support this kind of multi-project planning considering float and available capacity (Paul M. J. Giesberts & Tang, 2001). 3.3 INFLUENCE OF FACTORS AFFECTS ON INFORMATION FLOWS. In this section of the research, the influence of factors on the information flows is focused. An important impact factor for De Heus will be mentioned in chapter 5. Since each factor can influence the CODP positioning, the research also aims to investigate an influence of these factors on information flows within the company with different CODP production situations; namely make-to-stock (MTS), assemble-to-order (ATO) and make-to-order (MTO). According to the literature study, there are the major factors that impact the information flows (Dehaan, Peters, & Giesberts, 1992; Rudberg & Wikner, 2004; Silveira, 2010). In this research, the impact of mass customization and stock shortage on ordering process will be discussed in the next section. Note that the purchasing process for all of the production situations is not affected by these factors (Dehaan, et al., 1992; Rudberg & Wikner, 2004; Silveira, 2010). Page 34

36 3.3.1 MASS CUSTOMIZATION/MODULAR PRODUCT DESIGN ON INFORMATION FLOW OF ORDER PROMISING As mentioned in the previous chapter, mass customization/modular product design can influence the information flows in term of offering the diversity to the customer s order which can move the CODP toward the supplier. This is typically related to assemble-to-order (ATO) or make-to-order (MTO); however, if product variation is low, the CODP positioning will move toward the end consumer resulting in production efficiency focus which is typically related to make-to-stock (MTS). One of the most significant issues for the company is to be able to give right order promises to customers and to be capable to determine the delivery date for the customer demand that have been changed (Quante, Meyr, & Fleischmann, 2008). Hence, the order-promising process relates to the flow of information starting from the order inquiry from a consumer and the flow of materials that is sometimes limited by the material availability along the supply chain. In the next section, the discussion on the effect of mass customization on the information flow of the ordering process of three standard production situations (MTS, ATO and MTO) will be discussed. Make-to-stock (MTS) The most common production situation is make-to-stock, in the MTS situation focuses on the finished product (SCC, 2012b; Zhao & Simchi-Levi, 2005). This kind of situation can be found in the dairy and retail industries. The production and distribution are generally based on a forecast, and the instant delivery is expected from the product inventory when the customer places the order inquiry. As a result, the main focus of the information flow is on the inventory level and the inventory availability for the quoted volume. The order confirmation is based on the availability of the product in product inventory. The inventory will be always filled up by the product replenishment system. In case that the customer s order cannot be fulfilled by the time the product inventory is replenished, the production facility will be reserved to fulfill the customer s order. The product inventory replenishment process is started by the available on hand inventory and the demand forecast is made regarding the sales and production history. The crucial information flows in the order promising process for the make-to-stock environment are concluded in figure 10. In figure 10, Page 35

37 the order promise process is a gateway to check the product availability with the production and inform their customer whether the order is accepted or rejected. Figure 10: The information flow of the ordering process of make-to-stock production situation which is affected by mass customization. Assemble-to-order (ATO) The assemble-to-order production situation is the situation that the customer decoupling point placed somewhere in between the two extreme points which are make-to-stock (MTS) and make-to-order (MTO). This assemble-to-order production situation will lead to a more sophisticated order-promise process. The activities of the upstream part of the customer decoupling point (CODP) are based on a forecast as same as in make-to-stock (MTS). In order to create a buffer of materials used to finalize products within the production plant, the actual customer inquiries or orders are fed into the production process. In contrast, the activities of the downstream side are driven by the customer s order like in the make-to-order production environment. As a consequence, the assemble-to-order is the combination of both make-to-stock and make-to-order in which the customer order decoupling point acts as a separator. From Page 36

38 the order promise process perspective, the upstream part which is the MTS process needs to make sure that the subassemblies are available as a promise, while in the downstream section as in MTO, the production process needs to make sure that the activities are capable to produce the product as a promise to a customer. The information flow for the assemble-to-order production situation is summarized in figure 11. Figure 11: The information flow of the ordering process of the assemble-to-order production situation which is affected by mass customization. Make-to-order (MTO) The ordering process of the make-to-order production environment is relatively straight-forward. The customer decoupling point is usually maintained at the component (raw material) level where components are acquired based on a forecast or on a customers order. The process starts when the customer places an order inquiry, and the production provides the delivery information based on the availability of the components. The production lead time is derived from the bill-of-material (BOM) explosion and the present load in the customer order fulfillment process. In case that the customer order is recognized, the quoted delivery lead time is accepted by a customer. The customer order is fed into the customer fulfillment process order as shown in figure 12. Page 37

39 Figure 12: The information flow of the ordering process of the make-to-order production situation which is affected by mass customization STOCK SHORTAGE ON INFORMATION FLOW OF ORDERING PROCESS The volatility of customer demand makes the demand forecast and the production forecast more difficult and less accurate. Since the customer demand keeps changing, the product life cycle is shorter and the production anticipation can be inaccurate. The incident of unexpected stock out or shortage is likely to occur. When this incident happens, the company has to take an action which temporarily affects the information flows of order promising so that the customer demand can be fulfilled. Next, the impact of stock shortage for different production situations will be discussed and the impact on the model is presented. Make-to-stock In the make-to-stock (MTS) production situation, the stock shortage caused by the demand volatility has a huge impact on an order promising process; i.e. customer service time and order fulfillment. For example, the company has to negotiate with their customers on a delivery date (Quante, et al., 2008). One of the things which are considered to be the main problem is the machine capacity used to manufacture food or feed products. The major aim is to provide an alternative lever for matching demand and supply. There are several things that the production can do to adapt the Page 38

40 capacity level to short-term demand fluctuations including shifting unnecessary machines or production lines, hiring temporary workers and extending regular working hours. In case of out of stock; i.e. end products are not available to fulfill customer s order, the production strategies need to shift from make-to-stock to maketo-order. Since there is no product available on in the inventory, the machine capacity needs to be reserved to produce products based on an order. The process of order promising impacted by the stock shortage is represented in figure 13. Figure 13: The information flow of the ordering process impacted by stock shortage for MTS Assemble-to-order The assemble-to-order production situation which keeps inventory only for subassemblies and assembles the end products after the demand is realized. The short product life cycle of the finished product is the main driver for assemble-to-order. The demand volatility increases the risk of carrying inventories for the finished products (Zhao & Simchi-Levi, 2005). High demand fluctuation leads to the stock out of the subassemblies. This affects the order promising process by driving the whole process with a customer s order. In other words, the assemble-to-order which formerly focuses on MTO and MTS tends to shift the whole production capacity and availability to manufacture the product base on make-to-order. Notice that this shift in production strategies is only temporary. When the situation is back to normal, the production Page 39

41 retains its original production strategy. Figure 14 shows the information flows of the ordering process when the production strategy shifts. Figure 14: The information flow of the ordering process impacted by stock shortage for ATO Make-to-order Every food and feed production firms desire to drive their production situations toward make-to-order since this production situation has no finished inventory or safety stock. Therefore, the scenario with the shortage of the products is unlikely to occur since this production strategy is driven by a customer s order not a forecast. In other words, in the make-to-order production strategy, the safety stock is not considered, so there is no impact on the model. For the raw material stock, there is still no shifting in CODP. This is because the production needs to make the raw material according to customers order as in the normal situation. Page 40

42 CHAPTER 4: SUPPLY-CHAIN OPERATION REFERENCE MODEL (SCOR) 4.1 INTRODUCTION In this research, the study is based on a SCOR model. First, a definition of the SCOR needs to be defined. The Supply-Chain Operations Reference or SCOR is a model which provides a unique framework that links performance metrics, processes, best practices and people into a unified structure. The framework enhances communication within both the company and supply chain partners. Moreover, SCOR improves the effectiveness of a supply chain especially in terms of management, technology, information and other improvement activities relating to the supply chain (SCC, 2012b). SCOR helps to manage a basic set of business problems through a standardized language, standardized metrics and a common business practice which increase business changes and performance enhancement. SCOR acts as a process reference model which integrates the concepts of a business reengineering process, a benchmarking process and a measurement process of a cross-functional framework (SCC, 2012a). In other words, the SCOR model is the international standard model for supply chain management and the world s most widely known framework for assessing and comparing supply chain performances and their activities (SCC, 2012a). The SCOR process reference model has been noticed as a powerful tool in the hand of management. SCOR is organized around the five primary management processes of any firm that are Plan, Source, Make, Deliver and Return. This research focuses on only four major management processes which are Plan, Source, Make and Deliver as shown in figure 15. Return is not included in the study since it is not likely to occur within food and feed companies. Page 41

43 Figure 15: the SCOR model (Tolone, 2000) 4.2 SCOPE OF SCOR PROCESSES As mentioned in the previous section, the SCOR model is based on five management processes. In this research study, the four main management processes will be mentioned and discussed; namely Plan, Source, Make and Deliver. Plan In demand /supply planning and management processes, the main focus is on the balance of resources with the requirements and established or communicated plans for all actors within the company (Council, 2008). Moreover, plans include supply chain performance data, a data collection, inventory data, capital asset data, transportation data, planning configuration data and regulatory requirement data (Council, 2008). Source For sourcing, schedule delivery, product receive, product verification, product transfer and suppliers payments are important. In addition, the management of the business rule to assess suppliers performance and data maintenance are also vital. Furthermore, a management of the incoming product, capital assets, a supplier s network, suppliers agreements, import/export requirements and supply chain source risks are included in the SCOR as well (Council, 2008). Make For all production situations; namely make-to-stock, assemble-to-order and make-toorder, these management processes consist of production scheduling activities, product issue, production, quality assurance, packaging, product storage, product release and product delivery. According to the supply chain council, with the addition of the sustainability concept to the SCOR, there is a new specification for waste Page 42

44 disposal in the make process (Council, 2008; SCC, 2012b). Also, performances data, work-in-process products (WIP), equipment s and facilities, a transportation and the regulation network are included in the make process. Deliver For delivery process, all of the order management processes from customer inquiries and quotations to routing shipments and selecting carriers are included. Moreover, the management of delivery business rules, finished product inventories, capital assets and the transportation are incorporated in the delivery process (Council, 2008; SCC, 2012a, 2012b). 4.3 LEVELS OF PROCESS DETAIL IN SCOR The three process model levels of SCOR; i.e. top level, configuration level and process element level are involved in this study, so these three levels will be discuss in the next section. Level 1 : Top Level (Process type) At the first level of SCOR, the model is based on five core management processes. However, this study focuses on only four processes that are plan, source, make and deliver, which can be defined as following (Council, 2008). Plan means a process that balances aggregated demand and supply to develop a course of action which best meets sourcing, production and delivery requirements. Source is defined as a process that procures goods and services to meet a plan or an actual demand. Make is defined as a process that transforms product to a finished state such that a plan and an actual demand are met. Delivery means a process that provides finished goods and services to meet a plan or an actual demand, typically including order management, transportation management and distribution management (Council, 2008)(Council, 2008)(Council, 2008)(Council, 2008). Page 43

45 Level 2 : Configuration level (Process Categories) The level 2 processes differentiate the strategies of the level 1 processes. Both the level 2 process themselves as well as their positioning in the supply chain determines the supply chain strategy. SCOR contains 26 level 2 processes. The example of the Make level 2 processes such as, make-to-stock, make-to-order and engineer-to-order. So SCOR can be perfectly linked together with the CODPs concept. Furthermore, in level 2, each process can be further described by type. o Planning: a process that aligns expected resources to meet expected demand requirements. The planning processes include the following (Council, 2008): Balance aggregated demand and supply Consistent planning horizon Generally occur at regular, periodic intervals Can contribute to supply chain response time o Execution: A process is triggered by a plan or a definite demand that changes the state of material goods and contributes to order fulfillment cycle time. The execution process is generally involved the following elements: Scheduling and sequencing Transforming product Moving product to the next process o Enable: this is the process that prepares, maintains or manages information correlation in which planning and execution processes rely. Level 3 : Process element level (Decompose process) Level 3 provides detailed process element information for each level 2 process category. Each process category consists of different element information. Therefore, it contains different sub-categories as described according to the latest version (V.10) of the SCOR handbook (Council, 2008; SCOR, 2012). For example, Make M2 maketo order consists of the following element information: M 2.1 : Schedule production activities M 2.2 : Issue product M 2.3 : Produce and test Page 44

