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TOPIC:

Operations Management and Strategy

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The 3rd International Conference on Technology and Operations Management (ICTOM)


Conference Proceedings 2012 ISBN: 978-979-15458-4-6
Available at www.ictom.info

Conference Proceedings 2012 ISBN: 978-979-15458-4-6


www.sbm.itb.ac.id www.cob.uum.edu.my

The 3rd International Conference on Technology and Operations Management


Sustaining Competitiveness through Green Technology Management
Bandung Indonesia, July 4-6, 2012

Sustainable Operations Strategy: A Conceptual Framework


Gatot Yudoko1,*
1
School of Business and Management (SBM) Institut Teknologi Bandung (ITB),
Jl. Ganesha 10 (Gedung SBM-ITB), Bandung 40132, Indonesia

Abstract. Since the world's adoption on sustainable development, many green initiatives have been developed in business,
including operations, resulting in a new concept of sustainable operations management. However, rarely has green
development been included in the context of operations strategy. Therefore, the aim of this paper is to develop a conceptual
framework on operations strategy. The methodology for model building is based on the positivist, deductive-theorizing
orientation based on the literature review. The proposed conceptual framework of sustainable operations strategy contains
three major constructs, namely context, content, and process. The chosen context is sustainable development as it has been
accepted as a global consensus for the future generation. The content deals with a hierarchy of strategy, comprising corporate,
business, and operations strategy. In addition, content deals also with structural and infrastructural decisions that may
contribute to the achievement of environmental, economic, and social goals. The process involves top-down, bottom-up, and
strategic alignment process. The top-down process is meant as the formulation of corporate strategy, and subsequently
business and operations strategy. The higher strategy level provides direction and priorities for the lower, and vice versa, in
the bottom-up process, the lower level strategy functions to support the higher level strategy. In the strategic alignment a
process for creating fit between external requirements and the internal resources, processes, and capabilities is sought. In
addition, an adjustment to uncertain event or known as risk is another kind of process to build new fitness to achieve a
sustainable operations strategy.

Keywords: Structural and infrastructural decisions, conceptual framework, sustainable operations strategy

1. Introduction
Raturi and Evans (2005) defined operations management as the business activity that involves the design,
development, and maintenance of systems and processes that transform resources, such as raw materials,
technology, and labor, into goods and services that meet customers needs. Slack and Lewis (2011) defined
operations strategy as the total pattern of decisions which shape the long-term capabilities of any type of
operation and their contribution to overall strategy, through reconciliation of market requirements and operations
resources. Operations strategy has been understood by many to be distinct from operations strategy. Waters
(2006) provided some differences between different levels of decision as shown in table 1.

* Corresponding author.
E-mail address: gatot@sbm-itb.ac.id
110 G. Yudoko Sustainable Operations Strategy ...

Table 1. Some differences between different levels of decision

Type of decision Strategic Tactical Operational

Importance high medium low

Timescale long medium short

Level of manager senior middle junior

Focus whole organization parts of the organization individual activities

Resource used many some Few

Risk and uncertainty high medium Low

Structure unstructured some structure highly structured

Amount of detail little some detail very detailed

Data available limited some More

Management skills conceptual interpersonal technical

Source: Waters (2006)


One of the emerging research topics in operations management, according to Kleindorfer, Singhal, and van
Wassenhove (2005) is sustainable operations management by recognizing sustainable development through its
three major principles such as economics, social, and environment or also known as the triple bottom line,
consisting of profit, people, and planet. However, the inclusion of sustainable development in operations strategy
has rarely been addressed. Due to its strategic role, operations strategy affects operations management. Therefore,
the objective of this paper is to propose a conceptual framework of sustainable operations strategy in order to fill
this lack and expands the existing body of knowledge on operations strategy research (Boyer, Swink &
Rosenzweig, 2005; Gupta, Verma & Victorino, 2006; Bayraktar et al., 2007).

2. Method
2.1. Definitions
Many authors have agreed that operations has a strategic role in creating and sustaining competitive
advantage. In other words, operations has been viewed as competitive weapon (Garvin, 1992; Stonebraker &
Leong, 1994; Hayes, et al., 2005; Waters, 2006; Beckman & Rosenfield, 2008; Finch, 2008; and, Slack & Lewis,
2011). This common understanding can be seen through various definitions of operations strategy proposed by
several authors as shown in table 2. All these definitions signify the distinction between operations management
and operations strategy.
Table 2. Definitions of operations strategy

Author(s) Definition of operations strategy

Garvin (1992) Operations strategy examines the use of manufacturing and operations as competitive weapon).

Stonebraker & the current domain and pattern of resource commitments to transformation processes, and
Leong (1994) planned improvements, as a means to achieve the distinctive competence and goals of the firm.

Hayes, et al. (2005) a set of goals, policies, and self-imposed restrictions that together describe how the organization
proposes to direct and develop all the resources invested in operations so as to best fulfill (and
possibly redefine) its mission.

Raturi & Evans the set of decisions across the value chain that supports the implementation of a higher-level
(2005) business strategies.

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G. Yudoko Sustainable Operations Strategy ... 111

Waters (2006) consists of all the long-term goals, plans, policies, culture, resources, decisions and actions that
relate to its operations.

Beckman & connecting operations goals with customer concerns.


Rosenfield (2008)

Finch (2008) a strategy that establishes the link between operations decision making and business strategy.

Slack and Lewis the total pattern of decisions which shape the long-term capabilities of any type of operation and
(2011) their contribution to overall strategy, through reconciliation of market requirements and operations
resources.

2.2. Hierarchy of Operations Strategy


Another common agreement among authors regarding operations strategy is in terms of its hierarchy
(Stonebraker & Leong, 1994; Hayes et al., 2005; Waters, 2006; Beckman & Rosenfield, 2008; Finch, 2008;
Slack and Lewis, 2011). From the top-down perspective, corporate strategy determines business strategy and
business strategy affects operations strategy. From the bottom-up perspective, operations strategy supports
business strategy and business strategy supports corporate strategy. Figure 1 shows this hierarchy.
2.3. Two Major Paradigms
As in the area of strategic management research (Fahey & Christensen, 1986; Barnes, 2001;
Hutzschenreuter & Kleindienst, 2006; Barney, 2007), operations strategy shares the same major classification of
research into content and process (Stonebraker & Leong, 1994; Hayes et al., 2005; Raturi & Evans, 2005; Rytter,
Boer & Koch, 2007; Beckman & Rosenfield, 2008; Finch, 2008; and, Slack & Lewis, 2011). There are two
major paradigms in operations strategy, namely resource-based view and market-based view (Hart, 1995;
Aragon-Corea & Sharma, 2003; Lowson, 2003; Mills, Platts & Bourne, 2003; Beckman & Rosenfield, 2008;
Slack and Lewis, 2011). Then, there is a common consensus among authors that operations strategy involves a
strategic alignment or reconciliation between external requirements and internal resources and capabilities,
involving tradeoffs and focus.

Fig. 1. Hierarchy of strategy

2.4. Content
According to Slack & Lewis (2011), operations strategy content is concerned with strategic decisions that
shape and develop the long-term direction of the operation. There has been an agreement regarding
classification of strategic decisions in operations strategy. These decisions can be divided into structural and
infrastructural. The former affects the physical configuration of operations, while the latter consists of systems
and policies required to operate the former. Hayes et al. (2005) and Finch (2008) mentioned the structural
decisions to consist of capacity, sourcing, facilities, and information and process technology and the
infrastructural decisions consisting of resource allocation and capital budgeting systems, human resource
systems, work planning and control systems (e.g., purchasing, aggregate planning, scheduling, inventory control,
and waiting time), quality systems, measurement and reward systems, product and process development systems,
and organization.

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2.5. Process
According to Slack & Lewis (2011), operations strategy process is the way in which operations strategies
are (or can be) formulated. or the procedure that are, or can be, used to formulate operations strategy. In the
context of strategic management, process is about strategy making or formulation (Beckman & Rosenfield,
2008). Figure 2 shows strategic reconciliation process in operations strategy (Slack & Lewis, 2011).
2.6. Context
Context may refer to an external environment in which operations takes place. Alexander (1993) defined
context as time, social institutions and value-ideological premises. Therefore, a context is expected to influence
both structural and infrastructural decisions. In this paper, the context chosen is sustainable development as it has
been accepted as a global consensus. A summary of perspectives of sustainable development is shown in figure 3
(Yudoko, 2000).

3. Method
The methodology use in building the proposed conceptual framework of sustainable operations strategy
follows positivism with its deductive-theorizing orientation (Neuman, 2006). In this regard, the conceptual
framework consists of four major elements, namely assumptions, concepts, relationships among concepts, and
unit of analysis. The major assumption of the proposed conceptual framework is that sustainable operations
strategy which is based on sustainable development consensus is expected to be adopted by most companies in
the world to achieve its goals or objectives. This is in line with the practices of international operations strategy
(Prasad, Babar & Motwani, 2001). Concepts and their relationships related to sustainable operations strategy are
derived from the literature review. As mentioned by many, operations strategy is categorized as a functional
strategy, and therefore, the unit of analysis of the proposed conceptual framework is a functional unit within any
firm.

Fig. 2. Operations strategy process (based on Slack & Lewis, 2011)

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G. Yudoko Sustainable Operations Strategy ... 113

The proposed conceptual framework of sustainable operations strategy is developed based three major
constructs, namely context, content, and process as mentioned in the literature review. Context is the first order
as it is assumed to be the external environment in which operations strategy takes place. Specifically, the context
of sustainable development with its triple principles of environment, economic, and social or planet, profit, and
people is being adopted (Bansal & Roth, 2000; Branzei et al., 2004; Bansal, 2005). Next, inside the boundary of
the context, content and process exist. In the content, a hierarchy of strategy is being used, consisting of strategic,
business, and functional.

Fig. 3. A summary of sustainable development (Yudoko, 2000)

In the corporate strategy, four major concepts are used, namely mission, vision, values, and business area.
The proposed mission is to do ethical, economically viable, socially responsible, and environmentally business

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practices. The vision is to be a sustainable corporation supporting sustainable development (Jernnings &
Zandbregen, 1995; Diesendorf, 2000); Kleindorfer, Singhal & Van Wassenhove, 2005; Nunes & Bennet, 2010).
Values include principles and standard consistent with sustainable development, such as mentioned the United
Nations Global Compact (Steiner & Steiner, 2006). The business chosen is to make and sell product(s) and/or
services that support sustainable development goals (Porter & van der Linde, 1995; Diesendorf, 2000).

