ACTIVITY-BASED MANAGEMENT

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Theoretical background

After the major economic crisis in the 1970s, SMEs started to be considered very important within the market. In fact, those companies have proved that they could be successful, like large companies, and achieve competitive advantage. In general SMEs are different from large companies for several reasons. Firstly SMEs are considered to be organic and the main characteristic of an organic organization is the presence of informal work relationships and the lack of standardization . The division of activities is limited and unclear since there are not formal rules and procedures. Usually, there is a difficulty in the coordination between the various departments and the structure is very centralized with low level of responsibility division. The top management, moreover, has the opportunity to build strong relationships with the employees but interpersonal conflicts can also increase (Ghobadian & Gallear, 1995).
According to Negron (2009), during the last few years, companies went through a strong technological development and they adopted new tools that contributed to develop companies’ production systems. Those new tools, such us JIT, process reengineering, total quality and others, contributed to an impressively development of operational efficiency within the SMEs. In order to make the production system more efficient, it is necessary to consider different dimensions and measure the level of efficacy within each one. Those dimensions and the relative tools or improvements are showed in table 2.1:
The dimensions and the relative improvements described in table 2.1, are included in new methods and strategies that need to be implemented within SMEs in order to make the company operation more efficient. Some of those methods/strategies were described by Gunasekaran et al. (2000), who developed a conceptual model that can help SMEs to improve their productivity and quality. It contains the most used strategies and methods that could be implemented in SMEs in order to gain productivity and quality improvements.
As it can be seen in the model, the main strategy and methods that could be used to improve productivity in SMEs are: JIT(Just-in-Time), 5Ss (sweep, sort, spotless, standardize and step), Hoshin exercise and Activity-Based Management

Just In Time

According to Hirano (1988) the real power of Japanese industry were the small firms and subcontractors known as “shitauke”, even if when thinking about Japan the names that come to our mind are “Toyota” or “Matsushita”. Of those small-medium companies, about 200 (90% of subcontractors) contributed in a project called “JIT Factory Revolution” aimed to develop a new concept of production system. The conventional description of “just-in-time” (JIT) is defined as a system that distribute products that are needed, when it is needed and with the right quantity (Hirano, 1988).
During the first years of the Japanese industrial revolution, it was said that “manufacturing is the business of making things” since there was a lack of raw materials and anyone who could get those materials, also could make products and sell them. Successful manufacturers were thus those that had access to raw materials. Today things are changed, since globalization and international exchanges have made raw materials accessible to anyone all over the world. This means that the market of manufacturing products became more competitive and manufacturers need to make big changes in their way of thinking in order to become more competitive and achieve success. For these reasons it is important to hypothesize that “manufacturing is a service industry” (Hirano, 1990).
To achieve and maintain their competitive advantage, firms focus in strategies that reflect the issues of their system and address any kind of problem within the factory. Developing a manufacturing strategy consists of two phases: set-up the goals and achieve those goals. It is important to underline that strategic decisions affect not only the company, but also its suppliers, materials management, level of automation and customers. Those are the critical operation areas and they need to be well prepared, planned and coordinated to render the manufacturing strategy useful. One of those strategies is the Just-in-time strategy, which is a wide strategy that affects operation of many departments within the company. (Hernandez, 1989).
Hirano (1990) shows an approach that was used in many companies and which is called “the PQCDS approach”. It is a service-oriented approach that focuses on:

  • Diversification of Products since customers want a wider variety of products within the market;
  • High level of Quality
  • Low level of Costs;
  • Faster Deliveries in the way that firms try to replace stocked products as soon as they are sold to the customer with short delivery schedules;
  • Improved Safety regarding the factory and the products.
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In few words, the PQCDS approach helps manufacturers to produce desired products (P) of high level of quality (Q), with low cost (C), fast deliveries (D) and guaranteed safety (S)

JIT process

According to Hirano (1990), implementing a JIT system means also change the old production methods into JIT production methods. While traditional production methods are inductive (based on current conditions) and based on statistical data, JIT production uses a deductive approach that leads the company towards a goal of an ideal system.
Figure 2.3 shows the 5 principal steps that a company needs to adopt in order to implement a JIT production system.
The first step represent the base of this process since a JIT system is not possible to implement if everyone within the company and also outside (suppliers, customers etc.) are not aware of this revolution and participate in the innovation. Obviously it is important that anyone within the company take part of the innovation, including the workers at the bottom of the organization, but the best place to start is at the top management of the whole organization (Hirano, 1990).
According to Hirano (1989), there are 5 important points to follow in order to cast aside the traditional way of thinking and change it to a JIT way of thinking:

  • Assume that the current system is not working well;
  • The top manager needs to change his way of thinking since he’s the leader of this revolution;
  • All the executives and supervisors have to work hard to strengthen the working areas;
  • Workers have to learn new methods through training meetings and learning seminars;
  • Keep clear the policy and the principles since any change or revolution cause resistance.

