Redesign of the Inventory Control Model at KLM Inflight Services at Schiphol - Herontwerp van het voorraadbeheermodel bij KLM Inflight Services op Schiphol

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Delft University of Technology MATERIALS ENGINEERING Department Maritime and Transport Technology Mekelweg 2 2628 CD Delft the Netherlands Phone +31 (0)15-2782889 Fax +31 (0)15-2781397 www.mtt.tudelft.nl

This report consists of 66 pages and 5 appendices. It may only be reproduced literally and as a whole. For commercial purposes only with written authorization of Delft University of Technology. Requests for consult are only taken into consideration under the condition that the applicant denies all legal rights on liabilities concerning the contents of the advice.

Specialization: Production Engineering and Logistics

Report number: 2013.TEL.7800

Title:

Redesign of the Inventory

Control Model at KLM Inflight

Services at Schiphol

Author:

T. van der Gaag

Title (in Dutch) Herontwerp van het voorraadbeheermodel bij KLM Inflight Services op Schiphol

Assignment: Master’s thesis

Confidential: yes (until October 01, 2018) Initiator (university): Prof.dr.ir. G. Lodewijks

Initiator (company): B. Kroes (KLM Inflight Services) Supervisor: Dr. ir. H.P.M. Veeke

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Delft University of Technology MATERIALS ENGINEERING Department of Marine and Transport Technology Mekelweg 2 2628 CD Delft the Netherlands Phone +31 (0)15-2782889 Fax +31 (0)15-2781397 www.mtt.tudelft.nl

Student: T. van der Gaag Assignment type: Master’s thesis

Supervisor (TUD): Dr. ir. H.P.M. Veeke Creditpoints (EC): 35 Professor (TUD):

Supervisor (Company): B. Kroes Prof.dr.ir. G. Lodewijks Specialization: Report number: PEL 2013.TEL.7800 Confidential: No / Yes

until Month dd, yyyy

Subject:

Redesign of the Inventory Control Model of KLM Inflight Services at

Schiphol

Context

In the current economic climate, airline companies try to distinguish themselves from the competition by delivering better service to customers and reduce costs in the organization as much as possible. The same goes for KLM, a company which has set itself the objective to be the best service oriented airline in the world in 2015, at acceptable costs. An important part of the services that KLM offers its passengers is the catering onboard of flights, within Europe as well as for flights to worldwide destinations. A reliable catering supply chain is inevitable in achieving high service onboard of flights. All catering articles apart from fresh food, are delivered at a central place at Schiphol by numerous suppliers. The delivery at the storage facility at Schiphol is the start of the catering supply chain. The performance of this part of the chain has a large impact on the overall catering service level and corresponding costs. Optimizing the first part of the catering supply chain could improve this service level and/or reduce costs. Prior research has been executed on the distribution of catering articles to KLM outstations. KLM distributes catering articles to worldwide destinations for use on homebound flights, to guarantee a uniform product quality on all flights. All these catering articles are distributed from a central storage facility at Schiphol. An important aspect from the conclusions of prior research is that product availability at the central storage facility is of great importance. If articles are not available when needed for distribution, it causes usually high costs for emergency transport or other emergency solutions. This fact is important to take into account when the first part of the catering supply chain is analyzed.

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T

U

Delft

MATERIALS ENGINEERING

Delft University of Teclinology Department of Marine and Transport Teclinology

Mekelweg 2 2628 CD Delft the Netherlands Phone +31 (0)15-2782889 Fax +31 (0)15-2781397 www.mtt.tudelft.nl Problem definition

All non-fresh catering articles are delivered, stored and distributed at the KCS Warehouse at Schiphol Noord. The control of ail concerning processes is executed by the Network Supply Management department of KLM Inflight Services. It is presumed however, that the policy on dealing with suppliers and the way of controlling inventory levels could be improved. Higher availability of catering articles and lower costs are desired. The goal is to achieve this by creating a reliable control model for the first part ofthe KLM catering supply chain.

Assignment

'Analyze the part of the KLM catering supply chain where catering articles enter the storage facility at Schiphol Noord and identify bottlenecks and possible optimizations. Investigate the root causes of these bottlenecks and quantify possible optimizations. Then redesign the model for dealing with supplier deliveries and controlling inventories, to be able to control the system effectively and reduce costs.'

Execution

1. Analyze the current processes according to the Delft Systems Approach. 2. Determine the relevant areas for improvement and corresponding problems. 3. Quantify possible optimizations.

4. Redesign the model for 'store & distribute products' at Schiphol Noord.

5. Develop a method for effective control of the 'store & distribute products' system. 6. Develop an implementation plan.

7. Study relevant literature.

The TU professor, '/ The TU supervisor,

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Abstract

KLM has a complex distribution network for catering articles, with the aim of providing a good service on board of KLM flights. The many destinations with each their own regulations of customs and governments can make the distribution of goods sometimes very difficult. Distribution of non fresh catering products happens via the central warehouse at Schiphol Noord. More than a hundred vendors supply different products to the warehouse, these products are then used in aircraft departing from Schiphol Airport or for distribution to one of the outstations of KLM. For flights within Europe the aircraft are loaded for the outbound flights as well as for the homebound flights, so there is no need to load the aircraft at the destinations. For flights from Schiphol to a destination outside of Europe, the catering articles for the homebound flight are loaded at the outstation. This requires a local stock of articles at the outstations, which is provided by periodic shipments with sea vessels. Loading these vessels happens at Schiphol in a central warehouse. When articles are temporary out of stock at the central warehouse at Schiphol when they need to be loaded in a vessel, the articles are usually transported by airfreight at a later moment or they are temporary out of stock at the outstation which results in the fact that they cannot be loaded onboard of flights. So when articles are not available for flights that depart from Schiphol, the result will almost immediately be that these products are not onboard. Shortly, when products are not available at the central warehouse at Schiphol when needed, it will result in high costs(air freight is significantly more expensive then sea freight) or unavailability of these products onboard. Both situations are undesirable.

