THELUBRICATINGOILDIVISIONASITUATIONSUMMARY

Howistheprojectinitiated? The project deals with the operations of the Lubricating Oil Division (LOD) of a major US oil company.TheLODproducesandstoresabout400typesofautomotiveandindustriallubricating oilsandgreases,forultimatesaletoover1000customers.Theimpetusfortheprojectisareport by the firms internal auditors to the VicePresident of Finance that in their judgement the current average stock turnover achieved by the LOD of 12 times per year is well below the company target of 24. (Stock turnover measures how many times per year the entire stock is renewed.) As a result, the funds tied up in inventories are seen as excessive. This concern is passed on to the VicePresident of Manufacture who, in turn, informs the manager of the LOD with a request toreporttohiminduecourse.Inresponse,themanageroftheLODapproachestheORgroupin the company headquarters for help. That is where the analyst comes in. The initial request is somewhat vague the manager wants advice. Therefore the first phase of the project is clearly inthenatureofproblemscoping.Thereisnoguaranteethattheprojectmayevergetapproval. Learningthestakeholderstechnicaljargon The analysts first action is to arrange a guided tour of the offices and facilities of the LOD. Remembering peoples names is one of his weaknesses. So, whenever he meets new people, he immediatelynotesdowntheirnameandfunctiononanotepad.Hemakesaconscientiouseffort to understand, learn, and use the largely unfamiliar technical terminology which he encounters. Ifhedoesnotunderstandsomething,heisnotashamedtoaskevenattheriskoflookingabit dumb. It is important not to assume that somebody elses technical meaning of a term is the sameasyours.Sohechecksitouttoavoidanyconfusionandmisunderstanding. Detailsoftheoperations See the rich picture diagram. Starting in the top lefthand corner, it shows what triggers the study and the implied world view, namely a concern for the economic efficiency of investments. The core of the picture describes the various operations of the LOD and its relationships with otherpartsoftherefineryoperationanditscustomers.Herearesomeadditionalcomments. Production of lube oils and greases is done in batches in size from 400 litres to 100,000 litres. Many products are sold in several container sizes from large drums to small cans. The LOD carries 804 different productcontainer size combinations. As shown in the rich picture, some customers place such large orders for a single product that they are met by special production runs and directly shipped to them. Only orders from small customers are met from warehouse stocks. As these stocks are sold off, they are replenished by an appropriately sized production run.TheLODfollowsapolicyofshippinganygoodstothecustomerwithintwodaysafterreceipt oftheorder,i.e.thedeliveryleadtimeistwodays.

 Various base oils and additives are mixed to specified recipes in mixing vats. The vat size chosen depends on the size of the mixing batch. The base oils are drawn from storage tanks, fed from the refinery. After mixing, the finished product is tested to ensure that it meets the desired specifications. Once a batch has passed the tests, the finished lube oil is filled into containers, usuallywithin46hours.Thepatternforgreaseproductionissimilar.

The LODs existing mixing and filling capacities are sufficiently large that with few exceptions all production runs are completed in 24 hours. The production lead time is therefore one day. It is thisaspectwhichmakesitpossible toschedulespecialproductionrunsforlargecustomersafter receipt of their orders and still ship the products within the planned twoday delivery cycle. The same aspect also means that a stock replenishment has to be scheduled only once sales have depleted stocks to a level too small for meeting the last small customer order received. As a result,allcustomerordersarealwaysmetwithintheplanneddeliveryleadtime.Noshortagesor unmetcustomerdemandscanoccur. Packaged goods are moved by forklifts. Goods supplied from stock are moved twice, once from production to the stock location in the warehouse and a second time from there to the shipping docks. Goods for big customer orders, in contrast, are only moved once, i.e. from production to the shipping docks. Hence the total workload for forklift operators and the corresponding wage bill can be reduced by having more goods bypass the inventory stage. The larger the fraction of customersclassifiedasbig,thelowerthewagebillforforkliftoperators. Assessingdocumentflowsanddatasources The analyst follows up the guided tour of the facilities by an extended visit to the offices of the LOD.Hedrawsdetaileddiagramsofthedocumentandinformationflowforprocessingcustomer orders, from receipt to shipment, and for initiating and processing of stock replenishment, and verifiesthemonthespotwiththepeopledoingeachtask. Naturally, the analysts intense curiosity in seeing all data files is interpreted as enthusiasm for theproject.Heasksforphotocopiesofalldocumentsusedandcheckshowfarbackdatafilesare kept and whether during that period changes in operations and in processing information or in data file formats have occurred, so as to make sure that the right data in the right form is availablewhenneeded. Once back in the office, he immediately organizes all information gathered in a systematic form, filling in any gaps from memory, and highlights aspects that need further clarification or verificationonsubsequentvisits. IdentifyingtheproblemtobeanalysedIdentifyingtheissuetobeanalysed The rich picture indicates a number of possible issues, such as the process of scheduling productionrunstoachievetightcoordinationofthemixingandfillingoperationsandreducethe cost of changing over from one product to another, particularly on the filling machines; or the decision of which customer orders are classified as big and which ones as small or whether it is advantageous to allow a lengthening of the production lead time from the current 1day period. The latter would allow for better smoothing and coordination of the mixing and filling workload and may possibly reduce the number of operators needed to perform the same tasks. The

