STOEL B.V Investment Advisory Report

ILM2A-4Angelsloerdijk 39, 7824 AB

+31 644 770194Emmen - The Netherlands

3 / 3 0 / 2 0 1 1

Arinto Mahadi AntoroIqbal AdiansyahLijun LiRichard Owusu KonaduWeiqin ZhengWen Zhang

Table of Contents

1. Chapter I Executive Summary...............................................................3

2. Chapter II Introduction............................................................................5

3. Chapter III Logistics Improvement Strategy......................................6

a. Optimization of the Production Process...................................................... 6

a. Problem Definition................................................................. 6

i. Type of Manufacturing Waste Found in Stoel B.V

and its Possible Solution...................................................6

b. Lean Manufacturing Techniques/Methodology..........................................7

a. 5S Principle............................................................................7

b. SMED (Single-Exchange Minute of Dies)................................8

i. Specific Analysis Steps.............................................8

ii. SMED Method Applied on Injection Molder............9

c. Systematic Layout Plan...............................................................................10

4. Chapter IV Business Economics Analysis............................................12

a. Cash flow Analysis.......................................................................................12

b. Machine-intensive versus Labor-Intensive Production...............................13

c. Conclusion...................................................................................................14

5. Chapter V Business Organization..........................................................15

a. Advice on the Organizational Structure......................................................15

b. Advice on the Human Resource Department..............................................16

a. Employee Reconfiguration............................................................16

b. Training Employee........................................................................16

c. Strategy to Motivate Employees...................................................17

6. Conclusion and Recommendations.......................................................18

7. Appendix........................................................................................................ 19

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a. Appendix 1 Cash flow “Old Machinery Approach”..........................-

b. Appendix 2 Cash flow “New Machinery Approach”.........................-

c. Appendix 3 Productivity Level..........................................................19

d. Appendix 4 Assembly Chart and Process Diagram...........................21

e. Appendix 5 MRP calculation & Safety Stock Assumption................23

f. Appendix 6 Spaghetti Chart..............................................................26

g. Appendix 7 Layout Plan....................................................................28

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Chapter I Executive Summary

“People who don't take risks generally make about two big mistakes a year. People who do take risks generally make about two big mistakes a year.“

- Peter Drucker –

Stoel B.V is currently facing a decisive situation which might affect the company’s financial state

as a whole. The company’s close customer Maxi Cosi has revealed their plan to increase

demand by more than double compared to last financial year. To anticipate this, the upgrade of

current plant capacity is compulsory. However, the type of investment needed by Stoel B.V.

needs to be investigated. A wise action from the company is to select the option that would

enable them to grasp the opportunity and prevent the company from committing such

unjustifiable risky investment. For a medium-sized business such Stoel B.V. is, high capital

expenditure may cause fixed cost to rise enormously--leading to slower time to break even and

lower profitability-- which at the end, would cause inflexibility for company during turbulent

times. Furthermore, the new types of furniture product, namely ModCH and ModT, are already

developed to penetrate into the family furniture market. The number of units produced will be

adjusted to the capacity remained after producing time of MC and MCH is calculated.

Making effective and informed allocation of resources may be one of the most important

endeavors that Stoel B.V. should undertake to respond to the challenges faced by fluctuated

demand pattern. The comparative study to both types of investments will be performed to

analyze how both affects the cash flow and profitability of the company (To view the

comparative cash flow, please refer to Appendix 1 and 2).

Stoel B.V. would reduce the cost on capital investment enormously while increasing the factory

capacity at the same time. We arrived at the conclusion to not consider investing in new

machinery, unless Stoel B.V. could secure a long term contract with Maxi Cosi and ensure a

stable demand. Due to uncertain economic growth, the company should refrain from making

such high capital investment because the risk would be unbearable in case of a false

assumption on demand or the non-continuity of the current contract with Maxi Cosi.

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Furthermore, Stoel B.V should take under advisement the option to double the working shift.

The company might expect to have a doubled-volume of working hours, hence satisfying

customer demand. The overcapacity is to be fully-exploited to produce ModCH, one of the new

products in Stoel B.V’s portfolio that is specially designed for company’s expansion to family

furniture market.

Thus, in the first three years, the ModCH and ModT can act as pilot project to test the market.

