THE IMPORTANCE OF LEAN MANUFACTURING PRACTICES. TOWARDS ENHANCING SMEs PRODUCTIVITY NURUL FARHANAH BINTI CHE DERAMAN

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1 THE IMPORTANCE OF LEAN MANUFACTURING PRACTICES TOWARDS ENHANCING SMEs PRODUCTIVITY NURUL FARHANAH BINTI CHE DERAMAN UNIVERSITI TEKNIKAL MALAYSIA MELAKA

2 THE IMPORTANCE OF LEAN MANUFACTURING PRACTICES TOWARDS ENHANCING SMEs PRODUCTIVITY NURUL FARHANAH BINTI CHE DERAMAN This report submitted in partial fulfillment of the requirements for the award of Bachelor Technopreneurship with honours. Faculty of Technology Management and Technopreneurship Universiti Teknikal Malaysia Melaka 16 JUNE 2017

3 DECLARATION I hereby declare that I have read this thesis and in my opinion this thesis is sufficient in terms of scope and quality for the award of the Bachelor Degree of Technopreneurship with Honour. Signature Name of Supervisor : : MS. JOHANNA ABDULLAH JAAFAR Date : 16 JUNE 2017 Signature Name of Panel :. : DR. FAM SOO FEN Date : 16 JUNE 2017

4 ii DECLARATION I hereby declare that the work in this project is my own except for the quotations and summaries which have been duly acknowledged. The project has not been accepted for any other degree and is not concurrently submitted for award of other degree. Signature Name :. : NURUL FARHANAH BINTI CHE DERAMAN Date : 16 JUNE 2017

5 iii DEDICATION I would like to dedicated this thesis to my beloved father, Che Deraman Bin Che Wil and my lovely mother, Sobariah Binti Ab Rahman. I am also would like to dedicated this thesis to my siblings and friends. There are no doubt in my mind that without their continued support and counsel, I could not have completed this process. Last but not least to my respectful supervisor, Ms. Johanna Binti Abdullah Jaafar who always try her best in guiding me throughout completion of my final year project.

6 iv ACKNOWLEDGEMENT In the name of Allah, Most Beneficient and Most Merciful. Praise to Allah S.W.T for providing me with great health, strength and emotional support in completing this proposal for the title of The Importance of Lean Manufacturing Practices towards enhancing SMEs productivity. A project proposal is an assessment of one s great skill and aptitude. One needs to devote in immense patience, time and brains for the compilation of one such rewarding outcome of true efforts. I am indeed thankful to honourable supervisor, Ms. Johanna Binti Abdullah Jaafar who had been a constant source of inspiration and extensive guidance, cooperation and support. I also would like to thank Dr. Fam Soo Fen who is the panel that contribute a lot in guidance of completing my final year project paper and let us gain many knowledge in conducting future research. Very special thanks to my family and my friends who helped me prepare this proposal and gave me full support in giving useful information regarding to this undergraduate final year project paper. Last but not least, I am grateful to University Teknikal Malaysia Melaka (UTeM) especially to Faculty of Technology Management and Technopreneurship administration, city campus library and staff of the centre of the postgraduate studies who was helped me in many different ways to complete this undergraduate final project paper. Thank you very much.

7 v ABSTRACT Elimination of waste is the process of getting rid of something, whether it s waste, errors, or the competition. It is one of the most effective ways to increase the profitability of any business. Lack of understanding of the concept lean manufacturing and its principles and some of employees are reluctant to change were problems that facing by Small to medium-sized enterprises (SMEs). Besides, most of the industries especially SMEs are facing with seven types of waste, while costly and time consuming also become one of the problem among SMEs to apply lean. This study aimed to investigated the importance of lean manufacturing practices towards enhancing SMEs productivity. The objective of this study was specifically; i) To study the importance of Lean Manufacturing practices among SMEs. ii) To determine the Lean Manufacturing practices that could enhance SMEs productivity. iii) To examine the relationship between the Lean Manufacturing practices and SMEs productivity. A descriptive survey research was used to get the primary data by using questionnaire. Respondents were encompassed of 52 individuals who were management staff in selected SMEs through the states of Kelantan, Terengganu and Pahang. It showed there is a positive relationship between lean manufacturing practices and SMEs productivity in this study. The data analyzed using descriptive, regression analyses and correlation analyses found that the coefficient of determination R² = This suggests the SMEs productivity (Y) is influenced 87.6% by independent variables, while the rest (100% % = 12.4 %) is explained by other causes. Lastly, overproduction and waiting time is high positive relationship with SMEs productivity, while there were moderate positive relationship between over processing, excess motion and transportation with SMEs' productivity. Therefore, access inventory and production defects have a small and definite relationship between with SMEs' productivity. Hence, through this study, researcher can conclude that overproduction is the strongest characteristics in study the importance of lean manufacturing practices towards enhancing SMEs productivity.

