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Characterization of production-inventory systems in the hungarian industry
Engineering Costs and Production Economics, 18 ( 1990) 285-292 Elsevier Science Publishers B.V., Amsterdam-Printed in The Netherlands
285
CHARACTERIZATION OF PRODUCTION-INVENTORY SYSTEMS IN THE HUNGARIAN INDUSTRY* Attila ChikGn University of Economics, Budapest (Hungary)
ABSTRACT
The paper reports the main characteristics of the production-inven tory systems of Hungarian industrial companies. After a brief discussion of the general economic background some results of a survey are provided. We used a questionnaire developed from an international project aimed to carry out cross-national comparison. The results discussed here will be part of this project. The main conclusion is that the general character and relatively low level of development of the production-inventory systems in Hungary are direct consequences of the specific environ-
mental challenges companies in our country must face. The level of production-inventory management can be - and should be - raised considerably but attempts aimed to improve the situation can be successful only if the environmental conditions are appropriately taken into consideration. More advanced systems with a chance of successful implementation must utilize many conceptual and methodological elements of the internationally known integrated systems efficiently operated in the Western world but efforts to simply copying them would definitely lead to failure.
1. INTRODUCTION
a decisive factor of success under a variety of conditions. The Hungarian economy is not a particularly successful one, and among the major short-comings which are usually quoted as characteristic to our economy there are two which are in close connection with the application of integrated production-inventory systems: - the general methodological level of management is considerably lower than that of the Western countries, - inventory investments are high; but even the high inventories cannot defend companies from the effects of shortages of necessary inputs. From these two facts one could conclude that
Attending conferences where production management problems are discussed one can see that the involvement of companies in implementing up-to-date concepts of integrated manufacturing is so wide-spread that one gets the impression: no companies can gain nowadays sustainable competitive advantage without applying some variances of JIT or MRP systems. This is obviously not true - however, it would be hard to deny that a well-operated integrated production-inventory system can be *Presented at the 5th International Working Seminar on Production Economics, Igls, Austria, February 22-26,1988.
0167-188X/90/$03.50
0 1990 Elsevier Science Publishers B.V.
286 a major task is to improve inventory management. This is of course true but for being able to suggest ways of improvement we had to learn more about the causes of the present situation. A project was started about a year ago, the final goal of which is to develop principles for production-inventory systems and methodology which can be efficiently used at Hungarian industrial companies. First we made an overview of the general situation, partly on theoretical grounds and partly using the results of various previous surveys of different kinds. During this work we learned about the international project initiated by Professor Clay Whybark of Indiana University. This project aims to explain cross-national differences in production-inventory control practice. We decided to take part in this project and used this survey as a means to get deeper knowledge of the reasons of our present situation. At this stage we can report on the main findings of the evaluation of the questionnaire in Hungary. We still do not have the results of other countries - the cross-national analysis will certainly enrich our understanding of the Hungarian situation as well. 2. GENERAL ECONOMIC SITUATION INFLUENCING PRODUCTIONINVENTORY MANAGEMENT When starting the survey we already knew that the results would show a rather dark picture - not because we are too critical, but because we know both the actual operation of the average Hungarian company and the theoretical explanation of their behavior. There are several well established reasons why companies in a shortage economy do not - and reasonably cannot - go in trying to implement advanced management technologies, including such systems like MRP and JIT. What are these reasons? Why can’t the majority of our companies apply these successful ideas? It is a fact discussed many times (mainly
based on the theory of Janos Kornai [ 1 ] ) that companies in shortage economies are in a special “paternalistic” relationship with the state (or better to say, with the organizations representing it). The main form of appearance of this paternalistic relationship is the redistribution of the companies’ income: a very large proportion of this income is first centralized and than redistributed according to principles which cannot be derived from profitability requirements. The rules of this redistribution are to a great extent “tailor-made”, i.e. the fate of a particular company depends on its general judgement by governmental institutions, based on a complex set of quantitative and qualitative, formally and informally used measures, which can just by chance coincide with prolitability requirements. The main reason behind low methodological level of management is therefore that managers are much more involved in external “political” activity (to ensure good judgement and in this way central preferences) than in internal development of company operations, which latter can produce results only at the margin, while good relations to central government can result in incomparably higher rewards. The second track of thinking is about high inventories. A shortage economy is characterized by a seller’s market, where easy to sell but hard to buy. It is again a fact discussed many times that such a market which is characterized by a general overdemand leads to relatively much higher inventory levels (in particular, much higher input inventories) than the buyer’s market which is characterized by an oversupply [ 21. It is quite obvious that changing this situation is beyond the control of any company - the real question is how can they themselves to this given accomodate environment. Finishing this extremely short and necessarily superficial overview of the Hungarian situation, I just want to refer to the well-known thesis of organization theory, namely that open organizations (like companies) form their in-
287 ternal activity according to the requirements of their environment. From this it comes that even though we are not happy at all with the concepts and methods used in production-inventory systems in Hungary, it must be admitted that the present situation is adequate with the actual everyday interest of the majority of our companies. This fact must be taken into consideration if we want to effectively improve their operation. 3. THE SURVEY A questionnaire consisting of 96 questions in the following structure was used in the survey: I. Company profile II. Sales forecasting III. Production planning and scheduling IV. Shop floor control V. Purchasing and materials management VI. Inventory control The structure and the vast majority of the questions simply reflects the questionnaire used by Clay Whybark and his colleagues in several other countries. We wanted to have a comparable questionnaire; but a few questions must have been changed because of the specific situation at the Hungarian companies. Also we have included some direct questions about inventory control, to fulfill the special interest of the author of this paper. Seventy-eight companies have filled out the questionnaire. This is not a very high number but the structure of the sample reflects quite well the industrial structure in Hungary. The results were not sensitive neither on branches of industry nor on size of the companies. It has to be added, that since we wanted to get a picture which reflects the situation of the average Hungarian companies, we have deliberately left out those outstanding companies, which for one reason or another enjoy a special situation and usually are more advanced in their general operation, including production-
inventory management. This way we got a less favourable but more characteristic result. 4. RESULTS
OF THE SURVEY
The results of the survey did not cause any surprise but contributed to deepening our knowledge about the details. An extended study is under preparation - here we report about some of the most characteristic results. The results are presented in two parts: first, policy questions, and than methodological issues. 4.1.