Fig. 4. A conceptual framework of sustainable operations strategy

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Table 3. Sustainability perspectives of structural decisions


Decision Categories Economic Social Environment
Strategic capacity Cost per unit Provision of jobs Amount of virgin materials use
decisions Efficiency or utilization More efficient use of resources
Speed or quick response Reduced pollution
Long-run profit
Strategic facility Reduced purchase cost Provision of jobs Amount of virgin materials use
decisions Improved processes Provision of More efficient use of resources
Response time infrastructure Reduced pollution
Strategic process Reduced labour, inventory, Provision of jobs Amount of virgin materials use
technology decisions and utility costs Creation of safe More efficient use of resources
Reduced quality variability working condition Reduced pollution and wastes
Improved communication Reputation Use of alternative energy
along supply chain
Reduced production time
Strategic supplier Improved productivity Local participation Amount of virgin materials use
relationship decisions Improved dependability /partnerships More efficient use of resources
Improved quality Empowerment Reduced pollution
Increased flexibility Local capacity building Use of alternative materials

Table 4. Sustainability perspectives of policy and systems (infrastructural) decisions


Decision Categories Economic Social Environment
Strategic resource Resource optimization Provision of jobs or local Green procurement
allocation and capital economic development Green investment
budgeting system Provision of basic services
decisions (health, education, housing)
Protecting culture
Strategic human Labor cost Training and education Training
resource decisions Local recruitment
Local empowerment
Strategic quality Efficiency Safe working condition Adoption of ISO 9000,
decisions Speed Spreading knowledge and/or 14000
Quality practices
Dependability
Adoption of ISO 9000
Strategic work Purchasing/procurement Local participation Green operations
planning and control Forecasting Local empowerment Green productivity
decisions Aggregate planning Green warehousing
Inventory control Green transport
scheduling Green packaging
Green selling
Green marketing
Reverse logistics
Strategic new product Eco-efficient Local capacity building Design of green
or service development Opportunities for new markets products/services
decisions
Strategic performance Economic performance Social responsibility Environmental
system decisions indicators indicators performance
measurement
Strategic organization Establishment of formal unit to Establishment of formal unit Establishment of formal
system decision be responsible for the to be responsible for unit to be responsible for
achievement of economic and corporate social environmental
financial performance responsibility performance

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The business strategy uses both competitive and collaborative modes. The former consists of competitive
cost leadership through eco-efficiency or green productivity operations and competitive differentiation through
creation of eco-advantage or environmentally friendly competitive advantage, while the latter is collaborative
partnerships that support sustainable development objectives. Operations strategy as a functional strategy deals
with sustainable structural and infrastructural decisions that may have contribution on environmental, economic,
and social goals (Srivastava, 1995, 1995b).
In the process, there are top-down, bottom-up, and strategic alignment process. The top-down process is
meant as the formulation of corporate strategy, and subsequently business and operations strategy. The higher
strategy level provides direction and priorities for the lower, and vice versa, in the bottom-up process, the lower
level strategy functions to support the higher level strategy. In the strategic alignment a process for creating fit
between external requirements and the internal resources, processes, and capabilities is sought. In addition, an
adjustment to uncertain event or known as risk is another kind of process to build new fitness to achieve a
sustainable operations strategy. Otherwise, there will be mismatch between the effect from the unwanted event
or crisis and the internal resources, processes, and capabilities. This situation will eventually lead to decreasing
competitive advantage and a firms sustainability. Figure 4 shows the proposed conceptual framework of
sustainable operations strategy. Table 3 and 4 shows the three sustainability components of the structural and
infrastructural decisions based on Diesendorf (2000), Yudoko (2000), and Greater Vancouver Regional District
(2011).

4. Further Works
Because this paper adopts the positivist, deductive approach to theorizing, the next work is to develop
operationalization of the framework and then test it in Indonesia. This will provide state-of-the-art adoption and
implementation of sustainable development in operations strategy by Indonesian firms. The result of this model
testing research is expected to trigger more research in this area as sustainable operations strategy is a long-term
endeavor.

Acknowledgements
I wish to express my sincere gratitude to the anonymous reviewers who provided valuable comments to
improve this paper.

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Cite this paper

Yudoko, G. (2012). Sustainable Operations Strategy: A Conceptual Framework, Proceedings of The 3rd International
Conference on Technology and Operations Management: Sustaining Competitiveness through Green Technology
Management, BandungIndonesia (July 4-6), pp. 109-118. ISBN: 978-979-15458-4-6.

The 3rd International Conference on Technology and Operations Management (ICTOM)


Conference Proceedings 2012 ISBN: 978-979-15458-4-6
Available at www.ictom.info

Conference Proceedings 2012 ISBN: 978-979-15458-4-6


www.sbm.itb.ac.id www.cob.uum.edu.my

The 3rd International Conference on Technology and Operations Management


Sustaining Competitiveness through Green Technology Management
Bandung Indonesia, July 4-6, 2012

Relationship between Internal R&D and Operations Performance


moderated by Intellectual Property Rights in Malaysia
Herman Shah Anuar1,*, Faisal Zulhumadi1, Zulkifli Mohamed Udin1
1
School of Technology Management and Logistics (STML) - College of Business (CoB) - Universiti Utara Malaysia (UUM),
Sintok 06010, Kedah Darul Aman, Malaysia

Abstract. The purpose of this paper is to review roles played by firms internal R&D in stimulating operation performance
of manufacturing firms moderated by intellectual property rights particularly patent in Malaysia. The construct of this paper
is based on results of correlation between internal R&D and operation performance moderated by Intellectual property rights
(patent). Detailed discussions follow to give implications in policy making especially government or related authorities in
promoting and enforcing intellectual property rights. Intellectual property rights policy especially regarding patents should be
part of firms business strategy. Implementing IPR will safeguard firms new invention, innovation or processes in the long
run. Furthermore, firm may gain benefits in creating new business opportunity during various patenting stages. Effective
practice of internal R&D will give advantage to the firm in three different aspects namely ability to develop and grow critical
human resources, dynamic involvement in the corporate R&D program and ability to connect information wise. Therefore,
relationship between internal R&D and operation performance moderated by IPR, will encourage for betterment of firms in
the future. This paper provides the importance of internal R&D towards operation performance of a firm moderated by
intellectual property rights.

Keywords: Internal R&D, intellectual property rights, patents, operation performance

1. Introduction
Research and development (R&D) activities needs more investment to make better progress in current
economic scenario. It has been determined that investment in R&D is fundamental for firms to survive. From
one angle, R&D behaves as a major engine of economic and productivity growth. It has been noted that demand-
pull emphasizes demand side factors, such as consumers demand for new products, and cost-reductions as
primary drivers of R&D. On the other hand, supply-push, holds that supply-side factors, such as differences in
the technological environment and industry concentration, lead to variations in R&D expenditures (Tielemas,
2010).
Chan and Daim (2011) in their study have found that firms may reduce risks and cost through virtual
network. When multiple individuals agreed to invest in a risky enterprise, win-win situation has to occur with the

* Corresponding author. Tel: +6019-578-6948 ; Fax: +604-928-6860


E-mail address: herman@uum.edu.my ; faisal@uum.edu.my ; zulkifli@uum.edu.my
120 H.S. Anuar, F. Zulhumadi, and Z.M. Udin Relationship between Internal R&D ...

concept of risk sharing. This will reduce the burden if only one entity to cover if anything happen. Collaboration
and cooperation with additional parties will also reduce amounts that need to be paid for the investment.
Situation like this will create a healthy environment to do research efficiently. It broadens ups company capacity;
improve the flexibility, lower down the fixed infrastructure.
Internal R&D has been practiced by many corporations due to its less consuming funds to be allocated by
the management. Therefore, it has become the most preferred choice by many corporations. Generally, firms
understood that huge amount of money need to be allocated for firms to do research and development (R&D)
activity.
Decision either to use in-house or external formal R&D for certain project should be determined by the top
management of the firm. In the case of technological change and consequent competition between new entrants
and established firms, this is very important to implement (Pisano, 1990).

2. Aims of the paper


This study mainly focuses on R&D and IPR practices in Malaysian manufacturing industries. It studies the
interrelationship among these two practices as well as the effect of these two practices on organisational
performance. The operational performance is concerned with the organisational performance, since it is highly
important in the manufacturing context as a driver of competitiveness. The way R&D and IPR practices are co-
aligned with each other and the way these practices affect the organisations operational performance is the main
focus of this study. More specifically, the main objectives of the study are:
to study the relationship between internal research and development with firms operations performance;
to investigate the relationship between internal research and development with firms operations
performance moderated by intellectual property rights.
The paper proceeds as follows: first, we provide the literature review pertaining R&D activity in Malaysia
and its relation with the current practices of R&D firms. Thereafter concept of internal R&D and Operation
Performance is elaborated followed by description on intellectual property rights. The paper ends with a
discussion and suggestions for firms to practice concept of the discussion.

3. Literature Review
R&D capability is defined as ability to restructure the current knowledge and produce new knowledge
(Fleming 2001; Henderson & Cockburn 1994; Kogut & Zander 1992). It also has been determined as a prime
competence to differentiate between successful and unsuccessful firm performance. There are five core elements
of R&D capabilities which are R&D planning, internal R&D practices, external cooperative R&D activities,
coordination between internal and external activities, and IPR management.
To discuss this matter further, research and development (R&D) terms should be clearly defined. R&D
famously defined in Malaysian context as research and development that comprises creative work undertaken
on a systematic basis in order to increase the stock of knowledge, and the use of this stock of knowledge could
be used to devise new application.
R&D capabilities have been identified as one of the crucial elements for the survival of firm operations.
Performance of a firm is proven to have a direct relationship with strong R&D capabilities. When firms manage
to produce good products as an outcome of R&D success, this will help to increase the revenue of a firm. As a
result firms revenue, economic growth of a firm and its market share will also increase. Since many people
keep on talking about the advantages that can be generated from intellectual property rights, this study tries to
include IPR as a stimulus for the betterment of R&D toward operational performance.
In addition, it has been identified that entrepreneurs and companies can commercialise new technology
discoveries with the help of patents. This will later on manage to secure their financial gains using intellectual
property rights protection especially by patents. It is claimed that the future gains are very great when protection
is given to new invention/product (Featherstone & Specht, 2004).
In one scenario, Singh (2008) mention that there are negative relationship between impact of geographic
dispersion and firms R&D innovative output. It was concluded that geographically distributed R&D alone cannot
guarantee that it will increase the quality of a firms innovations. Therefore, R&D capabilities have its personal
impact to the operation performance of a firm. Table below shows how the evolution of economic ecosystem
moves by stages that significantly highlight the seriousness of effective implementation of R&D capabilities.

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Table 1.0: Differing requirements for stages in economic ecosystem


Agricultural economy Industrial economy New Economy/ Knowledge-based
Key Drives Labor Labor capital Knowledge/innovation
Source of competitiveness edge Economies of scale Productivity, Economies of scale Innovativeness
Source of wealth Real Estate (Land) Real estate (Land) and financial Intellectual property
property
R&D Low Moderate High
Human resource Basic Technical and skills Technical skills, scientists,
entrepreneurship
Funding Conventional Co-lateralized by tangible risk Co-lateralized by tangible risk
capital, particularly capital, particularly
Derived from: Innovation in nanotechnology: An Asia-Pacific perspectives (2010)

Table above highlighted that R&D, Intellectual property and source of competitive advantage is interrelated
in this modern new economy or in a catchy phrase, knowledge based economy. Its interdependencies show
that each and every individual parties need to work hand in hand for them to climb up further in the most
challenging value chain atmosphere.
3.1. Internal R&D
Internal R&D or In-house R&D (IRD) is defined as an activity of the firm whereby it sets up and fulfils a
research project within itself. Nakamura and Odagiri (2005) mentioned that this can be done by employing
important resources, such as researchers, research materials and equipment. It may also procure a part of the
R&D activity from outside. Audretsch et.al, (1996) and Bonte (2003) often used the terms internal R&D and
external R&D replacing in-house R&D and procured R&D.
Internal R&D as mention by Cassiman and Veugelers (2002) has several dimension that contributed to the
full function of it. This includes its ability to scan the environment for existing technology, ability to evaluate the
technology, integrate the technology, leverage the productivity of R&D activities, appropriation capacity and
prior knowledge to effectively absorb external know-how (Cohen & Levinthal, 1990).
Meanwhile, Cassiman and Veugelers (2002) pointed out advantages for implementing internal R&D
includes increase the complexity of the new product/ processes, establishing a lead time, appropriate returns to
innovation strategy (Teese,1986) and important source. Sufficient support by the internal network is one of the
examples where simultaneous interaction occurs. It is crucial because this support will direct to important
external network linkage. From another perspectives, properly managed external network linkages offers inputs
to R&D sources for internal network.
It has been found that there is evidence showing ability of the executive management to translate corporate
strategy into a sourcing strategy is a must. It is vital for the firm to face the challenging business environment.
Positive impact will occur once implementation of the R&D strategy of the organization being executed through
properly coordinated sourcing strategy. Trends to start commercializing output within R&D firms need to be
implemented while developing new capabilities should also work concurrently (Brook & Plugge,2011).
Bayona, Marco and Huerta (2001) who studied Spanish firms analyze that lack of infrastructure, information
technology and innovatory potentials impact negatively to the coefficient reinforces that move away the firms
from instigating cooperative relationships. Consequently, lack of infrastructure for R&D is also one of the
crucial elements in internal R&D of a firm. It was found that when firm only emphasize on short term
profitability can also impact firms internal R&D focus. Combining with lack of emphasize on the importance of
R&D for long term benefits could make the process for internal R&D being slowed down (MASTIC, 1998).
Lack of commitment by top management (Ramanathan, 2008), excessive top management involvement in
process detail (MASTIC, 1998), Delays in making decisions by the management (Bercovitz, & Feldman, 2005),
lack of R&D management know-how (Cassiman, 2005), lack of proven analytical techniques (Gima & Patterson,
1993), and inadequate market research (Green, Stark, & Thomas, 1996), are other elements that contribute to the
successful implementation for internal R&D of a firm. When all these factors being considered accordingly,
implementation of internal R&D would become smooth and future output is promising. At the same time, long
term gain for the firms will have a better future.
3.2. Operation performance
Companies operating in different competitive environments may have different performance objectives and
that the competitive strategy must fit the specific needs of the company and its customers. Stable environment
consists of reutilised operations focused on building efficient and lean operation flows. Their operations are

