Packaging Effects On Logistics Activities

The Ministry of Education and Science of the Russian Federation

Plekhanov Russian Academy of Economics

 

Chair of Foreign Languages

 

 

PROJECT

“Packaging Effects On Logistics Activities”

 

 

 

Performed by

Yarovoy Sergey

Marketing Faculty

Group 1514

 

Supervised by

_______________

 

 

 

Project defended on:

_________________________

Evaluation:

_________________________

Tutor`s signature:

_________________________

 

Moscow 2012

Table of Contents

1 INTRODUCTION............................................................................................................................ 1

1.1 BACKGROUND ........................................................................................................................... 1

1.2 PROBLEM DISCUSSION............................................................................................................... 2

1.3 PURPOSE.................................................................................................................................... 3

1.4 DEFINITIONS.............................................................................................................................. 3

2 FRAME OF REFERENCE............................................................................................................. 4

2.1 ACTIVITY BASED COSTING........................................................................................................ 7

2.2 PACKAGING............................................................................................................................... 8

2.3 MATERIALS HANDLING ............................................................................................................. 9

2.4 TRANSPORTATION ................................................................................................................... 25

2.5 CUSTOMER SERVICE................................................................................................................ 25

3 ANALYSIS...................................................................................................................................... 32

3.1 THE CURRENT SITUATION ....................................................................................................... 32

3.2 PACKAGING MATERIAL ........................................................................................................... 33

4 CONCLUSION............................................................................................................................... 50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 Introduction

 

1.1 Background

The logistics concept started to emerge as a business term in the 1960’s and was by the

time concerned with physical distribution. In the 1970’s and 1980’s the concept developed

to include both inbound and outbound logistics (Bowersox & Closs, 1996). According to

Porter (1985), inbound and outbound logistics is two of the primary categories in the generic

value chain that illustrates a firm’s value-adding activities. Inbound logistics is concerned

with acquisition of materials required for the production while outbound logistics is

concerned with the physical distribution of finished goods to the customer (Coyle, Bardi &

Langley, 2003; Porter, 1985). In the 1990’s, the concept of logistics developed to include

the entire material flow from supplier’s supplier to customer’s customer (Coyle et al., 2003).

Today, the concept of logistics is an integrated and important part of a firm’s business system.

The work of logistics can be divided into five interrelated functions; 1) network design,

2) information, 3) transportation, 4) inventory and 5) warehousing, material handling

and packaging (Bowersox & Closs, 1996). The last function contributes to a large part of

the overall logistics costs and could be viewed as a mini-system within the entire logistical

system (Bowersox & Closs, 1996). Because of its major impact on the entire logistical process,

warehousing, materials handling and packaging requires extra attention.

A warehouse operation could be viewed as performing three main activities, loading and

unloading products as they arrive to and depart from the warehouse, moving products to

and from storage and order filling (Ballou, 1999). The warehouse operations described

above all include some type of movement of products. These movement activities are often

referred to as materials handling and is vital for the warehouse efficiency (Ballou, 1999).

Materials handling is according to Bowersox and Closs (1996) the most important activity

for warehouse productivity. In a logistical environment, materials handling also concerns

aspects other than movement, such as time, quantity, space and coordination.

Since materials handling is concerned with handling products, it is of great importance to

consider the physical dimensions of the handled product. When considering this aspect,

packaging has a direct impact on materials handling because it affects the physical dimensions

of a product (Öjmertz 1998). For example, the size of a package affects the number

of products that can be handled in a single movement.

Two types of packaging can be identified, consumer and industrial packaging (Bowersox &

Closs, 1996; Coyle et al., 2003). Consumer packaging is mostly concerned with attracting

customer at the retail store for fast moving consumer goods. Industrial packaging is connected

to logistics where emphasis is on protection, ease of handling and information display.

