1 Introduction

Materials management has always been one of the most important and critical processes within production planning and control at companies with ETO supply chains (Persona et al. 2004). Managing the material flow in an effective and efficient way facilitates achieving success as it provides availability of materials with the right type, in the right quantities and at the right time to different phases of the supply chain. In a situation that material-planning activity does not perform well, supply chain faces problems such as work stoppages, delays of end product, losing responsiveness and hence loosing valuable customer satisfaction.

Having a supply chain with large number of suppliers creates even greater need for an effective and efficient management of material flow, as it is required to take into account deliveries of numerous components from different suppliers. Moreover, there are many challenges in ETO production environment that affect performance of material planning; e.g. engineering changes (Wänström and Jonsson 2006) and uncertainty of product specification, mix and volume (Bertrand and Muntslag 1993). In addition material and production requirements vary from project to project which makes planning and control more difficult (Stevenson* et al. 2005). Therefore, it is vital for ETO companies to control and monitor the performance of materials management under engineering change situation precisely. Measurement and assessment of performance are prerequisites for improvement (Armstrong and Baron 2005; Otley 1999; Douwe et al. 1996; Parthiban and Goh 2011). The processes of measuring and improving the performance are gathered in an area called performance management which provides an iterative process between these two steps (Parthiban and Goh 2011). The main concern of performance management is mostly what to measure and developing performance measures for different activities and individuals (de Leeuw and van den Berg 2011; Gunasekaran and Kobu 2007).

Even though a lot of literature on topic of performance measurement and performance measurement systems for supply chain exists, (Kaplan and Norton 2001; Theeranuphattana and Tang 2007; Otley 1999; Lin and Shen 2007) there is little information regarding performance measurement specifically in management of materials under engineering change situations in an ETO environment. The main result of this paper is to design a performance measurement system for materials management under engineering change situations in ETO environment.

2 Literature Review

2.1 Materials Management in ETO Environment

ETO environment are characterized mostly by large and complex products, which are designed and produced by customers’ requirements (Hicks and Pongcharoen 2006; Bertrand and Muntslag 1993; Gelders 1991). Products in this type of supply chain are required in low quantities and sometimes in medium volumes, but generally they contain a diversity of components in a complex combination (Hicks and Braiden 2000). Each component should be assigned to specific operation in the production (Jiao et al. 2007).

Overall task of material planning process is to ensure material availability at the right stage of production and at the right time. To do so material planning uses bill of materials, inventory data, and data from master production schedule in order to determine time-phased plans for all components and raw materials required for production (Vollmann et al. 2005). For conventional material planning accurate lead times and safety stocks are the most critical characteristics to determine the performance of this process (Jonsson and Mattsson 2008).

Material planning process includes broad set of tasks and activities like planning required materials, supplier selection, purchasing, inventory management and forecasting. Therefore, this process is not only simple computer calculations but also it includes effective communication mechanisms, education activities and training programs (Bell and Stukhart 1986). The material planning process starts when the order is received, materials specifications and materials coding systems are established and bill of materials is created (Bell and Stukhart 1986). In order to link bill of materials with process structure, each component in the bill of materials should be assigned to specific operations in the production (Jiao et al. 2007).

2.2 Performance Management

In ETO environments the biggest investments are put into materials, it would be very costly for a company with ETO supply chain to have an ineffective material flow. It is critical to manage the performance of material planning activity and material flow throughout the supply chain. As products have deep and complex structures which lead to a wide range of assembly processes, it is necessary to consider performance associated with end products and assembly as well as performance relating to components (Hicks and Braiden 2000). Effective performance of material planning activity in the supply chain supports the overall production by providing materials in a complete, timely and reliable manner. Material planning performance depends to a great extent on the environment it is executed in (Jonsson and Mattsson 2003) proved that user environment (software support available in the enterprise, quality of planning information, the function of planning activities in organizational design, education and knowledge of planner) have important impact on planning performance (Fig. 1).

Fig. 1.
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Material planning user environment based on (Jonsson and Mattsson 2008)

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2.3 Research Methodology

A case study method was preferred because of two reasons, firstly the research focussed on the ‘how’ and ‘why’ areas of the topic. Secondly, the investigators had little control over the events and the focus in interface between engineering and production on the contemporary activities in the company. The article draws on information collected from interviews, formal discussions and literature review, which be- long to the six sources of evidences for a case study (Yin 2009).

A literature review on the topic aimed at providing a brief yet comprehensive understanding of the existing academic research in the area was carried out. For the interviews semi-structured style was preferred as it provides more flexibility to both the interviewer and interviewee develop ideas and questions more widely on the issues raised in the research more widely (Denscombe 2014). The interview process is summarized in the table below (Table 1).

Table 1. Interview process overview
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Table 2. Current KPI at the Case Company
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3 Findings and Discussion

Requirements for engineering changes come both from customers/suppliers (external), but also from design/engineering (internally). And as planning phase situated before design stage-managing such changes become problematic for the company. The time for re-planning the required material to fulfil changes influences the total lead-time of the project. Engineering changes encompass a lot of paper work, which is time consuming to proceed. Material planning should be quite flexible in order to deal effectively with order changes in each project. Hence we design a performance management system based on the indicators below, the ISO14031 guidelines and on studies from (Andersen and Fagerhaug 2002).

The lack of a performance measurement system in the company led to the design and develop a performance measurement system with a strong focus on material planning that would consider the indicators in Table 3, which focused on how to measure the performance of material planning and what type of measures should be taken into the system. Secondly, since the engineering changes are an unavoidable characteristic of case company, it is critical for material management to be flexible with regards to engineering changes and to be able to quickly respond to these changes. The indicators will be further developed, based on multiple case studies.

Table 3. Performance indicators for materials management under engineering change: adapted from (Sjøbakk and Bakås 2014)
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Currently the case company does not have a specific performance measurement system. The set of key performance indicators developed for reporting are presented in Table 2.

This way of measuring will help to assess the performance of material planning during the order fulfillment process by means of tracking and monitoring the current state of each project. If any deviations from the plan occur it will be shown by measurement and further actions can be taken to fix the gaps for future projects. For this purpose a standard set of performance measures can be set in order to evaluate projects performance with the same indicators. This will give possibility to internal benchmark and further improvements. However, at the same time a problem may arise, as success criteria can be different from project to project. Standard set of measure does not address these differences.

The indicators are designed based on characteristics of the case company considering its unique and non-repetitive situation; they can be generally applied to other ETO/project- based production with similar characteristics. Therefore, it is recommended to take them into account when implementing performance measurement system for material planning in the case company as well as in other companies with similar ETO supply chain. Performance measures may require adjustments to serve the actual needs of a project performance tracking and evaluation. It can be time consuming for manager to measure every time new values for each project. For managers it is more suitable to assess performance of material planning activity from an operational point of view as this helps to measure and monitor day-to-day project operations. Moreover non-financial measures are preferred at operational level to give clear picture of current state of performance of production operations. Properly chosen operational measures can help to identify weak areas of production activities on which improvement initiatives should focus. Nevertheless, the operational measures do not provide shareholders with an overall picture of company’s performance (e.g. return on investments) that is so important for shareholders (Fig. 2).

Fig. 2.
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Designing a performance measurement system

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4 Conclusion

The study revealed the necessity to develop an integrated performance measurement system for managing engineering changes affecting materials management. The measures found in this study could help managers to address challenges incurred due to engineering changes, which affect different operations, more specifically materials. Having received little attention in academic literature, this topic is an area with much potential for further research. The researchers therefore call for more studies describing the design process itself, and the actual resulting performance indicators that should be tailored to materials management-specific and engineering change situations.