Lean production, Costing,. Cycle time reduction,. Customer service, Case studies. Abstract. The quotation process tightly links the manufacturer and its suppliers.
Using lean principles to streamline the quotation process: a case study Conan M. Buzby Department of Management, Worcester Polytechnic Massachusetts, USA Arthur Gerstenfeld Department of Management, Worcester Polytechnic Massachusetts, USA Lindsay E. Voss Department of Management, Worcester Polytechnic Massachusetts, USA Amy Z. Zeng Department of Management, Worcester Polytechnic Massachusetts, USA Keywords Lean production, Costing, Cycle time reduction, Customer service, Case studies
Introduction
Manufacturers are constantly presented with complex, multiple requests for price and Abstract delivery quotations, and are challenged to The quotation process tightly links respond quickly and accurately with bids the manufacturer and its suppliers that are tailored to each customer’s and customers on a supply chain. specifications. The quotation process, from An excellent record of successful quotes not only benefits trading which the request for quote is received, to the partners, but also positions the bid with complete information being manufacturer on the market in returned to the customer, can be quite terms of its responsiveness, complex and time-consuming, and yet it customer service, efficiency, and plays an important role in the supply chains, competitive pricing. In the existing literature, lean principles as can be illustrated in Figure 1. It is seen are generally applied to from Figure 1 that the quoting process links manufacturing only, this paper relies on a case study to show the the manufacturer, customer, and outside suppliers that provide either raw materials application of lean manufacturing principles to the administrative or the semi-processed parts closely together. function of the quotation process. A coordinated relationship between the In addition, the case supplier and the manufacturer and a quick demonstrates that electronic solutions are the best remedies for decision on internal production processes not only lead to a winning bid with streamlining the quotation process to reduce the total cycle competitive price, but also position the time ± the basis for providing manufacturer on the marketplace in terms of competitive prices and excellent its responsiveness, efficiency, customer customer service. service, and potential sales in the long run (Carbone, 1999). The biggest challenges every job shops or make-to-order firm face are what price and due date to quote when a potential customer requests a bid. The price is not only determined by the cost associated with manufacturing but also indirectly affected by the administrative cost incurred during the processing of the request for quotes (RFQ). The due date heavily depends on the efficiency of the internal production process as well as the responsiveness of the outside Industrial Management & vendors that supply the semi-finished items Data Systems 102/9 [2002] 513±520
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or raw materials. Therefore, a successful bid calls for reductions of unnecessary cost and time in processing the quotes, and streamlining the quoting process is strategically and economically important. This paper discusses how to use lean manufacturing principles to identify the potential waste areas in the procedure of processing the RFQs.
The lean principles Preceding discussions conclude that quoting may incur significant amount of cost and is critical to a manufacturer’s success, and thereby needs to be streamlined. In this paper, we attempt to apply lean principles to improving the administrative function of a quotation process for a medium-sized, domestic manufacturer. Before we present the case study, a brief literature review of lean principles is provided below.
What is lean? Many definitions of lean are available. For example, the National Institute of Science and Technology (NIST) Manufacturing Extension Partnership (MEP) defines lean as: . . . a systematic approach to identifying and eliminating waste (non-value-added activities) through continuous improvement by flowing the product at the pull of the customer in pursuit of perfection (NIST/MEP, 1998).
In particular, NIST/MEP lean training identifies eight waste areas of the lean factory: overproduction; motion; inventory; waiting; transportation; underutilized people; extra processing; and defects. The ninth waste area, material waste, has been added to by the Texas Manufacturing Center (Texas Manufacturing Assistance Center and
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Conan M. Buzby, Arthur Gerstenfeld, Lindsay E. Voss and Amy Z. Zeng Using lean principles to streamline the quotation process: a case study
Figure 1 The strategic role of quotation process in supply chains
Industrial Management & Data Systems 102/9 [2002] 513±520
Automatic and Robotics Research Institute, 2001). In a manufacturing context, the major lean philosophy focuses on generating just what is needed, when it is needed, in the amount needed with only the required material, labor, equipment and space (Heizer and Render, 1999; Vollmann et al., 1997). Basically, waste in manufacturing environments is anything that consumes resources yet produces no value.