Production-inventory
policy
Results of the survey show that production planning to a great extent depends on resource availability. Since companies mainly produce on order, sales forecast does not play a very important role. (As for the companies of our sample, production on of order represents more than 80% of total production in case of 85.9% of the companies, so this policy can be considered as overwhelmingly dominant. ) Sales forecasts are prepared usually for a one-year period and are updated quarterly. (Quarters play a very important role in production planning. Based on traditions, this can be considered as a time period of fundamental importance in company operations. ) Forecasts are usually made on the basis of actual knowledge of sales orders or on their judgement based on longterm relations with consumers. The evaluation of the question on the factors influencing production plans are presented in Table 1. As a direct consequence of the fact that our companies operate in a shortage economy production in the vast majority of cases goes on to order and not to stock. Companies’ behavior is much different depending on which market they want to sell on. In case of domestic and COMECON market they usually promise long delivery time, while in case of selling to market economies these
288 TABLE I Relative weight of factors influencing production plans Factor
Weight/% of companies
Average weight
0
1
2
3
4
5
1.2 1.3 3.8 2.6 1.3 1.3 93.6
0.0 0.0 1.3 3.8 7.7 6.4 0.0
3.8 1.3 9.0 15.4 19.2 23.1 0.0
3.8 7.7 24.4 34.6 30.8 39.7 0.0
16.7 28.2 41.0 28.2 28.2 23.1 2.6
74.4 61.5 20.5 15.4 12.8 6.4 2.6
Actual orders/backlog Production capacity The forecast Level of inventories Costumers’ plans Previous sales Other
Note: Factors could have been weighted l-5,0
means no answer.
TABLE 2 Delivery time promised in different market orientations Delivery lead time in days
Market
Internal Market economies COMECON countries
-60
60-180
180-
29.8 40.8 20.0
54.3 44.9 44.4
15.8 14.3 35.6
TABLE 3 Determinants
of delivery lead times
Lead time is mainly determined mostly by Consumer The company Negotiation Other way/no answer
% of companies Internal consumers
COMECON countries
4.64 4.52 3.73 3.37 3.19 3.0 4.5
Market economies
37.2 23.1 37.2 2.5
41.0 10.3 30.7 18.0
73.1 0.0 14.1 12.8
100.0
100.0
100.0
lead times are much shorter (see Table 2). This situation is of course not the consequence of something like a subjective preference of the companies, but the different requirements of the markets. This is illustrated by Table 3, answering the question “How the delivery lead times are determined?” Another result illustrating the importance of sales direction is the analysis of factors influ-
encing priorities in production scheduling, which is shown in Table 4. Combining the information provided by Table 4 with that of Table 2, one can conclude that since priorities in production mainly depend on due dates and in the same time sales to market economies are subject to a much tighter schedule, these priorities have a very basic influence on the actual operation of the production system. This conclusion is in correspondence with our everyday experience. Further consequences of the situation discussed above for the production system: (i) companies offer long delivery times for consumers to have time to ensure the availability of resources, (ii) since there is a great difference between the various market relations, those companies which sell for more than one TABLE 4 Priorities in production
scheduling
Aspects
Percentage of companies indicating the various aspects as important
Costumer order due dates Processing time required Similarity of set-ups Material availability Marketing preferences First-come first-served Selling price of item Management directive
91.0 35.9 3.8 61.5 16.7 9.0 6.4 17.9
289 type of markets (and this is the majority of the Hungarian companies) make themselves flexible by rescheduling their production when necessary to ensure the timeliness of delivery to the more important relation. As an illustration for this see the survey results regarding the timeliness of delivery (Table 5 ) . However this production scheduling policy leads to two major consequences, against an efficient operation: (i) Since companies want to protect themselves against frequent rescheduling as much as possible they build up high input stocks. (Which on the other hand, prevents them from holding appropriate output stocks and so from short notice order fulfillment because of course capital which can be invested in stocks is also limited. ) (ii) Since rescheduling depends mainly on material availability, which is a random factor, companies must have a rather flexible internal operation which can always adjust production to the resources. The answers to the questions which asked about priorities in production scheduling are shown in Table 6. TABLE 5 Percentage of orders late Market type
Internal Market economies COMECON countries
Percentage of orders late -10
10-20
20-
30.8 78.2 62.8
39.1 16.7 23.1
29.4 5.1 14.1
TABLE 6 Factors influencing delivery times promised to consumers Delivery time depends on
Product complexity Production load Importance of costumer Material availability Other
Market type Market economies
COMECON countries
Internal
38.5 44.9 50.0 56.4 1.3
32.1 38.5 39.7 50.0 2.6
35.9 56.4 56.4 66.7 3.9
