assugnment

NIAGARA COLLEGE

SUPPLY CHAIN MANAGEMENT (BOPS9404) – WINTER 2013

CASE STUDY 7

Industry and Company Overview

The Oak Hills facility is a unit of The Oil and Gas Services Company (TOGS), an integrated oil and gas industry services provider headquartered in Houston, Texas. Primarily, TOGS provides upstream services to public and government-owned energy companies.

Currently, oil prices and demand are at a low point in an industry-wide cyclical slump, and no upturn in oil prices or demand is evident in the foreseeable future. In addition, a wave of mergers and acquisitions has taken place within the oil and gas industry. TOGS was no exception and had recently acquired a competitor, Triangle Corp. (“Triangle”). The two companies manufacture the same types of service products. In turn, TOGS was in the process of being acquired by Pasadena Services, a larger competitor. At the time of the facility visit, the acquisition had not yet been fully completed. In order to finance the purchase of TOGS, Pasadena Services planned to issue a large amount of bond debt. Press releases by Pasadena Services indicated that the company intended to reduce operating expenses by consolidating redundant operations. Pasadena Services also expected that revenues would increase since the combined companies would now offer a full array of upstream services that could be marketed as a complete service package.

The Oak Hills Facility and Product Line

A project team of students in a Supply Chain Management class had been assigned the task of assisting the Oak Hills manufacturing facility in improving their operations processes. The semester was only two weeks old when the team met Pauline Zhang, special projects coordinator at the Oak Hills facility. Oak Hills was a separate facility located close to TOGS headquarters, and Pauline had recently been assigned to the Oak Hills plant. The agenda for the visit was to provide an overview of the facility and the product line under consideration for conversion to a lean system. A full tour of the facility, including the production lines, and a short question and answer session would conclude the visit. The facility layout is shown in Figure 1.

The main product manufactured at the Oak Hills facility was a special testing instrument used in oil and gas exploration. The facility supplies both internal and external customers. Internal customers at the Exploration and Extraction unit (E&E) used the testing instrument as part of a logging, drilling and measurement services package offered to external clients. The facility also sold to other oilfield supply companies and to large foreign government-owned companies that did not own manufacturing facilities for the testing instrument. Due to the depressed price of oil, exploration activities were at an all-time low, and demand for Oak Hills’ testing instruments was anticipated to drop from an estimated 2.5 million units in the previous year to less than half of that amount for the current year. This estimate included the demand from Triangle, but not from Pasadena Services. Oak Hills management was not certain when testing instruments would actually be provided to existing Pasadena Services business units and customers.

Demand for testing instruments was both local and global and, as seen in Table 1, was highly erratic within product lines. Large volume orders with lead times of up to three months were the norm for foreign orders, so months could go by before a specific instrument was manufactured again. The reason for the large international orders was the stringent paperwork requirement of the U.S. Government. Domestic order volumes were smaller, and lead times were between one to two weeks. Many E&E domestic orders were rush jobs and had to be expedited on the shop floor since the daily cost of an idle exploration well could range from U.S. $50,000 to U.S. $100,000 a day. Oak Hills management wanted to reduce domestic lead times to one week and lower the number of expedited orders.

The Oak Hills plant had little information concerning current or impending E&E projects that would require the testing instruments the facility supplied. Another problem was the fact that E&E customers were used to the luxury of placing rush orders: hence the plant had to maintain a high level of raw materials inventory on site. This, in turn, meant that inventory holding costs were quite high; inventory was estimated to turn over five times annually. Increased delivery costs and overtime pay were other costs associated with expediting orders. In addition, employee morale suffered and desired customer service levels were not maintained.

The testing instrument produced by Oak Hills was simple in design and consisted of three primary components that comprised 80 percent of the total production cost. A machined case acted as a protective receptacle for a sensor board. A lid made from a composite of powdered metals was adhered to the case with a sealer. This combination was called the “box.”

Cases were purchased from Precision Milling, an outside vendor located in San Antonio, Texas (about a three-hour drive from the plant). The cases had to be machined to specification in order to fit in a matching sensor board and to accommodate the wiring and attachments that would go out the back of the case and up the drill shaft. Cases comprised 48 percent of the cost of the box.

The sensor board was 20 percent of the cost and was purchased from Black Dome, an internal TOGS unit. Black Dome was only a 15-minute drive from Oak Hills, and they also supplied components to E&E. Sensor boards came in a variety of sizes depending on the variables to be measured in the well and three material variations that differed according to the expected temperature in the well. Sensor boards built to withstand temperatures up to 500° Celsius were more expensive than those built for 400° or for 325°. The volume of boxes with sensor boards able to withstand 500° was less than 7 percent of total production.

The lid was manufactured by Oak Hills. A different lid was required for each type of box, and the lids could not be inventoried due to the properties of the composite. The lid manufacturing process and the lid placement in the box were critically important; management estimated these factors accounted for 75 percent of the variation in the box production process.