What lean concepts are relevant in the case study? Lean principle suits very well in the context of the price quotation process (Knill, 1999), and the same ideas formulated for use in monitoring physical production apply ``equally to product development and order-taking’’ (Womack and Jones, 1996). In what follows, we concentrate on two important concepts of lean manufacturing principles that are applicable to this paper: 1 Cycle time. Frequently, a firm’s responsiveness is evaluated by the cycle time. A widely used measure is the receipt-to-receipt time, which is the actual elapsed time it takes a quote to be processed, including all queue time, downtime, and others. By averaging the receipt-to-receipt time of all quotes completed (or at least a sizable sample of them), the average cycle time for a quote can be calculated. 2 TAKT time. Equivalent to pace, this is the rate at which the customer requires the product. TAKT time defines the speed of the manufacturing lines and the cycle times for all manufacturing operations. The following function indicates how TAKT time for a particular demand rate is calculated:
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TAKT time ˆ Available work time per day …1† Daily required demand …quotes=day† The TAKT time can be used to compare with the cycle time in workload balancing. Ideally, cycle time should be close to but not exceed TAKT time. If the cycle time is less than TAKT time, the quote team is said to keep pace. If the cycle time is greater than TAKT time, then the available work time must be increased through adding quote team members, overtime or a second shift. If the available time cannot be increased enough, efforts must be made to eliminate wastes in the process.
A case study at Westfield Gage, Inc. In this section, a case study is offered to illustrate how theories can be actually applied to practices. Our study was conducted at a company, named Westfield Gage Incorporated (WGI), between October 1999 and March 2000. The study team consisted of two undergraduate students majoring in industrial engineering and two faculty advisors. In what follows, the company’s profile is briefly described.
The company background Started in 1943, WGI, located in Westfield, Massachusetts, has grown to be a leading domestic and international supplier of precision parts and assemblies for military, aerospace, and commercial equipment. With the recognition of the competition from the domestic as well as international suppliers,
Conan M. Buzby, Arthur Gerstenfeld, Lindsay E. Voss and Amy Z. Zeng Using lean principles to streamline the quotation process: a case study Industrial Management & Data Systems 102/9 [2002] 513±520
WGI has devoted a great deal of effort to improving every aspect of their internal processes. To keep up with the growing variety of customer needs and the customers’ desire for low price, the company has recently started a number of endeavors aiming at eliminating wastes and reducing costs in every aspect of the production cycle. The first internal activity selected for investigation is the administrative quoting process. The objectives of the study include establishing an optimal process flow for quoting, identifying appropriate data collection tools, and standardizing information retrieval.
Current quotation process and problems The general flow of the quotation process at WGI is divided into eight separate tasks and each member of the four-person quote team is responsible for the completion of one or more of these tasks. The flow of the process begins with ``initial log in’’ and ends with ``customer copy type up’’, where the final production quantity, parts quoted for, and the date that the quote will be completed. Table I provides the order of the quotation process tasks, the quoting team members, and the descriptions of tasks. To get an idea about the company’s performance in completing the quotes, the past seven months of quote delivery data are collected and are divided into three categories: quotes delivered late early; and on time. Table II shows the percentage of each category in each month. It should be pointed out that the data of September 1999 are ignored, because a special event took place that month, leading to a result that is significantly distorted. Table II implies that currently, on average, only 60 per cent of all quotes during the seven-month period were returned on time or early. This means that 40 per cent of quotes were returned late to
customers, and out of which approximately 10 per cent received no response. Imagine if manufacturing were to deliver 40 per cent of parts late to customers, the company would not be in business for long. The current response rate was one of the major problems that greatly concerned the top management at WGI and was expected to resolve as soon as possible.