46 M 2.4 : Package M 2.5 : Product storage M 2.6 : Release finished product to deliver M 2.7 : Waste disposal 4.3 OVERVIEW OF EXISTING SCOR BUSINESS PROCESS DIAGRAM In the area of production and supply chain management, business process diagrams represent the sequence of activities and information flows of a specific business control case and a coordination mechanism between each element. According to the SCOR model, level 3 processes can be used as the reference building block for a basic business process diagram (Council, 2008; SCC, 2012a, 2012b; SCOR, 2012). According to the model developed by Verdouw, the control reference configuration will be used in this study (Verdouw, 2010a). A SCOR process diagram depicts the interaction between level 3 processes in the SCOR model of the supply chain. The example illustrated in figure 16 zooms into the Make-to-Stock production process. The model shows the interaction between two actors within the supply chain which are suppliers and retailers. If focusing on the grey lane of figure 16, the core of the process diagram representing the sequence of the sourcing activities (the SCOR level 3 processes) is presented (see the previous section). The replenishment signal triggers the information flow among activities between a supplier and a retail store (Verdouw, 2010a). The process diagram that includes the elements allows the visualization of the information flow between actors and the specific activities that will later on be investigated. Figure 16: The example of the model showing the process diagram (Verdouw, 2010a) Page 45

47 Based on the SCOR model and the model developed by Verdouw, the new model has been generated due to literature studies combining with the nature of various production situations. Three main production situations; namely make-to-stock, assemble-to-order and make-toorder, will be discussed in the next section (Verdouw, 2010a). 4.4 REFERENCE MODEL FOR DIFFERENT PRODUCTION SITUATIONS In this part of the chapter, the new models are developed based on the available reference model (Verdouw, 2010a). The developed models attempt to link the relationship between the SCOR model and the concept of customer order decoupling point (CODP). Together with the indication of the customer order decoupling point concept where the inventory is defined at different positions of the different production strategies, these developed models are also within the level 2 processes of the SCOR model (Council, 2008; Tolone, 2000). Based on three core management processes (make, source, and deliver), the control configuration of three production strategies are generated. See figure 17. Make to stock (MTS) S U P P L I E R Source to forecast Source to forecast CODP Make to forecast CODP Assemble to order (ATO) Make to forecast CODP Make to order (MTO) Source to order Make to order Make to order Deliver to order Deliver to order Deliver to order C U S T O M E R Figure 17: The control configuration of three production strategies based on SCOR model and CODP concept. In figure 17, all of three production situations and activities are separated into two parts. In the first part, the activities are based on a forecast and another part depends on the customer s Page 46

48 order based activities. These two parts are separated by the customer order decoupling point where the inventory is kept. In the next section is a description of figure 17. For the make-to-stock production situation, the level 2 of both source and make management processes are forecasting-based and the CODP where the inventory is stored and located between make and deliver. The activities after the decoupling point are mainly driven by the customer s order. In the assemble-to-order production situation, the level 2 of the source and partly of the make activities are generally based on a forecast. The make process based on forecasting is mainly involved in the production of sub-assemblies. The production of sub-assemblies is still based on a previous sale data. The forecasting is used as a main tool for the production planning. The customer order decoupling point is located between the make process. Part of the focus is on the forecast and another part is on the order of customer. After the decoupling point, the forecasting of sub-assemblies is assembled based on the customer s order. Finally, the product is delivered according to the customer s order. For make-to-order, there is no inventory at a focal company. Mostly, all of the activities in the make-to-order production situation are triggered or are driven by the customer s order. Hence, all of the management processes; namely source, make and deliver, are entirely driven by the customer s order, and sometimes, the inventory is stored at the suppliers to minimize the number of inventory and management costs along the supply chain. 4.5 PROCESS MODEL FOR DIFFERENT PRODUCTION SITUATIONS. The process model is a very significant and useful tool for analyzing the interrelationship among the detailed process information of level 3 in the SCOR model. Based on the model develop by Verdouw, the models are develop based on SCOR and the CODP principle. All of the management processes; source, make and deliver, each management process are linked together with the management process called plan as shown in figure 15. Based on this configuration, the information flows among each element of different production situations are derived as shown in figure 18, 19 and 20 Page 47

49 In figure 18, the process model for make-to-stock situation, the process model is formulated by using the data from figure 17 and process elements in level 3 of SCOR. For source to forecast (source stock product S1 in SCOR), process elements consist of the following; S1.1 schedule product deliveries, S1.2 receive product, S1.3 verify product, S1.4 transfer product, and S1.5 authorize supplier payment. The source-to-forecast links with the make-to-forecast by a planning process. The planning process involves activities like making a production plan and a material requisition and checking for inventory availability. In the make-to-forecast process (make-to-stock M1 in SCOR), process elements include the following; M1.1 schedule production activities, M1.2 issue product, M1.3 produce and test, M1.4 package, M1.5 stage product, M1.6 release product to deliver and M1.7 waste disposal. A part of the process element is linked to the planning process which is also linked to the deliver-to-order (deliver stocked product D1 in SCOR) as shown in figure 18. The deliver-toorder consists of the following process elements; D1.1 process inquiry and quote, D1.2 receive, enter, and validate order, D1.3 reserve inventory and determine delivery date, D1.4 consolidate orders, D1.5 build loads, D1.6 route shipments, D1.7 select carrier and rate shipment, D1.8 receive product from source or make, D1.9 pick product, D1.10 pack product, D1.11 load vehicle and generate shipping documents, D1.12 ship product, D.13 receive and verify product by customer, D1.14 install product and D1.15 invoice. From figure 18, the inventory of the finish goods is located between the make-to-forecast and delivery-to-order according to the customer order decoupling point concept. Based on the mentioned data, the process model for make-to-stock production strategy is created as shown in figure 18. In figure 19, an assemble-to-order production strategy process model is formulated by using the same principle applies to figure 18. Source-to-forecast (S1) and make-to-forecast (M1) is the same as in figure 18. Since the production of sub-assemblies is based on forecast, the initial procedure is the same. The difference is after the CODP where the inventory is kept. After the inventory, sub-assemblies are assembling to generate final products based on customers order. The inventory is linked to the planning which is also linked to the make-toorder (M2). The process elements of make-to-order consist of the following; M2.1 schedule production activities, M2.2 issue product, M2.3 produce and test, M2.4 package, M2.5 stage finished product, and M2.6 release finished product to deliver and M2.7 waste disposal. The make-to-order is further linked to the deliver-to-order (deliver make-to-order product D2 in Page 48

50 SCOR). The deliver-to-order (D2) includes the following process elements; D2.1 process inquiry and quote, D2.2 Receive, configure, enter and validate order, D2.3 reserve inventory and determine delivery date, D2.4 consolidate orders, D2.5 build loads, D2.6 route shipments, D2.7 select carriers and rate shipments, D2.8 receive product from source or make, D2.9 pick product, D2.10 pack product, D2.11 load product and generate shipping document, D2.12 ship product, D2.13 receive verify product by customer, D2.14 install product and D2.15 invoice. The data mentioning above are used to generate the process model for assemble-toorder. The model is used as a basis to investigate the information flow of De Heus. The process model for assemble-to-order is shown in figure 19. Figure 20 shows the process model for the make-to-order production strategy. The source-to-forecast (S1) of make-to-order is the same as what is stated in make-to-stock and assemble-to-order production strategies. For make-to-order (M2) and deliver-to-order (D2) is compatible to what is stated in assemble-to-order production situation. The final process model for make-to-order production strategy is shown in figure 20. Page 49

51 Page 50 Figure 18: Process model for make-to stock

52 Page 51 Figure 19: Process model for assemble-to-order

53 Page 52 Figure 20: Process model for make to order

54 CHAPTER 5: DE HEUS 5.1 INTRODUCTION In chapter 5, the case company will be introduced. In the first section of this chapter, the background of the European feed sector will be discussed. Later on, the animal feed sector in the Netherlands will be projected. Next, the case study will be selected and the background of the chosen company will be stated. The information about their customers and what kinds of products are produced will be given. Then, in the next section, the specific sub research question four, five and six; namely How can different variants of CODP be recognized in De Heus?, How can we model information flow related to these variants? and How can information modeling support the management of CODP? will be analyzed and answered. The answer to these sub-research questions will be gathered by a qualitative analysis or an interview of people within De Heus. 5.2 THE EUROPEAN FEED SUPPLY In general, a feed supply is always noticed as being a part of a livestock production. In 2008, according to the European livestock production, about 500 million tons of feed are required within EU-27 (FEFAC, 2008; Pinotti, 2011). Approximately, 50 % of this amount are roughage produced on-farm, 10% are grain produced on-farm, 10% are purchased feed materials and 30% are industrial compound feed (Pinotti, 2011). Within the EU-27, 151 million tons of compound feed can be produced per year which is noticed to be the second largest of the world compound feed markets as shown in figure 22 (Best, 2010; FEFAC, 2008). Page 53

55 Figure 21: The main compound feed producing countries According to the research, most of the feed crops (i.e. around 75%) are being produced within Europe even though imported soy beans dominate the protein supplies for animal feed in EU (FEFAC, 2008). The feeding stuffs used by EU livestock farmers consist of forages produced on the farm and animal feed purchased from suppliers (FEFAC, 2008; Pinotti, 2011). Similar to other sectors, the entire European food supply chain from plant breeding, feed crop production and animal feed formulation to the production of meat is experiencing challenges created by the competition from low cost production countries (e.g. China and African countries). In addition, there exist many restrictions imposed by national and EU regulations on many aspects like environmental impact, animal welfare and traceability (Lina Bukeviciute, 2009). The regulatory restrictions imposed by the European Commission have impact on the functioning of the market through industry regulation (e.g. urban planning regulations and opening hours in case of the retail sector) or economy-wide provisions (e.g. labour market regulation and competition policy) (Lina Bukeviciute, 2009). The regulatory framework can raise the cost of the firm in operating and producing the product, which will be passed on to customers in terms of higher prices (Lina Bukeviciute, 2009). Regulations can also affect the cost price of the firm through directly price regulation. With all of these aforementioned reasons, the challenging competitive environment is created for all actors in food and feed supply chain. Page 54

56 5.3 FEED SUPPLY IN THE NETHERLANDS Dutch feed industry or feed sectors play a significant role in the production of meat, eggs and dairy products. The animal feed emphasizes on the product quality of animal origins. Additionally, the animal feed industry adds the extra value to the by-products of food or beverage manufacturers. According to Nevedi, in the Dutch feed industry association, 13.6 million metric tons of compound animal feed was produced in the Netherlands in 2010 (Gengler, 2011; Nevedi, 2012a; Wattagnet, 2010). Moreover, based on the data provided by Nevedi, there are currently 72 compound feed producers operating in the Netherlands (Gengler, 2011). The biggest five producers responsible for approximately 60% of the total feed production in the Netherlands are listed below (Gengler, 2011; Nevedi, 2012a). 1. Agrifirm 2. De Heus Feed 3. For Farmers 4. Hendrix UTD 5. Boerenbond Deurne The Dutch feed industry gets its raw materials from both within the country and abroad, but normally, a larger portion of its raw materials is from abroad. The raw material mainly consists of plant products (e.g. grain, soy and tapioca) and by-products from food and beverage industry (e.g. beer brewing, soybean meal, citrus pulp, potato fiber and animal fats) as shown in figure 23 (Nevedi, 2012b). The imported raw materials are from the following regions. Cereals mostly come from the European hinterland. Soya bean is imported from South America. Maize products are from North America, and tapioca is from Southeast Asia. Based on these raw materials, thousands of feed recipes are formulated. Page 55

57 Figure 22: The diagram shows raw materials used in compound feed industry in 2010(NEVEDI, 2012B). 5.4 DE HEUS FEED B.V. De Heus Feed B.V. is a private, family-owned company, and the company is also known as an international operating company with a core business of production and commercialization of high quality feed. De Heus Feed B.V. was founded in 1911 with many year reputation as a regional feed company (Heus, 2012a; Nevedi, 2012b). The company progressed to one of the biggest players in the Dutch feed industry. Since 2005, the company has embarked on an aggressive program of international expansion. Now the company has activities in more than 45 countries. For instance, there exist operating production facilities of the company in Poland, Russia, Egypt, Ethiopia, South Africa and Vietnam (Gengler, 2011; Heus, 2012a). In 2011, the company produced more than four million tonnes of feed in its own production location. From 28 production sites of De Heus, eight production facilities are located in the Netherlands. Moreover, the company has more than 2000 employees of which 575 people work in the Netherlands (Heus, 2012a). The head office of the company is located in Ede. The main types of feed produced by the company are feed for cattle, feed for pig and feed for poultry. Next, the mission, vision and value of De Heus will be mentioned. The mission of the company is to secure the continuity of De Heus as a family-owned business and to realize worldwide growth in the animal feed industry, in accordance with our vision, values and culture and in doing so, creating agricultural development and progress wherever we are active (Heus, 2012b). Page 56

