Case 14. NunaSacha: A Facility Redesign in the Ecuadorian Andes1
1 Professors Verónica León, Daniel Merchán, Ximena Córdova and Research Assistant Carla Tejada of Universidad San Francisco de Quito (USFQ College of Engineering) prepared this case in collaboration with Professor Giuseppe Marzano (USFQ Business School). The authors would like to thank Paula Crespo (USFQ) and the CTT-USFQ office for their valuable assistance throughout the project. This case is based on a field project carried out by the authors and has been developed solely as a basis for academic discussion; it is not intended to illustrate effective or ineffective practices. The authors have disguised names and other identifying information to protect confidentiality.
† Universidad San Francisco de Quito, Quito, Ecuador; [email protected]
‡ Universidad San Francisco de Quito, Quito, Ecuador; [email protected]
* Universidad San Francisco de Quito, Quito, Ecuador; [email protected]
** Universidad San Francisco de Quito, Quito, Ecuador; [email protected]
*** Universidad San Francisco de Quito, Quito, Ecuador; [email protected]
Introduction
It was a rainy Tuesday afternoon. Gabriela Santana Flores was staring at the report she received last week. Suddenly, she was distracted by a desperate call from her young assistant, Paola. “All of our work from last week is ruined; the batch we were packing is completely contaminated! Our client will not wait any longer, what are we going to do?”
Gabriela was head of operations at NunaSacha Export (NSE), a nonprofit organization that turned natural Andean raw materials into finished goods such as cosmetics and packaged food. Problems with contaminations and backorders had lately become too common, thought Gabriela.
The report she was reading and another call she had received the previous week made her very uneasy. An international donor group was interested in helping NSE increase its operational efficiency by investing a significant amount of money to enhance current facilities. However, two conditions had to be met: NSE had to submit a technical study to support the investment, and any enhancement had to be made within the next four months; otherwise, funds would not be granted.
Gabriela immediately asked her assistant to prepare a layout redesign proposal not necessarily limited to current equipment and space available. This kind of financial help by foreign donors was a once in lifetime opportunity and couldn’t be missed, she thought.
After two weeks, Paola handed in a proposal basically stating that the current company layout was adequate and only minor changes were needed, such as new doors and bigger lockers for workers. Consequently, the money could be invested mainly on quality control equipment. Gabriela felt strongly that these arguments were not sufficient for the donor group, nor for the NSE Board of Directors, and thus decided to call in a consulting firm for help.
Organization Background
NSE, a nonprofit organization, has been working for the last 20 years with the Kañari people, an ethnic group located in the South Andean region of Ecuador.2 This group mainly lives in rural settings and faces challenging socio-economic conditions. Therefore, any initiative aimed to support and provide assistance to this group has had a significant impact on the quality of life of this community.
2 Ecuador is a country in South America with 14 million people.
In the early stages of this project, in 1984, NSE focused its activities on providing technical assistance to enhance the Kañari agricultural know-how. Since January 2002, Gabriela Santana was appointed General Manager of the organization. Beginning at that stage, NSE’s goal also included building a storage facility capable of gathering all the products and then distributing them to local markets. By 2004 Gabriela had realized that by processing some of the raw materials into finished products, such as natural cosmetics and packaged food products, there were not only business but also cultural opportunities, including taking the Kañari culture overseas.
By mid-2005, Gabriela was able to get enough financial resources to install two production laboratories, one for cosmetics and one for packaged food items, and NSE launched two products: Melissa (Melissa officinalis) Shampoo and Toasted corn (Zea mays).
Some European, North American, and Asian market segments appreciated the fact that these products came from Ecuadorian indigenous communities and were in line with Fair Trade regulations, increasing their perceived value.
Over the next couple of years, Gabriela introduced two more products to the existing lines: lemon verbena (Aloysia citrodora) infusion and cinnamon (Cinnamomum) soap bar. At present, NSE has expanded its product portfolio with innovative combinations of essences for cosmetics and flavors for food products. (See Table 14-1.)
Table 14-1. Products List
Organizational Structure and Facility Layout
By 2009, NSE’s team included 17 people among workers and specialists. The organization was divided into four functional areas, each with its own coordinator: operations, logistics, technical assistance, and administrative, plus 12 workers who were in charge of all processes (Exhibit 14-1). Additionally, NSE often hosted volunteers from all over the world who helped the organization by coordinating and providing technical assistance.
At present, NSE’s infrastructure has grown into a two-floor building. There are three production laboratories, one main warehouse, a drying area, a cosmetics storage room, and three administrative offices in the basement (see Exhibits 14-2, 14-3, and 14-4).
Even though products were successful in the market, productive conditions were not the best. The lack of space combined with the continually increasing demand caused chaos and inefficiencies. Moreover, new equipment, which had been donated since 2005 (see Table 14-2) accounted for 20 machines that could be relocated more efficiently.