Other important factors were labor costs and the manufacturing system utilized at the facility. The cost of labor for the entire process was less than 10 percent of the total production and packaging costs. The plant had a working Materials Requirements Planning (MRP) system in place and used MRP for ordering all raw materials except the cases purchased from Precision Milling. The MRP system was not used to schedule production.

The Strategic Plan

Since the majority of the manufacturing costs were associated with the box, Oak Hills management was primarily interested in decreasing costs associated with box production.

The central tactic in the strategic plan was to implement lean manufacturing in order to reduce inventories and improve customer service. Management had selected a pilot line of twenty-nine boxes; these boxes accounted for 80 percent of the sales volume in units. Table 1 shows the bill of material numbers for the three common components of the product line as well as the forecast projections made by management. Currently, Oak Hills received shipments of 5,000 units for the cases and 10,000 units for the sensor boards. Precision Milling had recently agreed to ship lot sizes of 3,000 units for each case size within twenty-four hours of Oaks Hill placing an order. Precision Milling intended to meet this customer service level by maintaining cases for the pilot line as finished goods inventory. Management wanted to know what advice the project team could give them in changing over to a lean system and in improving their supply chain.

The Plant Tour

After a preliminary meeting in the administration building, the project team exited the receiving department doors into the humid Houston air and walked about 60 feet towards the wide open shipping department door. As the team entered the building, Sam McNeel, the manager in charge of manufacturing and shipping, met them and casually mentioned they were waiting for a delivery truck that would take a rush order to a freight forwarder for next day delivery to a drilling rig in Louisiana. The shipping department was a blur of activity as teams of employees worked frantically to have the order ready when the truck arrived. Due to the business slowdown, some employees had already been laid off, and those remaining were concerned about their jobs. Merger rumors and a lack of communication from management were also having an adverse impact on employee morale.

The employees in the shipping department were all part of a four-person team where team members rotated between four jobs. One member made the lids and delivered them to the press machines where an assembler assembled the box. An assistant kept the assembler supplied with cases and sensor boards and brought the box to the packer.

Because employees were cross-trained, they were often pulled from their team to assist other teams that had rush jobs; however, productivity and quality bonuses were team based. Seven assembly press machines were set up as parallel lines with the assembler sitting in the middle of a U-shaped table centered at each machine. Workflow moved in a clockwise direction with raw materials on the left side and finished boxes on the right.

Figure 2 shows the machine layout for the assembly press work area. The assembler seated the sensor board in the case, placed the case into a holding die inside the press, attached the lid to the press die, closed the door and pushed a button with each hand to activate the press. After the lid had been pressed into the case, a sealer was applied where the lid and case joined. When a box was completed, the assembler put the box into a sectioned tray that could hold twenty-five boxes.

Set-up procedures were a major problem of this production. In order to change the die set and recalibrate the pressure on one machine, all seven machines had to be stopped due to safety requirements. Press set-ups by the engineering department took ten to fifteen minutes, during which time employees either helped with packing or built up materials on the assembly table. When the presses were running, the level of employee movement was similar to that of a fast food restaurant during a lunch rush. Organized chaos was the impression the group members had. The assembly press machines themselves looked rather worn, and indeed they were, after over twenty years of use.

A small storage area behind the press machines held the sensor boards. All the sensor boards were packaged to prevent damage; however, because of the space constraints only a limited number could be held in the area. Often one of the team members would have to go to the warehouse to restock the supply of sensor boards that the team needed for a particular assembly. Cases were kept in the packing area by a large work table where the assistant could load trays.

Lids were manufactured in a separate area of the building. The lid manufacturing area was approximately 120 feet away from the box assembly area, and the only way to reach the area was to exit the building and travel under a covered walkway and re-enter the building (see Figure 1). The lid machine room had the same layout of seven machines in a line, with a single operator sitting in front of each machine around a much smaller U-shaped table. Figure 3 shows the machine layout for the lid press work area. Though the machines were coated with residue, it was obvious they were much newer than the assembly press machines.

Lids were made from a composite of powdered metals that included lead. Because of the health hazards of working with lead, the room had an extensive vacuum system and the operators wore face masks and gloves. The room was sealed off from the rest of the building, and the only way in was through the outside door. Each lid pressing machine was correlated with an assembly press machine, and enough lids were made to meet the requirements of the production run. To make a lid, the lid maker filled a metal scoop with powdered metal from a powder bin and drew the scoop across a metal bar to level off the powder. (Closer inspection revealed that the bar was no longer straight but concave due to continuous scraping.) The powder was then placed in the mold die that was inside the machine. When lid pressing was complete, a suction device lifted the lid out of the die and the door opened. The lid maker reached inside the machine, placed one hand under the lid and stepped on a foot pedal to release the lid. The newly formed lid was then placed in a holding rack and the process repeated. The rack could hold forty lids. When the rack was full, the lid maker walked the lids to the assembly press room. If it was raining, a plastic cover was used to protect the lids.