58 Company s vision is to retain and build on our leading position in countries where we are active, on the basis of our core competences. On the one hand, we aim to achieve efficiencies through economies of scale and, on the other hand, maximize our value-added potential through our know-how of nutrition, production and livestock breeding (Heus, 2012b). The value of the company includes the following (Heus, 2012b); Involvement: the passion of our customers requires a strong commitment to their business. Loyalty: sustainable relationships with customers and employees are the backbone of our company. Food safety: it is our responsibility to ensure maximum food safety. Cooperation: the power of a relationship, an organization or a chain is located in the quality of the cooperation between people, departments and companies. If mentioning about company s strategy, the company offers not only the products but also the knowledge that they accumulate as they operating the business are provided to their customers. For example, together with the sale person, there is always a nutritionist who gives suggestions of how to raise the animal and what kind of feed is suitable for each specific type of animal. This creates a win-win situation, where their customers can obtain the knowledge gained by the company, while the company obtains revenue from their customers. By using this strategy, the company develops a strong relationship with their customers. Their customer relationship is stronger than that of other companies since their customers do not depend only on the products which are produced by the company but also the knowledge which is offered by the company. With the mentioned strategy, the company gains the competitive advantage against other competitors within the animal feed industry. De Heus offers a wide range of product variety in various sectors including cattle, pigs, meat poultry, laying hens, goats, sheep, ducks and turkeys. The consumer can modify the product based on their needs. Page 57

59 5.5 THE VARIANTS OF CUSTOMER ORDER DECOUPLING POINTS WITHIN DE HEUS. In this section of the thesis, the variants of customer decoupling points which can be found within the case company will be mentioned. Firstly, the variants of customer order decoupling points occurring within the case company will be analyzed. Then the specific sub research question five how to model this information flow as related to these variant? will be answered. Finally, the last sub-research question will be discussed: How can information modeling support the management of CODP? In this part of the discussion, the answer to sub-research question four will be answered. The variant of the customer order decoupling points that occurs within De Heus will be discussed. De Heus has its plants in more than 10 countries, and there are differences in product type and product quantity from country to country. For example, if considering the Netherlands, poultry feed is the dominant product following by ruminant feed as the second most important type of product of De Heus. On the other hand, swine feed is dominant in the Asian countries like Vietnam. This research study only focuses on the Netherlands because the company originates in the Netherlands. Another reason is the accessibility of the information. The most important product category in the Netherlands is poultry feed. At lower level of this product category, sub-products are presented. For example, in poultry feeds, subproducts are broiler breeder feeds, broiler feeds and also feed for egg layers. The term poultry feeds is a general term for all of the sub-products to make them more comprehensive for the reader. According to the data from the year 2012, if considered about the proportion of the poultry feed production in the Netherlands compared to other types of feed products, it made up to fifty percent of the total feed production. According to the expert, the general broilers, broiler breeders and farmers are the company main market segments and customers. If mentioning about the customer order decoupling point, De Heus uses the combination of two delivery strategies. According to the interview, the delivery strategies that De Heus uses are make-to-order and make-to-stock since the company produces the product according to a customer request, and also, the company produces the product for stock. In this thesis, instead of using the term make-to-order, the author prefers to use the term assemble-to- Page 58

60 order. When the detail process of the delivery strategy is looked closely, the definition of the delivery strategy that De Heus is using fits more with the definition of assemble-to-order not make-to-order. This is because the raw materials like maize, soya and other materials have already been bought to stock prior to a customer s order receiving. After obtaining an order from a customer, the final feed product is mixed by using the available raw materials. From this reason and the definition given in chapter II, instead of the term make-to-order used by De Heus, the author would like to use the term assemble-to-order. If taking the Netherlands as an example, most of the time, the products are assembled based on a customer s order. According to the expert, it is better to assemble the product based on an order so that the product can always be delivered. At the same time, less stock is resulted. Creating an inventory for the finished products is costly and requires a lot of space. Instead, the company chooses to stock the product in the form of the raw materials, which can be mixed into a wide range of end products later on. In contrast, the company chooses to produce the finished product to stock when the products are really needed according to a demand forecast and a production history. For example, the sub-category products of poultry and ruminant are two major product groups that the company is willing to produce to stock. Due to both the production history and the demand forecast, the company knows exactly that the product can be sold. The company is unwilling to stock the products that have a low turn-over rate. The company decides to produce the product to stock for the products that contain a high inventory turnover rate like poultry and ruminant. Most of the times, other products are assembled according to a customer s order. Based on the interview, the expert even said that in the Netherlands sometimes it is impossible to make the product to stock because almost full production capacities are devoted to assemble the product according to customers orders. Only ten to twenty percent of the leftover capacity works on producing the inventory to stock. These make-to-stock and assemble-to-order production situations have nothing to do with the type of the customers, but they relate to the production history and the demand forecast. In other words, the company chooses the delivery strategy based on the demand forecast that increases annually to support the growth of the company and products that have the high turnover rate. Page 59

61 5.6 RESULT & DISCUSSION INFORMATION FLOWS RELATE TO VARIANT OF CUSTOMER ORDER DECOUPLING POINTS. In this research study, the author focuses on how the information flow is managed around the customer order decoupling points. Moreover, the author also focuses on the different delivery strategies. How the data flow can be modeled in which the fifth sub research can be answered. The five processes of information flows will be discussed; 1. The information flows relate to the purchasing process (information flows and interactions between the company and the suppliers). Is there any impact of the various factors mentioned in chapter II on this information flow? 2. The information flows relate to the order processing (information flows and interactions between the company and the customers). Is there any impact of the various factors mentioned in chapter II on this information flows? 3. The information flows relate to the production and the production planning. Is there any impact of the various factors mentioned in chapter II on this information flow? 4. The information flows relate to system integration structure (Information flow and interactions between head quarter level and production plants in each country since the Netherlands is also accounted for being part of the huge network) 5. The information flow of the company that is impacted by an exceptional situation THE INFORMATION FLOWS RELATE TO PURCHASING PROCESS The information flows relating to the purchasing process start when a factory sends a production forecast or a sale prediction to a purchasing department. That is the activity that triggers the whole process. Next, the purchasing department will see whether it is possible to make the contract with the suppliers or not. To determine whether it is possible to make a contract or not, it is usually the role of purchasing department to negotiate with the suppliers. The possibility basically depends on whether it is possible for suppliers to supply raw materials for a certain period of time; e.g. supplying the raw Page 60

62 material for four to six months with the agreement price. It always benefits the company to sign a contract because the price of raw material is cheaper. If signing the contract is possible, the contract is always signed. After the contract is signed, it will be registered into the purchasing application called Milas4 and this data is shared with the production department. Hence, the production department knows which suppliers are still available within the contract and how long the supplier will supply the company with the agreed raw materials. If there is no supplier in the contract anymore, the production will contact the purchasing department for further sourcing. After the contract is registered into Milas4, the logistics department will make a delivery schedule proposal in Milas 4. The delivery schedule proposal is sent to supplier. Then, they have to wait for their approval and send the approval back to the logistics department. During this stage, a negotiation on the delivery occurs. Next, after the correct delivery schedule is confirmed, the delivery schedule is sent to the production factory. The production will receive the raw material delivery directly from supplier. Then the information flows will be divided into two paths. This is due to the agreement within the contract whether the company has to pay before the delivery or the company buys the raw materials on credit where the payment process must be completed after the product is delivered. Two cases are specified below. The first case represents the payment after delivery. First, the first case will be described. After the Logistic department receives the delivery schedule approval from the suppliers, the Logistics department registers the delivery schedule in Milas 4 and the information is shared with the production department. After the factory receives the items based on the confirmed delivery schedule from the supplier, the received raw materials are stored. The factory needs to enter the received items into the factory system and the purchase administration will receive the item details passing through the ERP system. Later on, the supplier sends an invoice to the purchase administration department according to the sent items. Page 61

63 The purchase administration department needs to register the invoice into the system so that the data will be used by a finance department for further invoicing process. Finally, the purchase order will be closed. The second case represents the payment before delivery. The same situation happens like in the first case. After the Logistics department receives the delivery schedule approval from the suppliers, the Logistics department will register the delivery schedule in Milas 4. The information is shared with the production department. First, the supplier will send an invoice to the purchase administration department according to the price of raw materials. After that, the invoice is registered into the system. The invoice will be paid by the finance department. After the payment, the finance department will enter the detail into the ERP system before the production receives the raw materials based on a purchase order. After payment, the factory received the raw materials. These received raw materials are stored as an inventory. The factory needs to enter the detail of the received items into the factory system. Finally, the purchase order will be closed. When the information flow is analyzed in order to find the differences between the purchasing processes of different production strategies (i.e. make-to-stock and assembleto-order), the detail processes need to be discussed. According to the research mentioned in chapter three and four and the expert (see appendix II), there is no difference in the purchasing procedure for both delivery strategies. If mentioning about the material resource planning, the responsibility belongs to the purchasing department. The purchase planning usually depends on a seasonal purchase; e.g. most of the raw materials like maize and soya. The yearly purchase is a seasonal purchase where De Heus purchases the raw material when it is available and cheap. This raw material will be stocked and used throughout the year, but there are also some products that the company might not buy them seasonally like vitamins and minerals. As mentioned earlier, the company knows Page 62

64 how much to produce and how much raw materials are required. This data will be used as a production history for the next year. For some exceptional raw material shortage, the information flows can be affected by this exceptional shortage of raw materials. If the shortage occurs, the production department does not have to wait for planning. In other words, the production can purchase the items immediately for the current need from a local market if there is no available supplier within the contract. It also depends on whether it is a long term planning or it is a short term planning. The purchase department has to communicate with the production. If mentioning about the factors that have an impact on the information flows of the purchasing process, according to the expert interview (see appendix II), there is no impact on the information flow of the purchasing processes. For the exception situation like when the factory urgently requires the raw material for urgent order, instead of going through the normal procedure, the production, logistics and the purchase department will make a phone call to speed up the processes. The best solution is found by communicating between the head of three departments. The problem that likely occurs is that when the factory urgently needs the product, the purchasing department needs to make the contract with the suppliers, while the logistics department has to see the truck schedule for the receiving items. The biggest problem within the purchasing department is that the department has to compromise and tries to make the contract with the suppliers which require a lot of negotiation skills. When there is an urgent purchase order due to the shortage in raw material, the buying of raw material for urgent usage is always very expensive. Since the price of the raw material in European market is very fluctuate, the cost price of the final product is highly affected by the cost price of raw material THE INFORMATION FLOWS RELATE TO THE ORDERING PROCESS The information flow relating to the order processing is started from incoming calls or s from a customer for an order to the sales department. The sales department sends a customer s eligibility request to the finance department for eligibility validation. The eligibility of the customer is approved by checking his/her financial statement to see whether he/she can afford his/her orders or not. Most of the time, the company sells the Page 63

65 products on credit. In case that the customer s order is ineligible or he/she has a tendency of incapability to pay for the product, the financial department will send a notice back to the sales department. Then the sales department sends the notice back to the customer to inform the customer that the order is terminated. The reason for the eligibility validation of the customer is to prevent the risk of receiving an order from an indebted customer. To reduce the risk, the company prefers to check the statement of the customer in advance. In case that the customer is eligible, the sales department will send a production request to the production planning department. The production planning department will check for the possibility of accepting the order and send a notice back to the sales department. During this process, there are a lot of negotiations going on before determining a delivery date. The sales department has to always consult with the production planning department while negotiating with the customer. For the normal order, the company usually has a week time to deliver the product. This also depends on how urgent the order is. Some orders are very urgent. According to the interview, the expert gave an example of the customer who called and ordered the product in the morning and requested the product to be delivered in the afternoon. Normally, production planning depends on a customer request. When an urgent order is approved, the company tries to deliver the urgent order first and less urgent order later. The human factor is always used to evaluate this issue. The production planning department will check for the possibility of an order fulfillment. Later on, it will send the notice back to the sales department to give the customer a notice whether the order is accepted or rejected. In case of a production capacity is full; the sales department has to talk with the customer to change the delivery date. If the customer cannot accept the offer, the order needs to be rejected, which is always being the last option. In case if the order is accepted, the sales department will inform the customer about his/her order together with the delivery information based on the data that the sales department obtains from the production department. If the customer accepts the offer of the delivery date, the sales department will receive the delivery information from the customer, and the delivery information will be checked with the sales order. Afterwards, the sales department will send a delivery date confirmation to the customer. Next, the sales department will activate the invoice and will send it to the finance department for invoice processing. Finally, the ordering process is closed. The flow of information for production and production planning will be discussed in the next section. Page 64