8 vi ABSTRAK Penyingkiran bahan buangan adalah proses menghilangkan sesuatu, sama ada sisa, kesilapan, atau pertandingan. Ia adalah salah satu cara yang paling berkesan untuk meningkatkan keuntungan perniagaan. Kekurangan pemahaman tentang konsep pembuatan lean dan prinsip-prinsip dan beberapa pekerja yang enggan berubah merupakan masalah yang dihadapi oleh Perniagaan Kecil dan Sederhana (PKS). Selain itu, kebanyakan industri terutamanya PKS menghadapi tujuh jenis sisa, manakala mahal dan memakan masa juga menjadi salah satu masalah di kalangan PKS untuk menggunakan lean. Kajian ini bertujuan untuk menyiasat kepentingan amalan pembuatan lean ke arah meningkatkan produktiviti PKS. Objektif kajian ini adalah khusus; i) Mengkaji kepentingan amalan Pembuatan Lean di kalangan PKS. ii) Menentukan amalan Pembuatan Lean yang boleh meningkatkan produktiviti PKS. iii) Untuk mengkaji hubungan di antara amalan Pembuatan Lean dan produktiviti PKS. Satu kajian tinjauan deskriptif telah digunakan untuk mendapatkan data utama dengan menggunakan soal selidik. Responden merangkumi 52 individu yang terdiri daripada kakitangan pengurusan dalam PKS yang dipilih melalui negeri-negeri seperti Kelantan, Terengganu dan Pahang. Ia menunjukkan terdapat hubungan yang positif antara amalan pembuatan lean dan produktiviti PKS dalam kajian ini. Data dianalisis dengan menggunakan deskriptif, analisis regrasi serta analisis korelasi mendapati bahawa pekali penentuan R² = 0,876. Ini menunjukkan produktiviti PKS (Y) dipengaruhi 87.6% oleh pembolehubah bebas, manakala selebihnya (100% % = 12.4%) dijelaskan oleh sebab-sebab lain. Akhir sekali, pengeluaran berlebihan dan masa menunggu adalah hubungan positif yang tinggi dengan produktiviti PKS, manakala terdapat hubungan positif yang sederhana antara pemprosesan berlebihan, gerakan lebihan dan pengangkutan dengan produktiviti PKS. Oleh itu, inventori berlebihan dan kecacatan pengeluaran mempunyai hubungan yang kecil dan yang pasti antara dengan produktiviti PKS. Oleh itu, melalui kajian ini, penyelidik boleh membuat kesimpulan pengeluaran berlebihan merupakan ciri-ciri kuat dalam kajian kepentingan amalan pembuatan lean ke arah meningkatkan produktiviti PKS.

9 vii Keywords: Overproduction, Access inventory, Over processing, Excess motion, Production defects, Waiting time, Transportation, SMEs Productivity, Elimination of wastes, Small to medium-sized enterprises (SMEs), Lean manufacturing

10 viii CONTENTS CHAPTER TITLE PAGE DECLARATION DEDICATION ACKNOWLEDGEMENT ABSTRACT ABSTRAK CONTENTS LIST OF TABLES LIST OF FIGURES LIST OF ABBREVATION LIST OF APPENDIX ii iii iv v vi viii xii xiv xv xvi CHAPTER 1 INTRODUCTION Background of Research Problem Statement Research Objectives Research Questions Scope and Limitations of the Research Scope Limitations Significant of the Research Summary 9 CHAPTER 2 LITERATURE REVIEW Introduction SMEs Productivity for manufacturing firm Elimination of Waste Overproduction 15

11 ix Access Inventory Over Processing Excess Motion Production defects Waiting Time Transportation Research Framework Hypothesis Summary 24 CHAPTER 3 RESEARCH METHODOLOGY Introduction Research Design Research Design Methods Descriptive Research Design Quantitative Research Design Research Strategy Survey Research Questionnaire Design Scientific Canons Reliability Internal Validity Pilot Test Sampling Design Target Population Sampling Location Sampling Elements Sampling Techniques Sampling Size Data Collection Methods Primary Data Sources Secondary Data Sources Data Analysis 36

12 x Correlation Regression Summary 39 CHAPTER 4 DATA ANALYSIS Introduction Pilot test Overproduction Access Inventory Over Processing Excess Motion Production Defects Waiting Time Transportation SMEs Productivity Reliability statistics result for Independent Variables Total Variables Respondent rate Demographic Analysis Gender Races Age Level of Education Work experience Job position Department Lean method Descriptive Analysis Independent Variable Independent Variable Independent Variable Independent Variable 4 68

