Contents

1. Research title .......................................................................................................................... 2

2. Abstract .................................................................................................................................. 2
3. Introduction ............................................................................................................................ 3
3.1 Background ...................................................................................................................... 3
3.2 Literature review .............................................................................................................. 3
3.2.1 Make-to-stock vs. Make-to-order ............................................................................. 3
3.2.2 Lean concept ............................................................................................................. 4
3.2.2 Value Stream Mapping (VSM) ................................................................................. 5
4. Problem statement .................................................................................................................. 6
5. Research Methodology .......................................................................................................... 6
6. Expected benefits ................................................................................................................... 7
7. References .............................................................................................................................. 7

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1. Research title
A Lean Framework for Applying a Hybrid Production Strategy (HPS) to reduce inventory: A
Case Study of ORANGE Electric.

2. Abstract
This research is carried out as a case study of ORANGE Electric Company, which is the
largest electrical accessories manufacturer in Sri Lanka. It is a High Mix/Low Volume
manufacturing company with markets located locally and internationally. It is currently
suffering with a huge burden of inventories tied up in its warehouses as finished goods posing
a great threat in face of the ever increasing completion in the market. This research aims to
find a Lean based framework to help implementing a hybrid push and pull production
strategy to optimize the inventory levels without having to compromising the customer
service levels at ORANGE and similar industries. It is expected to use Value Stream
Mapping as a foundation and a guideline to implement the aforementioned strategy.

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3. Introduction
3.1 Background
ORANGE Electric is the largest Sri lankan electrical accessories manufacturer who owns more
than 80% of the Sri Lankan domestic switch gear market and is the largest CFL manufacturer
in Sri Lanka. And these product are exported to many countries such as Pakistan, Bangladesh,
Maldives, Myanmar, Thailand, Austria, UK, South Africa, etc. The manufacturing process uses
100% imported raw materials such as plastic granules, metal rods and stripes, springs, etc.
ORANGE Electric is mostly in Fast Moving Consumer Goods (FMCG) business. But it also
several cater niche markets with a large range of special purpose and customized products. For
example, it produces domestic power switches which are sold as FMCG and key card switches
for the hotel industry. It can be classified as a high mix/low volume manufacturer with a highly
labor intensive final assembly process.
For the past few months it has been suffering with a huge value of inventory. With the current
data available it is calculated to have Rs. 800 million worth of inventories of which finished
goods inventories (FGIs) accounts for more than 55% and work in progress (WIP) accounts for
a mere 9%. And there is 23% of raw material (RM), 8% of quarantine/market returns
inventories and 5% of spare parts. Looking at these figures it is obvious that the FGI levels has
to be optimized. This research will strive to define and apply a hybrid production strategy
(HPS) between make-to-stock (MTS) and make-to-order (MTO) to help reducing these
inventories and finally developing a standard framework to apply the same for similar
industries.

3.2 Literature review

3.2.1 Make-to-stock vs. Make-to-order
Make-to-Stock (MTS) is the traditional production strategy used by most organizations even
today. This can also be described as a Push system where products are pushed towards
downstream and inventory is held at the end of the supply chain adhering to a forecasted
production plan. Though MTS systems heavily rely on forecasts, forecasts are inaccurate by
nature at least to some extent. This can lead to frequent inventory pileups or stock-out situations
depending on the degree of error of forecast. But MTS is appealing due to its desirable
performance properties: high capacity utilization and short lead times (Kaminsky & Kaya,
2007). In contrast to MTS, Make-to-Order (MTO) systems are more agile and responsive to
demand volatility while enabling the production of a high variety of products. MTO is of Pull
nature, where the customer pulls products from the supply chain. Because the system responds
only when an order is made the inventories are eliminated and mass customizations can be
done efficiently. Customizations are now key features an organization should have to improve
its competitive position. But MTO implies several risk factors due to variability in the
production system and disturbances from the upstream supply chain and environment. This
causes the MTO supply chain to lose its balance and performance leading to undesirable lead
times, order delays and increased costs.
Looking at each of these production strategies, it is obvious that the suitability of a particular
strategy depends on the supply chain processes, market requirements and organizations
priorities. The subject organization of this literature is a multi-product manufacturer catering
to several market segments with a high variety and customizations. Short order lead times are
critical for both FMCG and customized products and stock-outs can be disastrous. Due to the
highly labor intensive final assembly process and overseas upstream supply chain the
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variability of the system is very high. Hence this literature looks into applying a hybrid of the
two systems to harness their synergy.
It is important to understand the concept of Customer Order Decoupling Point (CODP) in a
supply chain, as it practically defines the production strategy itself. CODP is the stage in the
manufacturing value stream where a particular product is linked to a customer order. Sharman
(1984) defines the CODP as the pont where the product specification are typically frozen. On
the downstream side of the CODP the finished goods are pulled by customer orders. On the
upstream side, the production is driven (pushed) by forecasts. Hence, a good production
strategy requires a clearly defined CODP.
There are several studies have been done to study different methods of combining MTS and
MTO. Kber & Heinecke (2012) proposes a simple hybrid solution which uses a combination
of three distinct approaches from separate studies. They are, first the Olhagers model (Olhager,
2003), the second approach based on Pareto Law (Christopher, 2001) and the third approach
based on separating demand patterns into base and surge elements (Gattorna, 1996). And
Philip & Kaya (2007) introduces a hybrid system with more advanced numerical calculations
together with scheduling and lead time quotation algorithms. However, to authors best of
knowledge it has not been explored in order to design a framework that would help deciding a
suitable production strategy for a firm of this nature and also a model to practically establish
and operate such a strategy.

