PRODUCTION OPERATING SYSTEMS: A CASE STUDY OF MAKE-TO-STOCK AND MAKE-TO- ORDER SYSTEM

Transcription

1 PRODUCTION OPERATING SYSTEMS: A CASE STUDY OF MAKE-TO-STOCK AND MAKE-TO- ORDER SYSTEM NUR NADIA RAMADHANI BINTI MD YUSOFF B UNIVERSITI TEKNIKAL MALAYSIA MELAKA 2012

2 UNIVERSITI TEKNIKAL MALAYSIA MELAKA PRODUCTION OPERATING SYSTEMS: A CASE STUDY OF MAKE-TO-STOCK AND MAKE-TO-ORDER SYSTEM This report submitted in accordance with requirement of the Universiti Teknikal Malaysia Melaka (UTeM) for the Bachelor Degree of Manufacturing Engineering (Manufacturing Management) (Hons.) by NUR NADIA RAMADHANI BINTI MD YUSOFF B FACULTY OF MANUFACTURING ENGINEERING 2012

3 UNIVERSITI TEKNIKAL MALAYSIA MELAKA BORANG PENGESAHAN STATUS LAPORAN PROJEK SARJANA MUDA TAJUK: Production Operating Systems: A case Study of Make-To-Stock and Make-To-Order system SESI PENGAJIAN: 2011/12 Semester 2 Saya NUR NADIA RAMADHANI BINTI MD YUSOFF mengaku membenarkan Laporan PSM ini disimpan di Perpustakaan Universiti Teknikal Malaysia Melaka (UTeM) dengan syarat-syarat kegunaan seperti berikut: 1. Laporan PSM adalah hak milik Universiti Teknikal Malaysia Melaka dan penulis. 2. Perpustakaan Universiti Teknikal Malaysia Melaka dibenarkan membuat salinan untuk tujuan pengajian sahaja dengan izin penulis. 3. Perpustakaan dibenarkan membuat salinan laporan PSM ini sebagai bahan pertukaran antara institusi pengajian tinggi. 4. **Sila tandakan ( ) SULIT TERHAD TIDAK TERHAD (Mengandungi maklumat yang berdarjah keselamatan atau kepentingan Malaysiasebagaimana yang termaktub dalam AKTA RAHSIA RASMI 1972) (Mengandungi maklumat TERHAD yang telah ditentukan oleh organisasi/badan di mana penyelidikan dijalankan) Disahkan oleh: Alamat Tetap: Lot 11, Kg Telok Chekering Jln Kuala Besar Kota Bharu, Kelantan Cop Rasmi: Tarikh: Tarikh: ** Jika Laporan PSM ini SULIT atau TERHAD, sila lampirkan surat daripada pihak berkuasa/organisasi berkenaan dengan menyatakan sekali sebab dan tempoh laporan PSM ini perlu dikelaskan sebagai SULIT atau TERHAD.

4 DECLARATION I hereby, declared this report entitled Production Operating Systems: A Case Study of Make-to-Stock and Make-to-Order System is the results of my own research except as cited in references. Signature :. Author s Name : Nur Nadia Ramadhani Binti Md Yusoff Date :

5 APPROVAL This report is submitted to the Faculty of Manufacturing Engineering of UTeM as a partial fulfillment of the requirements for the degree of Bachelor of Manufacturing Engineering (Manufacturing Management) (Hons.). The member of the supervisory is as follow:

6 ABSTRAK Lebihan kapasiti dan kekurangan kapasiti adalah sumber kepada system pengeluaran yang tidak sihat di dalam industri. Keseimbangan antara permintaan dan bekalan adalah sangat penting untuk memastikan bekalan produk berterusan kepada pelanggan. Sistem operasi pengeluaran digunakan untuk mengurangkan masalah ketidakseimbangan dalam pengeluaran. Tujuan kajian ini adalah untuk menentukan hubungan di antara MTO and MTS. Empat objektif telah ditetapkan untuk menentukan hubungan antara kedua-dua sistem tersebut; (i) Untuk mengenalpasti ciri-ciri MTO dan MTS; (ii) Untuk mengenalpasti kesan MTO dan MTS kepada kualiti produk; (iii) Untuk memperjelaskan kesan kepelbagaian produk kepada kestabilan pengeluaran; (iv) Untuk menganalisis faktor yang menyumbang kepada kenaikan paras inventori. Keputusan kajian menunjukkan sistem MTO digunakan dalam produk pilihan dan sistem MTS digunakan untuk produk yang telah ditetapkan dan produk asas. Sistem MTO memerlukan lebih banyak pembekal berbanding dengan sistem MTS. Berbanding dengan sistem MTS, sistem MTO memberikan kesan kepada kualiti produk yang rendah. Di samping itu, kepelbagaian produk tidak menjejaskan kestabilan pengeluaran. Dengan menganalisis faktor-faktor yang menyumbang kepada kenaikan paras inventori, pelanggan semasa adalah faktor kritikal yang meyumbang kepada kenaikan tersebut. Kesimpulannya, pemilihan antara MTO dan MTS adalah sangat penting, ia akan memberi kesan kepada keseimbangan antara permintaan dan bekalan. Tambahan pula, pemilihan sistem operasi yang betul akan mengurangkan kos inventori dan berpotensi kehilangan kesetiaan pelanggan. i