In a value perspective, logistics is defined as, “providing time and place value of materials and

products in support of organization objectives” (Coyle et al., 2003 p.39). According to the definition,

logistic can add value to a product by delivering it at the right place and in the right

time. However, this should be done in support of a firm’s objectives. A firm’s objectives

could for example be its aspiration for a certain level of customer service by decreasing

costs and provide a high level of quality. Lean thinking is a Japanese perspective for manag-

1

Introduction

ing processes where the focus is on reducing non-value adding activities, such unnecessary

transportation, without lowering customer service and quality (Shingo, 1989).

Previously, the view on customer service has been that higher level of customer service results

in higher logistics costs. Bowersox and Closs (1996, p.67) defines the critical question

concerning the level of customer service to be; “does the cost associated with achieving the specified

service goals represents a sound investment, and, if so, for what customer?” Thus, different customers

require different services and it is important for a firm to consider if the aspired service

level is feasible in terms of costs.

Today, increasing customer service does not exclusively result in higher costs. However,

the desired level of service will determine the cost for logistics such as warehouse handling,

transportation, packaging and order processing (Lambert, 1992). Saghir (2003) emphasizes

the importance of understanding the complexity of packaging and its influence on logistics

and marketing. The important issue is to find the balance between the customer service

level, the cost of logistics and the benefits for the firm (Coyle et al., 2003).

 

1.2 Problem Discussion

 

The company in focus for this thesis is ROL International, a Swedish manufacturer of

store interiors and ergonomic office furniture. The firm design, manufacture and distribute

their products to customers on a global basis. The head office of ROL International is situated

in Jönköping in connection with one of the production units. We have been assigned

by ROL to further investigate the impact of a change in the packaging configuration for

their shelves.

The product group in focus will be the store interiors and at the center of attention a basic

shelf concept which includes one shelf and two brackets. However, the activities around

shelves are according to ROL most relevant since they are much larger in size than brackets.

Shelves are a basic product that is included in almost all customer orders. The commonality

of the product makes it interesting when it comes to improvement work within

the firm because it has great impact on the overall performance. ROL is currently discussing

if a change in the packaging configuration for shelves will help improving the firm’s

performance.

ROL has proposed two alternatives for packaging their shelves. The first alternative is to

pack shelves and brackets together into a kit (kit-packaging), preferable with two shelves

packed together with four brackets. The second alternative is to bundle shelves together

into a batch (batch-packaging). This could for example be if four shelves were bundled into

a single package. The number of shelves in each batch could be discussed.

In today’s situation, the packaging activity takes place after the powder coating process

(painting) for shelves and this is where ROL suggest that the study starts. The study should

include factors that are affected by the selected packaging alternative until the shelf is installed

at the customer premises. For ROL, the study should generate basic data for a decision-

making process, concerning the feasibility for changing the packaging method.

The chosen packaging solution, either if it is to keep the current solution or change to one

of the two alternatives, creates consequences for the firm. In the different departments of

the firm there exist different approaches to packaging and its consequences. One suggestion

is that it might enhance the efficiency of materials handling within the warehouse.

Others suggest that it would facilitate the installation of shelves and decrease quality defects

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Introduction

through better protection. A more pessimistic view is that it would create higher costs that

could not be justified through small improvements. These different aspects include both

advantages and disadvantages that need to be considered in a decision-making process.

 

1.3 Purpose

 

The general purpose of this thesis is to provide ROL International with basic data for a decision-

making process concerning the development of a new packaging solution for the

shelf concept. More specific, the purpose is to establish a thorough view of the current

situation and evaluate what effects the two packaging alternatives will have on the outbound

logistic activities at ROL International.

1.4 Definitions

 

Outbound Logistics The terms is used to describe the activities in the value chain, according

to Porter (1985, p.40) outbound logistics are; “activities associated

with collecting, storing and physically distributing the product to the customer”.

Here, it will be used to describe the logistical process from

the powder coating operation until installation at customer premises.

Efficiency Efficiency can be viewed as an internal measurement of performance.

Efficiency is commonly measured by comparing input versus

output (Pfeffer & Salanzik, 1987). However, the difficulty lies in the

interpretation because the measures involve assumptions of causality

and theoretical understanding (Pfeffer & Salanzik, 1987), it is the direction

of the benefits that is open to question. Efficiency concerns

how much is produced at what cost. If a change in the procedures

results in a larger ratio of output to input it is perceived as positive.