Company could then observe the demand pattern and predict whether they’re able to attract

enough consumers. Only after Stoel B.V. is already established in the new market and able to

bear the risk of losing the customer’s contract, they could reconsider to make high capital

investment in the fourth year. Nevertheless, they should not engage in it in such an early stage.

Moreover, the additional operating costs will emerge after the increase of capacity. However,

as there is no tremendous increase in fixed cost, the payback time become much sooner. We

advise Stoel B.V. to take the advantage of using contract employee during the pilot project. By

doing so, company could gain the privilege of choosing to lower or increase capacity when

demand fluctuates. This would save a lot of money as contract labors also do not receive the

same benefit as a full time one.

Furthermore, the implementation of some of lean manufacturing principle should be seriously

considered by Stoel B.V. Enormous cost-saving can be achieved by eliminating waste in

operation, optimize the adjustment time between production run, inefficiencies of physical

motion, etc. We suggest Stoel B.V. to apply the 5S and SMED (Single Minute Exchange of Dies)

in order to cut the changeover time between department and help Stoel B.V. to identify non-

value adding activities, hence removing it from the production process. Nevertheless, the new

layout plan is developed based on the degree of importance and connection between

department, which illustrated by „Spaghetti Chart“. This would save employees from moving

too far from its department and prevent any unnecessary movement of goods.

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Chapter II Introduction

Stoel B.V. is a production company that specializes in the producing of moulded plastic chairs

for the office furniture market.

In this report we will provide an advisory report for Stoel B.V, which concern in the feasibility of

the investment in a new machine and machinery hall because the company is currently having

economic problems on retaining the market share and as a result is in a big need of dependable

advice to remain in the market.

Apart from the current problems, we will also discuss the possible improvements that the

organization can make in order to cut and save cost within its procurement and also production

department, whilst making profit out of it and at the same time satisfying its consumers. To

illustrate these problems, there will be thorough explanation using not only words but also

calculation and also financial analysis.

In the report we will divide the problems into three chapters. They are logistics, business

economics and business organization. In the end of the report we will provide conclusions and

recommendations.

In first chapter we will describe on how Stoel B.V. can apply some of logistics method to

improve its production like lean manufacturing, SMED, 5S and efficient layout plan.

Second chapter will concern on business economics aspects to compare on investing new

machine and not investing machine will affect the Stoel B.V. cash flows.

Last chapter we will provide the business organization structure and human resources. In the

end we want to give some advices and recommendations to Stoel B.V. so that in the near future

their business can match with the current market.

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Chapter III Logistics Improvement Strategy

1. Optimization of the Production Process

a. Problem Definition Non-adding value activities such as changeovers/adjustment of machinery, especially the injection molder machine would cost company a good fortune and are impeding Stoel B.V ability to higher the utilization rate and number of output of the plant. It causes many wastes in operation, and prevents Stoel B.V from being economically efficient.

b. Type of Manufacturing Waste Found in Stoel B.V.

Waste are non value-added activities are activities which aren’t required for transforming the materials into the product that the customer wants. Anything that adds unnecessary time, effort or cost is considered non value-added, for instance: The breakdown of machinery, Uneffective use of labors (e.g.labors are busy seeking lost tools rather than focusing on producing goods), labors don’t do anything while the machines are cleaned or adjusted.

i. Large Batch Production and Inventory: Over-production is needlessly producing more than demanded or producing it too early before it is needed. This will increases the obsolescence risk, increases the risk of producing the wrong thing and increases the probability of having to sell those products at a discount or reject them as scrap. Stoel B.V. should emphasize on producing in smaller batches so that reduce the manufacturing lead time and will allow company to reschedule more quickly to respond to changing customer needs without having to keep them waiting. Smaller batches will also reduce inventory which at the end will improve company cashflow and profits. Therefore, we advise Stoel B.V. to reduce half of the batch size.

ii. Long changeover/adjustment time: Changeovers/Adjustment of machinery, especially the injection molder machine takes too long and are impeding Stoel B.V ability to higher the utilization rate and number of output of the plant. It causes many wastes in operation, and prevents Stoel B.V from being economically efficient due to non-adding value activities during the changeover time (clean-up, set-up, and start-up of machinery). To solve this, Stoel B.V could opt to implement SMED (explained in next section).

