Production Operating System A Case Study Of Make To Stock And Make To Order System.

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UNIVERSITI TEKNIKAL MALAYSIA MELAKA

PRODUCTION OPERATING SYSTEMS: A CASE

STUDY OF STOCK AND

MAKE-TO-ORDER SYSTEM

2012

NUR NADIA RAMADHANI BINTI MD YUSOFF


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UNIVERSITI TEKNIKAL MALAYSIA MELAKA

This report submitted in accordance with requirement of the Universiti Teknikal Malaysia Melaka (UTeM) for the Bachelor Degree of Manufacturing Engineering

(Manufacturing Management) (Hons.)

by

NUR NADIA RAMADHANI BINTI MD YUSOFF B050810139

890617-03-5308

FACULTY OF MANUFACTURING ENGINEERING 2012

PRODUCTION OPERATING SYSTEMS: A CASE STUDY OF

MAKE-TO-STOCK AND MAKE-TO-ORDER SYSTEM


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UNIVERSITI TEKNIKAL MALAYSIA MELAKA

BORANG PENGESAHAN STATUS LAPORAN PROJEK SARJANA MUDA

TAJUK: Production Operating Systems: A case Study of Make-To-Stock and Make-To-Order system

SESI PENGAJIAN: 2011/ 12 Semest er 2

Saya NUR NADIA RAMADHANI BINTI MD YUSOFF

mengaku membenarkan Laporan PSM ini disimpan di Perpust akaan Universit i Teknikal Mal aysia Mel aka (UTeM) dengan syarat -syarat kegunaan sepert i berikut : 1. Laporan PSM adal ah hak mil ik Universit i Teknikal Mal aysia Mel aka dan penul is. 2. Perpust akaan Universit i Teknikal Mal aysia Mel aka dibenarkan membuat sal inan

unt uk t uj uan pengaj ian sahaj a dengan izin penul is.

3. Perpust akaan dibenarkan membuat sal inan l aporan PSM ini sebagai bahan pert ukaran ant ara inst it usi pengaj ian t inggi.

4. **Sil a t andakan (√)

SULIT

TERHAD

TIDAK TERHAD

(Mengandungi makl umat yang berdarj ah kesel amat an at au kepent ingan Mal aysiasebagaimana yang t ermakt ub dal am AKTA RAHSIA RASMI 1972)

(Mengandungi makl umat TERHAD yang t el ah dit ent ukan ol eh organisasi/ badan di mana penyel idikan dij al ankan)

Al amat Tet ap:

Lot 11, Kg Tel ok Chekering Jl n Kual a Besar

15350 Kot a Bharu, Kel ant an

Tarikh: _________________________

Disahkan ol eh:

Cop Rasmi:

Tarikh: _______________________

** Jika Laporan PSM ini SULIT at au TERHAD, sil a l ampirkan surat daripada pihak berkuasa/ organisasi berkenaan dengan menyat akan sekal i sebab dan t empoh l aporan PSM ini perl u dikel askan sebagai SULIT at au TERHAD.


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DECLARATION

I hereby, declared this report entitled “Production Operating Systems: A Case Study of Make-to-Stock and Make-to-Order System” is the results of my own

research except as cited in references.

Signature : ……….

Author’s Name : Nur Nadia Ramadhani Binti Md Yusoff


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APPROVAL

This report is submitted to the Faculty of Manufacturing Engineering of UTeM as a partial fulfillment of the requirements for the degree of Bachelor of Manufacturing Engineering (Manufacturing Management) (Hons.). The member of the supervisory is as follow:


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i

ABSTRAK

Lebihan kapasiti dan kekurangan kapasiti adalah sumber kepada system pengeluaran yang tidak sihat di dalam industri. Keseimbangan antara permintaan dan bekalan adalah sangat penting untuk memastikan bekalan produk berterusan kepada pelanggan. Sistem operasi pengeluaran digunakan untuk mengurangkan masalah ketidakseimbangan dalam pengeluaran. Tujuan kajian ini adalah untuk menentukan hubungan di antara MTO and MTS. Empat objektif telah ditetapkan untuk menentukan hubungan antara kedua-dua sistem tersebut; (i) Untuk mengenalpasti ciri-ciri MTO dan MTS; (ii) Untuk mengenalpasti kesan MTO dan MTS kepada kualiti produk; (iii) Untuk memperjelaskan kesan kepelbagaian produk kepada kestabilan pengeluaran; (iv) Untuk menganalisis faktor yang menyumbang kepada kenaikan paras inventori. Keputusan kajian menunjukkan sistem MTO digunakan dalam produk pilihan dan sistem MTS digunakan untuk produk yang telah ditetapkan dan produk asas. Sistem MTO memerlukan lebih banyak pembekal berbanding dengan sistem MTS. Berbanding dengan sistem MTS, sistem MTO memberikan kesan kepada kualiti produk yang rendah. Di samping itu, kepelbagaian produk tidak menjejaskan kestabilan pengeluaran. Dengan menganalisis faktor-faktor yang menyumbang kepada kenaikan paras inventori, pelanggan semasa adalah faktor kritikal yang meyumbang kepada kenaikan tersebut. Kesimpulannya, pemilihan antara MTO dan MTS adalah sangat penting, ia akan memberi kesan kepada keseimbangan antara permintaan dan bekalan. Tambahan pula, pemilihan sistem operasi yang betul akan mengurangkan kos inventori dan berpotensi kehilangan kesetiaan pelanggan.


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ii

ABSTRACT

Overcapacity and shortage capacity are the sources of unhealthy production systems in industries. A balance between the demand and supply is very important to ensure the continuous supply of the product to the customers. Make-to-order (MTO) and Make-to-stock (MTS) production operation systems are used to reduce the imbalance problem in the production. The aim of the study is to determine the relationship between Make-to-order (MTO) and Make-to-stock (MTS). Four objectives have been set to determine the relationship between both these systems; (i) to identify the characteristics of MTO and MTS; (ii) to identify the effect of MTO and MTS to product quality; (iii) to clarify the effect of product variety to production stability; (iv) to analyze the critical factor that contributes to the increment of the inventory level. Result of case study shows that MTO system is more applicable for customized products while MTS system for mass production product. MTO system requires more suppliers than MTS system. Compared to MTS production operating system, MTO system will give the poor quality of product. In addition, the variety of product does not affect the production stability. By analyzing the factors contributes to the increment in the inventory level, the current customers is the critical factor contributes to that. In conclusion, selection between MTO and MTS is very important on it will affect to the balance between demand and supply. Furthermore, the right choose of operation system will reduce inventory cost and potential of losing customer loyalty.


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iii

DEDICATION

To my beloved father, mother and friends, thank you for the support and encouragement.


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iv

ACKNOWLEDGEMENT

First and foremost, I thank the Almighty God for being my side throughout. I wish to extend my sincere thanks to Dr. Zuhriah binti Ebrahim as my supervisor for helping and always guiding me throughout the development of the study. I would to thank to personnel from industries; Mr. Kamrul bin Abdul Rahman, Mr. Abd, Rahman bin Rahmat and Mr. Wahid bin Rahmat for helping me with outstanding information while conducting the observation, interview and getting the data in the factory. I am also grateful thank to my colleagues for the creative thought and valuable discussion about my study. Also not forget to the Faculty of Manufacturing Engineering, Universiti Teknikal Malaysia Melaka management for allowing and giving me a chance to gain useful knowledge and experiences. In addition, I am especially indebted to my parents for their love, encouragement and support throughout the development of the study.