66 The factor that may impact the information of ordering process is the lead time, but according to the expert interview, it is mentioned by the expert that the production lead time is not affecting the flow of information for De Heus because the production lead time of De Heus is very short. Furthermore, the delivery lead time also has no impact on the flow of information. Since the production lead time is short, the product can be directly delivered to customer after the production of the product is finished. Base on the data analysis, it can be said that the ordering processes of make-to-stock and assemble-toorder are sharing almost the same path. In other words, there is no significant difference between the ordering process of make-to-stock and assemble-to-order THE INFORMATION FLOWS RELATE TO THE PRODUCTION AND PRODUCTION PLANNING This section of the thesis is divided into two sub-sections which are the information flows relating to the production and the information flows relating to the production planning. First, the production planning will be discussed. The production planning level is the most important process, where the activities of the two production strategies; namely make-to-stock and assemble-to-order, are separated into two paths. In production planning department, it contains a production history where the bestselling products (e.g. poultry and ruminant) can be produced to stock. After the sales department sends a production request to the production planning department, the production planning department will firstly check with the production department whether the ordered products are available in the inventory. If the inventory is available, the production planning department will make an inventory reservation within the system. Later on, the products will be sent to the logistics department to deliver to the customer. For an exceptional situation where the products are out of stock, the production planning has to consult with the production department whether it is possible to produce the product the following day. In general, the company tries to fulfill the customer order to the fullest. However, it is possible that the company sometimes has no way out and fails to negotiate with the customer. Hence, the company has to say no and rejecting their Page 65

67 customers order. After the production department receives a feedback of stock availability, the production planning department has to check for the availability of the raw material within supply stock before making a production plan. If the production planning department sees the possibility of scheduling the production plan (assemble-toorder). A notice will be sent back to the sales department. In the production planning department, after the orders have been accepted, the production planning department will make a production plan. The master production plan is derived from all of the received orders that have been registered into the sales registration system. The company takes the orders which are confirmed by the customers to include in the production plan. Sometimes, the customer orders the product, but the order has not been confirmed yet. In this case, only the confirmed orders are used for making the master production plan. The production planning department makes a weekly planning which derived from the master production plan and also depending on the delivery date and the order urgency. This production planning is sent to the production department and logistics department. The information flow of production process starts from receiving a production plan sent by the production planning department. For the assemble-to-order production strategy, after the production plan is received from the production planning department, the actual production is processed according to the steps mentioned in chapter II. After the production, the products are delivered to the logistics department. It is mentioned by the expert that the process is quite simple. Feed industry does not require a lot of complex machinery, so there is usually no problem in the production process (see Chapter II). At the same time, the production department makes a delivery report and updates the stored inventory in the system. The bill of material (BOM) or the recipe of the products is stored in the head quarter. For a product, the nutrient content is always the same, but the recipe might be different. For example, if a product must contain ten percent of protein, it is the role of the head quarter to formulate the recipe of the product with ten percent of protein content. Although the protein content is 10% of the recipe, the final protein content of the product may be solely made of maize or may compose of the mixture of maize and soya. In other words, although the protein quantity is the same, the recipe may differ according to different available raw materials. Prior the logistics department receives the product from the production department; the product has already been determined whether the Page 66

68 product will be sent by using the third party logistic or the truck of the company. It is mentioned by the expert that the company usually uses his own truck to deliver the product to the customer, but if there is a problem with the availability of the truck, the company tends to use the third party logistics. By using either the company s truck or the third party logistics, the finished product can be delivered to the customer. In case of the make-to-stock delivery strategy, after receiving the production request, the production planning department checks for the inventory of the ordered product with the production department whether the ordered product is available in the inventory or not. If it is not available, the production planning needs to change the strategy from making the product to stock to reserving the production capacity for the assemble-to-order strategy. As mentioned earlier, if the product is available in the inventory, the inventory is reserved and further sent to the logistics department for delivery. It is important that the delivery date is primarily determined with the cooperation between production planning and production department. In the step where the production planning department checks for the availability of the inventory and derives the production plan before giving the customer a notice of delivery date, the company uses the capacity of the machine to indicate which machine or which plant will be assigned for the production planning process. If the machine cannot produce and fulfill the order in one batch or the amount of the product producing is not matching with the capacity, the company will be assigned the work to other machine. This is because it is too costly if the production capacity is unbalanced with the assigned order. The next section presents some mentioned factors in chapter II that have an impact on the information flows of the ordering process. Product customization, which allows the customer to customize the product like addition of medication into the feed and increase of the protein content within the product, influences the flows of information in terms of the formulation of the production recipe. For each plant, if the order comes with the customization, the plant needs to request for the recipe from the head quarter which is located in the Netherlands (Holding level) because all of the formulation is stored in one place. Then, the information of the formulation is sent back to the production for further processes. The reason for only keeping all of the possible recipes in the database at the head quarter is because the company operates their business in many countries, so they Page 67

69 want to protect their competitive advantage by making their formulation a secret. The company needs to deal with a large number of data which is caused by product customization. As mentioned earlier that a product may have hundreds up to thousands of customizations. This impact can only occur in the assemble-to-order, where it does not occur in the make-to-stock production situation. For the make-to-stock delivery strategy, the products are produced to stock based on production history to fulfill customers demands. According to the expert, the demand volatility is not a major factor that causes a problem within De Heus. This is because the demand fluctuation in feed industry is hardly found, so the production planning can be based on the production history and the production volume will grow with the company expected growth. The company tends to stock the material in the form of raw material instead of the final product. Another factor which has a huge impact on the flow of information is stock shortage. In this case, the shortage is found at the stock of raw materials. If the stock of raw material is out, the production plant needs to send the information to the holding level to reformulate the recipe as shown in the line label 5.1, 6.1, 7 and 8 in appendix 3. It is important that the final content of nutrients needs to be the same. When the raw material stock shortage occurs, the company and the purchasing department must cooperate to find a way out together, for example, making a contract with a new supplier or buying the raw material from the local market. This causes an increase in the price of raw material, but it does not have much impact with the company since only small amount of raw materials are purchased. This only lasts for a short term in order to retain a good relationship with their customers. The flow of information is sent to the holding level in order to make a new formulation using different raw materials in compensation with the shortage raw material. According to the expert, the cost of the product will be calculated based on the cost of raw material because other costs are usually considered as a fixed cost. The stock shortage also has an impact on the customers due to the higher price of the final product. When the company raises the product price, farmers stop buying the product from the company. They will buy the product from the local market, but when the price gets back to its own position, they buy the product of De Heus again leading to an inaccuracy in production forecasting. Page 68

70 To clarify more about the production and the production planning processes, the product customization that the company offers to their customer changes the position of customer order decoupling point from make-to-stock to assemble-to-order. This change has an impact on the flow of the information of the company especially for the information flow of the production and the production planning. For make-to-stock, the production planning needs to check for the availability of the inventory and deals with the inventory reservation. In contrast, the information flow of the assemble-to-order especially in the production planning level needs to make the planning and assigns the work to the company facilities as mentioned earlier. For other factors which are not mentioned in this section but are mentioned in chapter II, the expert sees no impact from those factors on the information flows of the production and production planning processes THE INFORMATION FLOWS RELATE TO THE SYSTEM INTEGRATION STRUCTURE De Heus contains a number of production plants located internationally in various countries, so the data needs to be aggregated in the backbone of the information system which is called the service-oriented architecture. Information flows are related to the system integration start from the holding level at the headquarter where all of the recipes, data codes, labels, nutrients, units and reference values are kept. The information flows from the headquarter are sent to the headquarter located in each country. The data are stored in an ERP system which consists of many applications, for example, a human resource system and a data warehouse. The specific information flows are stored within an ERP system including recipes, article codes, labels, purchase order receipts, sale order releases and also production lot reports. The headquarter at the country level sends the information flows that are required by the plants located within the country including a recipe, an article code, labels, Purchase Orders (POs), Sales Orders (SOs) and a production request. All of the purchase and sales orders are sent from the headquarter passing through the country headquarter and finally to the production plant. Then, De Heus plant sends the recipe and the production request to the production control system Page 69

71 for an actual production. The plant consists not only the production control system but also a laboratory system where the quality of the raw materials to the quality of the final products are tested. The samples are sent from the production plants to the laboratory located in Den Bosch by the production manager. The raw materials are accepted and used in the production line before the approval of the laboratory result. It s the risk that the company willing to take. Thus, the plant sends a sample code, a VT number and a lot number to the laboratory information management system for quality assurance of raw materials and products. Next, the production control system sends back the production lot report; whereas, the laboratory information management system sends back the analysis results to De Heus plant. Afterwards, the plant will send the report back to the head quarter at the country level including the following information; Purchase Order Receipts (PORs), Sales Order Release (SORs), lab samples and results. Finally, the country headquarter sends the report of the production; i.e. the historic and replacement price, the raw material consumption and the raw material stock, back to the holding level located within the Netherlands. See the process flow in appendix THE INFORMATION FLOWS THAT ARE IMPACTED BY AN EXCEPTIONAL SITUATION. The information flow mentioned in section is based on a normal situation. Previous section has already mentioned about some factors which have an impact on the information flow. In this section of the thesis, the author will solely emphasize about the information flows that are impacted by an exceptional situation. There are many factors that can impact the information flow of the company, for example, delivery lead time, production lead time, stock shortage, product seasonal demand, etc. According to the interview result (see appendix II), the expert was asked to rank various factors that cause the most problem within the company. It turns out that a raw material stock shortage is the factor that has the most impact on the information flow of the company but there are also other factors that impact on the flow of information including the delivery of out of quality raw materials, product return from customer and invoicing of the raw material shipment. First, the raw material stock shortage will be investigated. The whole information flow is triggered by the stock shortage of the raw material. This results in an urgent request from the production planning department or Page 70

72 sometimes from the production department itself. The production department receives an urgent request and sends the purchase order to the purchasing department. For the urgent request, the purchasing department will try to find the suppliers and sign a contract with them. When the contact is possible to sign, the procedure goes according to the normal process. However, if the purchasing department is unable to sign a contract with suppliers, they send the production department a notice. The notice indicates the raw materials, the quantities that need to be purchased and the name of the supplier. Moreover, the price of the raw material is also given. The production department is allowed to choose to purchase the raw material from their own choice of suppliers from a local market. After the supplier from the local market accepts the purchase order, a proposal of the delivery schedule will be sent to the local market suppliers. The negotiation of the delivery date occurs during this phase. After the delivery date is agreed by both the company and the suppliers, the ordered raw material will be delivered directly to the production department. The invoicing process goes according to the normal procedure. The second factor of the exceptional situation is the delivery of out of quality raw materials. This is happened within the company. In the normal situation, raw materials are delivered to the company either by trucks or ships. Suppliers and De Heus have an agreement on the specification or the requirement of the raw materials. The quality check of the incoming raw materials is for example, the protein content, the moisture content of maize should be around % or the checking of Salmonella in soy that used to be an outbreak. The quality check is done after the raw material have already been received into the production plant. If the inspection after the delivery is not meet the requirement. Then, the purchasing department will first negotiate with the suppliers to inform them about the incident. The company will received the money back in term of discount. If the raw material is way out of specification, the raw material will be fully rejected. Invoicing of the raw material shipment is the third factor that can has an impact on the company information flow. Some raw materials are transported to the company by ships. The ordered quantity of raw material is indicated within the invoice. It is possible that when the raw material arrive, the quantity is not as agreed. Sometime, the company received a surplus or a shortage. The company will also inform the suppliers about the Page 71