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dedicated to functional products with long life cycles and a low degree of innovation, such as in stable consumer
goods industries.
Their performance priorities start with cost, followed by delivery and quality. Companies in dynamic
environments should focus on agility and market-responsiveness. They enable the production of innovative
products with short life cycles such as in emergent industries with rapid technological change (Da Silveira &
Cagliano, 2006). Therefore, their major performance objective is flexibility, followed by quality and delivery.
Considering these facts, for assessing the operations performance of organisations, researchers use the
following as the major variables (Da Silveira & Cagliano, 2006): (1) cost; (2) quality; (3) delivery; and (4)
flexibility. Cost is determined by the scale of economies, capacity utilisation, and inventory turnover. Delivery
involves performance in lead times and supply reliability. Quality may involve both conformance and
performance issues, appearing to suggest that stable operations system is aimed at quality sustainability
(conformance) levels, which might not be as high as the quality supremacy (performance) levels of the system
(Da Silveira & Cagliano, 2006).
Cost, quality, delivery/dependability, and flexibility have become widely used as indicators of the
competitive dimensions of manufacturing. In each market in which the company operates, it should identify
those criteria that win orders against the competition (Voss, 1995).
Once the understanding the operations capabilities of the provider firm being achieved, this will enable
successful service delivery as per the pre-set performance requirements (quality, speed, flexibility or cost
leadership). It was prove that most world-class operations strive to deliver high performance in all four of these
performance requirements, but in any performance-based service contract, this is very hard to quantify and
maintain as there are many uncertainties involved (Datta & Roy, 2010).
3.3. Intellectual property rights
Intellectual property rights is a concept of protecting ones own effort creating new invention or products
that has long been practiced by the world community since 1867. The establishment of the world body who
coordinate and become center of reference for issues pertaining intellectual property rights which is WIPO
(World Intellectual Property Organisation shows how deep the appreciation of the international community
towards IP.
Lim (2009) mentioned that situation in Malaysia differs from developed countries because they treat IP
merely as a means of protection on their new invention or product. They hardly see IP as a new mechanism for
them to create wealth and generate long term return on investment. They only concern on ways to gain profit on
investment from traditional way of doing it such as making money from landed property, manufacturing and the
stock market. The way of thinking to make money from traditional way should be shifted since the world is
facing new challenges especially from the emerging technology and new industries.
In order for the new invention, product or processes to be awarded patent protection, it needs to have three
main characteristics. Patent is an exclusive right granted for an invention, which is a product or a process that
provides a new way of doing something, or offers a technical solution to a problem. A patent provides protection
for a period of 20 years from the date of filing (http://www.myipo.gov.my/en/faq/patent.html). The invention,
product or processes must be new, have all the inventive steps and finally, it must be industrially applicable, in
other words, can give benefits to the society as a whole. When the three requirements fulfilled, firms or
individual person can apply for a patent.

4. Methodology
The data for this research is derived from a population of 599 chemical and metallurgy manufacturing firms
in Malaysia. This category of manufacturing firms was chosen due to its aggressiveness in filing patent in the
year 2010. This category was also the highest category that has been granted a patent. From the 599 firms that
has received the survey questionnaire, only 138 firms responded. After sorting out the best possible survey
questionnaire being answered, 14 were rejected due to the missing data and incomplete information. Based on
previous study, response rate in the range of 18% to 25% was considered normal apart from various strategies
that have been implemented to garner the more response for the survey questions. The complete survey is then
being analyzed according to the Social scince statistical package version 19.

5. Result and Discussion


Firms would be involved in multiple technological trajectories, speeded-up research direction development,
and effective external skills performance. At the same time, direct contact with corresponding research and

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development activities that is done externally can also be utilised. As a result, it will increase effects to the
internal R&D performance (Belderbos, Carree, & Lokshin, 2006; Cassiman & Veugelers, 2006).
Even though internal R&D would be able to perform successfully accompanied by external R&D and
knowledge sourcing, the empirical literature came out with various interpretations. A few papers that cross-
checked internal R&D and external technology sourcing in multiple scenarios concluded that there was no
complimentary relationship between the two. Some even suggested that these strategies are substitutes.
On the other hand, Blonigen and Taylor (2000) found out that in high tech industries, an inverse relationship
occurs between R&D intensity and technology acquisition. In this case, companies may choose between decision
strategy to make or buy. Study on estimation of simultaneous impact of internal R&D and technology
purchases on their productivity was done by Basant and Fikkert (1996).
Table 1: Correlation value for Operation performance, patent and internal R&D
Operation Performance Patent Internal R&D
Operation performance 1.00
Patent .66 1.00
Internal R&D .66 .64 1.00

6. Conclusions
The importance of internal R&D can be seen in three major perspectives:
1. Its ability to develop and grow critical human resources,
2. Active involvement in the corporate R&D program,
3. Its ability to connect information-wise (Vereecke, et. al, 2002).
Table 2: Conclusion for relationship between operational performance, patent and internal R&D
Operation Performance Patent Internal R&D
Operation Performance
Patent H
Internal R&D H H

From this study, it supports the three major perspectives of the degree of strengths that binds together in the
internal R&D organization. This also can be seen as sign on relationship that exists between other internal R&D
sites alongside the R&D headquarters.
However, there are two major limitation exists in this interaction. First, to avoid dispersion and information
leakage in the external network linkage by sustaining optimal balance between the two networks in order.
Second, other R&D sites in the network linkage are under too much supervision by the headquarters (Helble, &
Chong, 2004).
To conclude, past literature recommends that absorptive capacity is able to play important roles to make sure
firms makes more profit from technological knowledge obtained elsewhere. On the other hand, the literature is
not convincing about the linking between internal and external technology sourcing.
Therefore, we will explore the two variables by examining the impact of internal and external R&D on
operational performance moderated by intellectual property rights particularly on firms that are actively involved
in patenting their products or processes in Malaysia manufacturing firms. Further research should be focusing
more on the interdependency of internal R&D with other factors such as external R&D or any other factors in the
R&D capability element.

Acknowledgements
The author would like to thank for the supports given by the Ministry of Higher Education of Malaysia and
Universiti Utara Malaysia especially School of Technology Management and Logistic in contributing for the
success of this research paper. To those who involved directly or indirectly in helping through out of the research,
a token of appreciation is given to all of you. This research paper would not be accomplished without much of
your help.

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Cite this paper

Anuar, H.S., Zulhumadi, F., and Udin, Z.M. (2012). Relationship between Internal R&D and Operations Performance
moderated by Intellectual Property Rights in Malaysia, Proceedings of The 3rd International Conference on Technology
and Operations Management: Sustaining Competitiveness through Green Technology Management, BandungIndonesia
(July 4-6), pp. 119-125. ISBN: 978-979-15458-4-6.

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Available at www.ictom.info

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www.sbm.itb.ac.id www.cob.uum.edu.my

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Sustaining Competitiveness through Green Technology Management
Bandung Indonesia, July 4-6, 2012

Development of Performance Model: A New Measurement


Framework for Non-Profit Organization
Lisa Mardiono1,*
1
Quality Performance Management Laboratory,
Industrial Engineering Department - University of Surabaya (Ubaya),
Jl. Raya Kalirungkut, Surabaya 60292, Indonesia

Abstract. Nowadays, the role and contribution of Non-Profit Organization (NPO) are more important and strategic.
Various circumstances place NPO activities in competitive environment and require a complex management. This makes the
demand of NPO management should conducted in a more professional, modern, and use the concepts of strategic
management. In fact, the performance measurement models that have been developed are tend to profit-oriented
organizations, while performance measurement model according to the characteristics of NPOs is still relatively limited. The
lack of this limitation, is inadequacy the stage of identify and determine the aspects of NPO interaction with internal and
external parties that demands of higher levels of capabilities (the need for the level of the knowledge based organization).
While the difficulties to develop a mechanism of quantify intangible assets elements, is the intangibility of the leading
indicators that expected to perform quantitative value of organizational performance achievement. This constructive research
is to develop a performance measurement model according to the characteristics of NPOs based on the model of Social
Enterprise Balanced Scorecard (SEBC) and Intellectual Capital (IC). The output of this research is a generic model
framework and performance measurement NPO starting from the formation, measurement, and reporting. The integration
process in the model is consisting of various types of capital contained in the Intellectual Capital alignment with the
framework of the strategic perspective of SEBC model, in order to achieve the desired outcomes that are stakeholder
satisfaction. The findings of this development performance model can be performed in four advantages, (1) strategies can be
defined and linked to performance indicators, (2) stakeholders can be easily identified and associated with the internal
activities of the company, (3) able to measure the capability of NPOs not only in tangible assets but also intangible assets and
are able to maintain (4) the balance between critical success factors.

Keywords: Non-profit organization, Social Enterprise Balanced Scorecard, Intellectual Capital

1. Introduction
Information and technology development has formed a new era of globalization in the world. A wide range
of phenomena began to emerge more dynamic and flexible the environment. Internal forces and external

* Corresponding author.
E-mail address: lmardiono@ubaya.ac.id
128 L. Mardiono Development of Performance Model ...

organizations are increasingly supported by high IT development. As a result, organizations are able to produce a
system of complex and dynamic performance. One of the highest difficulty levels to measure the performance of
the organization is to produce an accuracy of intangible factors as part of the activities within the organization. It
is also experienced by organizations based Non-Profit Organization (NPO), which increasingly has a role and
contribution of strategic importance [1]. The growth of Non-Profit Organization (NPO) service is also triggered
by the rapid movement and social concerns of various stakeholders [2]. Some of the problems that arise due to
the growing organization based Non-Profit Organization (NPO), is the decline in interest and quality of
volunteers, and increasingly tight government funding will be a common phenomenon [3]. Based on that reality
the Non-Profit Organization (NPO) should be able to change dynamically and comprehensively to be able to
survival that can strengthen the stability of the organization.
In fact, the models were developed during this performance measurement has more related to profit-oriented
organizations (profit organization), while the models of performance measurement in accordance with the
characteristics of the Non-Profit Organization (NPO) is still relatively limited. Performance measurement models
are currently widely used to measure the performance of Non-Profit Organization (NPO), most of the adoption
of the method used for commercial organizations [2]. Seeing the difference around the drivers used in
commercial organizations and Non-Profit Organization, Kaplan and Norton, has considered the performance
measurement method which is adopted from the Balanced Scorecard for commercial organizations on the
characteristics of Non-Profit Organization with the ability to convert intangible assets into tangible assets [4]. In
turn, Somers proposed a model Social Enterprise Balanced Scorecard (SEBC) as a modified form of the BSC
concept. It is not easy because the BSC is static and balanced. To overcome this weakness, Wu then developed a
model of integration between the BSC and the concept of Intellectual Capital (IC) for commercial organizations
is characterized by knowledge-based organization [5]. The concept of Intellectual Capital (IC) which departs
from Knowledge Management (KM) is a flexible and dynamic concept in accordance with environmental
changes. Therefore with these advantages, Intellectual Capital (IC) is considered very appropriately to apply in
the Non-Profit Organization (NPO) whose management needs in todays business environment. However, the
concept of IC also has drawbacks when used independently. Because the IC is intangible assets makes IC does
not have a format suitable measurement strategy to be measured [6]. Therefore, the integration model of Social
Enterprise Balanced Scorecard (SEBC) and Intellectual Capital (IC) will be the new measuring framework for
performance measurement in the Non-Profit Organization (NPO).