7 ABSTRACT Overcapacity and shortage capacity are the sources of unhealthy production systems in industries. A balance between the demand and supply is very important to ensure the continuous supply of the product to the customers. Make-to-order (MTO) and Make-to-stock (MTS) production operation systems are used to reduce the imbalance problem in the production. The aim of the study is to determine the relationship between Make-to-order (MTO) and Make-to-stock (MTS). Four objectives have been set to determine the relationship between both these systems; (i) to identify the characteristics of MTO and MTS; (ii) to identify the effect of MTO and MTS to product quality; (iii) to clarify the effect of product variety to production stability; (iv) to analyze the critical factor that contributes to the increment of the inventory level. Result of case study shows that MTO system is more applicable for customized products while MTS system for mass production product. MTO system requires more suppliers than MTS system. Compared to MTS production operating system, MTO system will give the poor quality of product. In addition, the variety of product does not affect the production stability. By analyzing the factors contributes to the increment in the inventory level, the current customers is the critical factor contributes to that. In conclusion, selection between MTO and MTS is very important on it will affect to the balance between demand and supply. Furthermore, the right choose of operation system will reduce inventory cost and potential of losing customer loyalty. ii

8 DEDICATION To my beloved father, mother and friends, thank you for the support and encouragement. iii

9 ACKNOWLEDGEMENT First and foremost, I thank the Almighty God for being my side throughout. I wish to extend my sincere thanks to Dr. Zuhriah binti Ebrahim as my supervisor for helping and always guiding me throughout the development of the study. I would to thank to personnel from industries; Mr. Kamrul bin Abdul Rahman, Mr. Abd, Rahman bin Rahmat and Mr. Wahid bin Rahmat for helping me with outstanding information while conducting the observation, interview and getting the data in the factory. I am also grateful thank to my colleagues for the creative thought and valuable discussion about my study. Also not forget to the Faculty of Manufacturing Engineering, Universiti Teknikal Malaysia Melaka management for allowing and giving me a chance to gain useful knowledge and experiences. In addition, I am especially indebted to my parents for their love, encouragement and support throughout the development of the study. iv

10 TABLE OF CONTENT Content Page No Abstrak Abstract Dedication Acknowledgement Table of Content List of Tables List of Figures List Abbreviations, Symbols and Nomenclatures i ii iii iv v ix x xii CHAPTER 1: INTRODUCTION Preliminary Background of the study Problem statement The important of study Aim and Objectives Scope Company Background Company A Product Process flow Company B Product Process flow Expected Outcome 10 CHAPTER 2: LITERATURE REVIEW Preliminary Production Operation System 13 v

11 Content Page No Make-to-order (MTO) Make-to-stock (MTS) Classification of Make-to-order (MTO) and Make-to-stock (MTS) Decision Making Tools Step for Decision Making of MTO and MTS Factors to consider When Evaluating the Prospect of MTO The differences of MTO and MTS in terms of Customer Relationship Problems in MTO and MTS Main operation Issues in MTO and MTS Capacity Planning Inventory Planning Demand Forecasting Summary 30 CHAPTER 3: METHODOLOGY Preliminary Plan and activities Methodology Stage 1: Preliminary study Stage 2: Identifying the effect of MTO and MTS in product quality Stage 3: Determination of production stability index Stage 4: Identifying the factors contribute to the increments of inventory level Case study Sample size and limitation Data collection Data analysis Summary 48 vi

