UNIVERSITI PUTRA MALAYSIA

AFDIMAN BIN ANUAR

FK 2008 80

BEST MANUFACTURING PRACTICES IN MALAYSIAN SMALL AND MEDIUM ENTERPRISES

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BEST MANUFACTURING PRACTICES IN MALAYSIAN SMALL AND

MEDIUM ENTERPRISES

AFDIMAN BIN ANUAR

MASTER OF SCIENCE

UNIVERSITI PUTRA MALAYSIA

2008

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BEST MANUFACTURING PRACTICES IN MALAYSIAN SMALL AND

MEDIUM ENTERPRISES

By

AFDIMAN BIN ANUAR

Thesis Submitted to the School of Graduate Studies, Universiti Putra Malaysia

in Fulfilment of the Requirement for the Degree of Master of Science

December 2008

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In dedication to:

My dear parents, for their affectionate caring;

my beloved wife, Azlina Othman for her encouragement; and

my adored son, Muhammad Danial Afdiman for making my life happier.

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Abstract of thesis presented to the Senate of Universiti Putra Malaysia in fulfilment

of the requirement for the degree of Master of Science

BEST MANUFACTURING PRACTICES IN MALAYSIAN SMALL AND

MEDIUM ENTERPRISES

By

AFDIMAN BIN ANUAR

January 2009

Chairman : Associate Professor Rosnah Mohd. Yusuff, Ph.D

Faculty : Engineering

Facing increased competitive pressures due to globalisation and increased quality

requirements from their customers, small and medium-sized manufacturers must

increase their productivity and their competitiveness in order to survive and prosper.

Companies can gain competitiveness by increasing the productivity of manufacturing

operation and fulfilling the changing needs of customers and employees. Thus, it is

important to identify and analyze the practices that are currently being implemented

by the manufacturing companies nowadays. A study was conducted to identify the

manufacturing practices of the SMEs in Malaysia. The current level of best

manufacturing practices in Malaysian ISO certified SMEs and the relationship

between manufacturing practices and performance were investigated. A

questionnaire-based survey was conducted on 270 ISO9000 certified manufacturing

SMEs. Based on an extensive search of literature on performance requirements, eight

areas were identified. Thus, the questionnaire was designed consisting of the eight

areas which are management, human resources development, technology and product

innovation, marketing strategy, quality, production process, supply chain

management, and customer focus. A total of 60 respondents were received at 22.2%

response rate. Based on a 5-Likert scale which indicate best practices, the results

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showed that among the eight areas, customer focus is the most important area with

the highest mean of 4.16, followed by quality (3.92), management (3.78), supply

chain management (3.56), human resource development (3.27), marketing strategy

(3.05), production process (3.02), and technology and product innovation with a

score of 2.95. The results showed that level of best manufacturing practices can be

improved further especially in the area of technology and product innovation.

Pearson correlation and stepwise regression were used to test the hypotheses that

have been developed. The Pearson correlation results indicated that almost all the

benchmarking areas and performance were statistically significant. The regression

analysis results showed that each of the benchmarking areas were statistically

significant with performance. However, based on stepwise regression, the best

regression model obtained was Y = – 1.885 +1.065X1 + 0.467X2 – 0.299X3 +

0.282X4 with R2 = 0.853 where X1 = customer focus, X2 = supply chain

management, X3 = quality and X4 = marketing strategy. The negative coefficient

showed by quality in the regression model suggested that there are confounding

effects and other complex relationship exists among the variables. The project has

determined the current level of best manufacturing practices in some Malaysian ISO

certified Small and Medium Enterprises (SMEs) and identified the areas affecting the

companies’ performance. The results can be used by the SMEs to further improve

their manufacturing practices in various areas.

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Abstrak tesis yang dikemukakan kepada Senat Universiti Putra Malaysia sebagai

memenuhi keperluan untuk ijazah Master Sains

AMALAN PEMBUATAN TERBAIK DI DALAM INDUSTRI KECIL DAN

SEDERHANA DI MALAYSIA

Oleh

AFDIMAN BIN ANUAR

Januari 2009

Pengerusi : Profesor Madya Rosnah Mohd. Yusuff, PhD

Fakulti : Kejuruteraan

Industri kecil dan sederhana (IKS) perlu meningkatkan produktiviti dan sentiasa

bersaingan untuk terus kekal dan maju di bawah tekanan yang makin meningkat

disebabkan oleh globalisasi dan peningkatan kualiti permintaan dari pelanggan.