2. Literature Review
2.1. Non-Profit Organization
NPO or a non-profit organization is often defined as organizations that do not seek financial gain for the
benefit of the owner. That the reason why Social Organization, or Not-For Profit Organization put in place. The
definition is varying depending on the scope. World Bank stated that the Non-Profit Organization (NPO) is a
private Organization That Pursue activities to relieve Suffering, promotes the interests of the poor, protect the
environment, Provide basic social services or undertake community development [7]. While in Indonesia Non-
Profit Organization (NPO) is often known as a Organisasi Nirlaba with the definition of an organization that
cannot distribute the assets, revenues, or profits to members, officers, employees or directors of the organization
and only allows the provision of compensation. Non-Profit Organization (NPO) does not put profit as the main
purpose of the organization. The main purpose of Non-Profit Organization (NPO) is to provide services and the
best service possible with available resources as a contribution to public welfare and success of the Non-Profit
Organization (NPO) is often seen by how many services they provide and how well they give
The fundamental difference between the Non-Profit Organization (NPO) with Profit Organization (PO) is
situated on the main reason of the establishment of the organization. In simple terms it can be said that the main
purpose of Profit Organization is to create financial gain for its owners through profits from the goods/services
traded. While the main purpose of the NPO is to meet the social needs of a community or its members. In return,
the Non-Profit Organization (NPO) not only provide services that are owned but also need to consider all the
consequences arising from the services they have. Therefore there is a difference between the groups perspective
Profit Organization (PO) and Non-Profit Organization (NPO). Here are the general differences between Profit
Organization (PO) and Non-Profit Organization (NPO).

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Table 1 Differentiation between Profit Organization n Non-Profit Organization


No. Profit Organization Non-Profit Organization
1 Focus on marketing operation line (bottom line) Focus on social requirement
2 Aims to create value for shareholders Aims to create value for the needy
3 Employee hiring to run the company The volunteers who run the organization
4 Source of revenue comes from sales of products Source of revenue comes from contributions
and services from donors and government funding

2.2. Social Enterprise Balanced Scorecard


In the explanation of the Non-Profit Organization (NPO) has mentioned that there is a difference between
performance driver-Profit Organization and Non-Profit Organization. Based on these problems, Somers
developed a modified model of performance measurement of the Balanced Scorecard as a framework to think
comprehensively about the performance measures aimed at implementing the strategy by having adjustment
perspective based on the characteristics of the Non-Profit Organization (NPO) [8]. By looking at the BSC is the
primary focus of financial gain, causing the social aspects of environment-related or not so visible, and an
assessment of this is just a note attached to the end or the other separately. This happens because of the emphasis
on profit and the social are two different things. Or in other words, if the performance is about to be displayed
emphasis is on financial gain, then the factors related to social motivation to be closed. To bridge this problem,
Somers make three changes to the initial model of BSC, that are (1) the addition of a special on the final result to
be achieved (outcomes) that social objectives, (2) the financial perspective is widened their focus on
sustainability, and (3) customer perspective enlarged its scope to stakeholder perspective. So while maintaining
the advantages possessed Balanced Scorecard as a measurement of the balance between internal and external
factors and is able to link the rational measurement results as a driver of organizational performance is expected
to produce a model framework that is able to represent the performance characteristics of NPOs through SEBC
models. The figure 1 below shows a framework on which to base changes SEBC models.

Figure 1. Social Enterprise Balanced Scorecard Model

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130 L. Mardiono Development of Performance Model ...

Financial Sustainability in perspective, the main focus does not stop at a lot of profit from sales of products,
but for what benefits. If the commercial organization after a profit then the consequences arising out of the social
environment of the sale of products can be ignored, but the Non-Profit Organization (NPO) after providing
services held there should be a review of all the effects and consequences thereof. Examples of the Non-Profit
Organization (NPO) crafts produced the following products have been able to absorb the market then the
organization needs to consider social environmental factors that received the impact of the resulting organization
such as the level of unemployment that is associated with the absorption of labor organizations environment,
frequency of occurrence of craft businesses in the neighborhood organization, the welfare of the neighborhood
organization, employee welfare, and so forth.
Departing from the understanding of the financial perspective is the SEBC, the thing to note now is who the
real customers who want to be served. If the customer parameter is widened, it is included in the stakeholder
perspective into not only buyers, but also other employees and the wider community. While SEBC stakeholders
expressed by WHO pay for a service and consume it Those WHO (donors, grant Funders, employees, and the
Wider Community).
The next perspective is an internal process, not too much different from the initial concept of the BSC. Only
thing to note here is the diversity of stakeholders will be able to influence the activities of the process. As
described in Figure 1, the internal process perspective a lot more emphasis on communication and information
between the internal and external stakeholders. Resources perspective secondarily related to the resources on the
NPO is required. If at the Learning & Growth perspective is often referred to as Intangible perspective, then the
SEBC, the Resources perspective is also identical to the Intangible Asset. Therefore, this study also used the
concept of Intellectual Capital to meet such requirements.
2.3. Intellectual Capital
Roos classifies IC into human capital and structural capital due to unify the internal and external sides.
Therefore, structural capital divided again into the internal structure and external structure [9].
Internal structure consists of patents, concepts, computer and administrative systems, as well as
outspoken culture.
External structure includes relationships with suppliers and customers.
Human capital includes human capacity to interact in organizations, namely the ability, education,
experience, motivation and personal value.
Some models are developed to manage measure and report IC, one of them is the Skandia Intellectual
Capital Model [10]. This model departs from the transformation of traditional performance measurement
systems to the new performance measurement system, which aims to enhance incorporate non-financial
indicators beside the financial measures. Aspect for non-financial measurement is called Intellectual Capital. The
IC is classified into human capital and structural capital. It is very similar with Ross model. Human capital
meaning here not only on existing capabilities that are required to their workers but also to motivate and
encourage them to tacit knowledge transformed into explicit knowledge. Structural capital is further divided into
customer capital and organizational capital. Customer capital includes the organizational relationship with
external parties such as consumer loyalty, the organizations reputation, and relationships with suppliers,
partners, and/or other stakeholders. Organization capital consists of innovation capital such as intellectual
property and knowledge culture, and process capital such as databases, information systems, and others.
In line with the Roos, Kannan & Aulbur describes the IC as intellectual resources have been formulized
that, captured and leverages to create assets of higher value . With its uniqueness, many benefits to be gained by
organizations through the measurement of IC, including [11]:
Identification and mapping of the intangible asset
Increase innovation
Increase understanding of how the interrelationship of science can create
Improve workers personal perception of the organization which leads to increased motivation to work
Create a culture of performance improvement oriented
Understand the organization of social interaction and dynamic changes
Accelerate the learning patterns in the organization
Monitoring of asset values and are always looking for ways to enhance these values
Better understand the flow of knowledge within the organization.

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3. Integration Model of SEBC and IC


As described in the literature review, Intellectual Capital (IC) that departs from Knowledge Management
(KM) is a flexible and dynamically according to environmental changes. However, the research on the
measurement of Intellectual Capital (IC) remains a theoretical recently [6]. This is because the Intellectual
Capital (IC) is intangible asset and do not have a format suitable measurement strategy to be measured. While as
BSC is recognized as a powerful strategic management tool that has a series of measurements with a
knowledge-based organization. BSC originators themselves, Kaplan and Norton in their book that discusses the
BSC for the NPO [4], also state how to put the intangible asset in the companys strategies, as a meanwhile
usually covered into the learning and growth perspective. It is not simple because the BSC is static and balanced,
while the IC is a dynamic flow of customer capital, capital structure, human capital, and others [12]. Wu [5] later
developed integration between BSC and IC is the two aspects, namely (1) how the BSC helped create, define and
measure IC, (2) BSC strengthens the management of IC. Finally, it was agreed that BSC is an important method
for measuring and managing IC, which can be put through a strategy map aspects of IC (human, customer,
technology, innovation, organization capital, etc.) on learning and growth perspective of the company. Thus it is
necessary to modify the BSC perspectives to follow the SEBC perspectives that are financial sustainability
perspective, stakeholder perspective, internal business process perspective and resources perspective. The model
integration framework can be seen in Figure 2.

Figure 2. Model integration framework of SEBC and IC

Therefore, with the intention of focused on NPO with SEBC model, the three perspectives is also modified
to follow the SEBC perspectives, namely financial sustainability perspective, stakeholder perspective, internal
process perspective and resources perspective. The deployment strategy framework of Social Enterprise
Balanced Scorecard (SEBC) to SIC (Strategic Intellectual Capital) described in table 2 below.
Table 2 Perspectives linkage in SEBC with IC elements
SEBC IC (capital)
(perspective) Customer Human Organization
Financial What can be highlighted from What can be highlighted from What can be highlighted in the
sustainability the continuity of customer the continuity of human capital sustainability capital of the
capital in financial on financial performance? organizations financial
performance? performance?
Stakeholder What can be highlighted from What can be highlighted from What can be highlighted from
customer capital on internal and the human capital in the internal organization capital in the
external stakeholders? and external stakeholders? internal and external
stakeholders?
Internal Process What organization value chain What organization value chain What organization value chain
(value chain) on customer capital? on human capital? on organization capital?
Resources What are the resources needed What are the resources needed What are the resources needed
for development organizations for development organizations for development organizations
that will come from customer that will come from human that will come from
capital? capital? organization capital?

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By using the deployment strategy framework of Social Enterprise Balanced Scorecard (SEBC) to SIC
(Strategic Intellectual Capital) it can obtain a new perspective that is able to prioritize intangible assets and
intellectual assets through a variety of perspectives. This makes the area of intangible assets and intellectual
assets become more widespread and comprehensive enough to make the ability of this model in assessing the
performance characteristics of the Non-Profit Organization (NPO).

4. The deployment strategic of integrated model


The design of the scorecard is a description of the organizations strategy to be used in the process of
performance measurement. Start with the identification strategy of the organization through the process of
interviewing, brainstorming, or sharing with the organization top management [13]. If there is consideration that
some of the strategies are considered not to specific to be determined of performance measurement indicators,
then any strategy that has been generated can be translated into specific strategies to facilitate the determination
of performance measurement indicators. The next step is the formation of a description of an organization
strategic relationship with the perspective of the integration model of Social Enterprise Balanced Scorecard with
Intellectual Capital.

Figure 3. Strategic perspectives in model

Table 3. The deployment strategy in stakeholder perspectives


Stakeholder Perspectives Strategic Stakeholder Capital: Creation and Formation
Build community model Community complexity

To get recognition in the fields of environmental, social, Communities target successor


economic and community acceptable.
To increase the number of pupil Generation in each project

To increase the number of participant Communities that take benefit from the project

Improve the health program, the product. Information Various activities in accordance with the program
services, child development, etc.

Table 4. The deployment strategy in Internal Business Perspectives


Internal Business Process Perspectives Strategic Innovation Capital: Strategic Process Capital:
Creation and Formation Creation and Formation
To increase the number of invention and Goal Setting for product innovation
product diversification and diversification.
To increase the delivery ability. Responsiveness process.

To increase the utilitation of integrated Credibility services.


information services, health program.
To increase the utilization of art gallery Art and playground activity
and reading corner design.

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Table 5. The deployment strategy in Resources Perspectives


Resources Perspectives Strategic Human Strategic Customer Strategic Organizational
Capital: Creation and Capital: Creation and Capital: Creation and
Formation Formation Formation
Increase the frequency of the HR Leadership for human
leadership training resources development.
Increase the frequency of the Cooperative community.
training community.
Increase the percentage of Change management and
attendance of the training program. approachment
Increase the number of methods of Brainstorming and
community approach. sharing.