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2 Frame of Reference

 

The following chapter will provide basic tools for and understanding of the studied logistical

context. It is important to understand all perspectives of a packaging in order to make

the correct trade-offs between interrelated activities. When taking activities into consideration,

understanding of each activity and its contribution to the supply chain performance is

vital for evaluating the impact of change. A very popular method to adapt when evaluating

activities is the Japanese Lean thinking, which is based on elimination of the seven wastes.

The seven wastes are easiest discovered once the processes involved are visualized and

mapped in a process chart. Once a firm has visualized all activities in a chart, the firm has

to evaluate whether they are necessary or not. The firm could also take it one step further,

by putting a value and price on the activities. A very suitable method for this is to use the

activity based costing model, referred to as the ABC-model. Activity based costing is today

the best tool for attaching cost to activities. Knowing what the cost is for a certain customer

order allows an easier decision for what service level that is justified (Goldsby &

Martichencko, 2005).

While Lean thinking and the connected tools are focusing on reducing non-value adding

activities in order to cut costs and time, it is of great importance to understand what value

is added through the different activities. The main activities influenced by packaging are

materials handling, transportation and customer service. In order to analyze the added

value these activities have for the value stream, it is important to understand their interrelation

with packaging and the difficulty with satisfying all perspectives at once.

 

2.1 Lean Thinking

 

Lean thinking has its origin from the Toyota Production System that was developed by

Toyota’s chief engineer, Taiichi Ohno and sensei Shigeo Shingo (Shingo, 1989). Lean

thinking is a cyclical route to seeking perfection by eliminating waste and in that way enriching

value from a customer perspective (Harrison & van Hoek, 2005). This means that

all intermediate activities that demand resources, time and money, and do not add value for

the customer should be eliminated. Eliminating unnecessary activities will result in a more

efficient process.

Monden (1993) describes that there are three general types of operations in a manufacturing

context; 1) non-value adding, 2) necessary but non-value adding and 3) value adding.

Non-value adding operations could be referred to as pure waste and will be described further

under the seven wastes. Necessary but non-value adding is more difficult to eliminate

because they are needed under current working procedures. They could however be eliminated,

although elimination is only possible by implementing a major change in the current

working procedure. Value adding operations are those activities that transform raw materials

or semi-finished products into finished products (Hines & Rich, 1997).

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Frame of Reference

 

2.1.1 The Seven Wastes

 

One of the fundamental principles of lean thinking is to reduce all forms of waste throughout

the value chain. Hines and Rich (1997) explain the seven wastes developed in the Toyota

production system. The seven wastes are:

1. The waste of overproduction

2. The waste of waiting

3. The waste of transporting

4. The waste of inappropriate processing

5. The waste of unnecessary inventory

6. The waste of unnecessary motions

7. The waste of defects

The waste of overproduction is according to Hines and Rich (1997) the most serious waste

since it creates a fiction of workload and pressure in the value stream. Overproduction develops

when a firm produces or delivers too much or ‘just in case’ instead of making/

delivering ‘just in time’ (Harrison & van Hoek, 2005). In the second waste, time is not

used effectively, as in the case of queuing, and becomes a waste. The third waste is transportation

and is concerned with unnecessary movement of products, for example transportation

back and forth with a forklift in a warehouse (Harrison & van Hoek, 2005). Transportation

in this sense is internal and does not include transportation to customer. All

transportations could, in an extreme view, be seen as non-value adding and be objects for

removal, however, minimization of transports if often sought instead of removal (Hines &

Rich, 1997).