Using lean principle to evaluate current process This section describes how the waste areas of the administrative function of the quotation process at the company are identified using lean manufacturing principle. In order to apply the principle, the demand and cycle time based on historic data are first analyzed. First of all, six months of historical RFQ data (June 1999 through December 1999) were queried and used to estimate the most recent trend of demand pattern at WGI. As a result, an average number of new items to be quoted for each day are obtained. This number is equal to the average monthly demand divided by the average number of business days in a month. Table III reports the demand pattern at WGI. It is important to notice that ten quotation requests are not being received at WGCI each day; rather, they are being asked to quote for ten new items each day. These ten items could originate from a single RFQ or from up to ten different quote requests. Because of this fact, it was necessary to determine the average number of items included in each quote request received each time, which turned out to be approximately three. Second, we calculated the actual number of minutes available for quoting in each working day. At WGI, a typical workday is 8 hours and 45 minutes long, leading to 525
Table I Flow of the current quoting process Employee initials
Quoting task
1. Initial log in of customer info. and RFQ basics 2. Get quotes for raw material costs from suppliers 3. Get quotes for outside process costs from OSPV 4(a). Determine labor costs (processes, run times, set up times, indirect labor, overhead, profit) 4(b). Labor cost (same as above) R.P. (General manager) (new RFQ ± no history available) R.P. (General manager) (RFQ w/quote labor history available) 5. Final approval of costs (only if labor costing is completed by T.F.) 6. Type up three copies of finished quote: one for customer, one for file record, C.D. and one for sales department 7. Proofread typed copies C.H. or J.G. 8. Send finished quote to the customer C.D. T.F. T.F. T.F. T.F. (RFQ w/quote labor history available)
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Conan M. Buzby, Arthur Gerstenfeld, Lindsay E. Voss and Amy Z. Zeng Using lean principles to streamline the quotation process: a case study Industrial Management & Data Systems 102/9 [2002] 513±520
working minutes each day. This means that each member of the quote team has 525 minutes to finish quoting ten items each day, resulting in a TAKT time of 57.3 minutes per employee. Table IV indicates the calculation and summarizes the results. It is necessary to mention that multiple quotes at WGI are processed simultaneously. Hence, each member on the quote team may have multiple responsibilities related to quoting requirement, and it makes sense to calculate the TAKT time allowed for completing each task. To put it in a clear perspective, the cycle time for each task is equal to the actual process time plus the waiting time. To accurately capture the time each quote team member spends on their tasks, we asked them to record the total time needed for each quote during the six-month time frame. The results are reported in Table V.
Third, we looked at the average cycle time for each process and converted it into a proportion of the overall quotation process. We considered two scenarios. This first scenario represents labor costing being completed by the general manager (R.P.) and the second scenario represents labor costing being completed by T.F., whose entire responsibility is quoting, with just the final approval being completed by the general manager. The following formula is used to find the proportion of the total process that each quoting task represents: Percentage of time allocation ˆ
Average cycle time for one task : Average cycle time for all task
…2†
The total time allowed for completing a quote is found as:
Table II Current performance of the quoting process (% of total quotes in that month) Category On time or early responses 1-5 days late 6+ days late No response
June 1999
July 1999
August 1999
October 1999
November 1999
December 1999
January 2000
66 19 6 9
66 21 4 9
60 29 8 3
53 27 14 6
71 10 2 17
65 15 8 12
52 27 6 15
Table III Demand calculations based on historical data Month
Number of RFQ received/month
Number received for quoting/month
Number of RFQ received/day
64 66 98 71 59 61 69.8
112.0 200.0 196.0 179.0 241.0 251.0 196.5
3.2 3.3 4.9 3.55 2.95 3.05
June July August October November December Average/month Average/day Average items/quote
Items received/day
Number of items per RFQ
5.6 10.0 9.8 9.0 12.1 12.6
3.5
1.8 3.0 2.0 2.5 4.1 4.1
9.8 (~10) 2.9
Table IV TAKT times calculations per quote team member Month June July August October November December Average Average Average [ 516 ]
Items received per month
Items received per day
112.0 200.0 196.0 179.0 241.0 251.0
5.6 10.0 9.8 9.0 12.1 12.6
196.5
Number of RFQ received/month 64 66 98 71 59 61
Number of RFQ received/day
Number of Items per RFQ
3.2 3.3 4.9 3.55 2.95 3.05
1.8 3.0 2.0 2.5 4.1 4.1
3.5
2.9
69.8 9.8
TAKT time/RFQ
TAKT time/item
164.1 159.1 107.1 147.9 178 172.1 154.7
93.8 52.5 53.6 58.7 43.6 41.8 57.3
ˆ …TAKT time†
Conan M. Buzby, Arthur Gerstenfeld, Lindsay E. Voss and Amy Z. Zeng Using lean principles to streamline the quotation process: a case study
…No: of employees on quote team† ˆ …57:3†…4† ˆ 229:2 minutes:
…3†
We then multiplied the proportion of the total process time that we had assigned to each quoting task by the total available time to calculate the proportion of the total TAKT time that would be allocated for each quoting task. The results for scenario one are displayed in Table VI. It can be observed from Table VI that the time spent on tasks from number two through five constitute 97.47 per cent of the total quoting process time, implying that if the time spent on any one of these tasks can be shortened, the total cycle time will be reduced significantly. The TAKT time allocation for the second scenario is listed in Table VII. In this scenario, the labor cost is estimated by the employee (T.F.), not the general manager, when the quoted products are repeated and the company has related record to refer to. However, the final approval of the total labor cost requires the input of the general manager. As a result, even though the cycle time in estimating the labor cost is vastly reduced, the extra step of final approval stretches the time to an even longer frame. It should be mentioned that the general manager holds multiple responsibilities at the company, whose busy daily schedule
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often keeps him away from working on the quotes. Hence, workable solutions that will help the general manager complete his quoting tasks in an easier and faster manner are in great need. This calculation provides us with the total number of minutes that would represent the target TAKT time for each quoting task based upon the proportion of cycle time for that task to the total quotation process cycle time. Using this method, tasks that historically take less time to complete are allocated a smaller part of the total time available, leaving more time for the completion of more complicated tasks and bottlenecks. Figures 2 and 3 demonstrate the current time spending of the two scenarios compared to the target levels. From the comparisons, we see that none of the quoting tasks is under the target TAKT time for that task. We know that if each quoting task is not below TAKT, it will not be possible for the quote team member to keep up with demand on a daily basis. Therefore, all subsequent recommendations will be geared toward reducing the cycle times for the critical tasks.