The general tendency is that the dominant factor is the availability of input materials - in case of the internal and COMECON oriented production on the second place one can find capacity availability, while in case of export production to Western countries the second place is for the importance of consumer so if companies have orders from this direction, they try to find the way of fulfilling it. The flexibility of the above type supposes that companies react rather fast. For that there are two necessary conditions: (i) availability of slacks of production resources, (ii) organizational flexibility. As for the question of slacks, attention has to be given to the fact that they are in close connection with shortages. Slacks of production resources on the one hand serve as buffers against shortages, to protect production against the disturbances, while on the other hand slacks can be consequences of shortages: the shortage in one kind of resource for example can cause unusability of another resource, this way causing non-intended slacks. Theoretical studies as well as an other survey which was carried out a few years ago show that slacks play a very important role in the production system of Hungarian companies. Zelko [ 3 ] in his often cited book even states that having appropriate slacks belongs to the four basic policy goals of Hungarian companies (besides (i) high level of wages of employees, (ii) growth and expansion, (iii) favourable image). The high rate of investment in input inventories supports this statement. As for the use of slacks, or the short-term adaptation to the situation our survey shows that it mainly goes on by using overtime: if short term shortages occur in input materials or parts, companies wait until the necessary input arrives and then they try to catch up by working overtime. As for the required organizational flexibility, the above mentioned situation leads to two important consequences: (i) the operation of an informal decision system, built organically
290
into the system [ 41. (ii) The integration of the sales-production-inventory-purchasing processes in the vast majority of cases goes on under the leadership of a production manager, who is usually at a high level in the hierarchy (in most cases at the position of a first deputy of the CEO). The integration is actually dominated by the production, the interest of which is a smooth operation, which can be ensured by high input stocks. An interesting result of the survey shows that those companies which have a top-level manager in charge of all or most of the production and logistics operations tend to have considerably higher inventories than the group of companies which do not have such a leadership. The reason is, that the interest of smoothing production by stocks can be followed more efficiently when this interest is represented consequently by some top manager. Another interesting fact is, that inventory plans are better met at these companies, which result supports the existence of the above mentioned effect. 4.2. Operation-methodology The discussion of methodology is started with admitting that the generally known up-todate concepts of operation of the productioninventory systems have not penetrated the Hungarian industry (see Table 7 ) . Knowledge of some companies which more or less successTABLE I Exposures of companies to up-to-date production concepts Exposures to MRP/JIT
MRP (%)
JIT (%)
Never heard of it Using it and benefiting from it Using it but not benefiting from it Understanding it, but feeling no necessity of introducing it Just starting to introduce it Trying to introduce it, but having difficulty doing so Considering its introduction No answers
39.1 10.3 2.6 20.5
56.4 0.0 19.2 0.0
2.6 3.8
1.3 11.5
17.9 2.6
0.0 6.4
fully apply some forms of MRP was available, however these companies have not been in the sample. We do not know about any company which would have tried JIT. General conditions presented in the introduction fully explain this situation. Let’s consider three aspects of the methodology according to which companies’ operation of their production-inventory systems can be judged. (i)
Systematic
character
of operation
Under this heading the problem of how systematic is the control of operation (as opposed to an always changing, irregular, ad-hoc management) is dealt with. For the time dimension of operation, companies’ activity shows a rather regular annual, and within that quarterly cycle. Almost all activities are time-phased first on an annual basis and than figures or plans are broken down to the quarters of the year (59.0% of the companies in the sample make forecast and 66.7% plan production on that basis - and 47.4% do so both activities). This uniform behavior has both advantages and disadvantages: it is simple and the processes can be coordinated well, while on the other hand it is not very adaptive. This can be illustrated by the fact, that companies adjust their forecast with a rather random character, and this is only partly connected to changes in the production plan. Table 8 shows that a large proportion of the companies modilies the production plan independently of the sales forecast - which means that they have some other reason for correction (this can be explained in connection with their preferences discussed in the previous chapter). Purchasing is connected to the processes discussed through the ordering rule. Answers from the questionnaire indicate that this connection is very close: the vast majority of the companies (79.5%) says that their input material or-
291 TABLE 8 Frequency of changes in forecasts and plans How often is modified (annually)
1
2
3
4
4-
Sales forecast Production plan
10.3 3.8
26.9 9.0
15.4 16.7
24.4 47.4
10.5 12.8
der is based on their production plan, 25.6% says that the basis for ordering is the sales forecast. (There is an overlap among the answers, so they do not sum up to 100%. ) However, only a small proportion of the companies use formalized ordering mechanism: reorder time-order level (t, S) system is used at 16.6% of the companies, while reorder point-order quantity system (s, q) is introduced at 5.1%.