12 Content Page No CHAPTER 4: RESULT AND DISCUSSION Preliminary Characteristics of MTO and MTS Result Discussion Effect of MTO and MTS to product quality Result Discussion Production Stability Index Result Discussion Factor contribute to the increments of the inventory level Result Suppliers Customers Order placement Discussion Summary 76 CHAPTER 5: CONCLUSION AND RECOMMENDATION Preliminary Conclusion Recommendation 78 REFERENCES 79 APPENDICES Appendix A Gantt chart for study Appendix B Interview Questions Appendix C The customer portion Appendix D The defect of the product vii

13 Appendix E Appendix F Production Stability Index The factors contribute to the increment of the inventory viii

14 LIST OF TABLES Content Page No CHAPTER Product of Company A 7 CHAPTER Factors in evaluating the prospect of MTO (Soman et al., 2005) Types of production strategies characteristics based on customers relationship (Schragenheim et al., 2009) The problems occur in MTO-MTS (Lonnie Wilson, 1990) Main operation issues in MTO and MTS (Soman et al., 2004) 26 CHAPTER The degree of product customization (Amaro et al., 1999) The quantitative and qualitative data. 45 CHAPTER Result for identifying MTO/MTS using the proposed method by (Amaro et al., 1999) Result for identifying MTO/MTS using interview method Characteristics of MTO and MTS The characteristics of MTO and MTS customers The frequency of the defects happened The product variety of Company A The product variety of Company B The number of variety and the frequency of the result in production stability The criteria of the factors The quantity of the suppliers The quantity of customers The result of order placement 73 ix

15 LIST OF FIGURES Contents Page No CHAPTER Capacity imbalance at Company A Capacity imbalance at Company B Process flow of Product X Process flow of Product Y Manufacturing process flow of product at Company B 11 CHAPTER Architecture of MTO-MTS decision aid (Soman et al, 2005) Hierarchical to MTO-MTS problem (Soman et al) 21 CHAPTER The planning of the study Activities in phase 1 and Activities in stage Flow chart of activities in stage Activities in stage Flow chart of activities in stage Activities in stage Flow chart of activities in stage Activities in stage Flow chart activities for stage 4 43 CHAPTER Flow system of MTO operation Flow system of MTS operation The portion of customers for Product L 58 x

16 Content Page No 4.4 Defects for Product L The portion of customers for Product M Defects for Product M The portion of customers for Product N Defects for Product N The portion of customers for Product X Defects for Product X The portion of customers for Product Y Defects for Product Y Production Stability Index Factors contribute to the increment of inventory level The percentages of factors contribute to the increments of inventory level 76 xi

17 LIST OF ABBREVIATIONS, SYMBOLS AND NOMENCLATURE MTO - Make-to-Order MTS - Make-to-Stock FCFS First Come First Serve CODP Customer Order Decoupling Point PSM Projek Sarjana Muda xii

18 CHAPTER 1 INTRODUCTION 1.0 Preliminary This chapter presents the overall review of the study including the background of the study, problem statement and objectives of the study. Afterward, the background of companies and products are also described. Lastly, the expected outcome is explained in this chapter. 1.1 Background of the Study Make-to-order (MTO) and Make-to-stock (MTS) are the production operation systems that are used in the industries. Usually, overcapacity and capacity shortage are occurred during the production system and will affect the balancing of the demand supply of the product. In order to reduce imbalance problem in the production stability, MTO and MTO strategies were applied the industries. MTO is the production operation system geared to satisfy the customer requirement only upon receiving a customer s order. Usually, MTO offers a high variety of customer specific and more expensive product. The production plans of MTO are ordering execution and the performance focused on the order such as the average, response time and average order delay. During MTO production operation, the competitive priority is shorter delivery lead time. This priority will lead the company in reducing the delivery 1

19 time and will be the just in time (JIT) in delivering the product to the customer. MTO also have the main operational issues such as capacity planning, order acceptance and rejection and attaining high due date adherence. MTS is the production system where the industries make the product in stock. This MTS production operation strategy will cause the problem in the inventory. The MTS s products have low variablity and not expensive product. MTS is always planning to meet the demand focus on anticipating the demand. Usually, MTS measured the performance through the product focused where the line item fill rate and the average inventory level will be measured. The competitive priority of the MTS is higher fill rate and the main operation issues are inventory planning, lot size determination and the demand forecasting. Kingsman et al. (1996), Vollman et al. (1997) and Silver et al. (1998) had widely discussed the issues in pure MTO and MTS operation production. It is important to recognize the operation production systems in pure MTO and pure MTS strategy to know the suitable system to undergo in the operation production system. In deciding the suitable the system which will go through to the production system, it depends on the specific things such as the process of the product, the material and the capacity of the product. Sometimes, the combined MTO and MTS are necessary in the production situation because of different strategy contexts in which the products are produced. According to Soman et al. (2005), they postulated that mix of MTO and MTS products their interaction with the limited shared capacity open interesting possibilities as well as problem for production planning. For example, on the other hands, MTS product might be manufactured to fill capacity in periods of low demand for MTO items bit on the other hands, we do not fully understand these interaction to answer the question such as how much inventory should kept or hoe due dates should be kept or how due dates should be set in the combined MTO and MTS production situation. 2