The problem analysis in this report starts with choosing a system boundary and analyzing the different layers of ’the system’ using the Delft Systems Approach. The system boundary is chosen so that products enter the system when they are delivered by suppliers at the KCS warehouse at Schiphol Noord. When products are requested for distribution to an outstation or for loading on an aircraft departing from Schiphol, they leave the system. The function of the system can be described as ’ensure instant availability of products & distribute’. This system has requirements from its environment, in the category costs, safety and product availability. Three product categories are maintained, each with a different requirement on product availability. These requirements are expected to be met at the lowest possible costs. With the Delft Systems Approach it is checked if the system meets the four conditions for effectively controlling a system. It does meet the first two conditions. The third condition is partly met and the fourth condition is not met. Because it is unknown what the reliability of suppliers is and because there are no standards for supplier delivery reliability, the third condition is only partly met. Lastly, the fourth condition is not met because it is unknown what the relation is between the reliability of suppliers, the lead time from order to delivery, safety stocks and the resulting product availability in the warehouse. Besides, the current product availability is not measured and therefore the performance of the system is partly unknown. An analysis on stock levels in 2012 of 32 randomly chosen articles shows that the availability of most articles is higher then requested, meaning that the stock levels and corresponding costs are higher then necessary. In 2012 the average value of the inventory of e2.006K could have been 38% lower, while still meeting the requirements in terms of product availability. This reduction in stock value of e764K corresponds to a yearly reduction in inventory costs of e155K. Besides, the current way of communicating with suppliers is prone to errors which causes a lot of repair work. At several parts of the process, disturbances are caused by error prone communication, which results in about e11K costs for only solving invoice problems. This would not be necessary if the communication was free of errors. Concluding, for effective control of the system as a whole it is necessary that the reliability of suppliers can be controlled and that the relation between the applied safety stocks and resulting service levels are known and used in

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the system. Besides, a more reliable form of communicating can contribute to a higher supplier reliability and less repair work.

To make effective control of the system possible, it needs to meet the four conditions of the Delft Systems Approach. Both of the first two conditions are already met. To meet the third requirement as well, it is neces-sary to be able to measure the performance of suppliers and to influence this performance. For measuring supplier performance a report tool has been developed which makes it possible to monitor the performance real time. Two KPI’s are measured, which are both conducted of several sub performance indicators. In accordance with the management of the Network Supply Management department there are standards de-termined which suppliers should meet. In the close future, these standards will be included in contracts with suppliers, by the procurement department. By sending reports with the achieved performance over the past period to suppliers, the performance can be improved if necessary, by making the suppliers aware of underperformance. Besides, there are possibilities to apply penalties or terminate a contract in case the requirements are not met. When supplier performance is under control, the most optimal safety stock for each product out of the NSM portfolio can be determined. These safety stocks can be calculated based on four variables: actual delivery reliability of suppliers, expected demand during lead time, variation in demand during lead time and the required service level of the system. By means of the in this report proposed safety stock formula, the fourth condition of the Delft Systems Approach can be met, since it provides the relation between the before mentioned variables and the resulting service level for the system as a whole. If the proposed electronic communication with suppliers is applied as well, the service level of the system can be increased even further, the lead time from order to delivery can be shorter and the amount of repair work can be reduced significantly. By working with the proposed methods the system can be controlled effectively and a yearly saving of e155K on inventory costs is possible. Electronic communication for order and invoice messages costs about e6K on a yearly basis, therefore about e5K can be saved yearly because of e11K less repair work. On top of that, electronic communication provides indirect advantages in terms of shorter lead times and higher supplier performance because of less miscommunication. Concluding, the proposed solutions in this report offer a cost saving of e160K on a yearly basis and a more effective control of the system.

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Abstract (in Dutch)

KLM heeft een complex distributie netwerk voor catering artikelen met als doel het bieden van een goede service aan boord van KLM vluchten. De vele bestemmingen met elk hun eigen regels van de lokale overhe-den en douane kunnen het distribueren van goederen soms ernstig bemoeilijken. Het distribueren van niet verse catering producten verloopt via het centrale warehouse op Schiphol Noord. Meer dan honderd lever-anciers leveren uiteenlopende producten af bij het warehouse, die vervolgens gebruikt worden in vliegtuigen die vertrekken vanaf Schiphol of voor distributie naar een van de buitenstations. Voor vluchten binnen Europa worden voor zowel de heen als terugreis catering artikelen beladen op Schiphol, zodat er geen belading bij de bestemming plaats hoeft te vinden. Voor vluchten vanaf Schiphol naar een bestemming buiten Europa wor-den catering artikelen opnieuw belawor-den bij de bestemming in het buitenland. Dit vereist de aanwezigheid van een lokale voorraad van artikelen bij buitenstations. Om de verschillende buitenstations te voorzien van een voorraad artikelen wordt er periodiek een zeecontainer met artikelen per boot verzonden naar de verschil-lende buitenstations. Het vullen van de zeecontainers gebeurt op Schiphol vanuit een centraal warehouse. Wanneer artikelen niet aanwezig zijn om in een container te plaatsen, kunnen deze artikelen ofwel op een later tijdstip worden verzonden per luchtvracht of de artikelen zijn tijdelijk niet voorradig op een buitenstation, waardoor de artikelen tijdelijk niet aan boord van een vliegtuig geplaatst kunnen worden. Wanneer artikelen niet op voorraad zijn op het moment dat ze nodig zijn aan boord van vluchten die vanaf Schiphol vertrekken, zal dit vrijwel meteen leiden tot het niet aan boord aanwezig zijn van die producten. Kortom, wanneer ar-tikelen niet aanwezig zijn in het warehouse op Schiphol wanneer ze nodig zijn, resulteert dit in extra kosten (luchtvracht is vele malen duurder dan zeevracht) of een lagere beschikbaarheid van producten aan boord van KLM vluchten, beide gevolgen zijn onwenselijk.

De probleem analyse in dit rapport begint met het kiezen van een systeemgrens en het analyseren van de verschillende lagen van ’het systeem’ met behulp van de Delftse systeemkunde. De systeemgrens is zo gekozen dat producten het systeem binnenkomen op het moment dat ze door leveranciers worden afgeleverd bij het KCS warehouse op Schiphol Noord. Wanneer producten worden opgevraagd voor distributie naar een van de buitenstations of voor belading van een vliegtuig dat vertrekt vanaf Schiphol verlaten de producten het systeem. De functie van het systeem kan omschreven worden als ’garandeer directe beschikbaarheid van producten & distribueer’. Aan deze functie worden eisen gesteld door de omgeving, eisen op het gebied van kosten, veiligheid en voorraadbeschikbaarheid. Er worden een drietal productcategorieÃ´nn gehanteerd met elk hun eigen eis qua voorraadbetrouwbaarheid. Aan deze eisen dient voldaan te worden tegen de laagst mogelijke kosten. Met behulp van de Delftse systeemkunde is geanalyseerd of het systeem voldoet aan de vier voorwaarden voor effectieve besturing van een systeem. Aan de eerste twee voorwaarden wordt voldaan, aan de derde wordt deels voldaan en aan de vierde voorwaarde wordt niet voldaan. De reden dat er aan de derde voorwaarde slechts deels wordt voldaan is het feit dat het onbekend is hoe betrouwbaar lever-anciers zijn en doordat er geen normen zijn op het gebied van leverbetrouwbaarheid waar de leverlever-anciers aan moeten voldoen. Tenslotte wordt aan de laatste voorwaarde niet voldaan doordat het onbekend is wat de relatie is tussen de leverbetrouwbaarheid van leveranciers, doorlooptijd vanaf het plaatsen van orders tot aan levering, safety stock en de voorraadbeschikbaarheid in het warehouse die bereikt wordt. Daarnaast wordt de huidige voorraadbeschikbaarheid niet gemeten, waardoor de prestaties van het systeem niet geheel bek-end zijn. Een analyse van de voorraadniveaus in 2012 van 32 willekeurig gekozen artikelen laat zien dat de voorraadbeschikbaarheid van de meeste producten hoger ligt dan de gevraagde beschikbaarheid, waardoor de voorraden hoger dan noodzakelijk zijn wat extra kosten met zich mee brengt. De voorraad van gemiddeld e2.006K in 2012 had met ongeveer 38% gereduceerd kunnen worden terwijl er nog steeds wordt voldaan