Table 14-2. Machines List
Operations Management
By 2009, NSE had two product categories: food and cosmetics. Both of them were made with organic raw material, such as herbs, plants, and grains harvested in the Kañari Mountains by the local people (see Table 14-3):
1. Cosmetic category: Shampoo based on a variety of herbs and soap bars made with three mixes of herbs and roots.
2. Food Category: Packaged food, which includes vacuum-packed toasted corn and infusions. These products were sold in two presentations depending on the market (national or international); bulk corn and bulk coffee are only for export.
Table 14-3. Natural Herbs
Cosmetic Products
The production processes are described in Exhibit 14-5.
Shampoo of a Variety of Herbs
Since 2005, the shampoo production process has changed as it has adapted according to new machines, new formulas, and other operational aspects. Most of the time, two operators were exclusively devoted to this production process.
Soap Bars
Producing soap bars proved to be more complicated than shampoo production. Nevertheless, Paola has decided that only one operator was enough for this process because this room was very small. Due to quality and presentation specifications, this area had a limited amount of light.
Food Products
Production processes are described in Exhibit 14-6.
Products Sold in Bulk
For each presentation type, the packaging for raw corn and coffee was part of the receiving process. Moreover, activities such as quality control, drying, and bagging were also performed by the operators in this process. Usually, two operators would perform these activities.
Packaged Food
In general, the operator in charge of the soap bar production was also responsible for the packaged food products. This is why both processes were never done simultaneously.
All operators were responsible for all kinds of activities related to transformation, reception, storage, dispatching and any paperwork related to these products. In addition they were in charge of non-production related tasks such as uniform washing and machines cleaning.
Supply Chain Management
Procurement
Raw materials come from several local indigenous communities, some of them in voluntary isolation. This is a critical aspect in NSE’s business mission; however, it creates significant logistical challenges due to the sometimes limited or nonexistent communications and transportation infrastructure.
• Corn is delivered in bulk. Generally, the producers are responsible for harvesting and delivering the bags directly to the warehouse.
• Coffee comes from a southern area of the Ecuadorian highland near the border with the coastal region, where weather is more appropriate for sowing and harvesting. NSE provides transportation services as part of its technical assistance (see Exhibit 14-7).
• Herbs, flowers, leaves, and roots come from different locations. If the community is in the proximity of the warehouse, suppliers deliver them directly. However, for faraway communities or those that are in voluntary isolation, the scheme is similar to that of coffee.
Besides raw materials, NSE needs to buy chemical supplies for cosmetics production, packaging materials, cleaning supplies and tools. All suppliers are local, and orders are delivered as required.
The warehouse does not establish time windows for receiving raw material and, as a consequence, producers and suppliers arrive at their convenience during regular operating hours.
Receiving Operations
Receiving raw materials uses a standard procedure. Basically, when a supplier arrives at NSE’s warehouse to deliver raw materials, the first available person unloads and weighs the items. If materials need humidity control, the worker retrieves the appropriate instrument located in the production office; if not, only a visual quality control is performed. The accepted products are batched and taken to any storage location that is available.
Anytime raw materials arrive at the warehouse, workers have to fill out a form where they state the date, quantity, supplier region, and quality control.
Corn and Coffee
Corn and coffee have their own receiving and storage process due to quality and volume considerations. As the products arrive and batches of 200 pounds are completed, the product is temporarily bagged and stored anywhere available.
When a 200-pound batch becomes ready, two workers shell the corn and prepare the trays for drying in the oven. Coffee is directly taken to the oven. After drying, two workers weigh the products and place them into the industrial sifter. Once the product is sieved, it is then bagged and taken back to the main warehouse. These bags are specially labeled according to supplier region, date, and weight, since some international customers require corn or coffee with special characteristics regarding color, size and origin. All these activities can be performed on the same day or over several days, depending on the product arrival rate.
As cleanliness in the food and cosmetic industry is mandatory, Gabriela makes sure that everyone in the warehouse that could potentially have contact or receive materials is aware of the cleaning area procedures.
Warehousing and Picking
An average of 24,000 kilograms of raw food material is stored in the main warehouse, of which 60% is used in food products and the remaining 40% for cosmetics. By 2004, Gabriela had installed six pallet racks donated by an NGO (Non Governmental Organization) the previous year. With this equipment, NSE can store larger quantities of bulk products. They are also able to purchase chemical supplies in greater quantities and take advantage of supplier price discounts. Most importantly, finished food products can be conveniently located and organized by type, size and production date—or, at least, that is the plan.
As it turns out, despite the main warehouse being labeled per zone and per category, products in racks do not match with labels. Also, on the first floor some racks are empty, chemical products are on the floor, and cosmetics are assigned to another storage area on the second floor. Packaging materials, cleaning items and other unused equipment are also located in the main warehouse in disorderly stocking position.