20 1.2 Problem Statement Usually, the balance between demand and supply is very important to ensure the continuous supply of products to customers. But sometimes the imbalance of demand and supply occur the production where there might be a shortages or excess in capacity. Figure 1.1 shows capacity imbalance occurred at Company A. The shortage capacity was occurred at that company. This is due to high demand quantity than the production output. Figure 1.2 presents capacity imbalance occurred at Company B. The shortage capacity and overcapacity occurred at this company. The excess capacity occurred because of the production outputs is more than the demand quantity. In the case of shortage capacity, the workers productivity will be affected as they rush to replenish the product to meet the customer demand. Working in a rush situation would affects the workers performance. This will lead to low productivity. In the case of overcapacity, it means that the company holds a lot of waste. Since the waste has increased, at the same time the cost also increases. The overcapacity of products also requires more space for the inventory. In this regard the MTO and MTS production operating system were used. By doing so, the industries can reduce and overcome this imbalance problem from happening again. Using MTO and MTS systems reduces the inventory s cost while at the same time gain the profit for the company (Rajagopalan, 2002). MTO and MTS systems required to determine the capacity during the planning horizon, order acceptance and rejection policies (Rafiei and Rabbani, 2010). 3

21 700 PRODUCT X Shortage capacity BOXES OF PRODUCT demand quantity production output sales of product 0 May- 11 june july august sept okt nov dec MONTH Figure 1.1: Capacity imbalance occurred at Company A PRODUCT M Shortage capacity Overcapacity DRUMS demand quantity production outputs sale of products 0 May-11 June July August Sept Oct Nov Dec MONTH Figure 1.2: Capacity imbalance occurred at Company B. 4

22 1.3 The important of Study The importance of the study is to determine the characteristics of the MTO and MTS operation system that could give impact to product variable, production stability and product quality. The critical factors that contribute to the increment inventory level could be determined after. 1.4 Aim and Objectives The aim of the study is to determine the relationship between Make-to-order (MTO) and Make-to-stock (MTS). Basically, the main objectives in accomplishing this study are shown below: (a) To identify the characteristics of Make-to-Order (MTO) and Make-to-Stock (MTS) (b) To identify the effect of MTO and MTS to product quality. (c) To clarify the effect of product variety to production stability. (d) To analyze the critical factors contribute to the increment of inventory level. 1.5 Scope Case study at two Micro SME companies in Chemical industry; (i) Company A that produces chemical organic, (ii) Company B that produces the cleaning chemical. Both of companies have similar manufacturing process. The study focuses on: (a) Changes in demand quantity. (b) Delivery time. (c) Inventory control. (d) Advantages and disadvantages of MTO and MTS. 5

23 1.6 Company Background Company A Establish in November 2000, the firm started its business operation in mid the year and the office of management work and production activities is at Batu Berendam, Melaka. This company produces the three types of the fertilizer which be explained in Table Product Company A produces three types of product such as Product X, Product Y and Product Z. Table 1.1 is show the type and description of each product. 6

24 Table 1.1: Product of Company A. Product Product X Product Y Product Z Description Product X is one of the excllent liquid fertilizer product in the market. It product through adriculture technology profesional, which based on the biotechnology. This product are able for weaken growth for various type of weeds such as grass. Product Y is multi-purpose liquid fertilizer. It contains all the nutrients that are well balanced and specially formulated from organic and non- organic substances that are suitable for all types of plants. This fertilizer is easy to dispense and efficient because by spraying it onto the stem or leaves. So, it is practically to use this fertilizer as it helps to promote growth for a continuous harvest and also a solution for crops grown in an unfertile land. Product Z is organic fertilizer produce from the plant and choice herbs have been concluded special technology decomposed. This fertilizer will help to provide nutrients to crop by consistent, act fast and suitable to be used to variety type of crop. 7