73 weight of the delivered raw material. In case of the surplus, the company has to pay for the extra surplus which company received but this is rarely happened. In case of a shortage, the company will receive a refund payment from the suppliers. The exceptional situations of De Heus can be categorized into 2 main categories which are the exceptional factor that has an impact on the CODP positioning and the exceptional factors that not have an impact on the CODP positioning. The factors can be categorized as the following according to the information given by De Heus employees. The exceptional factor that has an impact on the CODP positioning. o Stock shortage The exceptional factors that not have an impact on the CODP positioning. o Delivery of out of quality raw materials o Invoicing for raw material shipment MODELING INFORMATION FLOWS. In this part of the thesis, the sub-research question five How can we model information flows related to these variants? will be answered. The information flows which have already been mentioned in sectioned will be used to make a model. First, the model for the purchasing processes of make-to-stock and assemble-to-order will be given followed by the model of ordering processes. Next, the main production and the production planning process where make-to-stock and assemble-to-order are separated in different paths will be shown. Based on the SCOR model mentioning in chapter 4 together with the expert interview in section 5.6.1, the purchasing process model has been developed see the descriptions of the detail information flows of the purchasing processes in section Figure 23 shows the information flow model of the purchasing process within De Heus. There is no difference between make-to-stock and assemble-to-order for the purchasing process of the company. They undergo the same process, no matter whether it s a make to stock or assemble to order. The discussion is given in chapter three and four. The factors which are mentioned in chapter two have an impact on the information flow of the ordering process. In addition, an exceptional situation mentioned in section regarding the raw Page 72

74 material stock shortage has an impact on the information flow of the company as well. Figure 23 shows that the purchasing process is triggered when the factory sends a purchasing request to the purchasing department. When the urgent raw material shortage occurs and the purchasing department is unable to make a contract with the customer, the information flow will change. The purchasing department will allow the production department to purchase the raw material from the local market in case of the urgent usage which can be seen in figure 28. The expert mentioned that the incident can happen from time to time. Instead of passing through the procedure mentioned in figure 23, the production and the purchasing departments will use a phone call to consult and negotiate about the urgency of the raw material shortage as shown in figure 28. Another issue that impacts the flows of information is the method of payment. As shown in figure 23 that the information flow has been separated into two paths, the first path is the payment after delivery and another is the payment before delivery. The models of the information flow s that are affected by the out of quality of the raw material delivery and invoicing of the raw material shipment can be found orderly in figure 29 and 30. Page 73

75 Page 74 Figure 23:The purchasing process for both make to stock and assemble to order.

76 In section , the information flow of the ordering process is represented in figure 24. There is no significant difference in the ordering process between make-to-stock and assemble-to-order production strategies as well. If we discussed about the production and production planning process which is mentioned in , there are some significant differences. According to the qualitative face to face interview and literature study, both confirm that the difference between the make-to-stock and assemble-to-order production situations is in the production planning. The production planning process is the point where the planning occurs as shown in figure 25, which is located between the production department and the sales department as in figure 20 and figure 26. Additionally, there are some factors impacting on the flows of information. The first factor mentioned in section and is the raw material stock shortage that has an impact on the information flow in terms of sourcing of the raw material. It appears that the raw material needs to be bought from a local market. See figure 28. Moreover, the reformulation of the recipe by finding the compensation of raw material will increase the cost of production and decrease in the number of customer because of the higher product price. In addition, the product customization that allows the customer to choose what he/she exactly wants in the formulation of the feed impacts the information flows. This is because the information needs to be sent back from the holding level to the production facility, and this divides the information flow at the planning level into two different paths for make-to-stock and assemble-to-order as mentioning in section and figure 25 and THE INFORMATION MODELING AND THE MANAGEMENT OF CODP In this section of the thesis, the author will discuss about how the information modeling helps to support the management of customer order decoupling point? It is the last sub-research question in order to fulfill the main research objective. Based on the information flow generated for De Heus that is mentioned in the previous section (figure 24-30), the information flow and its relationship with CODP will be studied. From figure 27, for the make-to-stock production strategy, an inventory of finished goods is kept after the production. A green color inventory from the figure 27 shows a normal production situation of the make- Page 75

77 to-stock delivery strategies and the information flow around the CODP which locates between the make-to-forecast and deliver-to-order. This leads to a limited end-product variety since the production is based on forecast. Therefore, the company produces only high demand products. The management of CODP for the make-to-stock production of De Heus is that they only produce products that are high in demand. In other words, the product that contains a high inventory turn-over rate is produced. The company needs to make sure that the product can be sold, e.g. poultry and ruminant. The disadvantage of make-to-stock is that the company needs to take the inventory cost of finish goods resulting in a low product variety. In order to fulfill the need of their customer and make the product more customizable, the CODP is moved backward toward the supplier. From figure 27, a red color inventory of a raw material is a point where the raw material is kept. This delivery strategy makes it possible for De Heus to fulfill the various needs of their customers without stocking of finished products. The company moves the CODP backward in order to use the available raw materials to customize into various end-products. The shifting of the CODP from make-to-stock to assemble-to-order of De Heus is caused by the product customization, which leads to a high inventory cost and a risk of end product stock-out. For an exceptional situation mentioned in section , this moves the CODP even backward toward the supplier as shown in figure 31. The raw material stock shortage leads to a shift in the CODP. Moreover, considering the usage of the model, the model is used to support the management by providing the clear holistic view of what is really going on within the company and how the information involves around the CODP of the two production strategies; namely make-to-stock and assemble-to-order. The difference between the make-to-stock and assemble-to-order production situations is in the planning process when the production planning receives a production request from the sales department. The production planning department has to check whether the product is available in the inventory or not. If it is not available, it will undergo the make-to-order production situation as clearly shown in figure 25 and 26 in a highlighted orange box called planning and in figure 31 where the CODP move backward. The Figure 31 summarizes the different production strategies and the factors that influence the shifting of the CODP within De Heus. The difference between three production situations provides an overview of how the thing works and which information is shared and is required by which departments since each department is focused on their own department without noticing how the information flows are managed and shared. The model offers a clear holistic view of how each department Page 76

78 functions in terms of purchase and order processes. It is a better option to give a clear visualized explanation of what is going on between each department and which information flows are responsible for each process. Figure 27 shows a combination of the purchasing, the ordering, the production and the production planning processes and the interaction between the supplier with the company and the company with the customers. Furthermore, this model can also be used as an input of information system (programming) by giving a clear picture of what information is required by which department and providing the inter-relationship between each process. Moreover, this model also aids decision making of the management to choose the application for the information system whether it is necessary to purchase a really expensive application, while the only basic application is already enough to fulfill the need of information flow. Page 77

79 Page 78 Figure 24: The similarity of ordering process for make to stock and assemble to order.

80 Page 79 Figure 25: The difference of production and production planning process for make to stock and assemble to order.

81 Page 80 Figure 26: Information flows when combing ordering, production and production planning process.

82 Page 81 Figure 27: The information flows of De Heus.

83 Page 82 Figure 28 : Exceptional information flow that is influenced by raw material stock shortage

84 Page 83 FIGURE 29:Exceptional information flow that is influenced by the out of quality of the raw material delivery

85 Page 84 FIGURE 30:Exceptional information flow that is influenced by invoicing of the raw material shipment

86 Figure 31: The three positions of the CODP and the factor that causes the CODP shifting within De Heus 5.8 CONCLUSION In this final section of thesis, the author wants to conclude the significant point of this study according to the main objective which is to analyze the factors (Figure 31) that influence the different positions of the customer order decoupling point (CODP) and related diverse of information flow within De Heus by modeling the information flow between various functions within the company. This main objective is answered through the main research question and six sub-research questions which have already been answered in chapter two to chapter five. The first sub-research question namely In what way, animal feed company arrange in general CODPs? is answered in chapter two. According to the literature study, the general animal feed chain arrangement is given considering the basic product transformation in the animal feed supply chain. The production processes are orderly consisted of the following steps: raw material receiving, crushing, batching, mixing, pelletizing, storage and distribution. The possible customer order decoupling points

87 within the feed industry are make-to-stock, assemble-to-order and make-to-order excluding engineer-toorder. The second sub-research question namely what are the factors that impact the positioning of CODPs? is also answered in chapter two. The factors can be categorized based on the food and feed supply chain characteristic and accidental incidents. For the food and feed supply chain characteristics, the factors can be further categorized into three main sub-groups including product-related factors, production-related factors and market-related factors. Product-related factors involve modular and product design and customization opportunity. For production-related factors, the production lead time, flexibility and position of the production process bottleneck are included in this sub-group, and finally, the market-related factors contains delivery lead time, demand volatility, product volume and customer order size and frequency. Accidental incidents (short-term impacts) involve shortage of stock product, seasonal demand and incidental factors, The conceptual factors that impact the model is formulated, and the position of the customer order decoupling point is suggested to determine by using the ratio between production lead time and delivery lead time which has already been mentioned in chapter two. The third sub-research question namely what information flows are related to different CODPs? is answered by using literature study indicated in chapter three and chapter four. A number of information flows are discussed. Especially in chapter three where the models of the various processes are generated, the information flows that are related to different customer order decoupling points are discussed. In chapter four, the business process models for three production situations (MTS, ATO, and MTO) are developed based on the SCOR model to make a reference business model that can be used to apply in the analysis. The fourth sub-research question that is How can different variants of CODP be recognized in a case company? Is answered in chapter five where the two main CODPs which are make-to-stock and assemble-to-order are analyzed based on the case company. The answer is obtained by doing the face to face interview. The make-to-stock production strategy is used with the product that have a high inventory turn-over rate like in poultry and ruminant feed. For other products, the company produces the product using assemble-to-order production strategy. The raw materials are prior bought to stock. Final products are then assemble according to customers order using the available materials. Page 86

88 The fifth sub-research question namely How can we model information flow related to these variants? Is also answered in chapter five. In this chapter the information flows of the purchasing, the ordering, the production and the production planning process are modeled based on the information gathered by the interview and the reference process model which have been developed earlier with the concept of SCOR. Moreover, the model for an exceptional situation of the raw material stock shortage is also generated and discussed The last sub-research question that is How can the information modeling support the management of CODP? is answered in chapter five. The factors that create the shifting of the CODP are discussed. The shifting of the make-to-stock to assemble-to-order is caused by the high inventory cost, the product customization and the stock shortage of the finished goods. For an exceptional situation, the temporary shifting of the CODP is caused by the raw material shortage. Figure 30 shows the influencing of different factors on the shifting of CODP within De Heus. The lesson learns from the study the impact of these factors on the information flow is that there are various incidental factors that can have the impact on the information flow but the is only the stock shortage of both end products and raw material can shift the position of CODP as shown in figure 31. This impact causes a change in the production lead time that directly impacts the position of CODP by shifting its backward. Other Furthermore Moreover, In terms of the information flow, the difference of make-to-stock and assembleto-order is in the planning process which is located between the production and the sales department that mention in chapter five. Also, the information modeling can help to support the management in terms of decision making and visualizing the information flows between the supplier and the company, different business functions within the company and between the company and the customer as shown in figure in chapter 5. The combination of information flows of De Heus is also given which combines the whole purchasing, production, production planning and ordering information flows in order to provide the holistic view for the management and to have a clear understanding of the overall information flows of the company. In this study, the use of SCOR on the interaction of various information flows between different functions within the company shows detail activities that happened in the real industry. By using SCOR code, the model can be referred to SCOR. The limitation of this study is that it is only focus on the animal feed industry. The impact of these factors on other industries still needs to be investigated. The author expected that this study can apply to other industries in term of providing the detail case study and showing how the information flows is managed around the different customer order Page 87

89 decoupling points. Since stock shortage is not only found in the feed industry but also in other industry like food industry, electronic industry as an example. Page 88

90 APPENDICES Analyzing different positions of CODP as related to information flow of De Heus APPENDIX I: QUESTIONNAIRE Page 89