(ii) The use of computers
Inventory recording Material accounting Sales order recording Wage recording Material usage planning Job-shop order recording Production scheduling Production planning Capacity planning Purchase order recording Quality control Production design Sales forecast (iii) The application
Computerization in Hungary is rather backward in comparison with the industrialized countries - there is a time-lag of a decade in hardware. Knowing that, the result was not surprising: only 23.1% of the companies in the sample uses computers in forecasting and only 10.3% of the companies say that they cannot carry out production planning without a computer because it is so strongly nested in their system. (Though it is remarkable that an additional 33.4% says that the computer plays a role: the system is operated partly on computer; by 69.2% it would lead to considerable results in their efficiency in production planning. ) A question which has been added to the original questionnaire is oriented to the general computerization of companies. Companies had to give a weight to the computerization of 13 activities: “ 1” means that computer is not used at all, “5” means that the activity is fully computerized. The following averages were obtained
of “hard”
3.1 2.8 2.5 2.5 2.4 2.3 2.2 2.2 2.0 1.9 1.6 1.6 1.4 methodology
The field we are examining is one of the favourite ones of the O.R. people; though, there are permanently complaints about the lack of practical implementation. We cannot tell any good news to researchers about the Hungarian situation. In sales forecast the results obtained from the questionnaire are illustrated in Table 9. The result is quite acceptable (in comparison with the other areas) - the cause may be that appropriate models can be found in practically all computer software packages. The results are much less favourable when we take a look on the techniques used to deterTABLE 9 Methods used for sales forecast Method
% of companies
Simple time series Causal models Complex time series models Other/no answer
31.6 9.0 5.0 54.4
292 TABLE 10 Methods used to determine inventory standards Method
Technical calculations Subjective judgement Statistical evaluation Mathematical models
Type of inventory Materials+ purchased parts
WIP
Finished goods
29.7 25.0 29.0 9.1
16.2 6.3 3.2 9.1
5.4 12.5 3.2 5.9
mine inventory standards (Table 10). This shows that the majority of companies build up their inventories according to rules determined on a technical (engineering) and not an economic basis. This is in connection with the fact that the whole area is dominated by managers who consider technical relations much more important than economic ones and who are happily willing to hold rather high inventories. An interesting result has turned out when we carried out a series of cluster analyses (which at the time of writing this paper is still not fully evaluated yet). There is a rather strong correlation between the hierarchical level where decisions are made in the production-inventorypurchasing system and the methodology used in the decision process: the higher the level of the decision the less advanced methodology is used. 5. CONCLUSION Results of the survey are not favourable neither if one thinks in terms of the theoretical possibilities nor if we consider the actual efliciency of the average Hungarian companies. However, the survey supports the concept outlined in the introduction: the behavior of companies reflect the conditions and requirements of the environment. Vast majority of the characteristics given above can be well explained with causes stemming from the situation of
companies in the Hungarian economy described very briefly in the introduction. A more complete evaluation can be given when the results of the survey carried out in other countries are available. What to do next? The question comes absolutely naturally since the above described situation do not promise any good to the average Hungarian lirms in their international competitiveness. The first and far most important way of approvement is to change the environment. That is the question of economic and political reforms, which are on the agenda in Hungary to discuss these goes far beyond the scope of this paper. The second and more direct task is to construct such systems of operation which conform adequately with the very special Hungarian circumstances. It is impossible to simply adapt even the most eflicient concepts and methods worked out under the different circumstances of the leading countries of the world though we can and have to take into consideration many elements of them. We have just started a project to promote the research on this field -the survey reported about above belonged to the first steps of this project. REFERENCES Kornai, J., 1980. The Economics of Shortage. North-Holland, Amsterdam. Chikan, A., I98 1. Market disequilibrium and the volume of stocks. In: A. Chikan (Ed.), The Economics and Management of Inventories, Part A. Inventories in the national economy. Akademiai Kiado, Amsterdam/Budapest, pp. 73-85. Zelko, L., 1979. Vallalatelmelet es politikai gazdasagtan. The Theory of the Firm and the Political Economy (in Hungarian). Kozgazdasagi es Jogi KBnyvkiado, Budapest. Barancsi, E, 1986. Formal and informal systems of inventory management in Hungary: A case study. In: A. Chikan (Ed.), Inventory in Theory and Practice. Elsevier/Akadtmiai Kiadd, Amsterdam/Budapest, pp. 303-313.
