OAK HILLS IN SUPPLY CHAIN

QUESTION

Final Take Home Examination

Course:  OMGT 1021 – Supply Chain Principles

Semester 1, 2012

Instructions/Guidelines:

• This is case study examination based.  The case study titled is “Lean Implementation and Supply Chain Development at Oak Hills”.  Please find attached.
• There are eight (8) pages.  There are six (6) questions to be answered.
• Maximum words are 2500 words in total for all your answers.  List of references are not included in the word count. (there is +/- 10% tolerance for word count)
• Please upload your file onto turnitin to get the originality report at least two days before you submit (this allows the turnitin system to produce the originality report) and print out your originality report from turnitin then attach to your final take home examination.

Then please upload your all final take home examination included originality report from turnitin through myRMIT by 23 May 2012, 5pm (by simply go to “Submission Links” section, then select “Final Take Home Examination”). Please do not send us email your softcopy of the final take home examination.  You are required to submit hardcopy on 23 May 2012 in the lecture.

• Ensure you have a cover sheet and write all your details on the cover sheet.
• You need to have a reference list.  It is important to have a reference list.  There are no such limitations of the reference list.
• Executive Summary and Appendixes are not required for this take home examination.
• Any assumptions made in relation to your answers should be indicated on separate page (headed “Assumption”).  This should be located at the first page of your answer.

On the basis of the above, no further inquiries related to final take home examination can be accepted after 9 May 2012.

SOLUTION

What are the specific quality problems Oak Hills is facing, and how will they influence the company’s ability to convert to a lean system?

Oak Hills facility is a manufacturing unit of The Oil and Gas Service Company. It produces testing equipments used in Exploration and Extraction unit (E&E). This report is pertaining to the task of assisting the facility in improving their operations processes. The first step towards improvement is to understand the specific problems associated with the envisioned improvements.

Oak Hills has envisioned reducing the lead-time to one week as to increase operational efficiency. Currently the lead-time of domestic orders for testing equipments is between one and two weeks. Some of these orders are placed as urgent orders with very small time to production. Shop floor is used to complete such rushed orders. The reason behind the urgent requirement lies with the high costs associated with keeping the exploration well idle (USD 50,000 to USD 100,000 per day).

Besides, Oak Hills envision reducing inventory levels and enhancing customer services with the help of lean manufacturing techniques. The inventory levels at Oak Hills are higher than required due to high demand volatility and lack of vendor management.

The main issues with the facility are as following:

1. Employees related concerns: There are rumors about the impending merger of parent company TOGS with Pasadena Services. This rumor along with the lack of communication from management has dampened the employee morale. Besides due to the recent lay off due to economic slowdown has also affected the employee morale adversely.Quality and productivity bonuses are awarded on team basis in Oak Hills shipping department. This is not justified considering the fact that employees are cross functionally trained and help other employees to complete the rush jobs.

2. Worn out machines: Oak Hills is using same machines for a long time. Assembly press machines at Oak Hills shipment department are old and worn out. Employees also feel the chaos at work level, which is negative for their morale. Metal bar used to level the raw material while manufacturing the lids has become concave. Such machines result in the waste of raw material. There is not enough space available for keeping sensor boards near assembly line in shipping unit. This leads to delay in production.

3. Workload on quality department: Lids are the main product for quality control process. Quality control department was overflowed with work due to fact that all seven assembly-units start at the same time even when the total time spent in quality inspection is 10 minutes. Such high workload can deteriorate the effectiveness of quality control department. This effect would result in higher number of faulty products that can tarnish the image of the organization and can affect the revenues (and profits in term) in an adverse manner.

4. Lack of Quality checkpoints: At Oak Hills facility there is a lack of proper quality checkpoints to measure the quality of product while work in progress. Quality is controlled during assembly only. Quality is not considered as factor while packing the product. Therefore firm is not able to access the damage done during the shipping and transportation process. Thereby the defects discovered at the customers’ end could not be assigned to the appropriate department. This will result in poor quality control.

5. Process/ task inefficiency: The processes are inefficient and cannot deliver the quality product on time. For example, engineering department is informed about the requirement of setting up assembly units only after the batch production was complete. Such a process results in wastage of time of shipping team because the engineering department can be informed a bit earlier about the expected time when the setting up is required. With proper operations and processes, time can be saved and efficiency can be improved for shipping department. Besides, such measures can help in reducing the work stress on engineering department.

All these concerns need to be solved before implementing lean system. Lean system dictates the practice of zero wastage with improvement in processes and quality. Employees are key to this change. With current mindset, employees may not accept the changes amicably. Secondly, the machines and systems need to be updated to reduce wastage of raw material and to save time & manpower. Management at Oak Hills needs to understand that quality is not the responsibility of quality department only. Quality can be achieved only when all employees and management are dedicated to it. Due to these issues, Oak Hills facility needs to go a long way to implement lean system successfully.