Moreover, Hirano (1989) highlighted 10 development principles to follow:

  1. Turn down traditional concepts about manufacturing methods;
  2. Think about how new methods will work;
  3. New methods are totally against the “status quo”;
  4. Don’t look for perfection;
  5. Adjust errors where they are found;
  6. Don’t invest lots of money for the improvement;
  7. Problems will give the possibility to use intelligence;
  8. Ask “why” for five times (5W rule);
  9. Ideas from ten people is always better that just one person idea;
  10. Improvements do not have limits.

The second step is following the 5S philosophy that highlights 5 basic principles to adopt in order to implement a JIT system. Those principles are represented by 5 words that begin with “S”. The 5S are: method arrangement (seiri), orderliness (seiton), cleanliness (seiso), clean-up (seiketsu) and discipline (shitsuke) (Hirano, 1990), see section 2.2.
The third step is about manufacturing flow that, according to Hirano (1990), means “bring the factory’s underlying waste to the surface”. For instance, big batch production tends to hide waste while flow manufacturing reveals it. Manufacturing flow process is based on handling the production piece by piece. It is important to study how the product is made during the manufacturing process in order to detect the bottlenecks, which can cause issues in the product flow.
The fourth step is about leveling the production in the way that it will be as close as possible to the customer demand. To achieve this the company needs to reduce the inventory level to zero. Reducing the inventory level leads the company to decrease warehouse costs, and at the same time, the company can offer a high level of diversification and shorter lead-times. (Hirano, 1990)
The fifth and last step regards the ability to standardize the operations. According to Hirano (1989), “Standard operations are rules and methods to safely produce products of high quality at a low cost through an efficient organization of people, products and machines.” According to Hirano (1990), standard operations are standards that join to a series of standard operating procedures (SOPs) into a specific order to build a product

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Material Management

To understand the JIT system it is important focus on the difference between two types of system:

  • Push System
  • Pull System

Both systems are about how to move materials within a factory. Companies that adopt push systems, use material requirement planning (MRP) to handle their production flow and control the material movement throughout a factory. In a push system, the production planning sends the information of required volume planned directly to the various stations. One issue that regards the “push” system is the risk of high level of inventories. This happens because the forecasts are uncertain and the “push system” does not produce based on customer orders. Usually, a “push system” produces more than just what the customer requests. This excess of products is converted into inventories.
In a pull system the customer request drive the flow throughout the process. In this type of system the production line will handle only the material requested to meet the customer demand and if a problem will show up during the production, all the process will stop itself. In this way the excess material produced will be less than in a push system (Hernandez, 1989).
JIT support a pull system where materials are moved from one work center to another in the smallest possible quantities and with the shortest possible lead-time.
There are two types of material movements in a manufacturing environment: the external movement of material from supplier to customer, and the internal movement of material throughout the several workstations within a company. Regarding both types of movement, according to JIT system, the time that a material spends travelling does not add any value to the final product and it is just a waste (Hernandez, 1989)

Safety stock and Inventories

According to Hernandez (1989), JIT considers also safety stock as one of the major wastes. Safety stock is a quantity of inventories that remain in the warehouse in order to feel safe in a manufacturing environment. There are two types of safety stocks:

  • Voluntary: inventories are kept voluntary in order to cover any hole in the production planning or in the supplied material;
  • Involuntary: the material department send to the production line more parts than the production capacity can use.

Experience show that the quantity of voluntary or involuntary inventories is larger in a push-system than a pull-system since the pull-system tends to produce only what is needed from the customer without any excess. But what happens in a real production line? How does the pull-system work? The pull-system works thanks to a card called Kanban that helps to make the process work (Hernandez, 1989)

1 Introduction 
1.1 BACKGROUND
1.2 AIM AND RESEARCH QUESTIONS
1.3 DELIMITATIONS
1.4 OUTLINE
2 Theoretical background 
2.1 JUST IN TIME
2.2 5S
2.3 ACTIVITY-BASED MANAGEMENT
2.4 HOSHIN EXERCISE
3 Method and implementation
3.1 WHAT’S A RESEARCH?
3.2 CASE STUDY AND ACTION RESEARCH
3.3 COLLECTION OF DATA
3.4 GANTT CHART
3.5 VALIDITY AND RELIABILITY
4 Findings and analysis 
4.1 COMPANY BACKGROUND
4.2 COMPANY PRODUCTION PROCESSES
4.3 PAINT DEPARTMENT
5 Discussion and conclusions 
5.1 IMPLEMENTED METHOD
5.2 FINDINGS AND IMPROVEMENTS
5.3 FUTURE RESEARCH
References
Appendices .
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