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aan de eisen voor voorraadbetrouwbaarheid, deze afname van e764K in voorraadwaarde komt overeen met een jaarlijkse besparing van e155K aan voorraadkosten. Daarnaast bevat the huidige methode voor het communiceren van orders met leveranciers enkele kwetsbare punten, wat zorgt voor veel herstelwerk. Op verschillende plekken in het systeem zorgt de kwetsbare communicatie voor verstoringen, alleen al aan arbeidskosten voor het oplossen van factuurfouten wordt op dit moment e11K per jaar gespendeerd, wat overbodig wordt indien de communicatie foutloos is. Kortom voor een effectieve besturing van het systeem is het noodzakelijk dat de betrouwbaarheid van leveranciers onder beheerst kan worden en dat de relatie tussen de safety stock en de bereikte voorraadbetrouwbaarheid bekend is en gebruikt wordt in het systeem. Daar-naast kan een meer betrouwbare vorm van communicatie bijdragen aan een hogere leverbetrouwbaarheid van leveranciers in minder herstelwerkzaamheden.

Om een effectieve besturing van het systeem mogelijk te maken, dient het te voldoen aan de vier voorwaarden uit de Delftse systeemkunde. Aan de eerste twee voorwaarden wordt reeds voldaan. Om aan de derde voorwaarde te voldoen, is het noodzakelijk om de leverbetrouwbaarheid van leveranciers te kunnen meten en beÃ´rnvloeden. Voor het meten van de performance van leveranciers is een rapportage tool ontwikkeld die het mogelijk maakt om real time de performance te monitoren. Er wordt gemeten op een tweetal KPI’s, die zijn opgebouwd uit verschillende sub performance indicators. In overleg met het management van de Network Supply Management afdeling zijn normen vastgesteld waaraan leveranciers moeten voldoen, in het vervolg worden dergelijke normen opgenomen in contracten met leveranciers. Door rapportages met de behaalde performance naar leveranciers te sturen kan de performance verbeterd worden indien nodig. Daarnaast zijn er mogelijkheden om boetes op te leggen of eventueel een contract met een leverancier te beÃ´nindigen indien er niet wordt voldaan aan de gestelde normen. Wanneer de performance van leveranciers onder controle is kan de meest optimale safety stock worden bepaald voor elk product uit het NSM portfolio. De safety stock kan worden berekend op basis van de actuele leverbetrouwbaarheid van leveranciers, het verwachtte verbruik tijdens de doorlooptijd van order tot levering, de variatie in verbruik en het verwachtte service level(voorraadbetrouwbaarheid) van het systeem. Door middel van de in dit rapport beschreven safety stock formule kan worden voldaan aan de vierde conditie van de Delftse systeemkunde, gezien het verband tussen de ingrepen in leveranciersperformance, de grootte van safety stocks en het resulterende service level duidelijk zijn. Wanneer er tevens wordt overgeschakeld naar een elektronische manier van communiceren met leveranciers, kan de leverbetrouwbaarheid verder verhoogd worden, de doorlooptijd van order tot levering kan worden verkort en de hoeveelheid herstelwerk kan aanzienlijk verminderd worden. Door op de voorgestelde manier te gaan werken kan het systeem optimaal aangestuurd worden waardoor er een besparing op de voorraadkosten van e155K op jaarbasis mogelijk is. Het elektronisch verwerken van het berichtenverkeer kost jaarlijks ongeveer e6K, waardoor er ongeveer e5K op jaarbasis bespaard kan worden. Daarnaast biedt elektronische communicatie indirect ook voordelen doordat de doorlooptijd van order tot levering verkort kan worden en doordat de leverbetrouwbaarheid van leveranciers omhoog zal gaan door minder miscommunicatie. In totaal biedt de voorgestelde werkwijze in dit rapport een kostenbesparing van e160K op jaarbasis en daarnaast een betere controle van het systeem.

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List of Abbreviations

Abbreviation Description

CIM Cabin Inflight Management

EDI Electronic Data Interchange

Homebound flight A flight to the base airport of an airline

Hub An airport that is used by at least one airline as base airport KCS KLM Catering Services Schiphol

NSM Network Supply Management

Outbound flight A flight from the base airport of an airline

Outstation A caterer abroad, prepares catering trolleys for inbound flights

PAX Airline passengers

SAP Supplier of the ERP system at KLM

SAP BW SAP Business Warehouse

VMI Vendor Managed Inventory

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List of Figures

2.1 Fokker II airplane[7] . . . 3

2.2 KLM divisions . . . 5

2.3 Organogram of KLM Catering Service . . . 6

2.4 Organogram of Network Supply Management . . . 7

2.5 Examples damage . . . 9

3.1 Black box approach of the Passenger Business division . . . 10

3.2 PROPER-model of the Passenger Business division . . . 11

3.3 Black boxes within the ’use resources’ subsystem of the Passenger Business . . . 12

3.4 Fully utilized truck unloading docks at the KCS warehouse . . . 13

3.5 PROPER-model of the ’Store & Distribute’ buffer . . . 15

3.6 Steady state model of the ’Store & distribute products’ function . . . 17

3.7 Initiate safety stock . . . 21

3.8 Example A: material usage and supply . . . 23

3.9 Screenshot of material movement data from SAP . . . 26

3.10 Stock level of Heineken beer 25CL cans in 2012 . . . 27

3.11 Reduced stock level of Heineken beer 25CL cans . . . 28

3.12 Control of inventory levels . . . 33

5.1 Proposed steady state model for the ’store & distribute products’ function . . . 39

5.2 Order point . . . 40

5.3 Integrating a normal distributed probability density function . . . 43

5.4 Timeline in case of a late delivery . . . 44

5.5 Integrating the probability of enough inventory . . . 45

5.6 New model for initiating safety stocks . . . 46

5.7 Relation between safety stock and service level . . . 48

5.8 Reporting tool developed with SAP Business Warehouse . . . 52

5.9 Supplier performance control . . . 53

5.10 Redesigned inventory control . . . 54

6.1 Screenshot of the overview, a part of the top 20 suppliers . . . 60

6.2 Screenshot of the individual supplier view, with St Amand selected . . . 61

6.3 Individual report, unfolded to article level . . . 62

E.1 Matlab code part 1 . . . 81

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E.2 Matlab code part 2 . . . 82