Persaingan sesebuah syarikat dapat dicapai dengan meningkatkan produktiviti

operasi pengeluaran serta memenuhi kehendak pelanggan dan pekerja yang sentiasa

berubah. Oleh sebab itu, adalah penting untuk mengenalpasti dan menganalisa

amalan pembuatan yang diamalkan oleh syarikat-syarikat pembuatan IKS pada masa

kini. Satu kajian telah dijalankan untuk mengenalpasti amalan-amalan pembuatan

yang dipraktikkan oleh IKS di Malaysia. Tahap semasa amalan pembuatan terbaik di

kalangan IKS yang memiliki pensijilan ISO dan hubungan antara amalan pembuatan

terhadap prestasi telah dikaji. Soal selidik telah diagihkan kepada 270 IKS dalam

bidang pembuatan yang memiliki pensijilan ISO9000. Berdasarkan kepada pencarian

menyeluruh mengenai kajian ilmiah ke atas keperluan prestasi, lapan bidang telah

dikenalpasti. Soal selidik tersebut mengandungi lapan bidang amalan pembuatan

iaitu pengurusan, pembangunan sumber manusia, teknologi dan produk inovasi,

strategi pemasaran, kualiti, proses pengeluaran, pengurusan rangkaian bekalan dan

fokus pelanggan. 60 responden telah memberi kerjasama dengan kadar maklumbalas

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22.2%. Berdasarkan skala 5-Likert, keputusan menunjukkan fokus pelanggan

dikenalpasti sebagai bidang terpenting berbanding dengan bidang-bidang lain. Nilai

purata untuk fokus pelanggan adalah yang tertinggi dengan nilai 4.16, diikuti dengan

kualiti (3.92), pengurusan (3.78), pengurusan rangkaian bekalan (3.56),

pembangunan sumber manusia (3.27), strategi pemasaran (3.05), proses pengeluaran

(3.02), dan akhir sekali teknologi dan inovasi produk (2.95). Nilai-nilai tersebut

menunjukkan bahawa tahap amalan pembuatan terbaik dapat ditingkatkan ke arah

yang lebih jauh terutamanya di dalam bidang teknologi dan inovasi produk. Korelasi

Pearson dan regresi berperingkat telah dilaksanakan untuk menguji hipotesis yang

telah dibina. Secara statistik amnya, hasil korelasi Pearson menunjukkan semua

bidang amalan pembuatan adalah signifikan dengan prestasi. Analisis regresi juga

menunjukkan setiap bidang amalan pembuatan adalah signifikan secara statistik

dengan prestasi. Akan tetapi, model terbaik yang dapat dibina berdasarkan kepada

regresi berperingkat adalah Y = – 1.885 +1.065X1 + 0.467X2 – 0.299X3 + 0.282X4

dan R2 = 0.853 di mana X1 = fokus pelanggan, X2 = pengurusan rangkaian bekalan,

X3 = kualiti dan X4 = strategi pemasaran. Nilai pekali negatif yang ditunjukkan oleh

kualiti di dalam model tersebut mungkin disebabkan oleh wujudnya kesan dari

pelbagai hubungan yang kompleks antara pembolehubah. Projek ini telah berjaya

mengkaji tahap semasa amalan pembuatan terbaik di dalam beberapa IKS yang

memiliki pensijilan ‘ISO’ di Malaysia dan mengenalpasti bidang amalan pembuatan

yang mempengaruhi nilai prestasi sesebuah syarikat. Hasil kajian dapat membantu

IKS untuk menambahbaik amalan pembuatan di dalam bidang-bidang tertentu.

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ACKNOWLEDGEMENT

All the praise to Allah the Al-Mighty for his blessing and benevolence

The author wishes to express his sincere gratitude and appreciation to the numerous

individuals whose have contributed towards the completion of this thesis:

To all my supervisors: Associate Professor Dr. Rosnah binti Mohd. Yusuff,

Associate Professor Dr. Megat Mohamad Hamdan Megat Ahmad and Ir. Hj.

Mohd Rasid bin Osman for their invaluable advise, supervision and assistance;

To Department of Mechanical and Manufacturing Engineering, Faculty of

Engineering, Universiti Putra Malaysia for providing facilities support

throughout the duration of the study;

To all the respondents of the survey, for their cooperation in answering the

questionnaire;

To all other individuals that directly and indirectly involved in this research.