constraint on maintaining the current level of customer service clearly seems to preclude the lattercourseofaction. The stimulus for the project in the first place is the concern voiced by the Vice President of Finance. Her statement about the inadequate average turnover of stocks in the LOD carries the implication that she considers that too much money is tied up in stocks. The average stock turnover for the LOD as a whole is a weighted average over all products. As shown in the rich picture, the normal inventory behaviour over time for each product has a typical sawtooth pattern. Each tooth corresponds to one stock replenishment and represents one complete stock turnover for that product. The fewer stock turnovers per year, the larger must be the stock replenishment.Forexample,ifthedemandforagivenproductis120,000litresperyearandthe size of each stock replenishment is 5,000 litres, the stock turnover is 24 times per year. If the stock turnover is reduced to 12 times per year, then each stock replenishment must be equal to 10,000 litres. So we see that the stock turnover for each product is directly linked to the size of the corresponding stock replenishment, which is controllable by the LOD. This issue is taken as thefocusoftheproject. Discussions with the LOD manager indicate that he shares the world view revealed by the Vice President of Finance, namely to assure the most efficient use of the LODs resources. The latter seesfundstiedupinstocksaslyingidle,whereasahighstockturnoverisinterpretedasasignof efficiency. From this narrow perspective, reducing the size of stock replenishment will increase the stock turnover. This would allow meeting the VicePresidents goal or prior expectation of a stock turnover of 24 times per year, thereby reducing the total investment in stocks. However, from the rich picture we see that every mixing and filling run also involves a setup the time operators spend to prepare a mixing and filling run and the lab technician needs to test the products. Increasing the turnover rate for a given product means more stock replenishment and hence more production setups. As a consequence, the time spent by operators on setups will also increase. At $16 per hour, this can well mean that any savings made by reducing investmentsinstockmaybelostbyhigherannuallabourcosts. The size of the stocks needed also depends on how small orders are defined. Lowering of the cutoff point reduces the demand met from stock. Consequently, smaller stocks are needed, which in turn translates into a reduction in stock investment. But lowering the cutoff point meansthatmorecustomerordersaremetbyspecialproductionruns,causinganincreaseinthe annualproductionsetupcosts. Each of these possible actions causes some costs to decrease and others to increase. A narrow efficiencyapproachfocussedonlyoninvestmentsmaythusnotbeinthebestinterestofthefirm (unless for other reasons the firm wishes to reduce its investments regardless of its effect on operating costs). We need to consider all costs that are affected by a change in policy. In other words, we are looking for the most effective production/inventory control policy a policy that keeps the total cost of the operations as low as possible, while at the same time maintaining or even improving the current level of customer service. Even if the relevant system is confined to the production/inventory control operations, the perspective taken should be one that looks at