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List of Tables

3.1 Stock availability requirements . . . 18

3.2 Stock availability requirements of regularly ordered products . . . 25

3.3 Material data of year 2012 . . . 26

3.4 Category 99% stock availability . . . 28

3.7 Variables t-distribution check . . . 30

3.8 Redundant inventory in 2012 . . . 32

4.1 Redundant inventory in 2012 . . . 36

5.1 Stock availability requirements . . . 40

5.2 Z-scores and service levels . . . 42

5.3 Variables of equation 5.14 . . . 44

5.4 Variables used for figure 5.7 . . . 47

5.5 SAP Ariba quotation . . . 55

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Chapter 1 Introduction

General introduction

At the start of my graduation project at KLM Inflight Services, the Network Supply Management department had a demand for optimization of the supply chain for the KLM catering products. The concerning product portfolio consists mainly of beverages, equipment and disposables. Fresh food is incorporated in a separate business unit within the KLM group and is out of the scope of my graduation project. The product portfolio of the Network Supply Management department contains products that have a shelf life of at least several months. Currently, suppliers deliver products to a warehouse at Schiphol Noord, from where it is distributed to outstations1_{and to KLM Catering Services at Schiphol Centrum. The central warehouse at Schiphol Noord}

is used as a buffer in the process and as a distribution center. When products are unavailable at the central warehouse when they are needed, it can result in high repair costs and extra administrative work. Within this supply chain a problem statement is defined by KLM, which serves as the starting point for my graduation project.

Problem statement from KLM

It is presumed, that the policy on dealing with suppliers and the way of controlling inventory levels could be improved. Higher availability of catering articles and lower costs are desired. The goal is to achieve this by creating a reliable control model for the first part of the KLM catering supply chain.

Structure of the report

The report starts with a general introduction of the company KLM Royal Dutch Airlines and the divisions which are relevant to the investigation, this introduction is described in chapter 2. Then an extensive problem analysis is executed in chapter 3, based on the main research question. In this analysis several processes are approached as systems and subsystems and are modeled according to the Delft Systems Approach. The analysis results in a three main bottlenecks which are briefly described in chapter 4. After the problem is clearly defined, a solution is developed for each of the bottlenecks in chapter 5. These solutions are

1_{An outstations is a caterer at one of the flight destinations of KLM.}

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underpinned by the theory of the Delft System Approach, but also made suitable for use in practice. Lastly, the report is finished with a conclusion and recommendations in chapter 7.

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Chapter 2 KLM Royal Dutch Airlines

2.1 History of KLM

The Koninklijke Luchtvaart Maatschappij N.V. (Royal Aviation Company) was established at notary office mr. H. Stoop on the 7th of October 1919 in The Netherlands, by eight business man. Less than a year later KLM executed its first commercial flight, from London to Amsterdam, on the 17th of may 1920. The first flight was executed with a leased airplane. Soon after the first commercial flight, KLM bought two Fokker II airplanes from the Dutch company Fokker. During the next years, the KLM fleet kept growing and KLM flew to a growing number of destinations in Europe[8][7].

Figure 2.1: Fokker II airplane[7]

KLM made its first intercontinental flight on October 1st in 1924, from Amsterdam to Batavia (Jakarta). In the following decades, KLM started scheduled flights to several intercontinental destinations. In the Second World War, the operations of KLM where temporary stopped. When the war ended, KLM started up again and first performed only domestic flights. In the following years, KLM continuously expanded its aircraft fleet and the number of destinations. In 1971 the KLM achieved a milestone with the arrival of the Boeing 747-206B, its first wide body aircraft. Aircrafts became bigger and were able to transport more and more passengers. From two aircrafts that could transport eight passengers in total in 1921, the KLM group fleet expanded to 204 aircrafts in 2013, with some airplanes having a capacity of over 500 passengers. Almost a decade ago, on the 5th of may 2004 the KLM group merged with Air France and formed AIR FRANCE KLM[8]. This merger provided all kinds of advantages, for example scale advantages in operations, marketing and procurement.

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After the merger KLM entered the SkyTeam alliance in September 2004, an international alliance of Airlines. Air France was already a member of SkyTeam, as well as Aeroméxico, Air France, Delta Air Lines, Korean Air, Czech Airlines and Alitalia. This membership provided AIR FRANCE KLM with a global network with more hubs and destinations. Besides expanding their network, AIR FRANCE KLM also expanded their organization, by taking over Martinair in December 2008 and by taking a 25% minority stake in Alitalia in January 2009. By expending their organization and network, AIR FRANCE KLM is more able to fulfill the demands of their customers and to offer them a better service[8][13].

2.2 The KLM group

2.2.1 Facts and figures about KLM

The KLM group has about 30.000 employees. In 2011 the KLM group transported 25,2 million passengers and 484.100 tonnes of freight. The transport of passengers and freight mainly happens from and to one global hub, Amsterdam Airport Schiphol. From this hub, KLM flies to 133 destinations worldwide with a fleet of 204 aircrafts. In total, the KLM group generated an income of nearly 7 billion euro in 2011[8].

2.2.2 Goals of KLM

The KLM group has set several goals, which are leading in decision making in the company and by setting up policy. All functions which are executed by the several divisions within the KLM group contribute directly or indirectly to these goals. At first, ’KLM strives to achieve profitable growth that contributes to both its own corporate aims and to economic and social development’. Besides, ’KLM works to create sustainable growth at Schiphol, to gain access to any market that will increase the quality of its network and to maintain a level playing field for all industry players. It also works to ensure a balance between the company’s interests and those of the people living and working close to the airport[8]’.

2.2.3 Policy of KLM

Based on the goals of the KLM group, the following policy is made: ’provide innovative products for our customers and a safe, efficient, service-oriented operation with a proactive focus on sustainability[8]’. This policy is a more practical guideline for the employees of the KLM group to work with, than the abstract goals.

2.3 Overview of KLM divisions

The KLM group delivers all kind of services to its customers. The three core businesses are Passenger Busi-ness, Cargo and Engineering & Maintenance. These core businesses are incorporated in different divisions.

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Cargo The Cargo division offers worldwide freight transportation possibilities for companies and customers,

together with Air France more than 400 destinations are offered to customers. All kind of freight is being transported, ranging from mail to large vehicles as shown in figure 2.2(a). KLM also has facilities for storing conditioned freight and living animals and offers transportation possibilities for this special ’freight’.

(a) TU Delft Superbus being loaded (b) A Boeing 777-300ER in maintenance

Figure 2.2: KLM Cargo division1_{and Engineering & maintenance division}2

Engineering & Maintenance The Engineering & Maintenance division performs maintenance and repairs

on aircrafts of the KLM fleet, but also on aircrafts of other airline companies. Also complete revisions of aircraft interiors and painting of the exterior of aircrafts are performed by Engineering & Maintenance.