Streamlining the quotation process The potential areas for reducing the cost and time associated with the quotation process at WGI have been identified and evaluated by
Table V Total cycle times by quoting task Employee Action T.F. T.F. T.F. T.F. R.P. R.P. C.D. J.G. C.D.
Log in Material cost OSP cost Labor cost Labor cost Final approval Type finished quote Proof read Send to customer
Frequency
Total hours
40 17 11 9 3 3 12 2 10
21.57 24.95 95.18 1.07 0.89 0.27 4.65 .06 1.17
Less Average minutes in Total wait hours Average waiting unknowns process before process (minutes) 2 3 1 3 1 0 0 0 3
2.94 106.93 571.08 10.70 17.80 5.40 23.25 2.00 10.03
19.71 64.43 8.71 9.34 13.66 18.28 25.13 0.12 4.04
0.52 276.13 52.26 80.0 409.80 365.60 215.40 3.6 26.93
Total cycle time 3.46 383.06 623.34 90.7 427.60 371.00 238.65 5.6 36.96
Table VI Allocation of total TAKT time ± scenario one Quotation task 1. Log in 2. Material cost 3. OSP cost 4. Labor cost (by R.P.) 5. Type finished quote 6. Proof read 7. Send to customer Total
Average task cycle time
Percentage of total process time
Total time available
TAKT time allocation
3.46 383.06 623.34 427.60 238.65 3.00 36.96 1716.07
0.20 22.32 36.32 24.92 13.91 0.17 2.15 100
229.2 229.2 229.2 229.2 229.2 229.2 229.2 229.2
0.46 51 83 57 32 0.40 5 229 [ 517 ]
Conan M. Buzby, Arthur Gerstenfeld, Lindsay E. Voss and Amy Z. Zeng Using lean principles to streamline the quotation process: a case study Industrial Management & Data Systems 102/9 [2002] 513±520
using the lean manufacturing principles. This section shows that these areas can be redesigned and streamlined based on e-business solutions (Tattum, 1999). As the project was being conducted at WGI, the company just acquired an ERP type of computer software package, whose functions can be developed to help improve the current quotation process dramatically. Here we offer a set of recommendations that specifically point out those important functions of the new ERP system related to the quotation process: Reduction of paper use via electronic quoting. Currently, the majority of the tasks involved in the quotation process utilize paper as the major tool of information transfer. The quote request packages (including specifications, customer details and blueprints) are received in paper form through mail or fax. As the quoting process begins, a paper traveler is attached to the RFQ package and all costs are recorded on it by hand. Labor costs are calculated on pen and paper before being recorded on the traveler. We offer two alternatives to avoid paper use: one is to ask customers to send RFQ via e-mail, and the other is to develop an online quoting capability on the company’s Web page. With some simple extensions, the Web site can be a powerful and cost reduction tool for the quotation process. Reduction of waiting time through electronic reminder. As we found in our actual cycle time analysis, the time that a quote spends waiting before a process begins is often much longer than the time the quote actually spends inside that process. In addition, the simultaneous processing of multiple quotes makes it difficult for the employees to keep track of the due date or the priority of each quote. Therefore, we recommend implementing an electronic reminder that is able to notify each member of the quote team about an awaiting RFQ. We also
recommend that this notification display a running count of the overall number of quotes in the queue at the time when a new RFQ is added. The system would involve configuring pop-up windows (including a defined text message) to appear on each member of the quote team’s computer screen. Elimination of tasks in the quoting process. Using the electronic solutions, it would be possible to eliminate two of eight tasks currently involved in the overall process, namely ``type up customer copy’’ and ``proofreading customer copy’’. These two steps are needed in the current system due to the format of the RFQ received and the possibility of transcription errors in copying information from one place to another (customer information, addresses, prices, etc.). In the new process, all of the information included in the cost estimating step is automatically formatted into a finished quote report using a programmed function built into the ERP system. In this way, any member of the quote team can generate and send a report back to the customer as soon as all costs are completed. Because the report is automated, very little preparation time is required