91 Page 90

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94 APPENDIX II: INTERVIEW SCRIPT Analyzing different positions of CODP as related to information flow of De Heus DATE: 17 th Jan 2013 Name of Interviewee: Mebrate Woldegebreal Name of Interviewer: Surapong Chanasettakul Function: International ICT Advisors Surapong: First I would like to introduce myself, my name is Surapong, and right now I m study food innovation and management at Wageningen University. I m doing my thesis in management study department. I study the variant of CODP within a company and how the factors influencing the CODP which then influencing the information flows. Mebrate: What is CODP? Surapong: its Customer order decoupling point which later on will be discussed. Surapong: First I want to kindly ask to introduce your company to me a little bit and what is you role within the company Mebrate: The Company, as you might read on our website. It s feed producing company. It work internationally in more than eight to nine countries and we are really grow every year to different continent. So basically we produce feeds. Animal feeds for dairy, poultry, pigs and ruminant all these kind of feeds and my role in this company is we have a department call corporate IT and process integration. That means we try to integrate the IT with the processes within the company, the production processes, the basic operation processes like logistics or registration of sales or all this kind of documentation, everything that related to basic daily operation and integrated with the IT system and that our department and I m an international ICT advisor. So I work for the department I told you. Surapong: So I want to go further with the interview, if we talk about the products of the company what are the most important brand Page 93

95 Mebrate: I read this on your , to be honest, they are many important products in the company but it really differs from country to country from factory to factory. Like if you take Holland, we have poultry products, we have ruminant, and we have pig but the proportion we produce this in almost all the countries but the proportion are totally different. If you take Asia, we also produce in Asia in Vietnam. The pig proportion is higher than other proportion and if you take it for Holland, the poultry is higher than other product so I can t really give you which product are important to us. The entire product are really important to us but it s depend on different location but I will give an example at the end of the interview from South Africa for example poultry more than other products it also differ from each branch in the country. If you take one of our branches in Africa, you will have totally different proportion from the other branch in the same country in South Africa because of the location because of the area is if the area is poultry area so the poultry product will be dominant Surapong: What if we only focus on the Netherlands itself? Mebrate: If we are talking about the Netherlands, we have poultry priority Surapong: and what about the second most important brand of the company Mebrate: Ruminant, ruminant animals if we categorize them in different way even when I tell you about poultry. We have many sub products for poultry. We have for example broiler breeders, broiler (a chicken for slaughtering) and for the breeders are for just breeding the broiler and the Broiler are the broiler basic products and we divided this into different classification. When I say poultry I m just generalizing all including the layers for egg laying, this kind of stuff so this is poultry in general, I m taking it into a little bit basic products. Surapong: and the second one is? Mebrate: It s the ruminant. Surapong: If we compare the proportion of sale for poultry product how many percent of the revenue are from the poultry focusing only in the Netherland? Page 94

96 Mebrate: OK! Roughly it can go up to more than 50% of the poultry products and other will be covered by the ruminant and other products. I m just telling you based on the statistic from I don t have to figure from the rest of the years Surapong: Which market segment is your company focusing on like for the poultry and ruminant. Mebrate: the broiler, the breeding broiler are the main products. Broilers we called them in general broilers and farmer and broiler breeder are our main market segment. Surapong: Who is your biggest customer for both products like for the poultry itself and also for the ruminant? Mebrate: No, I can t not give you the information but ok. For the customer you want the biggest customer. OK, I ll ask and give it to you. I have no direct connection to this application so I ll ask the guy who are really responsible for these things and then give it to you. Surapong: For first and second customer for both products (poultry and ruminant). Surapong: What kind of relationship that you have with your customers whether it is individual transaction, repeat transaction or you is forming strategic alliance with your customer? Mebrate: Basically we have sale people who are really working at each farm. Doesn t matter whether it s really big customer or not, even potential customer we visit them even now and then. And the sale guys advise them on how to work on the farm and everything. Based on the agreement they made there they make order to the factory, we always in contact with them. Surapong: Is it work the same for poultry and ruminant? Mebrate: Yes, the same for all. We have different product unit for poultry we have different responsible people, for dairy we have another responsible people. Starting from the formulation of the product and also to the sale Surapong: We are coming to the customer order decoupling point (CODP) I don t know whether you familiar with this term or not Mebrate: I m not familiar with it. Page 95

97 Surapong: So this is how it work, we have many different delivery strategy we have make to stock, assemble to order and make to order but most of the time in the food companies are whether make to stock or make to order so this CODP is like separating the activities which are based on forecasting and the activities based on customer order. Mebrate: so now I understand. Again it s totally different between factory based on their size and the capacity of the production Some of the factory for example If we take a factory in Ethiopia, we usually produce based on the customer order and also when there s no order we just produce it for stock. De heus combine these two delivery strategy. We produce per customer request and we also produce for stock. It also the same for other country as well but in South Africa we usually used base on order. Based on order for South Africa. Surapong: What about the Netherlands? Mebrate: Ok. For export product, based on the order that they received on order and they place an order and then they deliver but for the local sale I m not sure how they produce it but I can get the information for you. But usually we receive order so I expect they do the combination of those two. Surapong: but usually for the poultry feed. Are they usually make to stock right? For most of the time, you usually produce based on customer order or you produce a then you stock it at the end and you also need to have the inventory for it. Mebrate: It is also depend on the forecast. If they expect really to sell some figure, they is no way for the company that they stop producing so they will keep producing whether there s an order or not. So that why I told you that they do both they produce for order and they also produce for stock. It s both case. Surapong: What if we compare about the proportion of make to stock and make to order Mebrate: Most of the time make to order. Surapong: Do you know why this CODP is chosen. Page 96

98 Mebrate: I can give you only my own opinion. If you see for example of South Africa because I m really familiar with the South African situation. I m going to tell you from that. If you see our system and let s say you want to produce something and it s better to produce it base on order so you can always deliver it. You don t have to put it in the stock for a long time and its cost money to store it and also the space. You need spaces. It s better to deliver it like that even also when you produce it for stock we produce the product which are really needed base on the season. So basically they produce on order and sometime it s not even possible to make product for stock because you are busy producing orders. That s also the same. Surapong: Do you have an idea how the CODPs are managed like for the production and after sale how the product are delivered? Mebrate: OK! I have one process flow for you. I ll just show you what really happened is customer calls or send an with an order. They received the sale order and they register it into sale and registration system and that order is usually unconfirmed. They have to confirm it with the production. They have to confirm it and then when it s possible they just send the confirmation back that they can produce. Then, the production people have to make a planning of when to produce the product and the logistics guys also have to make a planning for delivery. This is done in the combination with logistics because you may be able to produce it for tomorrow but you might not be able to deliver it because they might not have logistics. So they always have to check it between the productions, the logistics and the order department about the possibility. Surapong: but you say that you have the process flow? Mebrate: Yes. I ll show you the process flows. Surapong: Do you have the business process flow of how the product is produced like for the poultry feed? Mebrate: There s no specific for poultry feed or ruminant. They way that they are produced is the same. I ll give you the overall idea. This is how we process our stuffs. We have different countries that are working for our production and we have different plant for each country so let say this Page 97

99 is the Netherlands and we have plant one plant two and plant three. We use the information flows that are coming like this is the holding level where we make the formulation and we store our data and we send it to the country so it can produce based on the given formula. Because the formulation is only in Holland for almost all the country except some exception. So we send it to the country and the country will distribute to the proper plants and then they will make the production. I ll show you another thing. We have this kind of processes you can ignore this. It s a data flow but on this level you see how the orders are coming in. They receive and make the sale orders for purchasing raw material and then they make a production request for that. That they have to produce something and this production request is send to the plant because usually the production request is per country level they sales order is received. For example, a plant received an order and then they register it into the central registration system per country level. The system is central per country level and then they send this order to the plants. Surapong: So this mean when the production plant received an orders the send it to central system in each country and then it will send the production plan back to appropriate plant again? Mebrate: It s only the system where they log in to the country level and they set it. It is the production level local guys who are make the ordering into the system but the system is central for all. They just come in and register their sale at different plant then the production request is send and then makes the production. For each production what is happening is I don t know whether you want to know like a production process where they put in raw material and then they grind it. Do you want to see that? Surapong: Yes of course. Mebrate: I ll pick it up later but basically the process is to give you the information. It starts by raw material and we put them in the milling they mix them and base on the type of product that we want to product because the product can be for example kind of crumble. It can be mashed just mix them and the grind material will be mixed and then taken out after all addition and the mixture. We also have product call pellet just making pellet out of it. If that s the case, Page 98

100 they mix it and they send it to the pellet press. I didn t mean the people but it s the production flows which lead to this pelletizing machine and then they make the pellet out of it. They sometime crush it again after they pellet it and that it can be crumble so we have mixer and then pelleted if necessary we have to pellet it or crush it to make it crumble Surapong: Do you have to dry it after coming out of the pellet press? Mebrate: OK: it losses some moisture after that for sure but that not just for drying but it s the process. I ll give you the detail later. Surapong: If I would like to ask you to rank the following factors, delivery lead time, demand volatility, production lead time, product customization, stock shortage, product seasonal demand. I want to ask you to rank the top three that caused the most problem within your company. I want to see which factors affect your company the most. Mebrate: Basically, the demand is not seasonal in most of the time. It grows up with the growth of the company together. Of course we consider it but it s not a big thing. The big thing I think it s the Stock shortage that really. When there is a shortage we also try to make a formulation using different raw material that s compensating with that. Surapong: So I think the first one will be Stock Shortage right? Mebrate: The stock shortage is the basic thing. Surapong: What about production lead time and delivery lead time? Mebrate: When we talk about this, it will happen when the production is reach your maximum capacity. And in that case we have a problem but I didn t see that this is the problem. Surapong: Let me show you this figure, this is based on the model that I formulated you say that most of the time the delivery strategy of your company is make to stock right? The model has been developed based on SCOR. I want to study the impact of factors on different CODP and which detail process that they are affected. This is from the supplier side and this from the customer point of view and in the middle is all the activities that happened within the Page 99

101 company. So according to the data that you mention earlier, the stock shortage? Do you have an idea which activities that are affected by this mentioned factor? Mebrate: Basically the production and also affect our cost, the cost is high when we have a shortage in raw material and we have to buy for more expensive prices. But we are calculated our cost basically on the raw material expense because the other cost usually are fixed almost, the production cost except the raw material which is going up and down that are very fluctuation which also affecting the European market as well. If I give you an example in Ethiopia, for example when the raw material get very expensive, when there s a shortage the raw material will be expensive. They have to buy within the local market which is more expensive and make the price of the product high and the customer staying away from buying a product from us. So sometime it really goes like this. You produce very good when you have local raw material and the customer are happy but sometime when our product go high, they stop buying from us. They will buy from local. When our price get back from its own position, they come back again which also affect the production and the whole process almost Surapong: Is there any specific process that affects the most like the planning process. Mebrate: Yes, the planning process is affected and basically the formulation, the formulation here. I told you. If you see on this stuff, you make a formulation here because the content of the product always have to be the same for the same product. Whether you have a good corn or less quality corn (Less protein content for example) but you still have to replace it with the same maize but the content of the product need to always be the same. We have to make reformulation how many percent of corn have to be included because the difference in raw material so that basically affect the base mix because they have to make a new formulation and they have to send this formulation downstream to the plant and for production. Whenever there s a change in raw material, it affects the base mix basically the formulation process Surapong: So I think the formulation process is in the Planning steps that dealing with the purchasing and other stuffs. Page 100

102 Mebrate: Yes, because after this is production already so this means is somewhere around the planning process. Of course, it affects this process as well, if you don t have raw material you have to change you planning to other kind of products That s is the basically best thing that we can do. Surapong: What about if we talk about make to stock situation? Do you think it s going to be the same? Mebrate: Yes of course it will affect the formulation. No matter whether you produce it for stock or produce it directly for order. Even you product it for stock, you know that you are going to sell it that why you are producing it. That mean you produce it base on demand because you have raw material shortage you don t say no that I don t want to produce it anymore. Basically you produce it and maybe it s affect your sale price or your margin is depending on what decision that you make. It can be like you say Ok there s a shortage in this item so let me produce other item for this week and then stock but that in case you don t have customer needs. Surapong: I also would like to know how you determine the delivery date for your customer. Mebrate: I depend on customer request, for example, they can request sometime I want it for tomorrow morning or I can also be like I want it for next week and then you make your own planning and sale and can be delivered it on Friday. So they give you a week sometime or may be sometime they might even say that my chicken are dying I want it for this afternoon. So you make your own planning depending on the request which order is in the urgent now. Human factors need to be there to evaluate this. Surapong: Do you have to consult with the production first before you giving the delivery date? Mebrate: Yes, especially the urgent stuff always has to be confirmed by the production. Surapong: What happened if the production scheduled are full and production is unable to make it? Mebrate: you just tell them to discuss with the customer to change the date of delivery to see how thing can go. It s just the human factor you can t may be sometime you can t say we deliver this one first then we deliver the next one which is not urgent later or sometime like that. If you have no way to move you have to talk to the customer. Page 101