Passenger Business Finally, the most well known division of KLM is the Passenger Business. The

Passen-ger Business division takes care of the transport of passenPassen-gers to worldwide destinations, but it also contains the handling of customer orders and the supply of resources. Only the Passenger Business is considered in this report from now on, since the problem statement described in chapter 1 only concerns this division.

The rest of this report focuses on the resources flow of the Passenger Business division of KLM. Both the catering articles flow and the equipment flow are considered, since the performance of these particular flows are not optimal according to the problem statement that is provided by KLM Inflight Services, as stated in chapter 1.

2.4 Catering & Equipment supply chain

The Passenger Business division of the AIR FRANCE KLM group contains several flows of resources, which are needed for the transportation of passengers. One of these flows of resources contains the beverages, equipment and disposables that are used on the flights executed by KLM. Two departments of the Passenger Business division are involved in the first part of the supply chain of the catering articles and equipment. Both of these departments are relevant to the problem as stated in chapter 1. The involved departments and their role in the supply chain is shortly described below.

1_{The Superbus is made by a project team led by Prof.dr. Wubbo Ockels from the Delft University of Technology[3]. A Boeing 747}

freighter aircraft from KLM Cargo was able to transport the vehicle as a whole from Schiphol to Dubai.

2_{Picture made by T. van der Gaag, at Schiphol East, Hanger 14.}

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KLM Catering Service

KLM Catering Service(KCS) is a 100 percent subsidiary of the AIR FRANCE KLM group and it operates as an independent business, however it does not have its own profit and loss account. KCS consists of several departments, including a warehouse for storage of catering articles. The main part of this warehouse, which is located at Schiphol Noord, is used to store catering articles on behalf of the Network Supply Management department of KLM. At the KCS warehouse, deliveries from external suppliers are received and stored. When products from the warehouse are needed for a flight from Schiphol or for a shipment to an outstation, KCS employees put products in different packaging if necessary and then prepare a shipment and finally the requested products leave the warehouse. Figure 2.3 shows an organogram of the warehouse division of KLM Catering Service, the departments which are directly relevant to the supply chain of beverages, equipment and disposables are highlighted green. Supervising departments are also involved, but they are not highlighted since they are not directly involved in the actual process.

Figure 2.3: Organogram of KLM Catering Service

Inflight Services

Inflight Services is a department within the KLM which is responsible for all material- and human resources onboard of the KLM airplane fleet. The department arranges that the crew is at the right plane at the right time, it takes care of inflight sales and it is responsible for all catering products onboard. Within this department, the Network Supply Management department is responsible for the operational part of the catering product portfolio. Product Management, another department within Inflight Services, is responsible for the selection of the product portfolio of food and drinks onboard, specified for different kind of flights and classes. Product Management is largely responsible for the initiating phase of new products. After a new product is specified, the Procurement department and the Network Supply Management department take care of tendering and the operations. This report will focus on the operational part of catering products, therefore the departments Product Management and Procurement are positioned outside the system border. In the organogram in

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figure 2.4 the grouping of NSM departments is shown. The green highlighted departments play a role in the operations of catering articles. The other departments of NSM are also positioned outside the system border.

Quality Assurance Director NSM Management Assistent Custom Affairs & Distribution Contract Management Head of Operations Head of Process Control Planning Loading & Ordering Supply Chain Specialism Project Management

Figure 2.4: Organogram of Network Supply Management

2.5 First impression on Catering & Equipment supply chain

In the supply chain for KLM catering articles and equipment, there are several elements that do not perform optimal. In this section, a first impression is given about problems that arise in the current situation. These problems will serve as a starting point for the problem analysis.

Full warehouse One of the points of attention is the filling degree of the KCS warehouse, the warehouse

used by Inflight Services to store catering articles and equipment. Mainly on Fridays the warehouse is rela-tively full. This is caused by the fact that suppliers deliver their goods from Monday to Friday, but the demand for goods from the KCS warehouse continues seven days a week. The planning department anticipates on this situation by ordering larger amounts of goods to be delivered on Fridays, to ensure that there is enough stock for the weekend. The result is sometimes, that delivered goods cannot be stored in the warehouse and stay at the truck unloading dock. This can disturb the truck unloading process and besides, goods that are stored at the unloading dock are not available in the warehouse3_.

Expected deliveries not delivered It happens that expected deliveries are not delivered at the moment

they were expected. This can have several causes, but one problem plays a central role, the responsibilities 3_{Because of practical limitations of the SAP ERP system, goods that are not physically stored in the warehouse are ’not existing’,}

and can therefore not be used further in the process.

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of the KLM planning department and the suppliers are not clear. When the Planning department sends out an order to a supplier, it has no means to check if the order arrived well at the supplier. This results sometimes in miscommunication with suppliers and the fact that an order is not delivered as expected. The Planning department of KLM notices this at the moment that the delivery was expected, but is not delivered. If a supplier indicates that he did not receive a correct order, is not clear who is responsible, because there is no order confirmation or another check in the process. The consequences of these situations are that the Planning department has to put a lot of effort in taking care that the ordered goods are still in time at the warehouse, often at higher costs. If goods are not in time at the warehouse, this often results in high costs further in the process.

Early and late deliveries Deliveries for KLM Inflight Services arrive regularly a few days earlier than

re-quested, or a few days later than requested. No clear policy exists for these situations, but in practice Inflight Services accepts these orders, as long as it does not cause any problems in operations. However there are no direct problems caused by this freedom of delivery dates, it has indirect consequences on the amount of stock in the warehouse and the inventory costs. Early deliveries cause a larger stock than planned and besides the stock level, goods that are received a few days earlier are also paid a few days earlier. On the other hand, for suppliers that deliver regularly a fews days late, a higher safety stock is maintained4_{. Higher}

stock levels cause higher costs in terms of interest, risk and space.

Inability of suppliers to meet fluctuating demand The orders of Inflight Services consist of batches that

sometimes strongly fluctuate in size. It appears that it is a real struggle for suppliers to adapt to this fluctu-ating order sizes. Inflight Services sometimes supplies forecasts to suppliers, to give an indication of their expected demand for goods for the coming period. However, these forecasts do not provide information about fluctuating demand and suggest a continuous flow. Therefore, suppliers do not have sufficient information to anticipate on strongly fluctuating demand. This results sometimes in the fact that a supplier cannot deliver an order, at least not the required order size or not on the requested date.

Solving out-of-stock issues When deliveries tend to be late, for example because of miscommunication,

too late ordering or fluctuating demand, products can get out-of-stock in the KCS warehouse. When this is the case for a longer period, Inflight Services puts a lot of effort in arranging an emergency delivery or buying substitute products. An emergency delivery can for example be executed by a cargo aircraft directly from the production facility of a supplier in Asia, instead of using the normal sea freight. Emergency deliveries are almost always an expensive alternative. Another solution for out-of-stock products, although not desirable, is to purchase substitute products. This option is not desirable because the current product portfolio is carefully composed and competitive prices have been negotiated with suppliers. Emergency deliveries and buying substitute articles both appear to be expensive and undesirable options to solve out-of-stock issues.