(Accepted July 8, 1989)
285
CHARACTERIZATION OF PRODUCTION-INVENTORY SYSTEMS IN THE HUNGARIAN INDUSTRY* Attila ChikGn University of Economics, Budapest (Hungary)
ABSTRACT
The paper reports the main characteristics of the production-inven tory systems of Hungarian industrial companies. After a brief discussion of the general economic background some results of a survey are provided. We used a questionnaire developed from an international project aimed to carry out cross-national comparison. The results discussed here will be part of this project. The main conclusion is that the general character and relatively low level of development of the production-inventory systems in Hungary are direct consequences of the specific environ-
mental challenges companies in our country must face. The level of production-inventory management can be - and should be - raised considerably but attempts aimed to improve the situation can be successful only if the environmental conditions are appropriately taken into consideration. More advanced systems with a chance of successful implementation must utilize many conceptual and methodological elements of the internationally known integrated systems efficiently operated in the Western world but efforts to simply copying them would definitely lead to failure.
1. INTRODUCTION
a decisive factor of success under a variety of conditions. The Hungarian economy is not a particularly successful one, and among the major short-comings which are usually quoted as characteristic to our economy there are two which are in close connection with the application of integrated production-inventory systems: - the general methodological level of management is considerably lower than that of the Western countries, - inventory investments are high; but even the high inventories cannot defend companies from the effects of shortages of necessary inputs. From these two facts one could conclude that
Attending conferences where production management problems are discussed one can see that the involvement of companies in implementing up-to-date concepts of integrated manufacturing is so wide-spread that one gets the impression: no companies can gain nowadays sustainable competitive advantage without applying some variances of JIT or MRP systems. This is obviously not true - however, it would be hard to deny that a well-operated integrated production-inventory system can be *Presented at the 5th International Working Seminar on Production Economics, Igls, Austria, February 22-26,1988.
0167-188X/90/$03.50
0 1990 Elsevier Science Publishers B.V.
286 a major task is to improve inventory management. This is of course true but for being able to suggest ways of improvement we had to learn more about the causes of the present situation. A project was started about a year ago, the final goal of which is to develop principles for production-inventory systems and methodology which can be efficiently used at Hungarian industrial companies. First we made an overview of the general situation, partly on theoretical grounds and partly using the results of various previous surveys of different kinds. During this work we learned about the international project initiated by Professor Clay Whybark of Indiana University. This project aims to explain cross-national differences in production-inventory control practice. We decided to take part in this project and used this survey as a means to get deeper knowledge of the reasons of our present situation. At this stage we can report on the main findings of the evaluation of the questionnaire in Hungary. We still do not have the results of other countries - the cross-national analysis will certainly enrich our understanding of the Hungarian situation as well. 2. GENERAL ECONOMIC SITUATION INFLUENCING PRODUCTIONINVENTORY MANAGEMENT When starting the survey we already knew that the results would show a rather dark picture - not because we are too critical, but because we know both the actual operation of the average Hungarian company and the theoretical explanation of their behavior. There are several well established reasons why companies in a shortage economy do not - and reasonably cannot - go in trying to implement advanced management technologies, including such systems like MRP and JIT. What are these reasons? Why can’t the majority of our companies apply these successful ideas? It is a fact discussed many times (mainly
based on the theory of Janos Kornai [ 1 ] ) that companies in shortage economies are in a special “paternalistic” relationship with the state (or better to say, with the organizations representing it). The main form of appearance of this paternalistic relationship is the redistribution of the companies’ income: a very large proportion of this income is first centralized and than redistributed according to principles which cannot be derived from profitability requirements. The rules of this redistribution are to a great extent “tailor-made”, i.e. the fate of a particular company depends on its general judgement by governmental institutions, based on a complex set of quantitative and qualitative, formally and informally used measures, which can just by chance coincide with prolitability requirements. The main reason behind low methodological level of management is therefore that managers are much more involved in external “political” activity (to ensure good judgement and in this way central preferences) than in internal development of company operations, which latter can produce results only at the margin, while good relations to central government can result in incomparably higher rewards. The second track of thinking is about high inventories. A shortage economy is characterized by a seller’s market, where easy to sell but hard to buy. It is again a fact discussed many times that such a market which is characterized by a general overdemand leads to relatively much higher inventory levels (in particular, much higher input inventories) than the buyer’s market which is characterized by an oversupply [ 21. It is quite obvious that changing this situation is beyond the control of any company - the real question is how can they themselves to this given accomodate environment. Finishing this extremely short and necessarily superficial overview of the Hungarian situation, I just want to refer to the well-known thesis of organization theory, namely that open organizations (like companies) form their in-
287 ternal activity according to the requirements of their environment. From this it comes that even though we are not happy at all with the concepts and methods used in production-inventory systems in Hungary, it must be admitted that the present situation is adequate with the actual everyday interest of the majority of our companies. This fact must be taken into consideration if we want to effectively improve their operation. 3. THE SURVEY A questionnaire consisting of 96 questions in the following structure was used in the survey: I. Company profile II. Sales forecasting III. Production planning and scheduling IV. Shop floor control V. Purchasing and materials management VI. Inventory control The structure and the vast majority of the questions simply reflects the questionnaire used by Clay Whybark and his colleagues in several other countries. We wanted to have a comparable questionnaire; but a few questions must have been changed because of the specific situation at the Hungarian companies. Also we have included some direct questions about inventory control, to fulfill the special interest of the author of this paper. Seventy-eight companies have filled out the questionnaire. This is not a very high number but the structure of the sample reflects quite well the industrial structure in Hungary. The results were not sensitive neither on branches of industry nor on size of the companies. It has to be added, that since we wanted to get a picture which reflects the situation of the average Hungarian companies, we have deliberately left out those outstanding companies, which for one reason or another enjoy a special situation and usually are more advanced in their general operation, including production-
inventory management. This way we got a less favourable but more characteristic result. 4. RESULTS
OF THE SURVEY
The results of the survey did not cause any surprise but contributed to deepening our knowledge about the details. An extended study is under preparation - here we report about some of the most characteristic results. The results are presented in two parts: first, policy questions, and than methodological issues. 4.1.