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iii. Defects: Defects – This include physical defects which directly add to the costs of goods sold, and also errors in paperwork, for instance: provision of incorrect information about the product, production to incorrect specifications, etc. When using small batch, workers could directly spot an error in quality of his WIP, thus eliminating Quality Control Department is possible.

iv. Transportation: includes any movement of materials that does not add value to

the product, e.g. moving materials between departments. The misuse of this

can result in exceeding production cycle times, inefficient use of space and

labors and can also be a cause of production stoppages. The new layout of the

factory should aim for the ideal that the output of one process is immediately

used as the input for the next process, hence continous flow and 5S method of

instruction are the keywords.

v. Waiting: When a machine run at a slower rate, it might cause bottleneck or

delay in production. The aftereffect will be an enormous loss to Stoel B.V.

Workers who had nothing to do would cost company a fortune. Streamlining

and adjust the machine capacity to run at the same level is the solution to this

problem.

2. Lean Manufacturing Techniques/Methodologya. 5S Principle

„The Five S’s are rules for the organization of workstation which aim to organize each worker’s work area for maximum efficiency. „

a. Sort: Classify what is needed and what is not needed in the factory, so that the things that are frequently needed are available nearby and as easy to find as possible.. Things which are not needed or less used should be relocated or thrown away.

b. Straighten (“Set in order”) – Arrange things for easy access. The objective is to minimize the amount of movement required in order for workers to do their jobs. For instance, by deploying a tool board closely to the department of workers with related function, they can easily find it. This way of arrangement can also help the user be immediately aware of any missing tools.

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c. Scrub (“Shine”) – Keep workstation and machinery clean to eliminate problems associated with untidy-ness and uncleanliness.

d. Stabilize (“Standardize”) – Make the first 3 S’s a routine practice by implementing clear procedures.

e. Sustain: Communicate, promote and exercise the 5 S’s to ensure that it is part of the company’s culture.

b. SMED (Single-Exchange Minute of Dies)

Reducing setup times is not all about spending much money on special tools, equipment or machine, it is about improvement on workplace organization, flexibility and capacity. Many manufacturers do mistake when they are producing. Usually when they finished producing product A, they will wait until the operator finish changing the equipment and gathering tools or resources. All this waiting time will lead to waste and not creating any value. Shortening the setup time can decrease the cost and expanding the customers demand. To achieve this and what Stoel B.V. need to do will be discussed below.

5 Phases of Setup Time Reduction:1. Identify internal and its potential external elements:

Identify the setup: description, part numbers date. List every step and time required: look for time-consuming steps Track the amount of movement and distance traveled: (“spaghetti diagram”, please see

Appendix 6 Spaghetti Diagram) Classify between internal and external steps

2. Convert internal elements to external Look for adjustments

Convert as many internal steps to external steps as possible

Minimize adjustments

Note when people leave the area and/or are searching for tools and materials

Look for ways setup can be done wrong and define ways to prove it (that it can go

wrong)

Seek out teamwork opportunities

3. Reduce setup processing time

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Reduce the internal steps times

Reduce the external steps times

4. Optimize setup processes Plot the current setup time graph

Plot the improved graph setup time

5. Standardize setup – the right way, the same way – every time1

Define the ideal setup

Plot the ideal graph and drive toward it

c. SMED Method applied on Injection Molder 2 : Preparation

o Making sure material or parts are available in the correct location and quantity and that shop paperwork is correct.

o Assuring tools and dies are in place and functioning properly.o Confirming extracted tools get cleaned, checked for maintenance needs and put

away properly.

Mounting and Extractiono What most people consider to be the set-up, the mechanical steps to take out

the old setup components including dies, tools and parts and put in the new setup components.

Measurements, calibrations and control settingso Centering, dimensioning, measuring temperature, etc.