What changes in themanufacturing environmentneed to be undertaken in order toconvert the current system to a lean system? Think about this from both a short-termand a long-term perspective.
Oak Hills wants to implement lean system for its production/ shipping processes. TO convert the current system into a lean system there is a need to change various parameters. But first we need to understand what a lean system is. According to Steven Spears and H Kent Bowen, lean system gives people at all levels of the organization the skills and a shared way of thinking to systematically drive out waste through designing and improving work of activities, connections and flows (1999).

Lean system means zero wastage. Besides such system helps in reducing variability and achieving process improvement. Implementation of lean manufacturing involves changes in processes, systems and employees’ perception. Some of these changes are listed below.

1. Change in organization thinking: Lean system is dependent on employees. The changes stem from the people not from the tools.For the success of lean system, the organization needs to change its perspective. The employees should embrace continuous learning and lean thinking. The management needs to develop lean leadership and continuous flow of information among employees for internal environment and among suppliers and customers for external environment.

2. Connect with customers/ suppliers⁴: As Oak Hills plans to reduce its lead-time to one week; it is necessary for the firm to integrate the continuous communication with its suppliers and customers. Precision Milling is an important supplier as it supplies the cases for the testing instruments. Cases account for around 50% of the total product costs. The supplier has agreed to supply cases within 24 hours of order placement by Oak Hills in a lot size of 300 units per shipment. Besides, Oak Hills needs to be apprised about the various E&E projects of its customers, so that it can schedule for the potential demand of testing equipment. Proper communication can also help in on time delivery by Black Dome, other supplier of the firm.

3. Structure every activity and simplify every flow⁵: This step is useful as it gives attention to every miniscule detail of production processes. From the case it is evident that there is wastage of time and effort because lid production unit is 120 feet away from the shipping department. As manufacturing of lid involves hazardous material, firm should think of using conveyor belts or some other system to move finished lids to shipment area.

4. Start improvement at the lowest level possible⁵: After careful consideration, there are various activities that can be improved with slight changes. For example, the metal bar that is used for leveling raw materials in the mold during lid production has become concave in shape. Such a small thing gives rise to increase in wastage. Process improvements are required on such levels that can improve quality of the product and can reduce the number of faulty products. It is in line with the lean philosophy that dictates zero wastage.

5. Elimination of buffers²: Lean system requires from the organization to reduce all kind of buffers, particularly inventory and time buffers. Oak Hills maintains high inventory due to inefficient supplier relations and high demand volatility. Once these factors are managed though communication with suppliers/ customers, Oak Hills would be able to reduce inventory drastically. Oak Hills utilize time buffers for its various operations. For example quality control for the boxes from assembly lines at shipping unit in the morning takes time because all seven product-lines start at the same time. Oak Hills can reduce the time buffer by managing the schedule in a way that there is 10 minutes time delay between the two consecutive product lines.

To maintain quality and process improvement brought by lean system in long term, the essential factors are cultural transformation brought by leadership and lean system thinking. Oak Hills has to be evolved as learning organization to sustain the quality in the long run.If lean manufacturing is combined with the practice of six-sigma discipline, the organization can achieve the best of all worlds.

How will the implementation of lean system impact employees, and what can bedone to smooth the transition?

When an organization implements lean system for its operations, it does not imply a change in operations and machines only. Lean system dictates changes in all facets of the organization, be it employee relations, employee education, processes, scheduling etc. Implementation of lean system starts with the change of thinking within organization. Therefore the implementation will indeed impact on employees in more than one way. Some of these changes are listed as under:

Team Dynamics⁶: Lean system demands multifunctional team with rotational team leadership. Currently, shipping department is using teams of four men. These men are classified as delivery person, assembler, assistant and packer. There is job rotation among the employees as they are trained in all the functions of shipping department. Therefore the requirement of multifunctional team is already achieved.

Education of employees: To achieve good results with teams they have to receive appropriate training and education (Rubenowitz, 1994). There should be trust and faith among team members. Currently there is no such environment due to recent laid offs and rumors of merger. An intensive and good vertical communication with managers and supervisors is necessary for trusting relations. Employees will need to embrace the lean thinking and continuous learning as the part of their job profile.

Organization management needs to plan and implement these changes in a way that employees do not feel stressed or left out. The communication is the key to make people accept the changes. Oak Hills needs to keep its employees informed about the changes and the potential benefits. It needs to change the current mode where lack of communication is prevailing. Employees need to be apprised of potential improvement in processes and smoothening of the operations achieved through lean system. With lean system, employees will be able to avoid stress caused by rush jobs. And finally the benefits from lean system will be passed to employees in the form of bonus and other awards. Details of these benefits along with the proper training and information can help the organization in smooth transition.

At what stage in the development of a supply chain is Oak Hills, and what can bedone to improve the supply chain?

