BULLWHIP EFFECT

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Theoretical Framework

This chapter encapsulates the most relevant and important theoretical frameworks that will be included in this thesis. In addition, this chapter is associated with the purpose of this thesis, as well as comprehensive information of every theory that is included.

Connections of Theory

The main focus for this thesis is to explore what kind of issues can be identified in value flows as well as how to minimize this issue. Mentioned in the background, the authors solidify the relevance and why it is important for the need for such research. To facilitate the result of this thesis the theoretical framework has been deliberately chosen. Moreover, the theoretical framework is established to be the base for theories that will be used in this thesis and in addition will support the three research question that are stated in Figure 6.

Lean

Lean is a commonly, widespread term and was first recognized in the 1980s when Toyota, a Japanese automotive manufacturer, became superior in quality and efficiency. Through the Toyota Production System (TPS), they greatly outcompeted their competitors in endurance and requiring less repair, especially in comparison with the Americans (Liker, 2004). Through their operational excellence they have put a footprint in many industries (Womack, Jones, & Roos, 1990). TPS, and the lean philosophy is built on two main foundations, continuous improvements, typically referred to as the Japanese term “Kaizen” and respect for people. Liker (2004) divides the 14 principles of the Toyota Way into four major categories which are; Philosophy, Process, People and Partners and Problem Solving. He further explains the importance of an underlying, long-term thinking philosophy to ultimately achieve continuous improvements and learning through problem solving. Lean is not only about philosophy but also includes built-in-quality (Jidoka), Just-in-Time and production systems such as Pull System and then strive towards a continuous flow (Womack, Jones, & Roos, 1990). This is visualized by Liker through two main figures, namely the lean pyramid (Figure 8) and the lean house as seen below (Figure 7) (Liker, 2004).
Lean tools and philosophy are further described below, to provide a solid framework to this paper. In alignment with the purpose of this study, the theoretical framework with regards to lean will consist of tools and principles related to the purpose and RQs. With this in mind, this framework will start by describing the foundation of the lean pyramid, the lean philosophy, further describing the “process” before exploring “People and Partners”.

Philosophy

Notably, lean is more than its tools, root cause analysis and problem solving. It derives from a foundation of philosophy of doing the right thing from a philanthropic standpoint. This follows through the whole concept of lean and predominantly the founders of TPS, where “The Right Process Will Produce the Right Results” (Liker, 2004, p. 101) highlights the importance of doing the right thing (Liker, 2004). The lean philosophy circles around a very specific point, that of thinking long-term. Long-term decision making and doing the right thing is the basis of lean production (Womack, Jones, & Roos, 1990). This long-term philosophy stretches to base all management decisions, remarkably even if short-term financials are at risk (Liker, 2004).

Process

This section elucidates different process and models that are common within lean. The purpose of lean processes is to create effective organizations with waste elimination of different practices and improving overall efficiency in production. The main focus of lean process is to improve products and services in order to achieve the proposed values and demand set by the customer. Further, achievement of reducing waste and customer satisfaction improvements will enable the lean process to save financial expenses and also improve overall profitability. (Liker, 2004)

Waste

In lean production, waste in manufacturing or production is essential to either be reduced or remove non-added activities completely. Everything that comes across as a non-value-added activity is in fact waste (Liker, 2004). The idea is to view waste as zero tolerance. If not incorporating the right processes to eliminate waste the result could subsequently lead to unnecessary costs and uncertainty in material flow (Lumsden, 2012). The founder of the TPS, Taiichi Ohno, identified seven different wastes that could occur in various manufacturing or production processes (Liker, 2004). However, Liker & Meier (2006) later on argued that one more waste could be identified as Waste in Creativity.
These are;
● Waste in Overproduction: This waste is out of all 8 wastes the one that bear most negative effect. Overproduction arise when more parts or products are produced than the customer demands and therefore are willing to purchase. Further, this waste can generate additional wastes such as Waste in Time, Waste in Inventory and Waste in Movement.
● Waste in Time: This waste refers to the time caused when there are two or more non synchronized independent processes. This could occur when part A and part B are to be assembled but part B is delayed. Thus, forces part A to wait and non-value-added time is created. The waste could also refer to the simple matter of workers being inaction and standing beside an automated machine for the next process.
● Waste in Transportation: This waste refers to the inefficiency in moving objects a longer or unnecessary distance such as finished goods to different locations between processes. Not only does this increase waste in time but it does also cause added costs.
● Waste in Process: This waste occurs when products are produced for higher quality purpose than necessary, this means taking redundant steps to process the parts than the customer values.
● Waste in Inventory: This are wastes that includes excessive raw material, redundant work in process, and finished goods that not bring any added value. In addition, Waste in Inventory can occur when a company decides to hold on to inventory just in case, this is if parts or products are defect, broken, poor quality but also when deliveries are late from suppliers, long setup times etc.
● Waste in Movement: When unnecessary motion is done in regard to what is actually needed for machinery or human work, it is seen as a Waste in Movement. This could be motions like, walking unnecessary distances, reaching for parts, stacking parts or tools.
● Waste in Defects: The Waste in Defects are the production of faulty parts, or parts that appear to have poor quality. Further, these defective or faulty parts would generally be adding additional and unnecessary cost than expected. If the parts or products were to be repaired or reworked, scraped or replaced is considered waste in handling, time and effort.
● Waste in Creativity: The Waste in Creativity implies that employees that acquire a set of skills or creativity but does not use it. The reason for this loss of creativity, ideas, knowledge and improvements could be due to management ignorance of listening to their employees.