5. Conclusions
The purpose of this research is to develop the performance measurement model of NPO. The model is
measurement framework designed by integration of IC and SEBC. This is a measurement framework that
addresses the key indicators issues to which a wide variety of NPO will be able to relate. The organization can
monitor the performance in order to provide feedback to the organization vision in the next period. The
organizations must recognize the role of social organizations to ensure problems identifying and improve the
performance in the future. The organization needs to consider the integration of strategy maps are used to
determine the specific strategies that need to put in place in order to allow the strategies to be delivered.
Outcome measures that contained in the performance measurement model are dynamic. Thus the use of
performance measurement model is required to analysis and review of performance measurement models in
order to appropriate the actual conditions. Some of the dependent variables that must be adjusted to actual
conditions are:
a. Performance measurement indicators
b. Targets for each indicator of performance measurement
c. Achievement of any performance measurement indicators

References
[1] McKinsey & Company, 2001, Effective Capacity Building in Nonprofit Organizations, Venture Philanthropy Partners.
[2] Clarkson, Paul & Challis, David, 2006, Performance Measurement in Social Care: A Comparison of Efficiency
Measurement Methods, Personal Social Services Research Unit (PSSRU), Faculty of Medical and Human Sciences,
University of Manchester, UK.
[3] Kong, Eric, 2007, The strategic Importance of Intellectual Capital in The Non Profit Sector, Journal of Intellectual
Capital, Vol. 8.
[4] Kaplan, R.S. & Norton, D.P., 2004, Strategy Maps: Converting Intangible Assets into Tangible Outcomes, Harvard
Business Review, Vol. 82.
[5] Wu, Anne, 2005, Between Balanced Scorecard and Intellectual Capital, Journal of Intellectual Capital, Vol. 6.
[6] Marr, B.et.al. 2004, The Dynamic of Value Creation: Mapping Your Intellectual Performance Drivers, Journal of
Intellectual Capital, Vol. 5.
[7] Singh, CA.Jyoti & Mirchandani, Pooja, 2006, Performance Measurements for Not-For Profit Organizations, The
Chartered Accountant.
[8] Somers, Ali.B, 2005, Shaping the Balanced Scorecard for use in UK Social Enterprises, Social Enterprise London.
[9] Roos, Johan, 1998, Exploring the Concept of Intellectual Capital (IC), Journal of Long Range Planning, Vol. 31.
[10] Edvinsson, Lein, 1997, Developing Intellectual Capital at Skandia, Journal of Long Range Planning, Vol. 30.
[11] Kannan, Gopika & Aulbur, Wilfried G., 2004, Intellectual Capital, Measurement Effectiveness, Journal of
Intellectual Capital, Vol. 5.
[12] Allee, V., 1999, The Art and Practice of Being A Revolutionary, Journal of Knowledge Management, Vol. 3.
[13] Niven, Paul R., 2003, Balanced Scorecard: Step-by-Step for Government and Non-Profit Agencies, John Wiley.

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Cite this paper

Mardiono, L. (2012). Development of Performance Model: A New Measurement Framework for Non-Profit
Organization, Proceedings of The 3rd International Conference on Technology and Operations Management:
Sustaining Competitiveness through Green Technology Management, BandungIndonesia (July 4-6), pp. 127-134.
ISBN: 978-979-15458-4-6.

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www.sbm.itb.ac.id www.cob.uum.edu.my

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Bandung Indonesia, July 4-6, 2012

A Proposal to Improve Shift Work based on Toll Collector


Management Satisfaction Survey:
Case Study at PT. Jasa Marga, Purbaleunyi Branch Office
Aurik Gustomo1,*, Intan Pramesthi2,*
1
School of Business and Management (SBM) - Institut Teknologi Bandung (ITB),
Jl. Ganesha 10 (Gedung SBM-ITB), Bandung 40132, Indonesia
2
TiasNimbas Business School - Tilburg University,
Campus Utrecht, P.O. Box 2040, 3500 GA, Utrecht, The Netherlands

Abstract. PT Jasa Marga always strives to improve its services to meet quality objectives: smooth, safe, and comfortable.
This research aims to measure the employee satisfaction who work at highway collection division in PT. Jasa Marga,
Purbaleunyi branch office. The consideration is because of the shift hours that currently divided in three shift in each 8 hours
(for 24 hours), meanwhile they work in highway gate which having many pollution, and also there are many consideration
such as social life, working tools, etc. This research shows that employees werent satisfied enough with the current shift
work system. Employees still have consideration in workload, system shift, employee healthiness, compensation, and manual
tools for the transaction. Considering the result, the possible option is redesign the shift work system to four shifts in each 6
hours.

Keywords: Employee satisfaction, shift work, man power planning, automatic transaction

1. Introduction
PT. Jasa Marga (Persero) is one of operator and also pioneer of toll undertaking in Indonesia. PT. Jasa
Marga is still becoming main toll operator by operating 76.2% out of the whole tolls length in Indonesia. This
company operates toll network in Indonesia and keeps all the toll road under its corporation functioning well. PT
Jasa Marga cooperates with other parties in building new toll road, increasing toll facilities, and other things that
can maximalize its utilities to the toll users.
PT. Jasa Marga has ten branch offices in Indonesia. Purbaleunyi is one of the PT. Jasa Margas branch
offices. Currently, the Purbaleunyi branch office is on the fifth position that generates the biggest traffic volume
and revenue. Purbaleunyi branch office is located in Bandung, more specific in Pasteur. It manages twelve toll
gates in several locations, which are: Sadang, Jatiluhur, Padalarang Barat, Padalarang, Baros 1, Baros 2, Pasteur,

* Corresponding author. Tel: +62-22-2531923; Fax: +62-22-2504249


E-mail address: aurik@sbm-itb.ac.id or intan.pramesthi@hotmail.com
136 A. Gustomo and I. Pramesthi A Proposal to Improve Shift ...

Pasir Koja, Kopo, Moh.Toha, Buah batu, and Cileunyi. Currently, toll collective management division has 42
number of employee that consists of three components which are administration, toll collector and head of toll
collector shift (PT. Jasa Marga, 2005).
Purbaleunyi branch office is the first branch office that implement new technology which are semi-
automatic integrated that called swalayan service, it occurred just for toll gate entrance and smart card as a tools
for the exit and entrance gate. Purbaleunyi branch office has ten ticket booths in Pasteur gate. In entrance gates,
there are already three ticket booths that operate semi-automatic integrated system. So, currently, in the entrance
gate of Pasteur it appears the inscription of swalayan ticket booth. In exit gate, Purbaleunyi branch office not
yet implements any transactions system, but they use the smart-card system to simplify the toll collector job in
order to create internal efficiency and increase the customer service.
It is important to measure the satisfaction that employees get since working in PT. Jasa Marga Purbaleunyi
branch office, as the toll collective management division. It because of the shift hours that divided in three shift
in each 8 hours (for 24 hours), meanwhile they work in highway gate which having many pollution, and also
there are many consideration such as social life, working tools, etc that will influence the employees productivity.
Shift hours will affect employee adversely. It interferes with time-oriented bodily functions,
such as digestion, sleeping, and elimination. Rotating shift work particularly affects personal
and family lives and social participation, adversely.
So, it is important in considering the employee satisfaction with emphasizing on the shift work. Shift work
could affect many aspects in individual for the employees and as the impact it will influence the company itself
for the productivity, effectiveness, efficiency and performance (Baron and Armstrong 2007, Dessler 2005, and
Wayne 2006). In other side, the company strategic plan is to implement the alternative of highway gate
transaction management that consists of semi-automatic integrated system and automatic system by using smart
card. The semi-automatic integrated system is the transaction of taking the highway card and the payment
transaction using smart card but still need human for the transaction. In the future, PT. Jasa Marga has planned to
implement the automatic transaction which is the transaction that didnt need human assisting. This option could
create several decisions for employees. It could make easier for employee to work and also it could create the
possibility that will impact the reduction or escalation number of employee.
According to both conditions above, PT. Jasa Marga, Purbaleunyi branch office will face the human
resource difficulty. As the research questions, with the output of employee satisfaction analysis and the
recommendation for personnel planning about number of personnel needed. The analysis will be focus on:
Highway shift work
What the output of employee satisfaction survey? Are the current shift hour have given employee
satisfaction, related to companys goods and employee need as an individual? What is the ideal new
shift work? Is there any increasing or decreasing in the number of people?
Technology
Can the implementation of new technology solve/ support employee satisfaction? With the new
technology, how the shift will be? What are the consequences in implementing the new technology?
Compare with the manual system, is it more effective or not related with the personnel planning?
In additional, within the analysis of employee effectiveness, ratio of highway length : employee amount = 1:
12. While, as a comparison, the ratio of highway length : employee amount in Malaysia is 1: 3 and in South
Korea is 1: 2.3. In fact, this comparison ratio could be influenced by many factors, such as, government
regulation, technology, management, system work for toll collector gate, etc. The ratio number above represent
that numbers of employee in PT. Jasa Marga were in big amount. In one side, it could be assume that PT. Jasa
Marga put into action about their corporate function, as the social and economic function. In other side, it is
important to have a target of employee efficiency, PT. Jasa Marga have target to decrease number of ratio.

2. Research Methodology
The process of this research begins with the informal discussion in PT. Jasa Marga to find what are the
current issues or problems present. Following informations about the current issue, it continued by the analysis
to decide the research project. Then, continued by the data collection in PT. Jasa Marga Purbaleunyi branch
office. In the data collection, confirmation of a data is very important. Consequently the data collection also
complicated by the informal discussion. Figure 1 shows the research methodoly.

Glueck, William F., 1978: 124

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A. Gustomo and I. Pramesthi A Proposal to Improve Shift ... 137

The data collection resources are came from the primary data. Primary data is data that come out directly
from the resource, it written and observed for the first time. The primary data in this research were come from:
a. Discussion or interview
b. Data collections
The primary data is the quantitative data that will be use in analysis, vehicle volume (data lalu lintas).
The other data is the supporting data for the analysis.
c. Questionnaire
The questionnaire also pointed to toll collective division. It will find about the employees perspective
regarding to the satisfaction of their job, in the perception of shift work and new technology. In deciding
the number of respondents, it not uses any specific approach, because there are small numbers of
employee in the toll management collective division which are just 42 people. The questionnaire will be
distributed in the target of response rate in up to 60%. Because studies with a poor response rate (<60%)
are likely to be biased. The questionnaire scales are 1-5. In detail the scales are: 1- strongly disagrees, 2-
midly disagree, 3- not sure, 4- agree, 5- strongly agree.

Figure 1. Research methodology

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138 A. Gustomo and I. Pramesthi A Proposal to Improve Shift ...

The analysis model or analysis flow will begin from the employee satisfaction survey, and then if the result
is bad it will continue with the redesign of new shift hour system. Together with the new system, it also result the
personnel needed estimation and it will continued by the recommendation of personnel action, as an example,
outsourcing. Considering the new technology which is automatic transaction, this technology could be the
alternative in support the personnel planning actions. It will create consequences that need to be considering also.
2.1. Standard calculation of toll division collector needed
To calculate the number of personnel in toll division management, especially for the toll collector positions,
PT. Jasa Marga have their own calculation based on number of vehicle that passed the toll gate. The number of
operation gate will be calculating with the formula below.

GO = N
(3600/ ) (Eq. 1)
Note:
N : Vehicle volume transaction an hour
: Conversion factor, from the number of vehicle came with number of vehicle serviced
: Gate service moment (time), is a function from type of vehicle and payment nominal

Conversion factor () made in 3 type based on gate transaction type


- Entrance gate : 1.08
- Exit gate : 1.20
The value of gate service moment () depends on the types of vehicle and gate. In this paper, it assume based on
the average of vehicle volume, the gate service moment are 6.969 for the entrance gate and 11.781 for the exit
gate. This number are based on the average proportion of vehicle number which are, type 1 95%, type 2A
5%, and type B 0%. This average number takes from the everyday proportion number of vehicle.