Trial runs and adjustmentso All time spent running trial pieces and making adjustments until a good piece is

produced and sustained production is possible

1,2 Hart, Greg. “Setup/Changover Optimization”. www.hartinnovations.com/Setup_Reduction.pdf.2

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3. Systematic Layout Plan(For the new layout figure, please see Appendix 7 Layout Plan)

a. Layout With the new layout for the current production hall, the hall is divided into 5 main departments, which are plastic department, metal department, assembly department, finished product department and office. Each department is sequenced on the right order to have a better interaction among others so that the good and information flows will go smoothly. What Stoel B.V. will get on the new layout are:

1. The goods flow on the new layout now goes on one direction so it will eliminate waste on unnecessary movement and better routing.

2. With group layout applied, the floor space look neater and well organized. Each department is grouped based on the components they have to produce, and the next department has to complete the task from what previous department has done. Once again it will improve materials flow and also reduction in time for moving good from another department.

3. Easy identification of bottlenecks. They produce in-group so that the production always go when one department has completed their part and if it stops it means that a group has the bottlenecks and they could identify right away and fix it at the same time. It means reduce in unnecessary time on looking in which department the problem is happening. With fixing at the same time it also means better output quality at the end and also reduce in defects and it will lead to reduce inspection in the end of the production.

b. Process

With the new layout, now the raw materials go to two production lines. Plastic materials go to the plastic department and there the injection machine will mold the plastic and then sawing, cutting, milling and later it will go to the assembly department. The plastic department produces backrest, seat, plastic pinpoint and plastic screw.

Raw material that goes to metal department will be sawed, cut, welded and later painted then will be sent to the assembly department along with other semi-finished products. Metal department produces metal frame, metal screw and steel tube.

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In the assembly department all the semi-finished products will be assembled to produce the finished product. The finished product will go to the quality control sector and then packaged and last stored in the finished product warehouse.

In the process we are suggesting that there are two things that need to be taken care of. First, as it is already mentioned above on the layout part, we rarely need the quality control, because bottlenecks or defects can be taken care of in the group. With checking in each group or department it will lead to better output and cut cost because all activity are dealt at the same time.

Second is, bear in mind that each semi-finished products from metal and plastic department have different production time. Stoel B.V. wants to have continuous flow so to prevent bottleneck if there are lack of semi-finished product from one of the department, they need to have some available finished products so that the assembly department can always go, idle department it means loss of money and more cost.

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Chapter IV Business Economics Analysis

1. Cash Flow Analysis It is not difficult to distinguish both approaches because it appears to us that the “old machinery”-approach has proven to be more profitable in the short run. Having not to invest too much money on machinery which depreciates evenly throughout the year, we are confident to advise Stoel B.V. to take this step—using the “old machinery” approach—as it offers a faster payback time with a lot less risk. We are convinced that Stoel B.V. should not spend lavishly on machinery in its early stage of penetrating to the new market. Unless Stoel B.V could secure a long term contract with its close customer, we strongly urge them not to invest. Referring to the Internal Rate of Return (IRR), both approach differs a lot. While “old machinery” approach has reach a good position in the level of 95.9%, the “new machinery” approach has lagged behind in the level of 24.2%. Clearly, the big gap of return between both approach has shown us which one is the smarter investment decision to make.

2. Machine-intensive versus Labor-intensive Investment

Based on our observation, there are several conclusion to be drawn:

a) High Capital Investment is not a preferable option . Machine replacement come up with many negative consequences, such as :

1. Layout redesign and reconfiguration might be costly.2. Disposal of old machinery that has not been fully depreciated is a loss to

company.3. The adjustment needed to prevent bottlenecks will escalate the overall cost. All

the related variables such as--velocity of goods flow and labor-hours--will increase linearly with the increase of machine speed and capacity. The capacity increase to 60 hours will require the employment of new labors, because under the “Dutch Labor Law”, the maximum working hours of a labor is 9 hours 45 minutes. Therefore, laying-off current labors are not a solution, as extra labors are needed. Nevertheless, machinery such as injection moulding machine still needs an operator and the working capacity of all department must be synchronized at the same level.

b) Unless Stoel B.V. could secure a long-term contract with Maxi Cosi to maintain a stable level of demand, the company should not risk in new capital investment as it also requires a long term commitment from both sides.

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c) Additional working shift. To be able to cope up with fulfilling the demand, we could opt for the alternative solution: Double working shift (“Earlies and Lates”). The first shift is form 08.30-16.30 and the second shift is from 16.30-00.30. The consequences from this decision are:

1. Double the working capacity from just 38-hours to 76-hours a week. (1900 hours to 3800 hours). This is a higher capacity than the “new machinery” approach which has the maximum capacity of 3000 hours.