Deliveries not according to contract are accepted by KLM Some deliveries at the KCS warehouse do

not contain the requested accompanying documentation or have other problems like damaged products or a broken pallet. These deliveries are always accepted, but cause often extra work for the warehouse employees and possibly also for employees of the Planning department and the Customs & Distribution department. 4_{Based on the current method for determining the required safety stock in the KCS warehouse. This method can be found in section}

3.5.1.

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Major incidents are directly communicated to the concerning supplier, however the problems and structural problems which do not cause major disturbances are not registered and monitored. This implies that within Inflight Services, there is no knowledge about structural low performance of suppliers in terms of the ’quality of deliveries’. Because this knowledge is not available, suppliers cannot be informed about their performance. Figure 2.5 shows two examples of products with damaged packaging. These products where accepted by KLM and caused a lot of trouble later in the process.

(a) Boxes with watercups at Schiphol (b) Trays with soft drink cans in Nairobi, Kenya

Figure 2.5: Delivered goods with damaged packaging

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Chapter 3 Problem Analysis

3.1 Black Box Approach of KLM

To get better insight in the functions that are performed by the passenger division of KLM, the division is approached as a black box, a system with unknown properties. Only the inputs and the outputs of the black box are known, a graphical representation of this black box is shown in figure 3.1. The system borders of the black boxes are chosen according to the guidelines of the Delft Systems Approach. The exchange of temporary elements with the environment is less than the exchange of these elements within the system boundaries. Besides, the selection of elements within the system border has clear emergent properties and the function of the system can be clearly formulated[15, p. 26]. Passengers with a need for transportation enter the system and transported passengers leave the system. The environment imposes requirements on the system and receives a certain performance of the system.

Figure 3.1: Black box approach of the Passenger Business division

From the input and the output flows, the transformation inside the black box can be derived, it can be de-scribed by ’transport passengers’. To make the execution of this function possible, an order flow and a flow of resources are essential. Incoming customer orders are processed which provides tasks for the ’transport passengers’ function. In practice, this means that based on an incoming customer order, the system starts to transport a passenger. The passenger division, which can be seen as a system, also contains a flow of resources. Several resources are needed to make the transportation of passengers possible, such as

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employees, aircrafts, catering articles and equipment. The three most important aspects of the Passenger Business division are modeled in a PROcess PERformance model in figure 3.2, also called a PROPER-model. A PROPER-model shows different aspect flows, their interrelations and the function control of a system[15, p101 - p102]. The flows of each of the three aspects are distinguished, and represented with different arrows.

Figure 3.2: PROPER-model of the Passenger Business division

The main flow of the model in figure 3.2, the flow of passengers, is represented by black arrows. Orders are represented by blue arrows and the green arrows represent resources. When a task is derived from a customer order, the subsystem ’transport passengers’ receives a task from the subsystem ’process orders’ and it receives the required resources from the subsystem ’use resources’. When a certain passenger or group of passengers is transported, the transported passenger(s) leave the system, which is represented by the arrows on the right side of the model. Also a handled order and used resources leave the system. The performance of the system as a whole is monitored and controlled by a controlling organ. This function control, measures the results of the system and requirements from the environment and provides, based on this information, standards to the system. In the next section, the resources flow that takes care of beverages, equipment and disposables is analyzed further.

3.2 Second Layer of the Passenger Business

The PROPER-model in figure 3.2 contains four subsystems. One of them, which is called ’Use resources’, processes all the resources which are used by the Passenger Business as a whole. Within the ’Use re-sources’ subsystem there are again several subsystems. Two of these subsystems are involved in the supply chain of beverages, equipment and disposables. Figure 3.3 shows the system ’Use resources’ in more de-tail, the second layer of the Passenger Business division. A steady state model shows the material flow of catering articles and equipment, together with its process control and function control. A steady state model according to the guidelines of The Delft Systems Approach is used[15, p62-p65]. The horizontal dotted lines separate the material flow at the bottom of the model, the process control in the middle and the function

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control at the top. Since this report focuses on the supply chain of catering articles and equipment, only the relevant resources flows of figure 3.2 are modeled in a steady state model.

3.2.1 Steady state of the resources flow

The Delft Systems Approach states that a system is in a steady state when it displays behavior that is completely determined and repeatable in time, whereby the behavior in one interval is similar to the behavior in another interval[15, p21]. According to this definition, the catering articles & equipment flow is in a steady state, as shown in figure 3.3. First the material flow is further explained. Thereafter, the process control and function control are shortly explained.

.

Figure 3.3: Black boxes within the ’use resources’ subsystem of the Passenger Business

Input material flow

At the input side of the model there a is a flow of catering articles and equipment entering the system. This flow consists of large batches of products which are not instantly available. In other words, for obtaining these products there is a certain lead time involved. The products come directly from over a hundred suppliers1_.

1_{The concerning suppliers are listed in appendix D}

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The articles arrive in relatively large batches, because of minimum order quantities of suppliers, or because of financial benefits for the procurement department of KLM. Deliveries of products take place on working days between 6.00 a.m. and 23.00 a.m., with a maximum of four deliveries simultaneously2_{. All incoming}

goods enter a buffer, which function is described as ’Store & Distribute’. Figure 3.4 shows the unloading docks, which are fully utilized at the time of the picture is being taken.

Figure 3.4: Fully utilized truck unloading docks at the KCS warehouse

Store & Distribute buffer

Within the Store & Distribute buffer, the incoming material flow is stored for a certian amount of time and when it leaves the buffer is it is also transformed. The output flow contains exactly the same products as the input flow of the buffer, however, the products are now instantly available and can be obtained in small batches. Shipments that leave the buffer usually contain products from several suppliers, sometimes in a different packaging. The output flow of the buffer is present seven days a week between 6.00 a.m. and 23.00 a.m., with a maximum of four shipments simultaneously. Goods that leave the buffer enter the ’Use catering articles & Equipment’ function.

Use catering articles & Equipment function

In the Use catering articles & Equipment function the material flow is transformed to used catering articles and equipment, or in other words, the goods are used/consumed aboard of a KLM flight. The output flow of the steady state model is present seven days a week, 24 hours a day, at locations all over the world.

Process control

A process control layer controls the process, with several measuring points along the material flow. The measured data is compared to standards and the deviation is determined. This deviation is then used to control the process with interventions at several locations in the process.

2_{The used warehouse contains four truck unloading docks.}

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Function control

Next to the process control, the system contains a function control that monitors if the process itself and the process control deliver the desired result. The result of the system as a whole is compared to the requirements of the environment and if necessary, the standards are adjusted to let the system meet the requirements of the environment.