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v

TABLE OF CONTENT

Content Page No

Abstrak i

Abstract ii

Dedication iii

Acknowledgement iv

Table of Content v

List of Tables ix

List of Figures x

List Abbreviations, Symbols and Nomenclatures xii

CHAPTER 1: INTRODUCTION 1

1.0 Preliminary 1

1.1 Background of the study 1

1.2 Problem statement 3

1.3 The important of study 5

1.4 Aim and Objectives 5

1.5 Scope 5

1.6 Company Background 6

1.6.1 Company A 6

1.6.1.1 Product 6

1.6.1.2 Process flow 8

1.6.2 Company B 9

1.6.2.1 Product 9

1.6.2.2 Process flow 10

1.7 Expected Outcome 10

CHAPTER 2: LITERATURE REVIEW 12

2.0 Preliminary 12


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vi

Content Page No

2.1.1 Make-to-order (MTO) 13

2.1.2 Make-to-stock (MTS) 14

2.2 Classification of Make-to-order (MTO) and Make-to-stock (MTS) 14

2.2.1 Decision Making Tools 17

2.2.2 Step for Decision Making of MTO and MTS 18

2.2.3 Factors to consider When Evaluating the Prospect of MTO 22

2.2.4 The differences of MTO and MTS in terms of Customer Relationship 22

2.3 Problems in MTO and MTS 22

2.4 Main operation Issues in MTO and MTS 26

2.4.1 Capacity Planning 26

2.4.2 Inventory Planning 28

2.4.3 Demand Forecasting 30

2.5 Summary 30

CHAPTER 3: METHODOLOGY 31

3.0 Preliminary 31

3.1 Plan and activities 31

3.2 Methodology 34

3.2.1 Stage 1: Preliminary study 34

3.2.2 Stage 2: Identifying the effect of MTO and MTS in product quality 37

3.2.3 Stage 3: Determination of production stability index 39

3.2.4 Stage 4: Identifying the factors contribute to the increments of inventory level 41

3.3 Case study 44

3.4 Sample size and limitation 44

3.5 Data collection 45

3.6 Data analysis 47


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vii

Content Page No

CHAPTER 4: RESULT AND DISCUSSION 49

4.0 Preliminary 49

4.1 Characteristics of MTO and MTS 49

4.1.1 Result 50

4.1.2 Discussion 54

4.2 Effect of MTO and MTS to product quality 56

4.2.1 Result 57

4.2.2 Discussion 63

4.3 Production Stability Index 65

4.3.1 Result 66

4.3.2 Discussion 68

4.4 Factor contribute to the increments of the inventory level 71

4.4.1 Result 72

4.4.1 Suppliers 72

4.4.2 Customers 73

4.4.3 Order placement 73

4.4.2 Discussion 74

4.5 Summary 76

CHAPTER 5: CONCLUSION AND RECOMMENDATION 77

5.0 Preliminary 77

5.1 Conclusion 77

5.2 Recommendation 78

REFERENCES 79

APPENDICES

Appendix A Gantt chart for study Appendix B Interview Questions Appendix C The customer portion Appendix D The defect of the product


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viii Appendix E Production Stability Index


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ix

LIST OF TABLES

Content Page No CHAPTER 1

1.1 Product of Company A 7

CHAPTER 2 2.1 Factors in evaluating the prospect of MTO (Soman et al., 2005) 23

2.2 Types of production strategies characteristics based on customers relationship (Schragenheim et al., 2009) 24

2.3 The problems occur in MTO-MTS (Lonnie Wilson, 1990) 25

2.4 Main operation issues in MTO and MTS (Soman et al., 2004) 26

CHAPTER 3 3.1 The degree of product customization (Amaro et al., 1999). 35

3.2 The quantitative and qualitative data. 45

CHAPTER 4 4.1 Result for identifying MTO/MTS using the proposed method by (Amaro et al., 1999). 52