2. Increased plant capacity will enable company to reach the objectives of producing 12,600 units of MCH and 35,000 units of MC. Moreover, the remaining capacity can be utilized to produce 8,342 ModCH and purchase the components for 2,086 units of ModT.

3. However, this plan also comes up with some additional cost, most notably the variable/operational cost, but no cost on capital (except for the current assets). These will take into account all the following cost:

i. Energy cost : Because the operation time of the factory becomes longer, the energy cost will peak twice as much as the current one. However, If compared to energy cost of “machinery investment”-approach, the cost is just slightly more expensive.

ii. Personnel Cost : To allow for 16-hours a day of continuous operation, extra workers are needed. This include labors for the same positions as the ‘Earlies’ shift and a shift coordinator/plant supervisor. The cost of training also account for this.

d) The use of Contract/Temporary Labors : With the current economic conditions putting a tighter restraint to company’s financial capability, it is wise to work with more flexible budgets. For Stoel B.V. Therefore, it is more efficient and responsible to engage the services of contract labor agency (“Uitzendbureau” in Dutch Language) to help with upcoming hiring possibilities. Benefits of using contract labors are :

1. Enables Stoel B.V. to adjust more easily and quickly to demand fluctuations. In the situation of uncertain demand, using contract labors can help to keep the workforce flexible. Using contract labor to work on the second shift gives the flexibility to increase or decrease capacity when demand fluctuates, without increasing company’s fixed cost.

2. Opportunity to analyse the noise/deviation in demand forecast. It gives company the time to evaluate the rise and fall in demand, hence making well-informed and anticipated decisions for capacity adjustment in the long-term.

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3. Saving time and moneyThe cost of hiring temp workers is cheaper than the cost of hiring permanent employees with benefits and severance pay (in case of a lay-off).

3. Conclusion

During uncertain economic growth, the company should refrain from making such high capital

investment because the risk would be unbearable in case of a false assumption on demand or

the non-continuity of the current contract with Maxi Cosi.

In the first three years, the ModCH and ModT can act as pilot project to test the market.

Company could then observe the demand pattern and predict whether they’re able to attract

enough consumers. Only after Stoel B.V. is already established in the new market and able to

bear the risk of losing the customer’s contract, they could reconsider to make high capital

investment. Nevertheless, they should not engage in it in such early stage.

Moreover, the additional operating costs will emerge after the increase of capacity. However,

as there is no tremendous increase in fixed cost, the payback time become much sooner. We

advise Stoel B.V. to take the advantage of using contract employee during the pilot project. By

doing so, company could gain the privilege of choosing to lower or increase capacity when

demand fluctuates. This would save a lot of money as contract labors also do not receive the

same benefit as a full time one.

Referring to the cash flow of the company, there is a huge gap between the Internal Rate of

Return (IRR) of both machine and labor investment. While purchasing machinery produce an

IRR of only 24.2%, using the old machinery and contracting temporary labors has an IRR of

95.9%. The latter is clearly a more profitable alternative to choose.

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Chapter V Business Organization

6. Advice on the organizational structure of Stoel BV

The significant problem of stole BV is that organization structure. Stole BV uses line organization structure to manage people in the company. Line organization structure is a traditional organizational structure, which orders travel exclusively along a simple line, with strict hierarchical relationships maintained between manager and subordinates. Though line structure has a lot of advantages like quick decision-making and low costs, it has many disadvantages as well. In line organization, and all communication has to go for single line, leading to delay in making decisions, even make the wrong decisions. Furthermore, coordination between departments can only take place via a senior manager who is responsible for both. The chart below shows the present organization structure (line organization structure).

1st management level

2nd management level

3rd management level

Stole BV needs a new organization structure— line-staff-committee organization because the current organization structure has a lot of problems that does not benefit to company. The big difference between two organizational structures is that line-staff-committee organization builds a committee to improve the coordination and cooperation between employees and departments. It brings a lot of advantages such as accuracy of decision, greater acceptance of decision and boosts the relationships between line and staff officials.