Two methods were used to control quality. The first method was to weigh the first scoop of powder used for the lids and then every fiftieth scoop. The second method was to fit the first lid into a fitting rectangle, which acted as a poka-yoke to make sure the lid was the correct size and thickness. Every tenth lid was checked this way. Lids were not weighed. The lid maker kept a written log of these results and used a hand held click counter to keep track of how many lids were made. At the end of each hour, there was a five-minute cleanup period where the lid maker used a portable vacuum cleaner to remove powder inside the machine and around the work area. Scattered around the room were ten-gallon cardboard containers that held the various mixtures of powdered metal; some of the lids were left partially open. Even though lid production was done for the day, all the bins on the work tables by the machines held powdered metal material.

The lid makers were busy helping the packers get the rush jobs ready for shipment. A large case with glass doors and rubber seals was used to hold a buffer supply of lids that would be used to start the next day’s production. On a table by the door was a small pile of defective lids. Sam demonstrated how fragile the lids were by crumbling one of the defects in his hand, and he mentioned that extra lids were always produced due to the high variability of the lid making process.

The next stop on the plant tour was the quality control department, which was next to the lid press room. Boxes were tested by sending an electronic shock through the lid; the shock fragmented the lid and exposed the sensor board to the environment in the well. The first box of each production run was tested; if the box passed, then the assembler could initiate the production run. If the box failed, the assembler had to wait while quality control determined the cause of the failure. The main causes of box failure were related to the lid. If the lid was too thick or the wrong density, the electronic shock would not be strong enough to fragment the lid. If the lid was too thin, it tended to fracture while being pressed into the case; however, this defect was immediately apparent to the assembler whose job it was to visually inspect each lid after assembly. The box test took about ten minutes including the travel time to the quality control room. During testing, the lid maker was still busy making lids while the rest of the work team was either idle or setting up the packing area. Management felt it was cheaper to scrap defective lids than to slow down production. Defective boxes were not salvaged due to rework costs and the possibility the case might have hidden fractures in the metal. There was always a backlog of work in the quality control department in the morning since all seven assembly press machines normally started production at the same time.

Completed trays of boxes were delivered to the packer who worked inside the open end of a large U-shaped conveyor belt. The packer applied a protective coating to each lid, and the tray of boxes then proceeded along the conveyor belt to a low temperature oven that dried the coating. After the tray emerged from the oven, the packer attached the packet of wires to the box and packaged and labeled the carton of boxes. The packer did not monitor for quality problems since the assembler was supposed to check the lid surface for damage. However, boxes did arrive at customer destinations with damaged lids. Management could not be sure if the damage occurred during transportation, even though the boxes were shipped in sturdy cartons with cushioning.

The Question-and-Answer Session

Upon completion of the plant tour, the project team had a short question-and-answer session with Pauline. The following information was gathered:

• Cycle time for the process averaged thirty seconds, with a range from twenty-five to forty seconds. The average was used for all planning periods except daily production.

• The daily production schedule was fixed, while the weekly production schedule was more fluid due to the need to expedite rush orders. In some instances the plant manager disrupted the daily production schedule to meet an important delivery.

• Black Dome preferred to manufacture large batches of sensor boards. They had a poor on-time delivery record that created late deliveries and rescheduling problems for Oak Hills. Black Dome attributed the late deliveries to rush orders for products supplied to E&E.

• The testing instrument was not inventoried by internal customers, and there were no formal mechanisms in place to update Oak Hills on drilling progress of E&E projects. The survey results in Table 1 are based on phone calls to internal departments of TOGS asking project managers to estimate their demand for the year. Not all project managers were contacted, and those on foreign assignments were the most difficult to reach.

• Sales information and production records for Triangle were incomplete, and Oak Hills did not have a contact list of Triangle customers.

• Employees were not trained in statistical process control techniques, nor were they empowered to stop the production process.

• Some lids took longer to make than it did to assemble the box. This created a shifting bottleneck, which had the effect of starving the assembly press.

• Engineers came in at 7:00 am to set up the required tooling for the assembly press machines. The tooling for the lid press machines was done in the afternoon so a buffer supply of lids could be built up for the next day’s production. The engineering department was usually notified of a set-up requirement after a batch had been completed. Production employees were not involved in machine set-ups.

These are the details four kinds of management

This is the objective

Production meets
customer demand
(uninterrupted supply to customers)
Reduce costs

Improve quality

Improve customer satisfaction

Demand management 1

Objectives

Forecasting techniques

Collaborative planning, forecasting & replenishment

Capacity management 2

Balancing production capacity (supply) with demand

Materials planning

Capacity planning

Enterprise resource planning

Integration of all activities in supply chain

Collaboration (working-together) with partners

Forming of strategic alliances (trust, sharing of information)

End-consumer focused

Flexibility (adapt and respond quickly to changes in environment)

Sustainability (environmental acceptable)

Eliminate wasteful activities.

Inventory management 3

Reduce cost/investment in inventory

Track/monitor

Maximize orders to reduce cost

Operations management 4

High quality; low cost; fast response

Lean Production

Six Sigma Quality

Operating

philosophies