5S

The 5S tool is not only constructed for the simple purpose of keeping production areas or workstations clean and orderly. The true purpose of 5s is set to be a visual control tool and to compile certain activities in order to eliminate wastes that subsequently might lead to errors, defects and injuries in various workplaces. Furthermore, standardization of the activities are important so that there are no uncertainties of how the workstations are to be managed, as well as facilitate the working condition (Liker J. K., 2004). To simplify the description of the 5s, they will be translated to English, these are stated below:
● Sort (Seiri): Sort out the unnecessary various items such as tools and material and dispose it. Keep only those items that are needed.
● Straighten (Seiton): Organize so that the tools needed are placed in a well accessible spot.
● Shine (Seiso): When the needed items have been used, they should be properly cleaned from dirt in order to eliminate defects and quality issues when used again. Further, they are to be placed at originate location.
● Standardize (Seiketsu): The three previous steps should be established as routine including appropriate maintenance of workstations and the various items used. Procedures and systems on how to maintain the workstation should be well visible.
● Sustain (Shitsuke): For the 5s tool to generate efficiency this has to be an ongoing process with an agreed policy throughout a whole organization in order to always strive towards continuous improvement.
Furthermore, 5s is a tool to improve safety, productivity, worker efficiency as well as creating a common ground for the overall workforce. However, with this in mind it is crucial not to forget that this tool, as any other lean tool needs commitment from everyone involved in order for it to function. (Srinivasan, 2012)

Process Mapping

A process map is a tool that visually describes the flow of work and decisions connected to them (Damielo, 2011). It shows a series of events from start to finish for a product or service for a single specific, unique output. The tool is used for businesses and organizations to reveal areas for improvement (Jacka & Keller, 2009). Further reasons to map a process is to help achieve a common understanding of the work, members to understand the context they work within every day, improve communication and understanding and code knowledge through a collective description of the work. As seen in Figure 9 there are processes described in a workflow, with additional decision gates exemplified through ‘Full container?’. The key features of a flowchart consist of distinguishing between value creating activities which is what the customer is willing to pay for and non-value-creating activities such as transportation and other wastes. These can be separated through the use of different symbols in the flowchart.
Moreover, to improve the current flow the wastes needs to be considered when doing a complete mapping by following the flow to when mapping the flow. Some common problems found in workflows are; path of items is too complex, path of items are not visual, items are not available when required and timing of up- and downstream activities are out of sync. (Damielo, 2011)
To be defined as an activity in a flowchart, the work has to be independent and a part of a larger whole, which can be exemplified through that you need to twist the ignition key (activity) before you can start driving your car (stop). Through its relationship between other activities and their common purpose or result creates the sequential work process (Jacka & Keller, 2009). However, process mapping doesn’t tell the members everything. It doesn’t include information as how much work is required in the activities, how effective the information or work is, what set of resources are required to perform the activity nor the effectiveness of it (Damielo, 2011).

Fishbone analysis

A fishbone diagram, or Ishikawa diagram as the Japanese term is often referred to, seeks to structure causes of a studied issue. By structuring possible causes through categorizing them, most commonly through categories such as Human, Machine and Method among others. This is done in a team where all have their sayings in trying to find possible causes for the issue (Sörqvist, 2004). Its strengths further lie in the visualization which enhances the probability of mutual understanding of the issue. As seen in Figure 10, the possible causes can then be examined to be deemed a cause of the problem. When causes have been commonly understood and accepted, the reason for this cause has to be identified, preferable through the use of a 5-why analysis (Radziwill, 2017).