Toll collector needed


The formula for calculate number of toll collector is:

i=n
- PTG = [(P x Kf ) + (J x Kf ] + [(P x Kf ) + (J x Kf ] + [(P x Kf ) + (J( x Kf ] x7
I I (i-n) (i-n) II II (i-n) (i-n) III III i-n) (i-n)
i=n
C
(Eq. 2)

- PTG aj = PTG x (1+ b) (Eq. 3)

Note:
PTG : Toll collector needed a day
P : Number of operations gate needed continually each shift in a day. (From the number of vehicle before)
I/II/III
Kf : Conversion factor
I/ II/III
J : Operation gate needed in back up (jadwal gantung)
(i-n)
Kf : coefficient factor for toll collector in back up (jadwal gantung)
(i-n)
C : Work hour in one week, 40 hour/ week
PTG aj : Toll collector needed in a day (adjustment)
b : 0.05, safety factor, used if gate available < gate operations

Personnel needed for day off consideration

Day off factor: 0.05 x PTGaj (Eq. 4)

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3. Data and Analysis


3.1. Existing Condition of Work System
From the data collection and questionnaire analysis above, we could see that there are two conditions faced
by PT. Jasa Marga Purbaleunyi branch office face. First is the issue of employee satisfaction and second is the
planning of automatic gate transaction.
Based on data in Pasteur gate, currently the maximal working capacity as toll collector is 86,96%, while in
fact the working capacity as toll collector is 84,66% (LAPI-ITB, 2004). We can see that, it have 1,2% gap which
is the excess of working capacity conversion. It means that, the number of employees should be decreased to get
the company more efficient. For example, in simple way, if currently the toll collectors are 34 people, than it
could be decreased to 32 people. Moreover, PT. Jasa Marga is in the process to implement their new technology,
which is semi-automatic integrated system and it will be continuous by automatic transaction system. So, it can
assume that PT. Jasa Marga could make more efficient in managing the number of employees in their operation
to meet the quality policy, which are:
Motivate all employees to always improve their skills and expertise as well as to always be responsible
and orderly to satisfy the customers.
Improving the system and work environment continuously to be more effective and efficient to assist
the achievement of quality services.
Basically, the working system of the three functions in toll management collective divisions (administration,
toll collector and head of toll collector shift) is equivalent, it divides in the schedule of three shifts each is 8
hours which are:
- Shift 1: 06.00am - 02.00pm,
- Shift 2: 02.00pm - 10.00pm, and
- Shift 3: 10.00pm - 06.00am.
In average, all of the employees in the toll collective management division are fairly distributed in the three
shifts, excluding women. They will be rotated to one shift to another. For example, in Monday A will work in
the shift 1, but in Wednesday he/she can be work for shift 2. The basic concept for shift scheduling is 4/2, means
that 4 work days and 2 rest days. Women are excluding for the entire shift schedule, usually they work only in
the shift 1 and 2. This consideration is actually based on safety factor.
3.2. The Questionnaire Result on Employee Satisfaction
The questionnaire result shows the average of satisfactory level towards each variables of shift work as
described in Figure 1.

Fig. 1. Employees satisfactions

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140 A. Gustomo and I. Pramesthi A Proposal to Improve Shift ...

Figure 1 shows that in general employees were not sure that they were satisfied with the current working
system. If we breakdown the question to healthiness factor, compensation, interaction, etc. employee would
consider in more specific about what things that actually make them not really satisfied. In this questionnaire we
can see that they still have consideration in weight of work, shift work, employee healthiness, compensation, and
manual tools for the transaction. From this consideration on employee opinion, there are several options that
could be done in this problem related with the new technology, which are:
Redesign the new shift work system to be more flexible
Consequence: could be adding more people, it will not be efficient
Increase the compensation
Consequence: increasing the labor cost, it will not be efficient
Use new technology to support the employees job
Consequences: new technology will support the employees job, but also could make employees cut
down.
3.3. Man Power Planning for Automatic Gate Transaction Option
PT. Jasa Marga - Purbaleunyi branch office have some targets in 2007, which are to implement minimal two
swalayan ticket booths for entrance gate in each gate locations, and they should also have implemented this new
technology minimal one ticket booth of automatic transaction in each location in this year. Currently, in Pasteur
gate, the first branch which implement semi-automatic transaction gate (there are already 3 ticket booths for the
entrance gate), it called swalayan gate or internally called GTO (gerbang tanpa orang).
Based on the automatic planning that will be implementing this year, PT. Jasa Marga should redesign the
personnel planning to meet the number of people needed. With the automatic transaction plan this year which are
three swalayan gates for entrance toll gate and three swalayan automatic transactions for exit toll gate.
Using the flexi time concept and also considering the employee satisfaction rate, the system should still
use the shift work schedule of 4 shifts with each 6 work hours. In the automatic transaction shift there are 3
automatic ticket booths that will be implementing in each gate. These three ticket booths are calculate as one
number, means that 3 automatic ticket booths = 1 ticket boots. The reasons of this assumption are: first, the
automatic ticket booths will not be close for 24 hours, except under urgent situation; second, 3 automatic ticket
boots are guarded by one person. So, in the calculation table it has 1 operational ticket booth that means 3
automatic ticket booths. For example, 3 operation ticket boots means the active ticket boots are 5, 3 automatic
ticket booths (as 1 ticket booths) plus 2 manual ticket booths.
Furthermore, explaining about the number of GO in shift 4, that there are 1 number of operational ticket
booth in GO operational ticket boots. So, even though the operational ticket booths required just 1, it has to be 2
ticket boots (1 ticket booth is the 3 automatic ticket boots) that should be active. As the result, Table 1 is shown
the total number of personnel needed facing the new technology which is automatic transaction.
Table 1. Personnel Needed of Automatic Transaction
Personnel needed
Automatic transaction
a day total
- Total toll collector 26 26
- KSPT - head of toll collector 2-4 5
- TU - administration 2-4 4
- FC - day off factor 1.45 2
Total toll collector division 37

From Table 1 it can be seen that the numbers of personnel needed are decreasing. It means that with the new
technology, PT. Jasa Marga Purbaleunyi branch office will meet the surplus condition of employee. As already
explain before, the decreasing number of employees are the consequences of a change. In this condition
decreasing number of employees was influenced by the redesign of new system and the new technological
aspects.

4. Conclusions
1. In general, employee satisfaction is still in below. Employees still have considerations in weight of
work, shift work, employee healthiness, compensation, and manual tools.

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2. It show that employee in toll collection management division not satisfies with the shift work.
3. Based on that reason, the ideal shift work considered to 4 shifts with each 6 hours. This new shift work
will decrease the weight of work and shift hours, increase or more controlling employee healthiness and
balance or equal with the compensation that employees get.
4. In the new technology implementation, it would reduce 5 people of employee as the consequences.

References
[1] Baron, Angela, Armstrong, Michael (2007). Human Capital Management, Achieving Added Value through People.
Kopan Page.
[2] Dessler, Garry. (2005). Human Resource Management. Person Education, New Jersey
[3] LAPI ITB. (1997). Penyusunan Profil Jabatan PT. Jasa Marga.
[4] LAPI ITB. (2004). Pengukuran Beban Kerja PT. Jasa Marga.
[5] PT. Jasa Marga. (2005). Annual Report of PT. JASA MARGA.
[6] US department of technology. (2005). Guide to workforce planning. retrieved on June, from
http://humancapital.doe.gov
[7] Wayne, Cascio, F. (2006). Managing Human Resources: Productivity, Quality of Work Life, Profits. McGraw-Hill,
Irwin.

Cite this paper

Gustomo, A., and Pramesthi, I. (2012). A Proposal to Improve Shift Work based on Toll Collector Management
Satisfaction Survey: Case Study at PT. Jasa Marga, Purbaleunyi Branch Office, Proceedings of The 3rd International
Conference on Technology and Operations Management: Sustaining Competitiveness through Green Technology
Management, BandungIndonesia (July 4-6), pp. 135-141. ISBN: 978-979-15458-4-6.

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Conference Proceedings 2012 ISBN: 978-979-15458-4-6
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Conference Proceedings 2012 ISBN: 978-979-15458-4-6
Available at www.ictom.info

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www.sbm.itb.ac.id www.cob.uum.edu.my

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Bandung Indonesia, July 4-6, 2012

Strategic Change and Transformation:


A Case Study at Malayan Banking Berhad
Darwina Arshad1,*, Hartini Ahmad1, Azrain Nasyrah Mustapa1, Shahimi Mohtar1
1
College of Business (CoB) - Universiti Utara Malaysia (UUM),
Sintok 06010, Kedah Darul Aman, Malaysia

Abstract. Nowadays the challenges faced by the banking industry are enormous and more challenging because the banks
system must cope with an era of rapid change of technology, trends towards greater market orientation and globalization and
simultaneously the emerging from a period dominated by cost-cutting, downsizing or downscaling. Overall confidence and
stability in the Malaysian financial sector is uncertain. Thus, this scenario reinforces most banks to do better transformation
on strategic change. The Malayan Banking Berhad (Maybank) was used as a case study because Maybank is the leading bank
in the Malaysian financial services industry. This case study aims to analyze internal factors of Maybank Berhad in
determining the achievement of Maybanks strategic change.

Keywords: Strategic change, internal factors, transformation

1. Introduction
The financial system has over several decades been instrumental in facilitating the economic success of
Malaysia. As Malaysia advances into the new transition to the new economy into a more globalised, a more
digitized and knowledge based economy. The financial system is also operating in an era of rapid change, in an
environment that is being shaped by advances in technology, by trends towards greater market orientation and
globalization.
Even to the most casual observer of the financial services industry, the above statement portrays the
challenging times for financial institutions. The rate at which the industry changes and develops in the complex
nature of the financial system is breathtaking. The rapid pace of the information technology revolution,
globalization, increasing buying sophistication and significant demographic changes are driving forces behind
these changes (Jagersma, 2006).
Nowadays the challenges faced by the banking industry are enormous, and as more challenging because
many banks are emerging from a period dominated by cost-cutting, downsizing or downscaling. In other words:
after a prolonged period of internal focus, banks must again concentrate on external issues, and put strategic

* Corresponding author. Tel.: +60126856841; fax: +6049287117


E-mail address: darwina@uum.edu.my
144 D. Arshad, H. Ahmad, A.N. Mustapa, and S. Mohtar Strategic Change and Transformation ...

marketing at the top of their agenda. Strategic business marketing (also known as strategic industrial marketing
or strategic business-to-business marketing) is the strategic marketing of products and/or services for
transformation or consumption by businesses.
It is important to understand the customers expectation and perception of quality, an organization may
deliver a satisfactory service where satisfaction has long been regarded as key to customer loyalty and views the
banking industry as a mature industry in nature; whereby, in this highly competitive environment customer
satisfaction is essential for banks sustainability. The banking sector has responded far more slowly than other
sectors to the new challenges that sustainability presents (Jeucken, 2004).
Bankers generally consider themselves to be in a relatively environmentally friendly industry (in
terms of emissions and pollution). However, given their potential exposure to risk, they have been
surprisingly slow to examine the environmental performance of their clients
(p. 15; Jeucken, 2004)
Malayan Banking Berhad (Maybank) has been chosen as a case study because Maybank is the leading bank
in the Malaysian financial services industry and has always been regarded as a benchmark of the financial sector
performance. However, how far it can sustain the position as a market leader in Malaysias banking industry is
still questionable. Therefore, this case study aims to analyze internal factors of Maybank Berhad such as by
looking at products and service marketing strategic and transformation program that had took place in this
company that could either flourish or diminish the key strategic factors of Maybank.

2. Case Analysis
In determining the achievement of Maybanks strategic change, this case study was analyzed the current
Maybanks strategy, the competitors analysis, the financial status and Maybanks products and services. The
VRIO analysis was also used to examine the overall resources and capabilities of Maybank.
2.1. Maybanks Current Initiatives
With the challenges in mind, Maybank has adopted best practices that will set the benchmark for customer
care. The foundation of this model is premised on Maybank Groups three Ps of People, Products and Processes,
which must be well aligned for the Group to achieve excellence in customer experience. With this the Bank
launched the Group-wide performance improvement programme, affectionately known as LEAP30, which was
initiated in the second half of 2008.
Maybank is confident that with the traction gained so far, and the continued commitment and strong support
of Maybankers, LEAP30 will thrust all sectors within Maybank towards achieving the Groups vision to become
one of the top five banks in South and South East Asia by 2015.