103 Surapong: How do you reserve the inventory for incoming customer order? Like when you produce the product base on stock and you have to reserve the inventory for the incoming order for this customer how do you do it. Mebrate: Again it depends on the country situation. In the place where they produce for stock what they do is when they received an order they check whether it s available in the stock first. Because they produce for stock whether it s in stock they check. If it is in stock they say ok I ll deliver you and then they make a reservation in the system so it s reserved but if it s produce in the country where they work directly for customer order and they produce, they have to check with the production. That s when the given period is really short, for example if the customer order for tomorrow or for tonight something like that but if it s order for like next week. They usually register it later on usually it s possible to produce base on customer order for this long period of time. It depends on the length of the period of time that customer demanded. Surapong: How do you make sure that the products are available to promise (ATP) to customer? Like what process that are you use to dealing with it to make sure that the product is going to be there upon the customer request? Mebrate: It s always possible to produce according to the customer request because we know our customer and they give us the schedule for delivery usually. They give us like for example next week with different date of delivery and you know what it is going to be and also base on forecast. What is the possible product that needed base on the analysis of historic production? Two or three week or maybe two or three month they make a forecast how many days will produce and fore that forecast they also make the material available for production. It s usually possible to almost always possible to fulfill the customer request except their urgent request they make I want immediately and they order it one hour ago and I just say I want it for now. That s impossible. Surapong: I also would like to know whether you have an diagram of all the information flow of how these things are manage how production and sale are cooperate with each other and how the information are shared. Page 102

104 Mebrate: We have ordering trace, we have the sale order and of course the order have to always come from customers and the sale order are enter into a system and that sale order is send to the production department so it s from sale to the production. And then they come into the delivery places where they make delivery. They also make it for stock sometime they delivery it from the stock or sometime from the production. I think it s better to send you all these because our department we are also working processing integration department not only for the IT. It ll give you the data if you want. Surapong: I have a diagram for customer inquiry process for make to stock and make to order so this is make to stock. I want to know whether it s how it works in the real situation. When the order came. Mebrate: Like what you say when this is the order that we produce for customer. Yes this is how it works. We have a customer order. Surapong: when the order came into the company it s go to the order process and it goes into production itself or is it to pass sale and marketing? Mebrate: No. there s an order department dealing with the order not the sale department. Usually the sale department is doing the marketing stuff they have to communicate with the customer. In the sale department there s also sales guys who are appointed for different customer they are moving around base on region of course. They make agreement of course they even sometime agree the prices with the customer. Depending on the situation the quantities and then they send order to here. Even from our sale order place order for customer order into our ordering department. So the order department always received order. So this is order department. That they say ok we receive an order from farm or personal contract and then they check whether it s possible with the production department or for from stock and then they reply yes or no to the customers and then it register into the system. Surapong: The order department is it under sale department or it s the other department separated from sale. Mebrate: It s separate Page 103

105 Surapong: So the order come in and it check with the production and then they send the message back. Mebrate: the production guy when they requested and it is possible then it is yes or from the stock. Then we say yes we can produce it or yes we have it in the stock and base on that they start planning once it s possible the logistic department have to check the delivery schedule whether it s possible to deliver it at that period of time or not. Surapong: What if in case of this inventory is out do they have to consult with the product replenishment or something? How these things work within your company? Mebrate: You mean when there is no stock? If it s out of they also have to consult with the production whether it s to produce for tomorrow or not because we don t want to say no to the customer always. We try to produce to fulfill customer order as much as possible and if possible. But there s a case to say no for some reason but not that often. Surapong: What about production forecasting is it made based on sale history or it s done by third party? Mebrate: not base on the sale history but based on production history. It s can be different based on season if you take a tropical country like the African countries seasonally you have good grasses but some season you don t have grasses but when the season that you have good grass they just cut their local grass and they take our feed as well and they mix with grass in combination. In those periods, the demand might decrease. So we have to check for the season as well. That why we say the history production. Surapong: for the production forecasting are you use only history production or you also use the third party to forecast the demands. Mebrate: No, we are doing it on our own. We have some tools to forecast this kind of things like for example not only for production but also for purchasing raw material for example we are not just purchase thing. We have to see what would be the production and what do we need and based on that. Even the formulation is affected for example if you have 100 tons of some raw materials and you say you forecast you need 200 tones then the formulation department has to start using this 100 tones in an efficient way so that it will be efficient for the period that will Page 104

106 come or they have to inform the purchase department that they need to make a new purchase so things are always linked. Surapong: I don t know whether within your company do they also have assemble to order delivery strategy? Where parts of the product are produce and then it was store in a stock and after that you receive an order from the customer and you assemble the final product based on the customer order and the material that you are already stock. Mebrate: We produce pre-mix as well. We call them pre-mix and concentrate where we sell the product to customer who makes their own feed but they want to use our pre-mix concentrate for example and mix it with the local stuff that they want to produce with but we only produce in a few countries this semi-product. Surapong: but they mixed themselves right? You are not mixing it for them? Mebrate: Yes, they mixed themselves. We are just producing the semi product or the full product and then we sell it. Surapong: I want to know how sale department and production department are cooperated Mebrate: At what level you mean? Surapong: For daily production and also at higher level that show how these two department are cooperate because usually the sale and production they also have a problem with each other so I want to know how this two department cooperate within your company. Mebrate: If you asking me just for orders. I don t see any problem, between these departments. Surapong: usually, the production they want to produce as efficient as possible and the sale also want to sale as much as possible. Mebrate: when you producing more and selling more is in the interest of both of them for the production and the sales. The sale is not existed if there s no production and the production is also not existed if there s no sales. Page 105

107 Surapong: There s might be an incident which you have different variety of product and you have to change the production so the efficiency when you produce the product decreases. Mebrate: If like the case that you said if they have to change the product, It have to be considered with the formulation department who have to design, the request always come from the customer the customers want to have a product like a product which have five percent medication including with it, then our nutrition department have to advise the customer of how it should be done or it is not worth doing it. It can affect the animal theses kind of thing. They advised them with the sale guys of course. The nutrition with the sale guys advising the customer first and then they are convinced that they have to produce it then they communicate with the production how to do it and is it possible as well and they always have to agree, yes, there s no way the sale place a product which the production people don t know. So there s always a communication between the production and the sales and they are working for the same target. Surapong: Do you have an idea how the information and what kind of information are shared between the production and the sales department. Mebrate: For example I know, they shared the information about volume of sales and the transport cost they have to share. They have to know what transport cost will make what kind of effect on the production. The nutritional content they have to know both and have to share knowledge on the nutritional contents because the sale guys have to understand. What really will happen to the nutritional value of some for example some elements go down or up and also the production so they always communicated and see whether there s a change in product they have to discuss it. And they have to see what does it means to change for example protein from fifteen percent to sixteen percent what does it means then they always make an at least conversation so they are always communicating almost always. And it s the sale guys who are really close to the production that they always discuss before they make any kind of adjustment that I told you before they making any kind of negotiation with the customer to change the product or change something. They always have to discuss it with the production if it s possible. Surapong: For this process how long will it takes? Page 106

108 Mebrate: For example if they want to change their product and they want to make some additional stuff It s once the nutritional content is agreed if they accepted that yes they have to do it. It s just informing the formulation department that they have to produce it in such a way. They have to make the recipe in such a way and then the recipe is sent may be one day or less but the communication might take longer the communication between the sales the production and the customer when they make an agreement you know to produce that feed and also see the advantage and dis advantage of these kind of thing based on the nutrition. Surapong: How long it possibly take? 3-4 days or a week or? Mebrate: I can t really say anything about this it s really. It really depends on how urgent the request is sometime the request can be like they already received some product the customer. I think it will be good if you add five percent of something for me some medication for me because my chicken are not strong enough or may be for example I want this medication for my chicken because I have a problem with my chicken then they really make it quick so it really depend on what kind of request. Or they can even take for example if it s not really urgent they can even say can we have an appointment with a production guy and then make an appointment for a meeting or a discussion. If it is really an urgent is just only a phone call. They make a phone call they make agreement and they change the product so it depends on the urgent of the request of the customer. Surapong: When you are receiving the order from the sale person how do you derived the master plan from this? Do you collect all the order and then you derive the master plan at once or not? Mebrate: What we do normally, we received order doesn t matter it s for tomorrow or for one month. We received orders then we put all of it into our system the sale registration system. And then out of that sale registration system. We take order which are confirm. You know it can be sometime customer ordering you can I have ten tones of animal feed tomorrow but I ll confirm it later. It s register in the system but they are not confirmed it will be just open but for all the order which are confirmed we make a planning depending on the delivery date. We make a planning and that is usually a week planning, we make a weekly planning. For next week, we make a planning at the end of the week you make a planning for next week so you know what Page 107

109 to produce for the next week based on the urgency as well. Sometime you make a planning and you have an urgent request from somewhere then you have to change you planning again. But you make the planning always a week. Surapong: What about the capacity of your company how large your company can produce? Mebrate: Totally depends on kind of factory and also, ok, One is the factory, in some factory they are only worked eight hours, they are just working during the day, the working days but If they really have a request they also work during the evening so the capacity is still there for the plant to produce but the demand is not that high. It s not pushing you to produce to maximum limits. So still you have to check it back. For Holland for example they producing with the full capacity that they can. Surapong: What about the variance of the product you say that it s based on the customer order right? Mebrate: Usually yes. Surapong: the variant between each product for each customer are not the same. I means the nutrition that not the same based on the formulation on each customer upon the consumer request? Mebrate: yes Surapong: Do you have an idea how variance this is going to be. Mebrate: No not really variance. Like an I can give you an example we having a formula called. I let just take broiler breeder and you say you have standard product first. That s the standard product. This product is always the same whether it is in Holland or in Poland it will always be the same. Let s say the farmer from South Africa asks for the medication of five percent of something and you just added this on top of the product and that is the difference. It s not a really big difference even five percent is too much they usually say one percent difference or something. Usually it is the same kind of feed for the same products. Surapong: For most of the time are the consumer using the standard product or are they willing to use the modified based on their own. Page 108

110 Mebrate: In South Africa they usually using the standard special they push it to customize feed we called it. They want to customize it for themselves. They customize it themselves for each customer. If you take other country, it s almost always using the standard product. Surapong: In South Africa that you mentioned about is it going to be any problem about product customization over there? Mebrate: The process is always the problem. You know if you work in the system of similar kind of application and you have to make a customization for them because you have to use the recipe plus something and it s not like when I m telling you now it s easy and everything is related inside. It can give you a lot of time for customizing this and it s not easy to manage it because instead of one product you can have may be 1000 customization. For three product you may have like really a lot of items. So it s not going to be easy but we do it. Surapong: So you are modifying the recipe at the holding level that you mentioned do you have to modify the machine for the production process? Mebrate: No, the production process is the same. Instead of taking it out at the end you just add something within the mixture just additional ingredient. The process is exactly the same you just add additional ingredient into it so that you have the medication in it. Surapong: So usually in the Netherlands and in Europe they are using the standard feed? Mebrate: Yes, they are using the standard. And also sometime for the regulation that you can t add anything in Europe and it s possible to add in Africa or you know these kind of things. It depends on the regulation. Surapong: How do you manage the bill of material (BOM) for most products. Mebrate: The basic recipe always the same but as I told you the basic recipe might change based on the raw material the content is the same. If you say we have ten percent protein broiler breeder feeds. It s really chose to ten percent protein but the material from which It s made might be different depending on the raw material you have. You can use corn for example or maize I don t know how you call it you use maize and soya let say for the first item and on the next Page 109