Thank you for all your contributions. May Allah bless you all.

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I certify that a Thesis Examination Committee has met on 22 December 2008 to

conduct the final examination of Afdiman Bin Anuar on his thesis entitled "Best

Manufacturing Practices in Malaysian Small and Medium Enterprises (SMEs)"

in accordance with the Universities and University Colleges Act 1971 and the

Constitution of the Universiti Putra Malaysia [P.U.(A) 106] 15 March 1998. The

Committee recommends that the student be awarded the Master of Science Industrial

and Systems Engineering.

Members of the Thesis Examination Committee were as follows:

Napsiah Ismail, PhD

Associate Professor / Datin

Faculty of Engineering

Universiti Putra Malaysia

(Chairman)

Norzima Zulkifli, PhD

Faculty of Engineering

Universiti Putra Malaysia

(Internal Examiner)

Md. Yusof Ismail, PhD

Associate Professor / Ir.

Faculty of Engineering

Universiti Putra Malaysia

(Internal Examiner)

Sha’ri Mohd Yusof, PhD

Professor / Ir.

Department of Industry and Manufacturing Engineering

Faculty of Engineering

Universiti Teknologi Malaysia

Johor, Malaysia

(External Examiner)

______________________________________

HASANAH MOHD GHAZALI, PhD

Professor and Deputy Dean

School of Graduate Studies

Universiti Putra Malaysia

Date:

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DECLARATION

I hereby declare that the thesis is based on my original work except for quotations

and citations which have been duly acknowledged. I also declare that it has not been

previously or concurrently submitted for any other degree at UPM or other

institutions.

________________________

AFDIMAN BIN ANUAR

Date: 21 February, 2009

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LIST OF TABLES

Table Page

2.1 Definition of SMEs in summary 8

2.2 Areas of best practices 12

2.3 Summary of benchmarking practices metrics 20

3.1 Likert scale used in questionnaire 27

4.1 Breakdown of the respondents according to the company

general information

34

4.2 Distribution of respondents according to the type of

industry

35

4.3 Results of the internal consistency analysis 35

4.4 Customer focus practices 38

4.5 Quality practices 41

4.6 Management practices 43

4.7 Supply chain management practices 46

4.8 Human resource development practices 49

4.9 Marketing strategy practices 52

4.10 Production process practices 54

4.11 Technology and product innovation practices 56

4.12 Summary of manufacturing practices area overall mean 57

4.13 Pearson correlation coefficients among manufacturing

practices areas

59

4.14 Summarized manufacturing practices area regressed with

the performance

61

4.15 Summarized regression model each manufacturing

practices

62

4.16 Summarized R2 Hypothesis 1 through Hypothesis 8 63

4.17 Model summary of stepwise regression 64

4.18 Coefficients of stepwise regression 64

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LIST OF FIGURES

Figure Page

2.1 SMEs distribution by sector (SMIDEC, 2004) 8

2.2 Distribution of SMEs in the manufacturing sector

(SMIDEC, 2004)