Why

As a later step of a fishbone analysis, when one or several causes have been identified, a 5-why analysis is key in understanding the root causes of the issue, seen in Figure 11. This is key in achieving long-term improvements. Furthermore, it’s of essence for all participants of a 5-why analysis to understand that it is not people who are wrong, but the process. The process of doing a 5-why analysis starts by gathering a team of people associated with the issue and ask the first “why”, why is this issue taking place? Through documenting all answers and discussion, the different branches can be followed through by continuing to ask “why” four more times. The key thing is to follow-up on the plausible answers to achieve an identification of a root cause. When the root cause has been identified, appropriate actions is needed to ultimately remove the issue. (Serrat, 2017)

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People & Partners

The responsibility and visibility of purchasing and materials management has in recent years increased and become a highly important process in today’s manufacturing organizations. Further, increase in responsibility as well as visibility has gained realization from people in general management to be a key success factor that subsidize to sustainable competitive advantage (Krause, 1997). With the ongoing increasing volume from companies in outsourced manufacturing work across industries, the percentage will probably rise. Furthermore, as this percentage rise the importance of purchasing and materials management continues to expand. Due to this effort, it becomes imperative for companies to rely more on their suppliers for design and production. As this dependence increase, performance has to depend on the actions of the suppliers. By reorganizing the supplier base as well as managing it through the organizations manufacturing system, the firm could increase their supplier performance (Carter, 1996).
In attempt to create more effective relationships with suppliers, organizations adopt both supplier selection criteria and supplier involvement. The supplier selection criteria focus on strengthen the process of selecting a supplier and supplier involvement focus on the decision-making processes to achieve continuous improvements. Moreover, illustrated by Vonderembse & Tracey (1999) in Figure 12 are two supplier-related methods that both are imperative in order to subsequently improve the overall manufacturing performance.
The first supplier-related method is the supplier selection criteria which aids the organization to identify suppliers that are able to provide with quality, performance, availability and consistency in delivery (Fawcett & Fawcett, 1995). If these objectives are identified with the supplier and subsequently selected, both supplier performance and the organizations manufacturing performance will ultimately be expected to increase. The second supplier -related method is the supplier involvement which help the organization with supplier involvement especially in product development and continuous improvement. The cooperation between customers, manufacturers and suppliers are strategic procedures that aids to build a supply chain that emphasize the needs of the final customer. Furthermore, in the establishment of long-term, strategic alliance that ties suppliers to customers is inducing the role of material management and purchasing to expand in a holistic manner. To insure that internal and external capabilities are done in ways that increase the overall performance, enhanced communication and interaction with suppliers, customers and other actors within the organization is needed. This also encompasses incorporating suppliers with the organizational design process as well as creating an arrangement of cooperation in efforts for continuous performance (Vonderembse & Tracey, 1999).

Data Analysis

When understanding and putting efforts towards improving a process, a data analysis is suitable to conduct (Xia & Gong, 2015). It is the process of interpreting data sets to understand the information, preferably visual. Data analysis can help businesses in increasing revenue, optimize market campaigns, customer service or operational efficiency (Judd & McCleland, 1989). There are different types of data analytical technologies depending on the industry or context they’re practiced within. Exploratory data analysis aims at findings patterns and relationships whilst confirmatory data analysis applies statistical techniques to find a hypothesis true or false (Xia & Gong, 2015).

Statistical Analysis

Statistical analysis purpose is to identify trends, e.g. to find patterns which can improve customer satisfaction for a retail firm (Walsh, 1962). Statistical analysis can be divided into 5 steps; describe the nature of the data, explore the relation of the data, create a model to summarize the data, prove the validity of the data, predict future data to help improvements. The analysis can be done through either a parametric or non-parametric technique. If the data is of ordinal or nominal nature, a non-parametric analysis is preferred while parametric is more suitable when there is normally distributed data (Conover, 1980).

 Normal Distribution

Normal distribution is an important theory in statistics (Casella & Berger, 2001). It assumes more values to be closer to the mean then further away. This will create a smooth curve where the central line will be normally distributed if the number of data points (n) is above 30. Normal distribution is crucial in understanding different phenomenon in both society and nature and it can describe it to a high extent of accuracy. If the data collection proves to be normally distributed, the standard deviations will prove to be within the 68%, 95% respectively 99.7% tile of the mean. The standard deviation is a measure to understand how spread out the data is from the mean, exemplified through Figure 14 where the green line has a higher standard deviation than the blue line. The normal curve can still look different, depending on the stability of the data, which in the figure means that the blue curve is more stable than the green. Whilst all three curves are normally distributed, the blue one is significantly more stable than the green, yet they are both normally distributed. Additionally, data can be skewed either positive or negative Figure 14. This can be seen as either the right or left of the mean is “heavier” whilst the opposite side has a longer tail (von Hippel, 2005).

Systems Thinking

Systems thinking is and has been growing rapidly with an exponential growth for over 60 years (Haraldsson, 2004). In the USA, the perception of systems thinking is seen as an activity that generates momentum on the circumference of system dynamics. The system dynamics are enable to perceive the unique ability to represent the real world. This means that it comprehends the complexity, nonlinearity and feedback loop structures which is immanent in physical and social systems (Forrester, 1994). Systems thinking is more extensive than thinking about systems, talking about systems, and acknowledging that systems are important. Systems thinking is the comprehensive study of systems in general. The overall goal is to describe certain principles that ultimately could be applied for different types of systems on different levels within different sciences. Moreover, systems thinking is a frequent used concept for interpreting how causal relationships and feedbacks works in daily operations (Haraldsson, 2004).