Production-inventory
policy
Results of the survey show that production planning to a great extent depends on resource availability. Since companies mainly produce on order, sales forecast does not play a very important role. (As for the companies of our sample, production on of order represents more than 80% of total production in case of 85.9% of the companies, so this policy can be considered as overwhelmingly dominant. ) Sales forecasts are prepared usually for a one-year period and are updated quarterly. (Quarters play a very important role in production planning. Based on traditions, this can be considered as a time period of fundamental importance in company operations. ) Forecasts are usually made on the basis of actual knowledge of sales orders or on their judgement based on longterm relations with consumers. The evaluation of the question on the factors influencing production plans are presented in Table 1. As a direct consequence of the fact that our companies operate in a shortage economy production in the vast majority of cases goes on to order and not to stock. Companies’ behavior is much different depending on which market they want to sell on. In case of domestic and COMECON market they usually promise long delivery time, while in case of selling to market economies these
288 TABLE I Relative weight of factors influencing production plans Factor
Weight/% of companies
Average weight
0
1
2
3
4
5
1.2 1.3 3.8 2.6 1.3 1.3 93.6
0.0 0.0 1.3 3.8 7.7 6.4 0.0
3.8 1.3 9.0 15.4 19.2 23.1 0.0
3.8 7.7 24.4 34.6 30.8 39.7 0.0
16.7 28.2 41.0 28.2 28.2 23.1 2.6
74.4 61.5 20.5 15.4 12.8 6.4 2.6
Actual orders/backlog Production capacity The forecast Level of inventories Costumers’ plans Previous sales Other
Note: Factors could have been weighted l-5,0
means no answer.
TABLE 2 Delivery time promised in different market orientations Delivery lead time in days
Market
Internal Market economies COMECON countries
-60
60-180
180-
29.8 40.8 20.0
54.3 44.9 44.4
15.8 14.3 35.6
TABLE 3 Determinants
of delivery lead times
Lead time is mainly determined mostly by Consumer The company Negotiation Other way/no answer
% of companies Internal consumers
COMECON countries
4.64 4.52 3.73 3.37 3.19 3.0 4.5
Market economies
37.2 23.1 37.2 2.5
41.0 10.3 30.7 18.0
73.1 0.0 14.1 12.8
100.0
100.0
100.0
lead times are much shorter (see Table 2). This situation is of course not the consequence of something like a subjective preference of the companies, but the different requirements of the markets. This is illustrated by Table 3, answering the question “How the delivery lead times are determined?” Another result illustrating the importance of sales direction is the analysis of factors influ-
encing priorities in production scheduling, which is shown in Table 4. Combining the information provided by Table 4 with that of Table 2, one can conclude that since priorities in production mainly depend on due dates and in the same time sales to market economies are subject to a much tighter schedule, these priorities have a very basic influence on the actual operation of the production system. This conclusion is in correspondence with our everyday experience. Further consequences of the situation discussed above for the production system: (i) companies offer long delivery times for consumers to have time to ensure the availability of resources, (ii) since there is a great difference between the various market relations, those companies which sell for more than one TABLE 4 Priorities in production
scheduling
Aspects
Percentage of companies indicating the various aspects as important
Costumer order due dates Processing time required Similarity of set-ups Material availability Marketing preferences First-come first-served Selling price of item Management directive
91.0 35.9 3.8 61.5 16.7 9.0 6.4 17.9
289 type of markets (and this is the majority of the Hungarian companies) make themselves flexible by rescheduling their production when necessary to ensure the timeliness of delivery to the more important relation. As an illustration for this see the survey results regarding the timeliness of delivery (Table 5 ) . However this production scheduling policy leads to two major consequences, against an efficient operation: (i) Since companies want to protect themselves against frequent rescheduling as much as possible they build up high input stocks. (Which on the other hand, prevents them from holding appropriate output stocks and so from short notice order fulfillment because of course capital which can be invested in stocks is also limited. ) (ii) Since rescheduling depends mainly on material availability, which is a random factor, companies must have a rather flexible internal operation which can always adjust production to the resources. The answers to the questions which asked about priorities in production scheduling are shown in Table 6. TABLE 5 Percentage of orders late Market type
Internal Market economies COMECON countries
Percentage of orders late -10
10-20
20-
30.8 78.2 62.8
39.1 16.7 23.1
29.4 5.1 14.1
TABLE 6 Factors influencing delivery times promised to consumers Delivery time depends on
Product complexity Production load Importance of costumer Material availability Other
Market type Market economies
COMECON countries
Internal
38.5 44.9 50.0 56.4 1.3
32.1 38.5 39.7 50.0 2.6
35.9 56.4 56.4 66.7 3.9