the effects on the firm as a whole, rather than simply the narrow (sub)system involved. (Recall the discussion on efficiency and on boundary judgements in Sections 2.2 and 3.5.) If this also meets the VicePresidents target stock turnover, all the better, but her expectation should not be the driving force. The problem owner the LOD manager should, however, fully understand the reasons for this and agree with them. Hence some management of prior expectationmayberequiredrightatthestartoftheproject. Thehierarchyofsystemsinvolved The problem is embedded in a hierarchy of systems. The widest system of concern is the company as a whole, with the refinery as one of its subsystems. The LOD in turn is a subsystem of the refinery system. Within the LOD system, production/inventory control operations form oneofitsmajorsubsystems.Itisthelatterwhichisthenarrowsystemofinteresthere.Sincethe LOD operation as a whole has control over the resources needed by the narrow system, as well ashavingthefinalsayintermsoftheproject,itbecomesthewidersystemofinterest. Stakeholders With the narrow system of interest tentatively chosen, the analyst knows enough about the situation to identify the various stakeholders. These are defined with respect to this narrow systemofinterest.Here,theroleofanalystisassumedbyaconsultantinternaltothecompany. Thereseemtobeseverallevelsofproblemownersordecisionmakers.Thisistypicalofproblem situations with a hierarchy of systems, as is the case here. At the top is the VicePresident of Finance, who coordinates the use of funds within the firm. She states the criteria by which investments of funds are to be evaluated. The Vice President of Manufacture (refinery system) operates within thesecriteria.He has delegated the authority formaking daytoday operational decisions on production and stock control for packaged products to the manager of the LOD (LODsystem).Forprojectsthatdonotinvolveanymajorinvestments,thelatteristheimmediate decisionmakerofthesituation.However,hewillhavetoreferthedecisiononlargeinvestments totheVicePresidentofManufacture. A priori, the only new use of funds is the cost of the project itself. Once the project has been completed, the analyst may recommend a change in the level of investment in inventories. Any suchrecommendationswillthenbeevaluatedintermsoftheinvestmentcriteriaspecifiedbythe VicePresident of Finance. At this point in the analysis, the project cost is the only use of funds whichhastobeevaluated.Asitturnsout,eventhatexceedsthemanagersauthorityandhence hastobereferredhigherup.Butonceapproved,anychangestothedaytodayoperationofthe LOD are under his control. It is his world view that the problem solver must use as a basis for determiningthegoaloraimoftheproject.

It is important to confirm that the world views of all levels of problem owners are compatible. If not,thestakeholdersatthevariouslevelsshouldbemadeawareoftheconflictsandtheneedto have them resolved prior to proceeding further. Resolution of such conflicts in world views is usuallybeyondthescopeofahardORproject,sinceitdealswithbasicorganizationalissuesand requires a soft systems approach. Persistence of conflicting world views between various levels of decision makers is likely to result in serious suboptimization, i.e. the benefits gained may be wholly or partially negated by additional costs inflicted elsewhere in the organization, e.g. in another subsystem at the same or at a different level. For the LOD, the analyst has already ascertained that there is basic agreement between the world views of the Vice President of Finance and the LOD manager in terms of profit maximization. However, one source of conflict can arise if the optimal solution does not meet the stock turnover target set by the Vice PresidentofFinance.Thisaspectneedstobeaddressedintheprojectproposal. To determine the problem users, we need to identify who is in charge of initiating production runs for stock replenishment or large customer orders. These decisions, within the policy defined by the problem owner the LOD manager are made by the stock officer. Any changes to the rules of the inventory/production control policy will have to be such that she is capableofapplyingthemwithoutaneedforextensivefurthertraining. The customers for the LODs products are the problem customers. One of the first points raised by the LOD manager is that any new policy will have to maintain or improve the current level of service offered to all customers, in particular with respect to the twoday delivery lead time. In addition to this requirement, there are other constraints that any proposed production/inventory control policy has to meet. The warehouse space and production capacity requirementsofanynewpolicyhavetoremain,atleastintheshorttomediumterm,withinthe currentcapacitiesavailable. In addition to this requirement, there are other constraints that any proposed production/inventory control policy has to meet. The warehouse space and production capacity requirementsofanynewpolicyhavetoremain,atleastintheshorttomediumterm,withinthe currentcapacitiesavailable. Problemelements Insummary,thesixelementsoftheproblemare: Immediatedecisionmaker:theLODmanager. Objective: achieving low operating cost for the LODs operation, subject to maintaining thesamelevelofcustomerservice. Performancemeasure:thetotaloperatingcostsoftheLOD. Decisioncriterion:minimizingtotalcosts. Alternativecoursesofaction:thesizeofstockreplenishmentbatchesandthe cutoffpointforclassifyingcustomerordersasbigorsmall. Widersystemofinterest:theLODoperationandtherefinery.