13 xi Independent Variable Independent Variable Independent Variable Dependent Variable Pearson s Correlation Analysis Relationship Between Independent Variable and Dependent Variable Multiple Regression Analysis Objective and Hypothesis Test Summary 82 CHAPTER 5 DISCUSSION AND CONCLUSION Introduction Respondent s Demographic Summary of Research Objective The Conclusion of Objective The Conclusion of Objective The Conclusion of Objective Conclusion Recommendation Recommendation for the Future Research Recommendations for the Management Summary 94 REFERENCES 95 APPENDICES A Questionnaire 97 APPENDICES B Gantt Chart PSM Gantt Chart PSM 2 112

14 xii LIST OF TABLE TABLE TITLE PAGE 1.1 (i) Key indicators of SMEs, (ii) SMEs definition for manufacturing A comparison of the characteristics of large and SMEs organizations Rules of Thumb of Cronbach s Alpha Coefficient Range Likert Scale Data Analysis Method Rules of Thumb about Correlation Coefficient (a) Case Processing Summary for Overproduction (b) Reliability statistics result for overproduction (a) Case Processing Summary for Access Inventory (b) Reliability statistics result for Access Inventory (a) Case Processing Summary for Over Processing (b) Reliability statistics result for Over Processing (a) Case Processing Summary for Excess Motion (b) Reliability statistics result for Excess Motion (a) Case Processing Summary for Production Defects (b) Reliability statistics result for Production Defects (a) Case Processing Summary for Waiting Time (b) Reliability statistics result for waiting time (a) Case Processing Summary for Transportation (b) Reliability statistics result for transportation (a) Case processing summary of SMEs 48

15 xiii Productivity (b) Reliability Statistics of SMEs Productivity Reliability statistics result (a) Case Processing Summary of total variable (b) Reliability Statistics of total variable Respondent Rate Distribution of Respondents by Gender Distribution of Respondents by Races Distribution of Respondents by Age Distribution of Respondents by Level of Education Distribution of Respondents by Work experience Distribution of Respondents by Job position Distribution of Respondents by the lean method that practiced in the company Descriptive analysis for independent variables Descriptive Analysis of overproduction Descriptive Analysis of access inventory Descriptive Analysis of over processing Descriptive Analysis of excess motion Descriptive Analysis of production defects Descriptive Analysis of waiting time Descriptive Analysis of transportation Dependent Variable: SMEs Productivity Strength of the correlation coefficient Pearson correlation analysis Model summary of Multiple Regression Analysis ANOVA The coefficients multiple regression analysis Hypothesis testing The conclusions for objectives 86

16 xiv LIST OF FIGURE FIGURE TITLE PAGE 1.1 Distribution of SMEs by sector, SMEs in manufacturing sector by state, Proportion of businesses, employment and turnover in micro, small and medium firms at 11 start of (i) The Seven Types of Waste (ii) Process of waste elimination for cost reduction Research Framework on the Importance of Lean Manufacturing Practices towards enhancing SMEs Productivity Distribution of Respondents by Gender Distribution of Respondents by Races Distribution of Respondents by Age Distribution of Respondents by Level of Education Distribution of Respondents by Work experience Distribution of Respondents by Job position Distribution of Respondents by Department Distribution of Respondents by the lean method that practiced in the company

17 xv LIST OF ABBREVATIONS LM TPS SMEs W.P JIT TPM WIP VSM ANOVA = Lean Manufacturing = Toyota Production System = Small and Medium-sized Enterprises = Wilayah Persekutuan = Just-in-time = Total Productive Maintenance = Work in process = Value Stream Mapping = Analysis of Variance

18 xvi LIST OF APPENDIX APPENDICES TITLE PAGES A Questionnaire 97 B Gantt Chart PSM 1 & 2 111

19 1 CHAPTER 1 INTRODUCTION This chapter covers the background of the research including the lean manufacturing and the types of waste which is the waste of transportation, unnecessary inventory, excess motion, waiting times, overproduction, inappropriate processing and defects of products among SMEs. Besides that, this chapter also covers the background of SMEs. The research objectives and the problem statement are on the issues that most SMEs are reluctant to implement Lean Manufacturing due to financial and resources before foreseen the benefits of lean. 1.1 Background of the Research Lean manufacturing (LM) is mainly inspired and sourced by the Toyota Production System (TPS) which has been focused on elimination of wastes within the enterprise (Ohno, 1998) and improving customer satisfaction (Womack et al., 1990) but Taj (2005) defined that LM as manufacturing without waste which production system that focusing continuous flow within supply chain by eliminating all wastes and performing continuous improvement towards product perfection. It is a set of principles, philosophies and business processes to enable the implementation of it, which is widely known and implemented since 1960 (Rose et al., 2011). Waste is anything other than the required equipment, materials, parts, space and working time. According to Dankbaar (1997), LM will be the standard manufacturing mode in the 21 st century.