4.2 Result for identifying MTO/MTS using interview method 53

4.3 Characteristics of MTO and MTS 53

4.4 The characteristics of MTO and MTS customers 56

4.5 The frequency of the defects happened 65

4.6 The product variety of Company A 67

4.7 The product variety of Company B 67

4.8 The number of variety and the frequency of the result in production stability 70

4.9 The criteria of the factors 71

4.10 The quantity of the suppliers 72

4.11 The quantity of customers 73


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x

LIST OF FIGURES

Contents Page No CHAPTER 1

1.1 Capacity imbalance at Company A 4

1.2 Capacity imbalance at Company B 4

1.3 Process flow of Product X 8

1.4 Process flow of Product Y 9

1.5 Manufacturing process flow of product at Company B 11

CHAPTER 2 2.1 Architecture of MTO-MTS decision aid (Soman et al, 2005) 20

2.2 Hierarchical to MTO-MTS problem (Soman et al) 21

CHAPTER 3 3.1 The planning of the study 32

3.2 Activities in phase 1 and 2 33

3.3 Activities in stage 1 36

3.4 Flow chart of activities in stage 1 37

3.5 Activities in stage 2 38

3.6 Flow chart of activities in stage 2 39

3.7 Activities in stage 3 40

3.8 Flow chart of activities in stage 3 41

3.9 Activities in stage 4 42

3.10 Flow chart activities for stage 4 43

CHAPTER 4 4.1 Flow system of MTO operation 51

4.2 Flow system of MTS operation 51

4.3 The portion of customers for Product L 58


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xi

Content Page No

4.4 Defects for Product L 58

4.5 The portion of customers for Product M 59

4.6 Defects for Product M 59

4.7 The portion of customers for Product N 60

4.8 Defects for Product N 60

4.9 The portion of customers for Product X 61

4.10 Defects for Product X 61

4.11 The portion of customers for Product Y 62

4.12 Defects for Product Y 62

4.13 Production Stability Index 68

4.14 Factors contribute to the increment of inventory level 75

4.15 The percentages of factors contribute to the increments of inventory level 76


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xii

LIST OF ABBREVIATIONS, SYMBOLS AND

NOMENCLATURE

MTO - Make-to-Order MTS - Make-to-Stock

FCFS – First Come First Serve

CODP – Customer Order Decoupling Point PSM – Projek Sarjana Muda


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1

CHAPTER 1

INTRODUCTION

1.0 Preliminary

This chapter presents the overall review of the study including the background of the study, problem statement and objectives of the study. Afterward, the background of companies and products are also described. Lastly, the expected outcome is explained in this chapter.

1.1 Background of the Study

Make-to-order (MTO) and Make-to-stock (MTS) are the production operation systems that are used in the industries. Usually, overcapacity and capacity shortage are occurred during the production system and will affect the balancing of the demand supply of the product. In order to reduce imbalance problem in the production stability, MTO and MTO strategies were applied the industries.

MTO is the production operation system geared to satisfy the customer requirement only upon receiving a customer’s order. Usually, MTO offers a high variety of customer specific and more expensive product. The production plans of MTO are ordering execution and the performance focused on the order such as the average, response time and average order delay. During MTO production operation, the competitive priority is shorter delivery lead time. This priority will lead the company in reducing the delivery


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2 time and will be the just in time (JIT) in delivering the product to the customer. MTO also have the main operational issues such as capacity planning, order acceptance and rejection and attaining high due date adherence.

MTS is the production system where the industries make the product in stock. This MTS production operation strategy will cause the problem in the inventory. The MTS’s products have low variablity and not expensive product. MTS is always planning to meet the demand focus on anticipating the demand. Usually, MTS measured the performance through the product focused where the line item fill rate and the average inventory level will be measured. The competitive priority of the MTS is higher fill rate and the main operation issues are inventory planning, lot size determination and the demand forecasting. Kingsman et al. (1996), Vollman et al. (1997) and Silver et al. (1998) had widely discussed the issues in pure MTO and MTS operation production.

It is important to recognize the operation production systems in pure MTO and pure MTS strategy to know the suitable system to undergo in the operation production system. In deciding the suitable the system which will go through to the production system, it depends on the specific things such as the process of the product, the material and the capacity of the product.

Sometimes, the combined MTO and MTS are necessary in the production situation because of different strategy contexts in which the products are produced. According to Soman et al. (2005), they postulated that mix of MTO and MTS products their interaction with the limited shared capacity open interesting possibilities as well as problem for production planning. For example, on the other hands, MTS product might be manufactured to fill capacity in periods of low demand for MTO items bit on the other hands, we do not fully understand these interaction to answer the question such as how much inventory should kept or hoe due dates should be kept or how due dates should be set in the combined MTO and MTS production situation.


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3

1.2 Problem Statement

Usually, the balance between demand and supply is very important to ensure the continuous supply of products to customers. But sometimes the imbalance of demand and supply occur the production where there might be a shortages or excess in capacity.

Figure 1.1 shows capacity imbalance occurred at Company A. The shortage capacity was occurred at that company. This is due to high demand quantity than the production output. Figure 1.2 presents capacity imbalance occurred at Company B. The shortage capacity and overcapacity occurred at this company. The excess capacity occurred because of the production outputs is more than the demand quantity.

In the case of shortage capacity, the workers productivity will be affected as they rush to replenish the product to meet the customer demand. Working in a rush situation would affects the workers’ performance. This will lead to low productivity. In the case of overcapacity, it means that the company holds a lot of waste. Since the waste has increased, at the same time the cost also increases. The overcapacity of products also requires more space for the inventory.