9

3.1 Research flowchart 26

4.1 Manufacturing practices areas versus performance

scatter plot graph

60

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LIST OF ABBREVIATIONS/NOTATIONS/GLOSSARY OF TERMS

CAD Computer Aided Design

CAM Computer Aided Manufacturing

CIM Computer Integrated Manufacturing

CNC Computer Numerical Control

FMM Federation of Malaysian Manufacturer

FMS Flexible Manufacturing System

GDP Gross Domestic Production

HRD Human Resource Development

ICT Information and Communication Technology

IMP2 Second Industrial Master Plan

ISO International Organization for Standardization

JIT Just-In-Time

KPI Key Performance Indicator

MATRADE Malaysia External Trade Development Corporation

NPC National Productivity Corporation

QFD Quality Function Deployment

SCM Supply Chain Management

SEM Structural Equation Modelling

SME Small and Medium Enterprise

SMIDEC The Small and Medium Industries Development Corporation

SPC Statistical Process Control

SPSS Statistical Package Social Science

TQM Total Quality Management

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TABLE OF CONTENTS

Page

DEDICATION ii

ABSTRACT iii

ABSTRAK v

ACKNOWLEDGEMENTS vii

APPROVAL viii

DECLARATION x

LIST OF TABLES xi

LIST OF FIGURES xii

LIST OF ABBREVIATIONS/NOTATION/GLOSSARY OF TERMS xiii

CHAPTER

1 INTRODUCTION

1.0 Background of the Research 1

1.1 Problem statement 3

1.2 Objectives of the Research 4

1.3 Scope of the Research 4

1.4 Importance of the Research 4

1.5 Layout of the Thesis 5

2 LITERATURE REVIEW

2.0 Introduction 7

2.1 Small and Medium Enterprises (SMEs) 7

2.1.1 Nature of SMEs in Malaysia 8

2.1.2 Role of SMEs in Malaysia 10

2.2 Best Practices 10

2.2.1 Definition of Best Practices 11

2.3 Benchmarking of Manufacturing Practices 13

2.3.1 Customer Focus 13

2.3.2 Management 14

2.3.3 Quality 15

2.3.4 Supply Chain Management 16

2.3.5 Production Process 17

2.3.6 Marketing Strategy 17

2.3.7 Human Resources Development 18

2.3.8 Technology and Product Innovation 19

2.3.9 Summary of manufacturing practices metrics 19

2.4 Relationship of Manufacturing Practices and Performance 21

2.5 Key performance indicator and Performance Measures 22

2.6 Summary 23

3 METHODOLOGY

3.0 Introduction 25

3.1 Design of the Survey 25

3.2 Design of Questionnaire 26

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3.3 Sampling 28

3.4 Instrument Validity 28

3.5 Reliability 29

3.6 Data Analysis 29

3.7 Development of the hypotheses and regression model 30

4 RESULTS AND DISCUSSION

4.0 Introduction 33

4.1 Profiles of survey 33

4.1.1 Response Rate 33

4.1.2 Profiles of the Respondents 34

4.1.3 Reliability Test: Internal Consistency Analysis 35

4.2 Manufacturing practices 36

4.2.1 Customer Focus 36

4.2.2 Quality 39

4.2.3 Management 42

4.2.4 Supply Chain Management 43

4.2.5 Human Resource Development 47

4.2.6 Marketing Strategy 50

4.2.7 Production Process 53

4.2.8 Technology and Product Innovation 54

4.3 Summary of Eight Areas of Manufacturing Practices 56

4.4 Relationship between Areas of Manufacturing Practices and 58

Performance

4.4.1 Pearson Correlation 58

4.4.2 Regressing Manufacturing Practices areas 59

individually with performance (simple linear

regression)

4.4.3 Manufacturing Practices areas with performance 63

(multiple regression)

5 CONCLUSIONS AND RECOMMENDATIONS

5.1 Conclusions 67

5.2 Recommendations for future research 69

REFERENCES 70

APPENDICES 76

BIODATA OF THE STUDENT B.1

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CHAPTER 1

INTRODUCTION

1.0 Background of the Research

SMEs have been the backbone of economic growth of an economy in driving

industrial development (Normah, 2006). SMEs play a big role in national economies

by providing job opportunities and supporting the big industries. Facing increased

competitive pressure due to globalisation and increased quality requirements from

their customers, SMEs manufacturers must increase their productivity and

competitiveness in order to survive and prosper (St-Pierre and Raymond, 2004).

Globalisation, shortening product life cycles, increasing labor costs and volatility in

input prices has created an environment where manufacturers must be flexible,

adaptive, responsive and innovative (Sohal et. al, 1999). Companies can gain

competitiveness by increasing the productivity of manufacturing operation and

fulfilling the changing needs of customers and employees. Thus, the manufacturing

organizations must not only become increasingly advanced in their manufacturing

process but also adopt world class manufacturing practices. The increased

competition will enhanced the demand for more customized products.

Manufacturing is the fastest growing sector in Malaysia with value-added expanding

by 9.8 per cent (Department of Statistics Malaysia, 2006) and an important

contributor to the economy accounting for 31.6 per cent of Gross Domestic Product

(GDP) in 2005 (Department of Statistics Malaysia, 2006) with 18,271 SMEs

manufacturing companies were registered. The manufacturing operation is the prime