3.3 Third layer of the Passenger Business

3.3.1 Store & Distribute

The Store & Distribute buffer in figure 3.3 contains the processes which are relevant to the problem definition as described in chapter 1. This section describes the transformation of the buffer and the interaction with its environment. From figure 3.3, only the Store & Distribute buffer is considered from now on, to make it possible to show the processes in more detail. This higher level of detail is the third layer of the system. The buffer is modeled in the right perspective in a PROcess PERformance model, with its three most important aspects. A similar model as in section 3.1 appears, but at a lower aggregation layer. This effect is called the nurses effect in the Delft Systems Approach[15, p82]. In the PROPER-model in figure 3.5, the resources flow, the order flow and the main material flow of the Store & Distribute buffer of the Passenger Business are modeled, together with their interrelations. Each of the aspect flows are described below.

Material flow

The material flow consists of catering articles and equipment, as described in section 3.2. Products enter the system in large batches and are not instantly available. On the output side, products leave the system in small batches with instant availability. Within the system the input is transformed to an output flow. The difference between the output and the input flow gives information about what happens inside the system. Based on the input and output flows, the transformation of the system can best be described as follows, ’Ensure instant availability of products & distribute’. The system uses the available input flow to deliver the requested products of the output flow, in the right batch sizes and with instant availability. The customers of the system exist of KCS Centrum, which loads trolleys for airplanes that depart from Schiphol, and the KLM Area Planning department, which supplies outstations. Now that the transformation function is defined, the order flow and the resources flow of the Store & Distribute buffer are described.

Internal order flow

KLM departments that send orders to the considered system in figure 3.5 can be seen as customers. The orders are called ’internal’ because they come from a department within the KLM Passenger Business. In-ternal orders are processed and a task for the ’Ensure instant availability of products & distribute’ function is derived. Information about stored products and distribution of products enters the ’process orders’ function and when orders are fully processed they leave the system as handled orders.

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Figure 3.5: PROPER-model of the ’Store & Distribute’ buffer

Resources flow

The ’Ensure instant availability of products & distribute’ function contains its own resources flow, which con-sists of employees, forklift, pallets and other materials that are used for the storage and distribution of prod-ucts. Resources that enter the PROPER-model are assigned to the ’Ensure instant availability of products & distribute’ function as long as needed, after that the resources are released and leave the PROPER-model as used resources.

Requirements from the environment

The ’Ensure instant availability of products & distribute’ system receives requirements for the execution of its function from its environment, which mainly consists of the KLM Headquarters. These requirements serve as a guideline for the behavior of the system. Currently, there are requirements for safe working circumstances, requirements on customs protocols and the internal customers require a certain service level. Finally, the aforementioned requirements are expected to be met at the lowest possible price.

Performance

In accordance with the requirements on the system, there are several performance indicators. The amount of safety incidents give information about how well the safety requirements are met. Mistakes with the customs protocols result in delays and disturbances. Performance on customs protocols is partly expressed in the costs, however, the impact on delivery reliability is not clear. The delivery reliability of the system is not available, which makes it hard to evaluate the performance of the system in regard to the required service level. Only out of stock incidents with a high impact are available as a performance indicator. Finally, the costs give information about the overall performance of the system, including the described customs protocols.

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3.4 Fourth layer of the system

From the three aspect flows in the PROPER-model in figure 3.5, the main material flow is analyzed further in this section. The ’Ensure instant availability of products & distribute’ function is modeled in more detail together with its process control and function control. A steady state model according to the guidelines of The Delft Systems Approach is used[15, p62-p65]. This model is shown in figure 3.6. The horizontal dotted lines separate the material flow at the bottom of the model, the process control in the middle and the function control at the top.

Material flow

The material flow is shown with double arrows. Catering articles and equipment enter the system on the left side of the model and are first encoded, so the properties of the product are known and the rest of the system can handle the products. Next, the incoming products are filtered on certain quality requirements. These requirements are determined by the Product Management department, which is outside the system border. Only products that meet the quality requirements pass through the filter and are unloaded from the truck in the next process step. Arriving products that do not meet the quality requirements are rejected and leave the system. After unloading products from the truck, the article numbers and quantity of products are measured and the products are stored at the unloading dock of KCS. When there are resources(employees, forklifts) available, the products are moved to the KCS warehouse. Every product that is stored in the warehouse will stay there until an order picker arrives with a picking list. The order picker collects the requested products from the KCS warehouse and checks if additional packaging is needed. The valve in the model represents the order picking process, only requested products leave the ’Warehouse KCS’ buffer in the model and flow to the filter. From every type of product that leaves the warehouse, the quantity and the articles numbers are measured. Next, the material flow is filtered and only products that need additional packaging flow through the filter to the next process. After these products are put in different packaging they are prepared for shipping. Also the flow of products that did not require additional packaging is prepared for shipping at this stage. When a shipment is fully prepared according to the standards from KLM and the customs of the country of destination, it leaves the system.

Process control

In the middle section of the model in figure 3.6 the process control is shown. Two information flows are available from the material flow. Both of these flows give information about the quantity and the article numbers of products in the material flow, but at a different position. Based on these two information flows and historic inventory levels, the actual inventory levels can be determined. If available historic inventory levels contain a deviation from the real inventory levels, this results in a deviation of the same magnitude in the determined actual inventory levels. Together with the standards for lead times, delivery schemes and safety stocks the actual inventory levels provide information for the ’control inventory levels’ function. This inventory control function monitors and controls the inventory levels at the unloading dock and KCS warehouse together. Inventory levels are controlled by sending orders to suppliers, about 100 orders are send to different suppliers every week. The ’control inventory levels’ function is partly executed by the SAP

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Figure 3.6: Steady state model of the ’Store & distribute products’ function

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ERP system3_{and partly by the Planning department. Finally, the process control contains one other function,}

’compose picking lists’. Based on tasks from the order flow of internal KLM orders, picking lists are derived. The picking lists determine in the material flow which products leave the KCS warehouse.

Function control

The upper part of the model in figure 3.6, above the upper dotted line, contains the function control of the ’store & distribute products’ function from figure 3.5. The function control consists of two functions, ’initiate supplier delivery scheme’ and ’initiate safety stock’. A transfer sheet that enter the system triggers the first of these functions and based on the data of the transfer sheet a delivery scheme is generated. Among the data that is used from the transfer sheets is the expected material consumption, the minimal order size and the lead time from order to delivery. When a delivery scheme is made, it is supplied to the ’control inventory levels’ function together with the lead time. Besides, the delivery scheme is supplied to the ’initiate safety stock’ function. A delivery scheme contains information about which days of the week a delivery is possible. The ’initiate safety stock’ function determines a safety stock, based on the delivery scheme, material consumption and flight details like number of flights and number of passengers per flight. When a safety stock is determined, it is supplied to the ’control inventory levels’ function in the process control.