Figure 1: LEAP30 Strategy

The LEAP30 Transformation initiatives continue to reinforce a strong service-oriented culture in the Group
based on embracing the Group Core Values to improve customer retention and increase customer acquisition.

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Figure 2: LEAP30 Performance Improvement Programme


Source: Maybank Annual Report 2009

As part of its strategic transformation plan the Maybank Group has also taken proactive steps to strengthen
its capital base by undertaking announced a rights issue of up to RM6.0 billion, which would positioned
Maybank as one of the best capitalized banks in Asia with a proforma risk weighted capital ratio of 16.4%. The
rights issue will support the Groups aspiration to be among the top 5 banks in South and South East Asia by size
and performance by 2015.
In line with Community Financial Services and Global based Banking strategic thrusts, numerous
transformation strategies have been successfully implemented, such as Insurance & Takaful, Information
Technology Transformation Programme and Quality of Service. These strategies closely related to staff and
customers of Maybank. It is very crucial for the company to understand customer expectations and perceptions
of offered quality. This is because the perceived level of satisfaction by a customer is a key to maintain customer
loyalty as well as uphold an image of the banking industry as the best industry in the world in a very competitive
environment. The results showed that many initiatives done by Maybank align with the vision and mission, have
quick wins; short and medium-term strategies, and long-term strategies.
2.2. Maybank in a Position of Strength
Maybank has positioned itself as the largest banking group in Malaysia with a total asset of RM 309 billion
as at 31 March 2009 and market capitalization of RM 41.05 billion as at 26 June 2009, surpassing its competitors,
namely CIMB (BCHB), Public Bank, RHB Capital, AMMB, Hong Leong Bank, Affin Bank, Alliance Bank and
EON Capital. As shown in the Table 1, Maybank is still among the top 3 in almost all key business sectors.
Nonetheless competitors are following Maybank very closely with BCHB in second place in terms of total assets
of RM 227 billion as well as RM 32.6 billion in terms of market capitalization. Public Bank in a closing in at
third position, with total assets of RM 199 billion and market capitalization of RM 31.43 billion ( Maybank
Annual Report 2009). It is lagging behind in terms of consumer loans and auto loans controlling 16% of market
share, housing loan with 14%, corporate loans and Islamic deposits with 17%, debt issuance with 21% and asset
management with 9% as compared to other industry players.
Maybank realized that as the market leader it is facing serious challenges to maintain its number one
position in the highly competitive banking industry. The competitors are trailing Maybank closely and have
intensified their competition, this coupled with other factors such as the macroeconomic pressure, demanding
customers and significant gaps in its execution capabilities and performance culture resulting a less than
impressive performance and Maybank is losing market share to aggressive competitor who are ever ready to
pounce at Maybanks leadership.

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Table 1: Maybanks Competitors in all Key Business Sectors


Source: Maybanks Presentation at Invest Malaysia Conference 2009, Kuala Lumpur, 30 June 2009

It was observed that both BCHB and Public Bank are rapidly catching up with Maybank and the possibility
of them overtaking the leadership position from Maybank. Under the circumstances Maybank embarked on a
strategic transformation journey to safeguard and maintain its leadership as well to retain and regain its market
share. The table below illustrates further on the threat Maybank is facing in its market leadership.

Table 2: Maybanks Market Leadership


Source: Asean bankers Equity Report on Maybanks 5 Year Performance

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2.3. Financial Status


Maybank remained focused on its goal to become a leading regional financial services group by 2015 and
further expanded its presence in 13 overseas markets. For the financial year 2009, the International sector
managed to contribute 9.6% to the Groups profit before tax. The Groups Singapore operations, maintained its
growth momentum by recording an increase of 12% in profit before tax and contributed approximately 88% of
profit before tax to the International sector for the financial year 2009 ( Maybank Annual Report 2009).
Maybank Singapore is also the Groups largest overseas unit in terms of assets. Maybank Singapore
contributes approximately 60% to the Groups total international loan portfolio. The Singapore branch is the first
in Singapores banking industry to have achieved triple certification for business excellence (Maybank Annual
Report 2009). Singapore Quality Class (SQC), Service Class (SC) and People Developer (PD).
2.4. Product & Services
Maybank Group offers an extensive product and service range which includes commercial banking,
investment banking, Islamic banking, offshore banking, insurance and takaful, factoring, trustee services, asset
management, stock broking, nominee services, venture capital and internet banking. Maybank's main business
operations are in Consumer Banking, Business Banking and Corporate Banking, Global Markets and
International Business. Maybank Investment Bank is the Group's investment banking division while the
Insurance business is operated under the Etiqa brand.
Commercial banking is the main business of the Maybank Group with Consumer Banking as one of the
Groups primary contributors which had a variety of services and products including mortgage and automobile
financing, credit and debit cards, bancassurance, wealth management as well as retail and Internet banking.
Corporate and Business Banking, which comprise corporate and commercial segments, caters to public listed
companies, multinationals and institutional clients as well as SMEs via a variety of services that include cash
management and trade financing. With these extensive products and services, the rivals of Maybank especially
other local banks could have difficulties to outcompete in the Malaysia market.
2.5. VRIO Analysis
Maybank perspectives their performance relative to industry peers is likely to vary according to the level to
which resources, capabilities, and ultimately core competencies satisfy VRIO criteria. The four criteria are
explored as follows:
Valuable. A resource or capability is said to be valuable if it allows the firm to exploit opportunities or
negate threats in the environment. Maybank can be said as the first mover in the internet or online banking in
Malaysian financial sector. This can lead to develop valuable advantage to attract large number of subscribers to
the service. The technical expertise on internet or online banking facilitate Maybank to reach wide clienteles,
particularly white color clients who prefer to conduct desk banking than the traditional method. Maybanks
wide networks, both local and also global reach, made it convenient for its clients to conduct businesses and
transactions across nations. Strong financial resources coupled with GLC status provide advantages to the
Maybank to tap deposits from government and government related agencies. Besides, the Maybanks
commitment of the Islamic banking services offers a significant advantage in both markets, regional and global
expansion. The abundant of experience and strong workforce are valuable assets that drive Maybank to where it
is now.
Rare. A resource is rare simply if it is not widely possessed by other competitors. Maybank is widely known
and well recognized by its unique brand name and a tiger head logo. Maybanks subsidiaries and related
companies are closely associated by the same brand name and logo making it easily recognized as a group.
Inimitable. Inimitability is probably the toughest criterion to examine because given enough time and
money almost any resource can be imitated. At Maybank, its strong financial resources and wide network, across
the globe, is a difficult act for others to catch up. Further, Maybank can be classified as an expert in Islamic
banking which expands the service across Asian region and other Muslim countries. The courage to pursue this
market penetration strategy to other regions can be notified as inimitable competent that most banks could not
possess.
Organized. The firm must likewise have the organizational capability to exploit the resources. Being
government linked company, Maybank enjoys some advantage in term of government deposits and other credit
portfolios. Within its stable, Maybank is a model of being one stop financial center providing full range of
financial services.

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3. Discussions and Conclusions


The highly competitive environment of the banking industry is a mature industry and in Malaysias case the
situation has become challenging with financial market liberalizations with international players setting up their
operations here. The macroeconomic situations with the economic slowdown that hit globally, changing in
borrowing patterns, low interest rate margins and profits are aggressively being pinched by competitors has
resulted the Maybank Group losing some of its market share to the competitors.
To continue being a leader in the industry Maybank Group has embarked towards a strategic transformation
journey to retain its position and it involves a total transformation where the firm is changing the organizational
culture towards customer-centric via adopting to the relationship marketing approach. To retain its customers
and, be it internally or externally, the banking group is looking at building long-term relationship, creativity and
competitive advantages within the organization via the launch of the LEAP 30 program. Although changes do
take time the change is taking place.
The banking group should continuously ensure that the strategic change must be acknowledged and
channeled the banks shared value and aspirations to its employees. The significant aim is at a common value
and culture where all employees will have the same vision towards achieving the organizational goals. Besides,
for a local bank in an industry where the market is highly competitive with aggressive competitors, the bank
needs to retain its customers and gain their trust and commitment to ensure the banks ability to continuously
survive and regain its market share; hence a right approach in building the long term relationship is crucial.

References
[1] Jagersma, P. K. (2006) Strategic marketing and the global banking industry: elements of excellence, Journal of
Business Strategy, Vol. 27 No. 4, pp.50 59.
[2] Jeucken, M. (2004), Sustainability in Finance: Banking on the Planet. Studio Hamsken: Amsterdam.
[3] Maybank Annual Report 2009.

Cite this paper

Arshad, D., Ahmad, H., Mustapa, A.N., and Mohtar, S. (2012). Strategic Change and Transformation: A Case Study at
Malayan Banking Berhad, Proceedings of The 3rd International Conference on Technology and Operations
Management: Sustaining Competitiveness through Green Technology Management, BandungIndonesia (July 4-6), pp.
143-148. ISBN: 978-979-15458-4-6.

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Available at www.ictom.info

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Bandung Indonesia, July 4-6, 2012

Application of Spatial Load Forecasting Model for Regional


Infrastructure Electricity Planning in Indonesia
Sudarmono Sasmono1,*, Ngapuli Irmea Sinisuka1, Mukmin Widyanto Atmopawiro1
1
School of Electrical Engineering and Informatics (STEI) - Institute of Technology Bandung (ITB),
Jl. Ganesha 10 (Labtek VIII), Bandung 40132, Indonesia

Abstract. Sectoral approach in electricity load forecasting has been used by local government consultant within regional
infrastructure electricity planning in Indonesia. It has disadvantages that cannot be determined optimal planning for
electricity infrastructure within the region. Spatial load forecasting method developed in the academic world can be combined
with the sectoral approach to overcome its disadvantages. Principally, sectoral approach is used as a model for the effect of
macroeconomic variables in electricity demand. However, their application conducted in spatial units which are defined to
spatial approach. It conducted several simplifications in the variables for obtain an appropriate model.

Keywords: Spatial load forecasting, spatial approach, regional infrastructure electricity planning, sectoral approach

1. Introduction
Generally, electricity planning in Indonesia consists of 2 types of planning. They are technical electricity
planning and electricity planning as basis for policy. Technical electricity planning created and implemented by
utility. Electricity planning as basis for policy created and implemented by government, including local
government. In Indonesia, according to Article 7 Paragraph 3 in Act Number 30 Year 2009 Regarding Electricity,
each local government shall conduct regional infrastructure electricity planning as basis for local policy in
electricity [9]. Electricity planning currently constructed by local government that arrange within macro demand
and macro load forecasting. It is global approach and using macroeconomic variables.
On global approach, electricity demand as basic for electricity planning is the aggregate of electricity
demand from all end users. They are residential, commerce, industry and public. Hence, global approach
recognized as sectoral approach. Electricity demand is shown in energy units. Due to its characteristics as
single value, electricity demand form is aggregation of energy demand on specific observation period.
The weakness of macro demand approach in infrastructure electricity planning that it doesnt deliver
detailed picture of location and position of electricity infrastructure and their priority. Hence, the planning
conducted cannot be determined optimal planning for electricity infrastructure within the region. This could

* Corresponding author.
E-mail address: udharslytherin@yahoo.co.uk
150 S. Sasmono, N.I. Sinisuka, and M.W. Atmopawiro Application of Spatial Load ...

potentially mistakes in decision during planning. Spatial approach may overcome the disadvantages. However,
spatial approach currently developed limited for electricity distribution. Lee Wilis is one who develops it as
spatial demand forecasting. Lee Wilis developed spatial demand forecasting for infrastructure on electricity
distribution in small area and limitless time, usually in 5 years [8]. On its development, spatial demand
forecasting on electricity distribution was developed using land use as basis to forecast. It can be found in several
research such as [2], [3], [4], [6], and [7].
Brunoro proposed integrated model for demand load forecasting and spatial load forecasting in electricity
distribution using GIS analysis [1]. However, it didnt change its characteristics as small area and limitless time.
Infrastructure electricity planning which was developed by government is long term planning. Usually it
created minimum within 20 years. It is intended as basis for decision making on government policy. Due to the
characteristics, different approaches of spatial in infrastructure electricity planning shall develop.