Food Products
When a production order arrives, raw materials are picked up from the main warehouse and taken to the corresponding production area. Once the product is ready, the worker in charge takes the bag or carton to his or her storing area. Food products such as herbal infusions and toasted corn are stocked in the same room where they are produced (if space is available) or to the main warehouse when the batch is too big. Unprocessed products such as green coffee beans are always stored at the main warehouse and picked up from there to fulfill a pending order.
Cosmetic Products
The processes for cosmetics warehousing and pickup are a bit different, as this product category has a special storage room. A closed room on the second floor of the building is adapted to store finished cosmetics as well as small labels for exporting cosmetics and food products. Windows in this room have to be covered to ensure correct illumination conditions. Three small shelves are installed. This room is located in the end of the hallway, so the workers find circulation to and from the venue to be low.
Shipping Operations
NSE has established neither a specific shipping area nor a process. The activities are performed as customer orders arrive in any space available close to the main door.
• If the order contains only food-processed products, the worker has to go to the production room and pick the first available batch to complete the order. If there are not enough products in there, the worker has to look for it in the main warehouse.
• If the order includes a bulk product, such as coffee or corn, the product is picked up in the main warehouse. Sometimes, small bags of toasted corn are stocked in plastic containers inside the production room.
• When the order included cosmetics, the worker in charge consolidates the order directly in the cosmetics storage room and walks down the stairs with the box to dispatch it. If the box is too heavy to be carried by one single worker, then a forklift is used to take the package down.
After any of these various scenarios, a shipping order form has to be filled out and handed to the person responsible for invoicing, who is located in the administrative office.
Distribution
The distribution process varies depending on the commercial channel:
• Local Market: NSE currently has one store located in Cuenca, the largest city in the southern region of Ecuador located 60 kilometers south of the warehouse. A delivery truck is sent for replenishment every two weeks.
• International Market: This is the most important channel for NSE, representing 80% of its net revenue. Every week a truck leaves the warehouse to reach the closest international airport in Ecuador, located 250 Kilometers west in Guayaquil. An FCA3 sales contract has been established with its international customers.
3 Free Carrier (FCA) is an international commerce term published by the International Chamber of Commerce (ICC). It is a type of transaction where the seller is responsible for arranging transportation to a specific carrier at a named place.
Two Different Perspectives
Paola could not stop thinking that production processes at NunaSacha Exports were well-designed and that the facility did not need to be redesigned or expanded. Her belief was that higher efficiency could be achieved and cross-contamination problems would be solved if workers organized their daily activities better and if minor architectural changes were made. Nevertheless, Gabriela was still restless thinking about the international donor requirements, operational inefficiencies, and customer claims.
The consultant team received Gabriela Santana’s call with enthusiasm and asked her to prepare an initial request for proposal (RFP). An extract of the RFP is presented next:
At present, our operations are functioning in an area of 1,365.95 square meters. Only 30% of the space is used for production and storage. According to some demand studies we did last year, we expect to increase the number of SKUs (stock keeping units) by 30%. In the main warehouse, we store all raw materials and food products in double reach pallets racks. The racks have four levels each, and they can handle at least eight bulk bags and 12 boxes of finished goods. If there is no space when a significant amount of raw product arrives, we place it on the floor temporarily. Plastic curtains keep products safe and clean by separating the production areas from the warehouse. For cosmetic products, we sterilize the bottles on the first floor and then take them to the second floor.
Operators wash herbs and plants in the sink in the food laboratory on the first floor, and they are left to dry there while other food products are being transformed or packaged. As you can see, we try to make the best with our limited resources; operators are multifunctional.
We have identified that in order to improve our quality control, we would need three new laboratories: quality control, microbiology and new products design laboratory. Please consider them in your new layout proposal.
If you have any additional suggestions, we would be happy to consider them if they are aligned to Good Manufacturing Practices (GMP) certification requirements. Furthermore, it is important to consider that to avoid production interruptions, we are not willing to stop or change our production plans.
When the consultant team read this report, they were intrigued about what else was happening at NunaSacha Export. They needed to analyze the situation from different points of view. For instance, is there a way that the production processes could be improved? Is it vital for the facility layout to be redesigned, expanded, or relocated? Considering procurement and delivery, is NSE working in the best possible way? Are the warehousing operations being handled in the most effective and efficient manner? And finally, what makes NSE unique? What about its mission provides advantages and disadvantages in the marketplace? Would any proposed solutions be different if NSE were a for-profit firm with a more traditional strategy? With all these questions in mind, the team members decided to pack their backpacks and travel directly to the site to get further information for their study, taking advantage of the trip to taste a little bit of local gastronomy—so famous in the country.