Continuing, inappropriate processing becomes a waste in activities that are performed in a

more complex way than necessary (Hines & Rich, 1997). This fourth waste is often difficult

to find and requires a good understanding of customers needs and wants as well as technology

developments. The waste of unnecessary inventory is often a sign of a disruption in

the flow. Inventory consumes space that is often limited, especially in a warehouse. The

sixth waste of unnecessary motions is often connected to ergonomic discussions (Hines &

Rich, 1997) as it focuses on operators unnecessary walking, bending over and stretching

(Harrison & van Hoek, 2005). Finally, the waste of defects concerns the waste of time and

money when processing defect goods. As described by Harrison and van Hoek (2005), the

longer it takes to identify defects, the more cost is added.

A good way of starting the lean path is by conducting a value stream mapping analysis

(Goldsby & Martichenko, 2005). In addition to the seven wastes, Hines and Rich (1997)

presents seven value stream mapping tools that are useful for researchers and practitioners

in their search for and removal of waste in selected value streams. A value stream is, in

comparison to a value chain, the activities that are connected to a specific product or service

(Hines & Rich, 1997). The seven value stream mapping tools are presented in Figure

2-1, which visualize the correlation between the seven wastes and the seven tools.

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Frame of Reference

Figure 2-1. The seven value stream mapping tools (Hines & Rich, 1997).

In a warehouse environment, activities such as handling, transportation and storing are

most common. Considering the logistical perspective and the warehouse environment of

this report, these activities are connected to the wastes of transport, inappropriate processing,

unnecessary inventory and unnecessary motion. However, the other wastes still exist in

a warehouse environment but are of less importance. Taking this into account, the process

activity mapping tool is in accordance to this situation most appropriate and will be further

introduced in the following section.

 

2.1.2 Process Activity Mapping

 

The process activity mapping has its origin in industrial engineering. It is used to remove

waste, inconsistencies and provide high-quality products fast, easy and at low cost. The use

of the process activity mapping tool as presented by Hines and Rich (1997) follows a

common five step implementation sequence.

1. Study the flow of processes

2. Identify wastes

3. Consider whether the process can be rearranged in a more efficient sequence

4. Consider a more appropriate flow pattern, including different flow layout or transport

routing

5. Consider if all steps in the process are necessary and what are the consequences of

removing superfluous activities

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Frame of Reference

In summary, these five steps can be concluded into two simplified steps (Hines & Rich

1997). First, one makes a preliminary examination of the process and included activities

and presents them into a simple process map. The second step is to gather detailed data for

each activity, in terms of time, distances, employees involved, material consumed and type

of activity (operation, transport, retention or inspection). The finished process activity map

can be used for further analysis and improvement. It could also be used as a base for ABCanalysis

since the activities mapped provides the necessary information, in terms of resources

consumed, required for performing a specific activity or process.

 

2.2 Activity Based Costing

 

Activity based costing (ABC) is a cost management system that focuses on cost drivers

compared with traditional cost systems that uses volume driven allocation bases such as direct

labor, machine hours, and sales, to assign organizational expenses to individual products

and customers (Cooper & Kaplan, 1992). Traditional cost systems often understate

profit on high volume products and overstate profits on low volume, high variety products

(Harrison & van Hoek, 2005). ABC on the other hand is a costing system based on the

formulations of activities, resources and cost objects, and these three elements are linked

together in cause and effect relations called cost drivers (Emblemsvåg, 2004). Focusing on

activities behind the costs generates a more equitable share of costs for each individual

product or process.

Emblemsvåg (2004) stress that cost in the ABC system is a measure of resource consumption

that relates to the demand for jobs to be done. Furthermore, products consume resources

indirectly via their consumption of activities and this implies that costs cannot be

controlled, but activities underlying them can.

The basic idea behind ABC is to break the business into major processes such as production,

warehousing and distribution, and then break each process even further into small activities

in order to discover every cost driver connected to it. There are several versions and

integrations of the ABC system, this report will apply the Time Driven Activity Based

Costing developed by Kaplan and Anderson (2004). In their revised approach, managers

directly estimate the resource demands imposed by each transaction, product or customer.

Each group of resource requires two parameters, the cost per time unit and the unit times.

Kaplan and Anderson (2004) explain the procedure as following:

1. Estimating the cost per time unit of capacity.