Reduction of Order Handling through Outsourced Kitting

Elgersma, S.F. (2014) Reduction of Order Handling through Outsourced Kitting.

Abstract:This research was initiated by the purchasing department of Thales Nederland. The goal was to reduce the costs of this department using outsourced kitting. A kit can be defined as a container with the needed parts for one or more assembly operations for a sub-assembly or a whole end product and kitting can be defined as the collection of these parts. Outsourcing the kitting to a supplier means that the supplier delivers the kit with its parts already kitted. The research investigated how outsourced kitting should be organized at Thales Nederland. The research question was as follows: How should Thales Nederland organize outsourced kitting of parts of a single supplier for the same radar? We approached this research by studying literature on in-house kitting due to lack of literature on outsourced kitting. The literature formed the basis for the model we used during this research. This model was used to find the relevant parameters and locate possible obstacles which could increase the costs. We formulated solutions to these obstacles when possible and calculated the savings based on a case study on with the SYSTEM-X as system and Supplier-X as supplier. Using the model, the current situation was analysed. The following factors can cause extra costs when outsourcing the kitting:  Incomplete kits, because the assembly cannot start when not all parts are present and the part needs to be reordered.  Inspections, since it would create a lot of movement and waiting of the parts.  Late deliveries, since their number can increase due to outsourced kitting.  Design changes of parts, since the changed part must be traceable.  Special handlings, since a part with a special handling must be traceable.  The bill of material, since implementing a kit in the BOM is currently difficult  Delay due to missing/broken parts that are currently kept on stock, since there is no internal buffer for these parts anymore. The major benefits of outsourced kitting are a reduction in the number of order lines, picks at the warehouse and a reduction in warehouse capacity needed. Outsourced kitting requires some changes in the current process. The following changes must be implemented when outsourcing the kitting:  There must be a manufacturing-BOM (M-BOM) in which kits can be defined. The M-BOM is just a regular BOM, but is more independent than a regular BOM from engineering influences.  Outsource visual (V) and functional (F) inspections to supplier to prevent movements of kits.  Supplier keeps a stock policy which is equal to or better regarding the fill rate than Thales’ stock policy to prevent production/delivery delay. This policy counters the possible benefit of a reduction on holding costs, since the stock is moved to the supplier. The value of the stock is small compared to the possible delay costs. Besides these changes, the kit must meet some requirements. Its design must facilitate the pick and assembly operations such that it can improve these processes. Subsequently this design must be kept up to date. The kits must have some distinctive features, such that it and its parts are recognized. The kit should have its own number and the parts must be kept in their original packaging. Kits must not incorporate parts that are difficult to kit due to their size or the special handling they require. As last, the kit should have space for other parts of suppliers such that it can move as one kit to the final assembly. We analysed the costs and the gains of outsourced kitting using the theoretic model. Taking the costs and gains of both Thales and Supplier-X into account, the savings of outsourced kitting are around the €XXX per System-X. These savings create enough margin regarding errors and exceptions. When taking only Thales into account, the gains are €XXX per System-X. Comparing these gains with the costs of a System-X, which is several XXX, the gains are very marginal. Implementing outsourced kitting is not very interesting when only taking the gains into account. However, the side effects of easier communication and control and enforced coordination could create additional gains. Yet these effects are only present when a supplier has performance issues. Alternatives which solve these issues are probably more effective. Outsourced kitting could be used to share the information on the assembly process. Since outsourced kitting leads to a small saving, it is a suitable alternative to accomplish this sharing. Outsourced kitting could also be a useful tool to support the outsourcing of assembly activities. It is questionable if outsourced kitting should be implemented for its direct savings or savings due to easier communication and enforced coordination, but it can be implemented for sharing information of the assembly process or as tool to support the outsourcing of assembly activities. If one of those two benefits is wanted, we advise to implement outsourced kitting. The parts that are currently ordered in a quantity bear the risks of outsourced kitting. If the quantity used is a small fraction of the quantity ordered, these parts do not contribute much to the overall gains of a kit. This results in that these parts are sensitive for errors. Excluding these parts could therefore be an option to reduce the risks. It is questionable if outsourced kitting is profitable for other suppliers. The location of Supplier-X causes a very short delivery time. This reduces the costs if a part that currently is kept on stock, is broken/missing. Other suppliers that are not located nearby cannot provide these small delivery times and resulting in higher costs for missing/broken parts. Removing the parts with a low ratio on quantity used compared to quantity ordered can make outsourced kitting at other suppliers more interesting. As stated earlier the gains of Thales are €XXX per System-X. These gains are realised for a large part by the reduction of the handling at the logistic inbound and the picking and storing activities at the warehouse. The gains for the purchasing department are €XXX per System-X, which is almost nothing. So outsourced kitting does not contribute to the goal of reducing the costs of the purchasing department. There are already projects started that facilitate the changes needed for outsourced kitting. When implementing outsourced kitting, we advise to create awareness on outsourced kitting such that outsourced kitting can be taken in account in these projects. We advise to start with a project to outsource the V and F inspections. When all projects are finished, we advise to start outsourced kitting with the kits that are the most robust regarding costs against missing/broken parts. These kits can help in detecting and solving the start-up problems without much cost.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:Industrial Engineering and Management MSc (60029)
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