The general tendency is that the dominant factor is the availability of input materials - in case of the internal and COMECON oriented production on the second place one can find capacity availability, while in case of export production to Western countries the second place is for the importance of consumer so if companies have orders from this direction, they try to find the way of fulfilling it. The flexibility of the above type supposes that companies react rather fast. For that there are two necessary conditions: (i) availability of slacks of production resources, (ii) organizational flexibility. As for the question of slacks, attention has to be given to the fact that they are in close connection with shortages. Slacks of production resources on the one hand serve as buffers against shortages, to protect production against the disturbances, while on the other hand slacks can be consequences of shortages: the shortage in one kind of resource for example can cause unusability of another resource, this way causing non-intended slacks. Theoretical studies as well as an other survey which was carried out a few years ago show that slacks play a very important role in the production system of Hungarian companies. Zelko [ 3 ] in his often cited book even states that having appropriate slacks belongs to the four basic policy goals of Hungarian companies (besides (i) high level of wages of employees, (ii) growth and expansion, (iii) favourable image). The high rate of investment in input inventories supports this statement. As for the use of slacks, or the short-term adaptation to the situation our survey shows that it mainly goes on by using overtime: if short term shortages occur in input materials or parts, companies wait until the necessary input arrives and then they try to catch up by working overtime. As for the required organizational flexibility, the above mentioned situation leads to two important consequences: (i) the operation of an informal decision system, built organically
290
into the system [ 41. (ii) The integration of the sales-production-inventory-purchasing processes in the vast majority of cases goes on under the leadership of a production manager, who is usually at a high level in the hierarchy (in most cases at the position of a first deputy of the CEO). The integration is actually dominated by the production, the interest of which is a smooth operation, which can be ensured by high input stocks. An interesting result of the survey shows that those companies which have a top-level manager in charge of all or most of the production and logistics operations tend to have considerably higher inventories than the group of companies which do not have such a leadership. The reason is, that the interest of smoothing production by stocks can be followed more efficiently when this interest is represented consequently by some top manager. Another interesting fact is, that inventory plans are better met at these companies, which result supports the existence of the above mentioned effect. 4.2. Operation-methodology The discussion of methodology is started with admitting that the generally known up-todate concepts of operation of the productioninventory systems have not penetrated the Hungarian industry (see Table 7 ) . Knowledge of some companies which more or less successTABLE I Exposures of companies to up-to-date production concepts Exposures to MRP/JIT
MRP (%)
JIT (%)
Never heard of it Using it and benefiting from it Using it but not benefiting from it Understanding it, but feeling no necessity of introducing it Just starting to introduce it Trying to introduce it, but having difficulty doing so Considering its introduction No answers
39.1 10.3 2.6 20.5
56.4 0.0 19.2 0.0
2.6 3.8
1.3 11.5
17.9 2.6
0.0 6.4
fully apply some forms of MRP was available, however these companies have not been in the sample. We do not know about any company which would have tried JIT. General conditions presented in the introduction fully explain this situation. Let’s consider three aspects of the methodology according to which companies’ operation of their production-inventory systems can be judged. (i)
Systematic
character
of operation
Under this heading the problem of how systematic is the control of operation (as opposed to an always changing, irregular, ad-hoc management) is dealt with. For the time dimension of operation, companies’ activity shows a rather regular annual, and within that quarterly cycle. Almost all activities are time-phased first on an annual basis and than figures or plans are broken down to the quarters of the year (59.0% of the companies in the sample make forecast and 66.7% plan production on that basis - and 47.4% do so both activities). This uniform behavior has both advantages and disadvantages: it is simple and the processes can be coordinated well, while on the other hand it is not very adaptive. This can be illustrated by the fact, that companies adjust their forecast with a rather random character, and this is only partly connected to changes in the production plan. Table 8 shows that a large proportion of the companies modilies the production plan independently of the sales forecast - which means that they have some other reason for correction (this can be explained in connection with their preferences discussed in the previous chapter). Purchasing is connected to the processes discussed through the ordering rule. Answers from the questionnaire indicate that this connection is very close: the vast majority of the companies (79.5%) says that their input material or-
291 TABLE 8 Frequency of changes in forecasts and plans How often is modified (annually)
1
2
3
4
4-
Sales forecast Production plan
10.3 3.8
26.9 9.0
15.4 16.7
24.4 47.4
10.5 12.8
der is based on their production plan, 25.6% says that the basis for ordering is the sales forecast. (There is an overlap among the answers, so they do not sum up to 100%. ) However, only a small proportion of the companies use formalized ordering mechanism: reorder time-order level (t, S) system is used at 16.6% of the companies, while reorder point-order quantity system (s, q) is introduced at 5.1%.