20 2 Papadopoulu and Ozbayrak, (2005) agreed that LM could be a cost reduction mechanism and can be used as a guide to be world class organization. Theoretically, LM can be applied to all industries and it is considered as strategic weapon in a competitive market. For example, in a study done by Meier and Forrester (2002), they found that LM was successfully implemented in the tableware industry. This manufacturing implementation requires time, money, energy and full company s commitment. It was noticed that LM has been implemented successfully in large organizations but there is still few documented evidence of its implementation in smaller organizations. The increasing demand for high quality products and highly capable business processes by large organization has left no choice for the SMEs to consider LM implementation. Small companies have advantages such as they are more agile, much easier to get management support and commitment, as opposed to large organizations. Small and Medium-sized Enterprises (SMEs) have played incredible role in manufacturing sector all over the world. Manufacturing is defined as the physical or chemical transformation of materials or components into new products, whether the work is performed by power-driven machines or by hand, whether it is done in a factory or in the worker s home, and whether the products are sold at wholesale or retail. Based on the record in the year 2011, Malaysia have 97.3% of total business establishments of SMEs which contributed to 28.5% of total gross output and 30.2% of total value added (Statistic Department, Economic Census, 2011).

21 3 Table 1.1: (i) Key indicators of SMEs, Source: Statistic Department: Economic Census, (2011) Total Large SMEs Number of establishments Gross output (RM million) Value added (RM million) Employment (peoples) Number of establishments Gross output (RM million) Value added (RM million) Employment (peoples) 662,939 17, ,136 1,777,317 1,270, , , , ,921 6,963,973 3,294,714 3,669,259 % In addition, based on the data from Statistic Department: Economic Census, (2011), more than 3,669,259 or 52.7% of total Malaysian workforce were employed by SMEs while SME in Malaysia is defined as a company with a full time employees between 5 to 150 people and annual sales turnover between RM250k to RM25 million. An establishment will be classified as SMEs if it meets either one of the above criteria. The table below summarizes the SMEs definition for specific sector:

22 4 Table 1.1: (ii) SMEs definition for manufacturing Source: Statistic Department: Economic Census, (2011) Sector Manufacturing Based on full-time employees Micro Less than 5 employees Small Between 5 and less than 50 employees Medium Between 50 and less than 150 employees Based on annual sales turnover Micro Less than RM250,000 Small Between RM250,00 and less than RM10 million Medium Between RM10 million and less than RM25 million Among the 645,136 SMEs covered, the majority were in three (3) sectors which are services, manufacturing and construction. SMEs were the largest in the services sectors constituting 90.0% or 580,356 establishments. In manufacturing sectors, the number of SMEs was 37,861 or 5.9% (Figure1.1). Figure 1.1: Distribution of SMEs by sector, 2010 Source: Statistic Department: Economic Census

23 5 1.2 Problem Statement Although lean manufacturing is becoming a popular technique for productivity improvement, SMEs are still not certain on the costs of its implementation and the likely tangible and intangible benefits they may achieve (T. Perera et al.,2006). The aim of this study is to examine the relationship between the lean manufacturing in SMEs and its impact towards productivity. Most of the SMEs are reluctant to implement Lean Manufacturing due to financial and resources before foreseen the benefits of lean (Rose et al., 2011). Moreover, the implementation of lean manufacturing is a strategic activity which involves the entire organizations. Although SMEs have identified people who are open to change, but some of them are not able to receive it. In particular, if an employee has been with SMEs since the organization was founded, it may be difficult to convince them that the way they do it is not always the most effective way to work. From the perspective of SME, how this has been successful, so it can be difficult to accept that not only increase the productivity of current management. Therefore, to change the way employees work is a problem. Besides, most of the industries especially SMEs are facing with seven types of waste such as the waste of transportation, access inventory, excess motion, waiting times, overproduction, over processing and production defects. They will be exposed to excess motion for movements of the operators or machines which will affect the level of productivity in production process. These will cause inefficiency in working such as the waste of time, increase in cost and traumatic to the employees. Thus, costly and time consuming also become one of the problem among SMEs.

24 6 1.3 Research Objectives 1. To study the importance of Lean Manufacturing practices among SMEs. 2. To determine the Lean Manufacturing practices that could enhance SMEs productivity. 3. To examine the relationship between the Lean Manufacturing practices and SMEs productivity. 1.4 Research Questions 1. What is the importance of Lean Manufacturing practices among SMEs? 2. What are the Lean Manufacturing practices that could enhance the SMEs productivity? 3. How is the relationship between the Lean Manufacturing practices and SMEs productivity? 1.5 Scope and Limitations of the Research Scope The scope of this research is to determine the importance of Lean Manufacturing practices towards enhancing SMEs productivity in Kelantan, Terengganu and Pahang states and the target respondents will be the management staff of the SMEs Manufacturing sectors who applied lean manufacturing practices. There are many SMEs in this sectors which can be as target respondents. From the data, there are 39,669