In this regard the MTO and MTS production operating system were used. By doing so, the industries can reduce and overcome this imbalance problem from happening again. Using MTO and MTS systems reduces the inventory’s cost while at the same time gain the profit for the company (Rajagopalan, 2002). MTO and MTS systems required to determine the capacity during the planning horizon, order acceptance and rejection policies (Rafiei and Rabbani, 2010).


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4 Figure 1.1: Capacity imbalance occurred at Company A

Figure 1.2: Capacity imbalance occurred at Company B.

0 100 200 300 400 500 600 700 May-11

june july august sept okt nov dec

B O X E S O F P RO D U C T MONTH

PRODUCT X

demand quantity production output sales of product

Shortage capacity

0 20 40 60 80 100 120 140 160 180

May-11 June July August Sept Oct Nov Dec

D RU MS MONTH

PRODUCT M

demand quantity production outputs sale of products

Shortage capacity

Overcapacity Shortage capacity


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5

1.3 The important of Study

The importance of the study is to determine the characteristics of the MTO and MTS operation system that could give impact to product variable, production stability and product quality. The critical factors that contribute to the increment inventory level could be determined after.

1.4 Aim and Objectives

The aim of the study is to determine the relationship between Make-to-order (MTO) and Make-to-stock (MTS). Basically, the main objectives in accomplishing this study are shown below:

(a) To identify the characteristics of Make-to-Order (MTO) and Make-to-Stock (MTS) (b) To identify the effect of MTO and MTS to product quality.

(c) To clarify the effect of product variety to production stability.

(d) To analyze the critical factors contribute to the increment of inventory level.

1.5 Scope

Case study at two Micro SME companies in Chemical industry; (i) Company A that produces chemical organic, (ii) Company B that produces the cleaning chemical. Both of companies have similar manufacturing process. The study focuses on:

(a) Changes in demand quantity. (b) Delivery time.

(c) Inventory control.


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6

1.6 Company Background

1.6.1 Company A

Establish in November 2000, the firm started its business operation in mid the year and the office of management work and production activities is at Batu Berendam, Melaka. This company produces the three types of the fertilizer which be explained in Table 1.1.

1.6.1.1 Product

Company A produces three types of product such as Product X, Product Y and Product Z. Table 1.1 is show the type and description of each product.


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7 Table 1.1: Product of Company A.

Product Description

Product X Product X is one of the excllent liquid fertilizer product in the market. It product through adriculture technology profesional, which based on the biotechnology. This product are able for weaken growth for various type of weeds such as grass. Product Y Product Y is multi-purpose liquid fertilizer. It

contains all the nutrients that are well balanced and specially formulated from organic and non- organic substances that are suitable for all types of plants. This fertilizer is easy to dispense and efficient because by spraying it onto the stem or leaves. So, it is practically to use this fertilizer as it helps to promote growth for a continuous harvest and also a solution for crops grown in an unfertile land.

Product Z Product Z is organic fertilizer produce from the plant and choice herbs have been concluded special technology ‘decomposed’. This fertilizer will help to provide nutrients to crop by consistent, act fast and suitable to be used to variety type of crop.


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2 time and will be the just in time (JIT) in delivering the product to the customer. MTO also have the main operational issues such as capacity planning, order acceptance and rejection and attaining high due date adherence.

MTS is the production system where the industries make the product in stock. This MTS production operation strategy will cause the problem in the inventory. The MTS’s products have low variablity and not expensive product. MTS is always planning to meet the demand focus on anticipating the demand. Usually, MTS measured the performance through the product focused where the line item fill rate and the average inventory level will be measured. The competitive priority of the MTS is higher fill rate and the main operation issues are inventory planning, lot size determination and the demand forecasting. Kingsman et al. (1996), Vollman et al. (1997) and Silver et al.

(1998) had widely discussed the issues in pure MTO and MTS operation production.

It is important to recognize the operation production systems in pure MTO and pure MTS strategy to know the suitable system to undergo in the operation production system. In deciding the suitable the system which will go through to the production system, it depends on the specific things such as the process of the product, the material and the capacity of the product.