Causal Loop Diagram

Causal loop diagrams are models that can be used in Systems Thinking and are valuable because they help to clarify mental models as well as make reasoning behind them clearer. Causal loop diagram also help to identify common original mindsets that drive systems behavior. Causal loop diagrams consists of different variables, feelings, actions or simply different things, which then are connected with links and casual arrows together with polarities that are either negative or positive signs. The content of the causal loop diagram subsequently creates positive or negative feedback loops. (Haraldsson, 2004)
Shown in Figure 16 is an illustration of a causal loop diagram between the two variables Births and Population. The first step is to place the variables that is intended to be examined. Then, determine the causality between the variables, in this case higher Birth rate leads to greater Population, but important to remember is that in this case, Population links back to Births as well. Further, the polarities are to be set for the first link (Births to Population). Then, the polarity for the next link
Population to Births), which would be the feedback. Lastly, the final step is to set behavior of the loop, which in this case would be a reinforcing (R) loop. The reinforcing loop would indicate a systematic growth or decline. However, if the loop is set to be a balancing (B) loop, it would indicate that it moves the system in direction towards symmetry or equilibrium. Furthermore, the Figure 16 would in this case illustrate a causal loop diagram that has a reinforcing system of Population with high Birth rate and therefore an increase in Population. (Haraldsson, 2004)

Bullwhip effect

Misrepresented information from different stages within the start and end of the supply chain can contribute to profound inefficiencies. These inefficiencies can result in everything from excessive inventory investments, poor customer service, lost revenues, non-aligned capacity plans, ineffective transportation (Lee, Padmanabhan, & Whang, 1997). Furthermore, Chen et al. (2000) describe some inefficiencies within the supply chain that can lead to the bullwhip effect:
● Disorganization: Poor organization alignment between different supply chain areas can lead to ordering larger or smaller quantities of a product than is actually needed due to over or under reaction somewhere in the supply chain.
● Order Batching: Each member of different areas in the supply chain put order quantities received from the downstream customer and higher or lower the quantities in order to not having article shortages or no excessive inventory on their part. If different areas in the supply chain is following this pattern it will be more distortion in demand.
● Lack of Communication: The lack of communication between both internally within an organization as well as externally to other actors in the supply chain makes it difficult for operations or processes to run continuously. Some areas in the supply chain perceive the demand to be different in different areas, thus leads to ordering different quantities.
● Demand and Forecast Updating: This is performed individually by all areas within the supply chain. Based on the demand from the downstream customer and order received, each area updates its own demand forecast. With more areas in the supply chain updating their own demand could subsequently lead to less forecast updates that actually shows the end-customer demand.
These mislead key factors and inefficiencies can lead to something called the bullwhip effect. The bullwhip effect is a mechanism that can be described as an occurrence detected by the supply chain. Orders are delivered to the manufacturer in which the supplier are creating a larger variance than the sales to the end user or the end customer. Subsequently, the variances created tends to interrupt the continuous tranquility of the processes within the supply chain, as each activity in the supply chain will either over or underestimate the demand resulting in preposterous fluctuations as seen in Figure 16.
Moreover, the demand from the customer is lower than the supplier intends to actually deliver. The incentives for the supplier to over or under produce is because they buy in bulk in order to save cost as well as receive enough stock to guarantee safety stock and finally economy of scale in production to meet the demand. (Chen, Drezner, Ryan, & Simchi-Levi, 2000)

Table of Contents
1.0 Introduction
1.1 BACKGROUND
1.2 PROBLEM DEFINITION
1.3 PURPOSE AND RESEARCH QUESTIONS
1.4 SCOPE AND LIMITATIONS
1.5 DISPOSITION
2.0 Methodology
2.1 WORK PROCESS
2.2 RESEARCH APPROACH
2.3 CASE STUDY
2.4 CASE COMPANY
2.5 DATA COLLECTION
2.6 DATA ANALYSIS
2.7 RESEARCH QUALITY
3.0 Theoretical Framework
3.1 CONNECTIONS OF THEORY
3.2 LEAN
3.3 PROCESS
3.4 DATA ANALYSIS
3.5 SYSTEMS THINKING
3.6 BULLWHIP EFFECT
4.0 Empirical Analysis
4.1 CASE DESCRIPTION
4.2 QUESTION OF ISSUE I
4.3 QUESTION OF ISSUE II
4.4 QUESTION OF ISSUE III
5.0 Discussion
5.1 ANALYSIS DISCUSSION
5.2 DISCUSSION OF METHODS
6.0 Conclusion
7.0 References
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