Performance of the system as a whole

The overall performance of the ’Ensure instant availability of products & distribute’ system, modeled in figure 3.5, is judged by other KLM departments on its total costs and its stock reliability. Both KCS Centrum and the Area Planning department are internal customers and have certain requirements on the stock availability of products in the product portfolio. These requirements consist of minimum stock availability percentages for different product groups, each product group has its own requirement, as shown in table 3.1. Products

Table 3.1: Stock availability requirements

Product category Required stock availability Product characteristics Number of products

Category A 99% No go items 23

Category B 98% Highly important 334

Category C 95% Preferably available 189

from category A are absolutely necessary aboard. If products from this category are not available, a flight can be canceled. Examples of products from this category are water and toilet paper. Category B contains products that are highly important but not indispensable, when products of category B are not available a flight can still depart. Category B products are for example certain well known soft drinks that are expected to be available by KLM customers. When these products are not available it can damage the image of KLM, but it has no impact on the flight safety. Finally, the remaining products belong to category C. This category contains products that are nice to have aboard, but not necessary, like juices that can be replaced by another comparable drink.

3_{KLM makes use of an Enterprise Resource Planning system from SAP, more information can be found at}

http://www.sap.com/netherlands/index.epx.

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The internal KLM customers demand that requested products are available with the defined stock availability, against the lowest possible costs. The achieved stock availability of the system4_{depends on five variables.}

• Variation in demand • Safety stock size

• Lead time from order to delivery • Supplier delivery reliability • Warehouse performance

Four of these variables can be adjusted by the NSM department, only the variation in demand cannot be influenced by the NSM department. The second variable, safety stock size, can be changed continuously, according to the current needs. This is not the case for the lead time from order to delivery, this fixed variable can only be changed when a new contract is concluded. Structural supplier delivery reliability can also be controlled continuously by NSM, however, to achieve the desired delivery reliability, KLM is dependent on suppliers. Next, warehouse performance includes proper administration of incoming and outgoing material flows, and careful handling of goods. This is the responsibility of KCS, a subsidiary of KLM.

Shortly, four of the five variables that determine the stock availability can be used to control the system. However, it appears that the control of the system does not meet the requirements as defined by Professor J. in ’t Veld.

Control of the system as a whole

In the current situation at NSM, the requirements on the system are clear. However, the performance of the system as a whole on stock availability is not measured. This makes it very hard to intervene in the process, because there is no reliable quantitative data available. Professor J. in ’t Veld defined three conditions, which are inevitable for controlling a process in a system, or a system as a whole[16, p. 66]. H.P.M. Veeke, J.A. Ottjes and G. Lodewijks [15, p. 62] distinguish a fourth condition.

When the following four conditions are met, a system can be controlled effectively. • There needs to be a target state for the system

• The system needs to be able to achieve this target state

• There needs to be a possibility to influence the behavior of the system

• The relationship between the intervention and the resultant system’s behavior is known

Target state From these four conditions, the first is clearly present. The target state is defined by the

internal KLM customers, in terms of required stock availability against the lowest possible costs. 4_{The ’Ensure instant availability of products & distribute’ system.}

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Achieving the target state It is realistic to assume that this target state can be achieved, since there are

several possibilities to improve the stock availability, as described before. Theoretically, the applied safety stock can be adjusted from zero to infinity, which should make it possible to achieve the target state and therefore the system satisfies the the second condition.

Influence behavior of the system Influencing the systems behavior is limited possible, the safety stock can

be adjusted, but the lead time from order to delivery can only be adjusted when a new contract is concluded. Besides, suppliers can be asked to increase their delivery reliability, but there are no hard measures possible because of the lack of a target state. Since there is no target state, it is impossible to effectively control the delivery reliability of suppliers or to terminate the contract in case of exceptional low performance5_{. Therefore,}

influencing the behavior of the system is only partly possible.

Relationship between intervention and result Finally, the fourth condition for controlling a process is not

met, since the relationship between the applied safety stock, lead time from order to delivery, supplier delivery reliability, warehouse performance and the resulting stock availability and costs of the system is not known.

Shortly, the third condition defined by the Delft Systems Approach for controlling a system is only partly met and the fourth condition is not met, therefore a well-founded control of the system is not possible. To make an effective control of the system as a whole possible, measures can be taken to let the system meet the requirements for process control as defined by the Delft Systems Approach.

Critical functions in the system

The steady state model in figure 3.6 contains two functions that are strongly related to the bottlenecks as described in the introduction, chapter 1. The concerning functions are ’initiate safety stock’ and ’control inventory levels’, one function of the process control and one out of the function control. In the next section, both of the just mentioned functions are modeled in more detail to analyze if these functions are bottlenecks in the system as a whole.

3.5 Fifth layer of the system

In the model of figure 3.6 the ’initiate safety stock’ system and the ’control inventory levels’ system are again black boxes. Information enters the systems and information comes out of the systems, but what happens inside the systems is not clear. In this section, both these systems are modeled in more detail, at the fifth layer of the Passenger Business system.

5_{Current contracts between the NSM department of KLM and suppliers do not contain requirements on delivery reliability. Therefore,}

there is no legally valid measure to end the purchase of goods from of a supplier, in case of low delivery reliability.

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3.5.1 Initiate safety stock

Current situation

Figure 3.7 shows the ’initiate safety stock’ function with its information flows and transformations. When a new product is added to the portfolio of Network Supply Management, a forecast of the material usage enters the ’initiate safety stock’ function. Together with the delivery scheme and experience of employees a safety stock is determined, without mathematical logic. In other words, an employee determines a safety stock which he thinks is best for the concerning product. This initial safety stock enters the ’take most recent safety stock’ function and this function supplies the determined safety stock to other functions outside the system border. The just described process is executed only once for each product.

Figure 3.7: Initiate safety stock

After a product is in the product portfolio, a new safety stock is calculated periodically with an interval of 18 months. Three information flows are used for this calculation, as shown in figure 3.7 by function ’calculate safety stock’. Real-time material usage enters the system and the first derivative in the time domain is taken to determine the total material usage per month. Together with the experience of the employees and the delivery scheme a safety stock is calculated according to equation 3.1. In the equation the average monthly usage is subtracted from the peak monthly usage of the period that a product is in the NSM portfolio, then the resulting value is divided by the number of deliveries that take place each month. Next, a correction is made to compensate for low delivery reliability of suppliers. This correction is made by employees, based on their experience with suppliers. These employees determine which amount of extra days of safety stock they consider necessary and multiply this with the average monthly material usage and divide the outcome by 30. When all the variables are known, equation 3.1 is filled in and a safety stock is calculated and supplied to the ’take most recent safety stock’ function. Finally, the most recent safety stock passes the system border and is available for other functions in the model of figure 3.6.

Saf ety stock = P eak monthly usage− Average monthly usage

N umber of deliveries per month + M argin delivery reliability (3.1)