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strategic function of any business. Whether or not, manufacturing operation achieves

its strategic potential and contributes to the competitive position of a business

depends entirely on how it is managed (Kasul and Motwani, 1995 cited in Rosnah,

2004). Benchmarking techniques can be used by the SMEs to measure the level of

manufacturing practices performance in their firms and would lead manufacturing

SMEs to adopt new business practices (St. Pierre and Raymond, 2004). It is

important to benchmark the practices of the Malaysian SMEs to determine their

current manufacturing practices (Rosnah, 2004). Many manufacturing organizations

in Malaysia do not benchmark their manufacturing practices in pursuing global

competitiveness. This is because it uses a lot of money and time but they do not

realize that, implementing benchmarking and best manufacturing practices can

improve the performance of their company (Goetsch and Davis, 2003). The process

of identifying manufacturing practices opens up a lot of opportunities for the SMEs

to evaluate their performance and also improve their quality and productivity at the

same time. Most SMEs used to compete based on the quantity of production, price or

quality, but now they have to compete across all competitive performance objectives

including responsiveness and flexibility in the current economic environment

(Gunasekaran, 2003).

The outcomes of this study could help the Malaysian small and medium companies

that are trying to improve their manufacturing practices and performance.

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1.1 Problem Statement

In Malaysia, the SMEs are under increasing pressure to improve their performance

level (Normah, 2006). Globalization, shortening product life cycle, increasingly

sophisticated consumers, increasing labour cost, and volatility in input prices has

created an environment where manufacturers must be flexible, adaptive, responsive

and innovative (Sohal et. al., 1999). Previously, the companies used to compete

based on the price and quality, but now they have to compete across all competitive

aspect including flexibility and responsiveness in the current economic environment

(Gunasekaran, 2003). Thus, it is necessary to identify the current manufacturing

practices of the Malaysian manufacturing companies and with the manufacturing

practices of world class companies. This will enable the companies to identify and

direct their focus on the areas that require improvement. Also, the companies will

become more aware of the manufacturing practise that will help increase their

performance and competitiveness. With best manufacturing practices, SMEs will be

able to improve their business performance and expand their company assets,

providing work opportunities, and indirectly boosting the growth of the small and

medium enterprises (Government of Malaysia, 2006) and contribute to Malaysian

economic development.

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1.2 Objectives of the Research

1. To determine the current level of manufacturing practices in Malaysian ISO

certified Small and Medium Enterprises (SMEs)

2. To determine the relationship between manufacturing practices and

performance

3. To develop a regression model of manufacturing practices for Malaysian

Small and Medium Enterprises (SMEs)

1.3 Scope of the Research

The research is carried out to identify the manufacturing practices of Malaysian

Small and Medium Enterprises covering the following areas:

1. The manufacturing practices were limited to only eight areas identified as

customer focus, management, quality, human resource development, product

technology and innovation, production process, supply chain, and marketing

strategy.

2. The samples for this research were small and medium manufacturing

companies that have been certified with ISO9000 as listed in the Federation

of Malaysian Manufacturers directory (FMM, 2005) and Small and Medium

Industries Development Corporation website (SMIDEC, 2006).

1.4 Importance of the Research

Due to the importance of implementing best practices and manufacturing practices,

this research attempts to flourish studies in this area within the Malaysian

manufacturing companies. The findings from this research would be making the

following important contributions:

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1. To enrich the pool of reference materials and findings relating to the

manufacturing practices in the manufacturing companies, which are relatively

scarce since very few journals and research papers have been found,

especially for Malaysian SMEs.

2. The current status of manufacturing practices in the Malaysian manufacturing

companies will help indicate the level of competitiveness and provide policy

makers or organization to develop appropriate strategies in improving the

SMEs.

3. To provide some insights and help the Malaysian manufacturing companies

to implement best practices and manufacturing practices in improving their

practices.

4. To promote awareness of the importance of manufacturing practices

implementation in the Malaysian manufacturing companies.

1.5 Layout of the Thesis

This thesis consists of five chapters as listed below:

1. The first chapter introduces the background, objectives, scope, importance

and limitations of the research.

2. Chapter 2 is a review of literature related to the SMEs, best practices, Key

Performance Indicators, best manufacturing practices and performance.

3. Chapter 3 describes the methodology used for this research. Research

instrument that was conducted for data collection and analysis are also

elaborated in this chapter.

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4. Chapter 4 presents the results analysis and discussion. It consists of the

survey results, manufacturing practices in the Malaysian SMEs and

relationship between manufacturing practices and performance.

5. Chapter 5 concludes the main findings in relations to the objectives of the

research and provides suggestions for future research.

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