Sometimes, the combined MTO and MTS are necessary in the production situation because of different strategy contexts in which the products are produced. According to Soman et al. (2005), they postulated that mix of MTO and MTS products their

interaction with the limited shared capacity open interesting possibilities as well as problem for production planning. For example, on the other hands, MTS product might be manufactured to fill capacity in periods of low demand for MTO items bit on the other hands, we do not fully understand these interaction to answer the question such as how much inventory should kept or hoe due dates should be kept or how due dates should be set in the combined MTO and MTS production situation.


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3 1.2 Problem Statement

Usually, the balance between demand and supply is very important to ensure the continuous supply of products to customers. But sometimes the imbalance of demand and supply occur the production where there might be a shortages or excess in capacity.

Figure 1.1 shows capacity imbalance occurred at Company A. The shortage capacity was occurred at that company. This is due to high demand quantity than the production output. Figure 1.2 presents capacity imbalance occurred at Company B. The shortage capacity and overcapacity occurred at this company. The excess capacity occurred because of the production outputs is more than the demand quantity.

In the case of shortage capacity, the workers productivity will be affected as they rush to replenish the product to meet the customer demand. Working in a rush situation would affects the workers’ performance. This will lead to low productivity. In the case of overcapacity, it means that the company holds a lot of waste. Since the waste has increased, at the same time the cost also increases. The overcapacity of products also requires more space for the inventory.

In this regard the MTO and MTS production operating system were used. By doing so, the industries can reduce and overcome this imbalance problem from happening again. Using MTO and MTS systems reduces the inventory’s cost while at the same time gain the profit for the company (Rajagopalan, 2002). MTO and MTS systems required to determine the capacity during the planning horizon, order acceptance and rejection policies (Rafiei and Rabbani, 2010).


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4

Figure 1.1: Capacity imbalance occurred at Company A

Figure 1.2: Capacity imbalance occurred at Company B.

0 100 200 300 400 500 600 700 May-11

june july august sept okt nov dec

B O X E S O F P RO D U C T MONTH

PRODUCT X

demand quantity production output

sales of product Shortage capacity

0 20 40 60 80 100 120 140 160 180

May-11 June July August Sept Oct Nov Dec

D RU MS MONTH

PRODUCT M

demand quantity production outputs

sale of products Shortage capacity

Overcapacity Shortage capacity


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5 1.3 The important of Study

The importance of the study is to determine the characteristics of the MTO and MTS operation system that could give impact to product variable, production stability and product quality. The critical factors that contribute to the increment inventory level could be determined after.

1.4 Aim and Objectives

The aim of the study is to determine the relationship between Make-to-order (MTO) and Make-to-stock (MTS). Basically, the main objectives in accomplishing this study are shown below:

(a) To identify the characteristics of Make-to-Order (MTO) and Make-to-Stock (MTS) (b) To identify the effect of MTO and MTS to product quality.

(c) To clarify the effect of product variety to production stability.

(d) To analyze the critical factors contribute to the increment of inventory level.

1.5 Scope

Case study at two Micro SME companies in Chemical industry; (i) Company A that produces chemical organic, (ii) Company B that produces the cleaning chemical. Both of companies have similar manufacturing process. The study focuses on:

(a) Changes in demand quantity. (b) Delivery time.

(c) Inventory control.


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6 1.6 Company Background

1.6.1 Company A

Establish in November 2000, the firm started its business operation in mid the year and the office of management work and production activities is at Batu Berendam, Melaka. This company produces the three types of the fertilizer which be explained in Table 1.1.

1.6.1.1 Product

Company A produces three types of product such as Product X, Product Y and Product Z. Table 1.1 is show the type and description of each product.


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7

Table 1.1: Product of Company A.

Product Description

Product X Product X is one of the excllent liquid fertilizer product in the market. It product through adriculture technology profesional, which based on the biotechnology. This product are able for weaken growth for various type of weeds such as grass. Product Y Product Y is multi-purpose liquid fertilizer. It

contains all the nutrients that are well balanced and specially formulated from organic and non- organic substances that are suitable for all types of plants. This fertilizer is easy to dispense and efficient because by spraying it onto the stem or leaves. So, it is practically to use this fertilizer as it helps to promote growth for a continuous harvest and also a solution for crops grown in an unfertile land.

Product Z Product Z is organic fertilizer produce from the plant and choice herbs have been concluded special technology ‘decomposed’. This fertilizer will help to provide nutrients to crop by consistent, act fast and suitable to be used to variety type of crop.