(ii) The use of computers
Inventory recording Material accounting Sales order recording Wage recording Material usage planning Job-shop order recording Production scheduling Production planning Capacity planning Purchase order recording Quality control Production design Sales forecast (iii) The application
Computerization in Hungary is rather backward in comparison with the industrialized countries - there is a time-lag of a decade in hardware. Knowing that, the result was not surprising: only 23.1% of the companies in the sample uses computers in forecasting and only 10.3% of the companies say that they cannot carry out production planning without a computer because it is so strongly nested in their system. (Though it is remarkable that an additional 33.4% says that the computer plays a role: the system is operated partly on computer; by 69.2% it would lead to considerable results in their efficiency in production planning. ) A question which has been added to the original questionnaire is oriented to the general computerization of companies. Companies had to give a weight to the computerization of 13 activities: “ 1” means that computer is not used at all, “5” means that the activity is fully computerized. The following averages were obtained
of “hard”
3.1 2.8 2.5 2.5 2.4 2.3 2.2 2.2 2.0 1.9 1.6 1.6 1.4 methodology
The field we are examining is one of the favourite ones of the O.R. people; though, there are permanently complaints about the lack of practical implementation. We cannot tell any good news to researchers about the Hungarian situation. In sales forecast the results obtained from the questionnaire are illustrated in Table 9. The result is quite acceptable (in comparison with the other areas) - the cause may be that appropriate models can be found in practically all computer software packages. The results are much less favourable when we take a look on the techniques used to deterTABLE 9 Methods used for sales forecast Method
% of companies
Simple time series Causal models Complex time series models Other/no answer
31.6 9.0 5.0 54.4
292 TABLE 10 Methods used to determine inventory standards Method
Technical calculations Subjective judgement Statistical evaluation Mathematical models
Type of inventory Materials+ purchased parts
WIP
Finished goods
29.7 25.0 29.0 9.1
16.2 6.3 3.2 9.1
5.4 12.5 3.2 5.9
mine inventory standards (Table 10). This shows that the majority of companies build up their inventories according to rules determined on a technical (engineering) and not an economic basis. This is in connection with the fact that the whole area is dominated by managers who consider technical relations much more important than economic ones and who are happily willing to hold rather high inventories. An interesting result has turned out when we carried out a series of cluster analyses (which at the time of writing this paper is still not fully evaluated yet). There is a rather strong correlation between the hierarchical level where decisions are made in the production-inventorypurchasing system and the methodology used in the decision process: the higher the level of the decision the less advanced methodology is used. 5. CONCLUSION Results of the survey are not favourable neither if one thinks in terms of the theoretical possibilities nor if we consider the actual efliciency of the average Hungarian companies. However, the survey supports the concept outlined in the introduction: the behavior of companies reflect the conditions and requirements of the environment. Vast majority of the characteristics given above can be well explained with causes stemming from the situation of
companies in the Hungarian economy described very briefly in the introduction. A more complete evaluation can be given when the results of the survey carried out in other countries are available. What to do next? The question comes absolutely naturally since the above described situation do not promise any good to the average Hungarian lirms in their international competitiveness. The first and far most important way of approvement is to change the environment. That is the question of economic and political reforms, which are on the agenda in Hungary to discuss these goes far beyond the scope of this paper. The second and more direct task is to construct such systems of operation which conform adequately with the very special Hungarian circumstances. It is impossible to simply adapt even the most eflicient concepts and methods worked out under the different circumstances of the leading countries of the world though we can and have to take into consideration many elements of them. We have just started a project to promote the research on this field -the survey reported about above belonged to the first steps of this project. REFERENCES Kornai, J., 1980. The Economics of Shortage. North-Holland, Amsterdam. Chikan, A., I98 1. Market disequilibrium and the volume of stocks. In: A. Chikan (Ed.), The Economics and Management of Inventories, Part A. Inventories in the national economy. Akademiai Kiado, Amsterdam/Budapest, pp. 73-85. Zelko, L., 1979. Vallalatelmelet es politikai gazdasagtan. The Theory of the Firm and the Political Economy (in Hungarian). Kozgazdasagi es Jogi KBnyvkiado, Budapest. Barancsi, E, 1986. Formal and informal systems of inventory management in Hungary: A case study. In: A. Chikan (Ed.), Inventory in Theory and Practice. Elsevier/Akadtmiai Kiadd, Amsterdam/Budapest, pp. 303-313.
(Accepted July 8, 1989)