and the double data entry that occurs in the present process is eliminated. Coordinating with outside vendors. In steps 2 and 3 of the quoting process, suppliers providing the raw materials and semi-finished parts are involved. Their timely response to the company’s requests contributes to total cycle time reduction. We offer two suggestions for improving the current practices. First, the suppliers should be required to submit their material and outside process quotes within a validity date. This means that the outside vendor or material supplier gives a quote that can be honored for a certain period of time. A well-coordinated relationship between the manufacturer and the suppliers is essential for this
Table VII Allocation of total TAKT time ± scenario two Quotation task 1. Log in 2. Material cost 3. OSP cost 4. Labor cost (T.F.) 5. Final approval 6. Type finished quote 7. Proof read 8. Send to customer Total [ 518 ]
Average task cycle time
Percentage of total process time
Total time available
TAKT time allocation
3.46 383.06 623.34 90.70 371.00 238.65 3.00 36.96 1750.17
0.20 21.89 35.62 5.18 21.20 13.64 0.17 2.11 100
229.2 229.2 229.2 229.2 229.2 229.2 229.2 229.2 229.2
0.45 50 82 12 49 31 0.39 5 229
Conan M. Buzby, Arthur Gerstenfeld, Lindsay E. Voss and Amy Z. Zeng Using lean principles to streamline the quotation process: a case study Industrial Management & Data Systems 102/9 [2002] 513±520
validity date to work. The second suggestion is to establish a computer database to record the cost of all historic items provided by the suppliers. For each completed quote, the average of quoted costs and the actual costs are calculated and can provide an excellent estimate for any incoming new quotes. If the engineering drawing of a particular part is changed and the material cost needs to be assessed differently, then the new costs will be created and entered into the ERP system by the general manager. In summary, information on all parts that have been through the company should be compiled into a computerized database so that retrieval of historic data would take place within seconds. Collection of shop floor data for accurate labor costing. Estimating the labor cost is the most complicated task in the quoting process and can become extremely time-consuming, especially when the
Figure 2 Scenario one ± TAKT times versus cycle times
Figure 3 Scenario two ± TAKT times versus cycle times
outside processing is needed to complete the final part. An accurate estimate of labor cost depends on an accurate assessment of actual production time. Currently, the general manager relies on his experience and subjective adjustment to estimate the labor cost, leading to the results with large margins relative to the actual cost. One method would be to develop a computer database to compile the information on all the parts that have been produced by the company. Specifically, the actual production run and setup times inputted by the machine operators for each part will be entered into a computer database along the quoted numbers. The information stored in the database provides a benchmark or reference when labor costing for new parts is required. Another alternative is the use of bar coding. Using the bar codes to obtain the accurate production time can also provide a basis for calculating the actual labor costs.
Conclusions and future research directions The quotation process links major trading partners on a supply chain, thereby playing an integral role in supply chain coordination and improving supply chain effectiveness. This paper not only identifies the strategic importance of the quotation process in a supplier-based manufacturing context, but also provides a case study that applies some contemporary techniques, such as lean manufacturing principles and economic commerce, to streamlining the quoting process. The problems associated with the quotation process at the company are identified and detailed plans for restructuring the process flow are provided. We have shown how lean manufacturing methodology can be applied to the important process of providing quotation quickly to current and potential customers for a medium, domestic manufacturer. We believe that future research can also focus on how other operations management techniques, such as six-sigma, just-in-time, and forecasting, can improve the quotation process that links customers, manufacturers and suppliers on a supply chain.
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