111 item you say the same content but you add bread meal but the content is the same but the way you made it might be different depending on the raw material that are available. The availability. But what they do at the local is for the standards customize feed. Ok this is the standard special and they plus one percent of something. This is a customization. Surapong: and how do you manage the material and resource planning of your company. Mebrate: We have a purchasing department doing that in contact with the production department of course and always in contact with. The purchase planning is usually depended on the seasonal purchase and also timely in demand purchases. The yearly purchase is seasonal purchase we purchase the raw material when they are available and we stock them and some raw material you have might to buy them during the production. Not exactly during the production but not seasonally so the yearly purchase is based on forecast usually. We know how much we will to produce and how much raw material we are will need for next year with also plus and minus error. For some time like what I have told you we have plus and minus and we run out of stock and this make you don t always have to wait for planning you can purchase them immediately for the current need. It s depend on whether it s a long term planning or it s a short term the purchase department has to communicate. Surapong: but if like most of the time for the product that always use like maize? Mebrate: Always seasonally bought. Surapong: When you buy a product to store is there a lost during storage? The spoilage of the maize that you store usually accounted for how many percent of the whole product. Mebrate: We try to avoid that kind of problem. We use different pellet to not just put the raw material on the ground we just put them on the pellet so that and not any of it closes to the wall. We have our own warehouse management which use to monitor damage. Surapong: but you are not stocking the raw material in the silo right? Mebrate: We also store it in silo for some product we store on the ground on the pellet. Page 110

112 Surapong: Like what product you store in the silo. Mebrate: for example if you ask me about Holland. We store it in silos because we have big silo but if I take you to any of the African country what they do is they buy in bags and then they store it on the pellet. So they use them on the pellet and first in first out usually. We use the first in first out kind of material usage. But we lose the moisture content during the storage and this also affects the nutritional value and when you have ten percent of moisture it s totally different so we the first in first out for that. Surapong: I also want to know how the orders have been assign to the capacity. How do you manage that? Mebrate: Ok. In some plant when we receive order for example we might not receive a batch. The batch can produce 2.5 tones one batch. If you ask for example I want to1.8 tones we will not produce this because it s not possible for us to produce it in one batch and it will be too costly. Instead of producing 2.5 you produce only 1.8 or 0.9 or this kind of thing. We make this kind of planning so the customer already know how to order it and also depend on their size as well. If they buy a bag or a pack item they can just buy you can sell 1.5 bag of feed you just sell one bag two bags or three bags depend. We sell product in bag or we sell the product in bulk. When the truck came and you load it in a truck so not just bag but you load it in a truck the bulk so we the capacity is different from plant to plant some plant can only produce two point five so I don t know some might be able to produce to three or more. Surapong: Let come back to this diagram again. I really want to know do you have kind of very specific process that caused the most problem with in you company, like form sale or in production. Mebrate: OK, for processing we might have some communication issue while working in the system we might have some issue that people might not confirmed order or this kind of things but it s really technical stuff. In the processes I didn t see any problem. I don t know what kind of problem you mention. Surapong: Like when the orders come, the cooperation between the sale and the production and the checking of the availability of the inventory something like that? Page 111

113 Mebrate: It s sometime a problem to make sure that all raw materials are available. In some country where you don t have a good technology, the problem that we have is that they might not even know that it s out of stock for some raw material. When the customer orders something and they might say oh we don t have this raw material anymore to produce so then they have a problem that they have to communicate with the formulation department to make a new formula due to the shortage and It s happened only where there s no sophisticated software kind of application to know the online stock because they only know their stock within a week or two. They have to count it and do a lot of thing and everything is manual but in the other countries they know already you can go and see in ERP system what stock they have for each raw material which is not a problem. That s can be mentioned that the problem may be the raw material and the communication that can be a problem. Surapong: What about the logistics are you using the third party or you are doing it yourselves. Mebrate: We use our own and also third party. Mostly for delivery we use our truck delivery feed but for purchasing item usually I think third party logistics. The third party logistics or the supplier themselves just deliver it whether it s a third party or not. Some time we have to rent a truck to bring raw material for us, usually for the feed is with our own truck if we have to deliver them. Surapong: If we look for the process for make to stock and make to order do you see any kind of difference in term of problem that can happen within the process? Mebrate: Making for order for customer is the best way for me. In my opinion because you just produce it for your customer so you don t have to stock it and you know your demand but that will also have the problem that may be they sometime ask you an very urgent question and urgent supply. You really have to make some way out to deliver the feed but on the other side when you make for stock you have the product in the stock but there s also many disadvantages. Surapong: It costs a lot of money. Mebrate: Yes. Page 112

114 Surapong: If you see the difference between this two that do you think is the main differences? Like the difference for the process of how you manage it. Mebrate: You me the two way of receiving orders. Surapong: Yes. Mebrate: I think, the basic difference in my opinion is if you produce it for stocks in a plant where you don t have too many demand that of course you produce it for stock and you sell it and also you don t have a consistent electric power or sometime you might have a power failure or something like that or machine break down if all of these thing happened of course making the product to stock is better which you can still sale even you production go down for some reasons and also the raw material. You may not say because of raw material I can t deliver it. You have it in the stock and you have to make raw material available in front and for countries where they produce to their maximum capacities. Its advantage to produce to customer order you may not have time to make the produce the product to stock. You may be busy producing according to customer order. Surapong: If you say how long will it take for a normal product to be produce like from the receiving order until you deliver to them. I want to know how long this process is. Mebrate: They can order it a week ago and you can receive it today or tomorrow because they process itself take only per ton as I told you a batch can produce 2.5 tones and it s also depend on the capacity of the type of the machine we have. Some machine in one hour they can produce a lot of tones and there are some that can produce we few tones. So I don t how long it takes. Surapong: There s a measurement from the point where they order are received and the point where the company is being able to deliver it. Mebrate: It s not in days like I told you for example per order and per delivery date they ask so if he order it one month ago and he want it for today. Surapong: But the production lead time of your product is short right? Mebrate: It s short really short. Page 113

115 Surapong: and how long this production process might take from the point where the raw materials go in and later the product is come out how long this process usually takes? Mebrate: In an hour time you can produce let me just guess the number of the capacity you can produce like 2.5 tones an hour in a really small factory. It s depending on how many tones that you want to have and how many batch that you have to produce. The production lead time is not the problem and when they order it and if you have really a lot of order to produce and when they say I want it now it s a problem. It s not the production lead time itself. Surapong: Is there anything you want to add up since my interview almost comes to an end Mebrate: I think it would be nice to look at the figure that I ve prepared for you. Mebrate: Purchase department have to check first if whether we have in contract. If we have a contract or not, in case they don t have a contract they make a new contract. Then they negotiate with the customer and send it to delivery system so that they can communicate we call it MILES 4 but that is only the application to register the purchase order. If they say that it s not possible to deliver it in the given time to make a contract then what they do is to inform the factory to buy some amount of item for their urgent need so the factory will be just buying and use it. Surapong: Did the production have to consult with the purchasing department. Mebrate: Yes, they can t make a contract so they say ok you can purchase this raw material for needed quantity. You can purchase it from local market and this is the price. They also send the price. They know what the price is and then they know the quality this guy, the production guy. They received that and make a purchase for the urgent need but that is only few raw materials that is not like corn or the raw material that really use in bulk, in big amount. Surapong: What kind of product that these products can be? Mebrate: Pre-mix for example sometime usually we use small amount but you may need it very urgently so I have to be purchase but if it is possible to make a contract then usually they make a contract for six months for example six months consumption or a year consumption depending on what kind of raw material it is. If it is a possibility they always make a contract. In that contract, they divide into different delivery describe which produce we are taking. As I told you in the beginning, the logistics department has to check always Page 114

116 if it is available in the contract. The contract that made by the purchase department the logistics can see how much we can receive from the given supplier. Ok we have this quantity from this supplier so we can deliver it tomorrow or something like that depending on the schedule. The factory received an order if it is not possible to make a new contract and they process it and the supplier will receive an order from this or making the contract with the purchase department if it is a big quantity. Then the rest of the process is just checking the receipt and the way they process the order and the documentation and I can sent you this. Surapong: This is the relationship between the factory and the supplier do you also have this with the customer as well? Mebrate: That what I would look for I ll later send you. Surapong: Since I do a lot of study and they say for the purchasing point for make to order and make to stock they both are the same. The differences are more like the point between the factories with the customer point of view. Mebrate: I ll send you the PDF of it to make it clear for you. This MILAS 4 is just the registration application. The other I think it s written in words. This S400 is also an application to register sale and everything it s what I told you there s an application which is at the center per country and everyone communicate with this center application. Even application communicate with this center application. This MILAS4 is always communicating with this. This is an ERP system. Do you know ERP system? The ERP system is depend on the countries. Different countries have different ERP system. This is for just Holland. I don t see other stuffs. Then send to accounting and the rest of the process. Ok I ll give you this. The file that I ve given you is only in Holland. It s different for different countries. Mebrate: This is all application OK. This is the overall structure, we include the ERP system and human resource system we have data warehouses like all app where we collect data from each application into central location and this is the PCS the production control system and this is the laboratory information management system where we manage our inventory just quality control. So you can see clearly this is the formulation. This is made for the head quarter of our company the green one. This is the actually the process flow let me just show you once. I have the presentation last time and I made it for that and it s still reusable. From the previous one do you see how the stuff flows? We the information flow coming from the best mixed recipe and coming to this application and this application send to the countries and then they distribute to each plant the recipe and then the plant, we have an application at the plant level which is automatic. They just send it from the central and everything is synchronized and the production Page 115

117 control we received it from here to here. Then he knows when there s an order he can which recipe he should select because you just select from one recipe that send from here. Then, he start producing based on that quantity five percent of corn, five percent of soya and so on. That s the recipe huh! Then it send the result to the production result back up because when you produce even you say fifty percent of corn you might not produce fifty percent of corn because there s always discrepancies like forty nine percent or forty nine point five percent or something like that. Whatever they use is just coming up, the result of what they are using, the consumption report is coming up so you now know how many raw material are used you know what is produce and then you send that information here and this information is send to the country back to holding. This is basically how the process flow. We have this ERP system for the registration of sale registration of purchases and this kind of thing even we don t register them directly here the application are communicating with this to make it central. Like Holland for example, MILAS 4 for purchase administration. But it s communicating with the ERP system before it s going anywhere. So it s here where every application will communicate and make aggregate report upward to so we have all the information including the lab information where they check the quality of the product and the quality of raw material and they send the information back and also to here. So I m just going to show you because you are interested in the production so I ll show you this part. How we communicated between the countries. Here s where we have the recipe the sale order and the purchase order. This is the important thing for you and the production request. The rest ignore them. The purchase order, the sale order and we also have internal order for stock production. This might produce based on stock we might produce for stock base on order or for stock. So if we say sale order (SO) we are saying for customer and when we say internal order (IO) we produce for stock so we produce both for stock and customer order so we sent this information and production requested what to produce to the plant as I told you so they are coming here we have this information and this plant will have to send the information to the production then, the production will make a production and make stock calculation how many batch is produced what is the execution report and everything it sent to here. It also include the sample analysis and send to here and then it communicate with the analysis application that we have the laboratory with something nutrient protein fat and this kind of thing. In percentage in milligram or this kind of things. They send the result back to here and the result is now up and combine with the sale order releases with the delivery because we produce now received the recipe, we make a production and we analyze it the n we have to deliver it to the customer. When we deliver it our truck passing by taking when everything is completed we have the reported that we want and this report not everything is sent but you know the consolidated kind of report. You will see from place to place there are different kind of item is moving. So what we sent is the Page 116

118 production lot report, consolidated production lot report and delivery lot or sometime call them POR or purchase order receipt. We receive the purchase or SOR is sale order release. So this are sent to here you can see now the sale order and all of this information will go back to the Holding level which I m not going to show you. Ok it s communicating with SOI. Do you remember the one with a big box with all the architecture with the ERP system and everything. I m just take and make it smaller so it isn t take too much space. Just call it ERP because the ERP have to calculate the consumption and everything based on the lot report. It makes the consumption report and also the financial statement and invoices everything is produce here. This will make like the consumption report based on this they make the sale forecast, the production forecast, price forecast even the price are forecast and this are sent to the country again not everything just the raw material consumption, sale and production forecast and price forecast. These are sent to the holding. This is basically how the processes go. We sent the information back down and we sent the information back. The order handling is under the ERP system and the ERP system processes both the purchases and the sale. That are usually in this or the application which is link to the ERP system will register the stuff and later it s linked to this one and that s how it goes. Hope this helps. Surapong: Yes, it helps a lot. Mebrate: You can always ask if you have a question. So right now I understand what you really looking for so I can ask people and gather this all information for you and I ll sent you all these stuff. Surapong: Thank you for you cooperation and Thank you again for your help. Page 117

119 APPENDIX III: SYSTEM INTEGRATION STRUCTURE Page 118