Supply Chain is a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers (Harland, 1996). For Oak Hills, its customers and suppliers are the essential part of the supply chain.

From the study it is evident that supply chain at Oak Hills is not managed properly. There are not proper communication channels with suppliers or customers. This has lead to higher lead-time and high inventory levels. Lack of communication has also caused fallout in delivery by one of the suppliers. Besides Oak Hills is not appraised about the details of E&E projects of its customers and therefore is not able to schedule production plan for potential demand volatility.

Oak Hills use Materials Requirements Planning system that is used for ordering raw materials according to planned quantity. But this system is not used for scheduling production or ordering cases from the vendor Precision Milling. To improve the supply chain at Oak Hills various steps can be taken. Some of these are given below.

• Ø Oak Hills should strengthen supplier relationship using proper communication channel. Adopting the practice of supply chain integration can help in accomplishing this task.
• Ø Firm should be in touch with its customer to know potential demand of testing instruments.
• Ø MRP system should be utilized fully to schedule production planning and to manage requirement planning.

For Oak Hills, what is the connection between demand management and the supplychain?

For any organization, demand management is directly linked to its supply chain management³. Firms plan their operations and production processes based on demand forecast. Supply chain management helps in achieving the desired result from production with operational efficiency.

Oak Hills faces a serious issue in the form of demand volatility. The concerned product is testing equipment that is used in E&E projects. The demand for this product fluctuates highly within the production limit. There are various reasons and consequences for this issue.

The main culprit for the issue is lack of communication between Oak Hills and its clients. Oak Hills is not knowledgeable about the E&E projects of its customers. And customers are accustomed to placing last minute orders. These two factors join hands as Oak Hills is not able to plan for potential demand in advance and is forced with rush jobs. To complete these orders in time, Oak Hills needs to keep high inventory levels thattranslate into higher holding costs.

Besides holding costs, demand volatility is associated with others costs that are necessary for expediting orders. Delivery costs and overtime manpower charges are among such type of expenses.Lean system is useful in reducing waste but firm needs to manage the variability itself, as lean manufacturing does not guarantee of zero volatility.

As evident from the given details, Oak Hills face serious demand fluctuations. This volatility is cause of many issues within Oak Hills and its suppliers. Supply chain Management can be utilized in such situation. The suppliers need to be apprised of the order quantities and the production schedule so that they can also plan their production schedule accordingly. Such integration will eliminate the delivery related issues and reduce the pressure on inventory level.

This integration will spread through customers also. If Oak Hills is able to receive details of E&E projectsof its clients, it can schedule the production process for the potential demand fluctuation in upward direction. This will help in lowering inventory and costs and lower lead-time.

What should Oak Hills do? What problems might occur in implementing yourrecommendations, and how can these problems be avoided or neutralized?

From the discussion it is evident the processes and the operations at Oak Hills require an overhauling for efficiency improvement. Lean manufacturing can solve some of the issue related to production processes of Oak Hills. But implementing lean system may give rise to some problems. These problems along with the solutions are discussed below.

Opposition to Change: People are the main factor to be considered when an organization is planning to implement lean system. Generally people are opposed to changes. The current mode of employee relationship lacks the communication from the management to the employees. All the related stakeholders need to understand the impact and benefits of lean system before starting the implementation. Such knowledge will drive them to accept the changes in their job description and organization thinking.

Cost of implementation: Embracing lean system means educating employees, changing processes and adopting latest techniques. All of them involve monetary expenses. As the merger is pending, there may be issues revolving around the costs associated with revamping the operations. Higher management needs to be convinced about the profits of lean manufacturing for accepting the change. Cost value benefit analysis can be useful in appraising the situation and getting the complete picture.

In total, Oak Hills might encounter some problems while implementing the recommendations provided but these issues can be resolved by the efforts of senior management¹.

Reference List:

1)Atkinson P. (2004).Creating and Implementing Lean Strategies. Management Services.

2)Berg Andreas and Ohlsson Fredrik. (2005). Lean Manufacturing at Volvo Truck Production Australia. Gothenburg: Lund Institute of Technology.

3)Chopra Sunil and Meindl Peter. (2007). Supply Chain Management: Strategy, Planning and Operation. 3^rded. New Jersey: Pearson Education Inc.

4)Choy K.L., Lee W.B. and Lo Vicor. (2003). Design of a case based Intelligent Supplier Relationship Management System. Expert Systems with Applications, 25, pp.87-100.

5)Flinchbaugh, Jamie. (n.d.). Beyond Lean: Building Sustainable Business and People Success through New Ways of Thinking. Lean Learning Center.

6)Mullenhour, Paul and Flinchbaugh, Jamie. (2005). Bringing Lean Systems Thinking to Six Sigma. [online] Quality Digest. Available at: <http://www.qualitydigest.com/mar05/articles/05_article.shtml> [Accessed on 14 may 2012].

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