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director

finance manager

secretary

purchase manager

sales manager prodution manager

Shift Coordinator/

Supervisor

skilled and unskilled staff

workers administration

7. Advices for human resource management of Stoel BV

The way of using labors properly has big effect on the organization to meet its goal. Stoel BV has decided to establish a new machinery hall, so Stoel BV should take some measures especially in the field of human resource to adapt itself to the changed situation. The present situation is that company should increase new labor power of part-time employees, which engage the people of contact with Dutch labor agency. Company starts to work with two shifts depends on time, which works from 8.30-16.30 and the other shift is from 16.30-00.30.There are some important points that the human resource management should take into account.

a. Employee reconfiguration After introduce in to new labor force, Stoel BV should reconfigure the employees to the right positions. Motivate the employees by giving them the right jobs. Hence, the expertise and specialty of each staff can be utilized optimally, a high working efficiency at the end.

b. Training staff New part-time employees work in Stoel BV don’t know how to use the machineries and they also don’t familiar with the operation process because the machinery hall and layout. In this way, a training team can be established. The activities of this team are firstly introducing the operation process, then show how to use particular machine, finally organize operating practices. One simulated production can be conducted, so possible bottlenecks and drawbacks can be noted before ahead.

c. Strategy to motivate employees Managers should motivate employees through financial incentives, task design and setting high objective. Financial incentives keep people on the move, which is a fact in the real life. Financial incentive is achieved in bonus, which means company give employees bonus regarding to their performance. The harder employee work, the more bonus they get. Except financial incentives is a way to motivation extraneous to the job, motivation employee via the job itself is a manner of motivation that is intrinsic to the job. People are very happy to their jobs if they obtain a high degree of satisfaction from their job. Also another situation that people will see his or her job as a challenge when he or she gets a new task. The task can be made attractive to employee in three different ways: task enrichment, task enlargement and task rotation. The last but not least, setting high objectives is a good way to motivate people. What is the reason of set high targets is that in order to improve performance. However, objectives need to satisfy many conditions such as high but realistic, specific, accepted by employees and has to be regular feedback on process. Objectives can be formulated through the SMART principle, which

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stands for specific (S), measurable (M), acceptable (A), realistic (R) and time-fixed (T). For example, decrease the defects even o defects in the production process. Employees must be motivated of the targets.

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Chapter VI Conclusion and RecommendationsIn the view of an economically unhealthy business climate today where even the most

unexpected things occurs all of a sudden, we advise Stoel B.V. to opt for not investing in high

capital machinery in the first year of the project. Unless Stoel B.V could secure a long-term

contract with Maxi Cosi, company should not risk its financial state as fixed cost will increase

enormously after the investment made, putting the profitability of the company at stake.

Instead, Stoel B.V could implement a more flexible approach to increase the overall plant

capacity by utilizing the resources at its own disposal.

Therefore, we urge Stoel B.V. to hire temporary labors who suit the criteria of the job from an

agency (as called in dutch as “Uitzendbureau”) to enable the plant to operate in two shift, of

which takes 8 hours to finish. This decision will upgrade the current capacity twice as much.

Stoel B.V. would have a maximum capacity of 3700 hours a year (already deducted by time

needed to clean the machinery every two weeks). However, this plan also comes at a cost. The

operating cost will increase linearly with the increase of capacity, but surely, this is a more

profitable cost to spend on since it gives company a flexibility (either to increase or decrease

the budget), and allow the production capacity to be aligned with fluctuation in demand.

Furthermore, new products will be added to company’s portfolio as Stoel B.V future plan to be

established in family furniture market will be realized as the overcapacity of the factory will be

utilized to produce this product. As the market share of Stoel B.V. in this market become larger

throughout the year, then we could consider to purchase machinery.

Nevertheless, the optimization of the production process also plays an important role to

eliminate waste and saves cost for company.

The reduction of adjustment time could bring an incredible impact to company’s cashflow

position. After it is reduced to only one hour after the implementation of 5S and SMED,

company’s income boost by € 72,400. Thus, If Stoel B.V. could maintain the operation that is

based on the lean principle, reducing the changeover time, enabling continuous flow, have a

faster lead time, and smaller batch size, the company would mark a new milestone in its

history.

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