3.2.2 Lean concept

Lean organizations are highly customer focused, providing the highest quality, lowest cost
products in the shortest lead time possible. According to the book Lean Thinking by James
P. Womack and Daniel Jones, the Lean approach can be summarized in five principles
(Womack and Jones, 2003):

Specify what creates value from the customers perspective:

Value should be specified from the customer point of view not by the
perspective of individual firms, functions and departments. If the customer does
not pay for an activity, it is a non- value adding activity and should be
eliminated.
Identify all the steps along the process chain:
This means identifying the value stream. It can be used to identify activities
where value is added to the product and those do not.
Make those processes flow:
The value added product must flow continuously from the start to finish without
interruptions, detours, backflows, waiting, scrap and stoppages.
Make only what is pulled by the customer:
The customer should pull the product from the source as needed rather than
process pushing the products onto the customer.
Strive for perfection:
After implementing above steps the team should be continuously remove wastes
as they are uncovered and pursue perfection through continuous improvement.
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3.2.2 Value Stream Mapping (VSM)

VSM is one of the most powerful tools used to plan, implement and enhance the Lean practice.
Toyota was the first company to use the methods of the VSM concepts and tools for
implementing Lean. It is a graphical tool created using a predefined set of standard icons that
helps the firm to observe and understand the flow of materials and information to understand
how the product goes over different phases of the supply chain. After developing the value
stream map it helps the firm to differentiate activities which add value to organizations from
that do not add value (current state) and identify opportunities for kaizen. VSM is a much
systematic tool and a framework to streamline individual improvement efforts to achieve
common goals of the firm.
Identification of
product family

Drawing current
state VSM

Identification of
waste

Drawing future
state VSM to set
targets
Plan and
implement
improvements/
Kaizens

Figure 1 VSM implementation methodology

There are four stages of implementing the VSM technique.

1. Identify what product or family of products to be mapped.
2. Draw the current stage of the processes (current VSM).
3. Identify where the improvements can be done to eliminate waste.
4. Draw and implement the future state VSM.
Benefits of VSM approach:

Helps to see linked chain of processes and to envision future Lean value streams.
Provides a common language and understanding so that everyone has the same vision.
Integrates material and information flows.

It is desirable to start the Lean journey by drawing the current VSM. Otherwise the rest of
process will be useless. This technique is usually a management lead initiative. In order to
create an accurate VSM, a company must engage their line workers in drawing the value
stream.
After drawing the future VSM, an implementation plan is drawn. It can be used as a reference
when employing other Lean tools and techniques. This plan identifies each activity that
requires achieving future state, the responsible persons and the due date. The end result is
usually a company with least amount of waste with maximum productivity.

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4. Problem statement
ORANGE Electric is struggling with a large inventory tying up a huge amount of money and
exposing itself into to greater risks of ever increasing market competition. It uses MTS for the
most part and MTO for a very few selected products which is not in optimal proportions and
there is no set policy regarding these strategies. The inventory level, especially the FGIs has to
be drastically reduced with a sustainable solution. The solution need to answer the following
considering its High Mix/Low Volume nature:
1. Which items should be produced MTO and which ones MTS at each step of the supply
chain?
2. What are the optimal levels of inventory for MTS items?
3. Which item should be produced next when a facility becomes available for production?
4. How to use lean principles and tools (VSM) to form a guideline to perform above tasks
and to sustain the strategies adopted and improvements made.

5. Research Methodology

Carry out three separate interview on current planning strategy and the above problem
statement among the following three groups
Planning
Manufacturing
Sales
Analyze the plan, production achievement, inventory and sales reports to identify trends,
different product categories in terms of demand, value, etc.
Research and identify a suitable HPS for the whole production.
Select two product families which will be MTS and MTO based on the HPS selected.
Draw current state VSMs for each family
Identify required improvements to implement the HPS.
Draw future state VSM with the HPS in place.
Standardize the procedure to form a common framework to implement a HPS in a similar
process
Validate the framework with an experimental production line
Three separate interview on proposed framework among the aforementioned groups for
re-evaluation purposes and to identify the perspectives of each group on migration into
new method.
Note: This research will only consider the supply chain downstream from final assembly to
customer and FGI optimization as the only goal.

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6. Expected benefits
This research will help establishing a simple framework for ORANGE Electric and similar
companies to follow in order to optimize FGIs and to sustain those improvements through a
lean concept. It will explore the possibilities of VSM as a Lean way of performing PDCA
(Plan-Do-Check-Act) to help implementing manufacturing strategies such as the HPS in a more
systematic and sustainable manner.

7. References
1. P. Kaminsky, O. Kaya, 2007, Combined make-to-order/make-to-stock supply chains
2. J. Kbera, G. Heinecke, 2012, Hybrid Production Strategy Between Make-to-Order
and Make-to Stock A Case Study at a Manufacturer of Agricultural Machinery with
Volatile and Seasonal Demand, 45th CIRP Conference on Manufacturing Systems
2012.
3. Sharmann, G., 1984. The rediscovery of logistics, Havard Business Review 62/5, pp.
71-80.
4. Olhager, J., 2003. Strategic Positioning of the Order Penetration Point, International
Journal of Production Economics 85/3, pp.319-329.
5. Gattorna, J.L., Walters, D.W., 1996. Managing the Supply Chain A Strategic
Perspective, MacMillan, London.
6. Womack, J.P. and Jones, D.T. (2003). Lean Thinking. 1st Free Press ed., New York:
Free Press, pp. 16-26.

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