2. Developing Model
Develop model intended to answer the question how to make optimal planning on electricity infrastructure
as basis for government policy. The model is expected to meet requirements of government planning as long
term planning and equivalent area of regency. According to Lee Wilis [8], spatial approaches for electricity area
are accomplished by dividing the service territory into small areas, irregularly shaped areas and elements of a
uniform area. The spatial approaches are shown in Figure 1.

(a) (b)
Fig. 1: Spatial approaches for electricity area (a) uniform area (b) irregularly shaped areas

On this modelling, appropriate spatial approach used is irregularly shaped area. This approach is considered
more appropriate to be used refers to regional development in Indonesia. Generally, they are developing in
irregular spatial. While the base was used as a reference for dividing the district is the centres of economic
growth and the surrounding area. In Indonesia, the centres of economic growth developed through a series of
government regulation. For district level, it is The Government Spatial Plan. Generally, this regulation has
planned up to 20 years.
Electricity use and gross national product as one of economic parameter have been, and probably will
continue to be, strongly correlated [8]. Hence, the centre of economic growth and the surrounding area shall be
basis for dividing the district in to small area.
Electricity demand forecasting in defined small area of the district can accomplished using various common
method in electricity demand forecasting. One of common methods is trending method base on econometric
model. The econometric model shall arrange for each small area. However, it can be easily performed.

3. Application of Model
Application of model accomplished in infrastructure electricity planning at East Kutai Regency. Period of
planning is in 20 years. The centres of economic growth and the surrounding area base on East Kutai Spatial
Plan. According to document, East Kutai divided in to 4 centres of economic growth named development area.
They are Sangatta, Sangkulirang, Muara Wahau and Muara Bengkal. Sangatta consists of 7 sub districts. They
are North Sangatta, South Sangatta, Rantau Pulung, Teluk Pandan, Bengalon and Karangan. Sangkulirang
consists of 4 sub districts. They are Sangkulirang, Kaubun, Kaliorang and Sandaran. Muara Wahau consists of 3
sub districts. They are Muara Wahau, Kombeng and Telen. Muara Bengkal consists of 5 subdistrict. They are
Muara Ancalong, Busang, Long Mesangat, Muara Bengkal, and Batu Ampar. Area of East Kutai Regency and
its sub district are shown in figure 2.

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Fig. 2: Area of East Kutai and its sub district

Fig. 3: The econometric and trending methods had used on spatial demand forecasting at East Kutai

On each development area, econometric and trending methods had used to forecast electricity demand in
energy and load. In the early stage, household electricity demand survey conducted to determine household
electricity demand in each development area. Other, historical data analysis conducted to predict population
growth and economic growth for 20 years forward in each development area. Population growth becomes the
basis to forecast electricity demand in household through 20 years forward. While electricity demand for other

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sectors had determined using elasticity factor between sectors. The elasticity factor between sectors was obtained
from historical data of electricity consumption in each sector through at least 5 years backward. However, the
elasticity factor between sectors was used only for commercial sectors and public sectors. For industrial sector,
electricity demand determined using elasticity factor between economic growth and industrial electricity
consumption. Also, it was obtained from historical data of industrial electricity consumption and economic
growth at least 5 years backward. The econometric and trending methods had used shown in figure 3. Final
result of forecasting was electricity demand forecasting through 20 years forward for each development area.
Since demand forecasting is probabilistic, then electricity demand forecast in 3 scenarios i.e moderate, low and
high. The result of forecasting had shown in figure 4.

(a)

(b)

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(c)

(d)

Fig. 4: The result of electricity forecasting in each development area in East Kutai (a). Sangatta, (b). Sangkulirang, (c), Muara
Wahau and (d). Muara Bengkal

According to Figure 4, infrastructure electricity planning to meet electricity demand can accomplish for each
development area as unit spatial. Since power plant shall build nearest primary energy resources and demand,
optimal position of power plant and electricity networking can accomplish through spatial approach. Figure 5

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show the final result of infrastructure electricity planning based on spatial demand forecasting as spatial
approach.
As shown in Figure 5, large capacity power plant built in Sangatta as high demand area in East Kutai. Also,
Sangatta is primarily centre of economic growth in East Kutai. Transmission 150 kV as backbone networking
among development area built to connect Sangatta as mother city of East Kutai to primarily city on each
development area. Other important transmission in regional infrastructure electricity is transmission 70 kV. It
built depend on electricity demand at development area as direction of electricity flow. Also distance between
power plant and development area. Distribution 20 kV as backbone network distribution built in similar criteria
with Transmission 70 kV. Also in figure 5, isolated power plants meet electricity demand in remote area.
Isolated power plant used local renewable energy as primary energy for generation.

Fig. 5: The Infrastructure electricity planning in East Kutai developed through spatial approach

4. Discussion
Spatial approach as method in infrastructure electricity planning had developed limited on electricity
infrastructure for distribution. Accordance with advancement of knowledge in power system planning,
simultaneous generation and transmission planning had been attention of researcher. Spatial approach required
on simultaneous generation and transmission planning. Currently, there are no exactly definitions and confirm
methodology to determine the spatial size of the power transmission in infrastructure electricity planning.
Defines spatial size of the research was based on given spatial definition as centre of economic growth area and
the surrounding. Another approach may be necessary to determine the size of spatial for non-distribution
planning.
Econometric approach and trending method in this research, accomplished in electricity demand forecasting
on a spatial area. However, it didnt include the effect of various dynamic factors such as use of energy saving
equipments, electricity tariff and so on. Dynamic electricity demand forecasting could be combined with spatial
approach. This combination may generate electricity demand forecasting precisely. Hence, the result of the
infrastructure electricity planning will be more accurate.

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5. Conclusions
Spatial approach in electricity demand forecasting for infrastructure electricity planning can be developed
not only limited in distribution electricity planning. Spatial approach can be developed for transmission
electricity planning as one of a part of regional electricity planning. Hence, spatial approach can be developed as
basis for policy decision. Spatial approach was used may refer to central area of economic growth in a region.
However definition of spatial regions for planning in non-distribution still needs to be developed.

Acknowledgement
Local Government of East Kutai Regency which funded research on applied of this model in Electricity
Planning of East Kutai Regency 2011 2025.

References
[1] Brunoro, Claudio Marcello, El Hage, Fabio Sismoto, de Oliviera, Carlos Cesar Barioni (2009), Integrated Model of
Spatial and Global Load Forecast for Power Distribution Systems, Proceedings of 20th International Conference on
Electricity Distribution, paper 0565.
[2] Carreno, E.M, Padilha-Fetrin (2009), A Spatial Electric Load Forecasting Using A Local Movement Approach,
UNESP, Ilha Solteira, Brazil, 1-5
[3] Carreno, E.M, Padilha-Fetrin, Leal, A.G (2010), Spatial Electric Load Forecasting Using An Evolutionary Heuristic,
Revista Controle & Automacao, Vol 21 No 4, 379-387.
[4] Chouw, Mo-Yuen, Zhu, Jinxiang, Tram, Hahn (1998), Application of Fuzzy Multi-Objective Decision Making in
Spatial Load Forecasting, IEEE Transaction on Power System, Vol 13 No 3, 1185-1189.
[5] Committee on Electricity in Economic Growth (1986), Electricity in Economic Growth, National Academy Press,
Washington DC, pp 1-13.
[6] Jain, Amit, Jain, M. Babita (2010), A Novel Hybrid Method for Short Term Load Forecasting using Fuzzy Logic and
New Particle Swarm Optimization (NPSO), Proceedings of 16th National Power System Conference, 132-138.
[7] Javadi, Shahram (2001), Spatial Load Forecasting Using Fuzzy Logic, Electrical Engineering Department, Azad
University, Tehran, 4-5.
[8] Wilis, Lee (2002), Spatial Electric Load Forecasting, 2nd edition, Marcel Dekker Inc, New York, 1-5.
[9] _______, UU No 30 Tahun 2009 tentang Ketenagalistrikan, pg. 9.

Cite this paper

Sasmono, S., Sinisuka, N.I., and Atmopawiro, M.W. (2012). Application of Spatial Load Forecasting Model for Regional
Infrastructure Electricity Planning in Indonesia, Proceedings of The 3rd International Conference on Technology and
Operations Management: Sustaining Competitiveness through Green Technology Management, BandungIndonesia
(July 4-6), pp. 149-155. ISBN: 978-979-15458-4-6.

The 3rd International Conference on Technology and Operations Management (ICTOM)


Conference Proceedings 2012 ISBN: 978-979-15458-4-6
156

The 3rd International Conference on Technology and Operations Management (ICTOM)


Conference Proceedings 2012 ISBN: 978-979-15458-4-6
Available at www.ictom.info

Conference Proceedings 2012 ISBN: 978-979-15458-4-6


www.sbm.itb.ac.id www.cob.uum.edu.my

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Sustaining Competitiveness through Green Technology Management
Bandung Indonesia, July 4-6, 2012

Low Cost Product Development Methodology


Ayunda Azhar1, Gatot Yudoko1,*, Soemantri Widagdo2
1
School of Business and Management (SBM) - Institut Teknologi Bandung (ITB),
Jl. Ganesha 10 (Gedung SBM-ITB), Bandung 40132, Indonesia
2
PT. 3M Indonesia,
th
Perkantoran Hijau Arkadia (Tower F, 8 floors), Jl. TB. Simatupang Kav.88, Jakarta Selatan 12520, Indonesia

Abstract. Low cost product is one of strategy that very common in Indonesia in order to stimulate demand and gain market
share. The poverty rate in Indonesia supports the growth of low cost product in small scale or large scale industry. Indonesian
entrepreneurs slowly start their small scale industry in developing low cost product with good quality which could match up
with imported and expensive product. Then, many multinational companies desire to enter Indonesian market with lowering
its price by developing new product that heavily considering about target cost. Considering the importance of low cost
product development, developing low cost product development methodology would be advantage for any scale company
who need to develop low cost product. Using several new product development models and methodologies that already exist,
such as Generic product development and Change model Simchi-Levi as reference models, the proposed low cost product
development methodology obtained. The proposed low cost product development methodology then verified and validated
by interviewing four low cost products that already exist before. Each of interviews contain history of developing each the
low cost product, starts from stating the idea, identify the critical requirement, build and test, and end up in produce the low
cost product. The desired result after doing four interviews is final low cost product development methodology.

Keywords: Strategy, low cost product, product development methodology, interview

1. Introduction
Low cost product in Indonesia is the most wanted product among other segment. Indonesian people wants
low cost product with best quality they can get. Indonesia who price sensitive to new product which does not
have good reputation and not known well brand, the low cost product would be the most wanted product.
Foreign product which tries to enter Indonesian market mostly should redesign their product, especially the price.
Redesign the price means redesigns the formulas, pack design, quality, etc.
In developing Low Cost Product Development framework, there would be several basic Product
Development models needed that might adjust according to framework requirement. Because the developed
framework is for low cost product, cost or price would be the main consideration in creating a new or modified
product.

* Corresponding author.
E-mail address: gatot@sbm-itb.ac.id
158 A. Azhar, G. Yudoko, and S. Widagdo Low Cost Product Development Methodology ...

2. Research Methodology
In developing the proposed low cost product framework, reviewing literature as basic concept has done as
initial step. Using several basic model such as Change model Simchi-Levi (2008) and Generic product
development (2008) the proposed low cost product methodology obtained. Next step is verifying the proposed
framework to several low cost product that has been developed by their own framework. The verifying process
resulted with final framework that has been revised according to verified low cost products framework.

3. The Proposed Low Cost Product Development Methodology


There are four main steps in developing low cost product. The four steps are Stating the idea, Identify, Build
and test, and Production. Figure 1 shows the proposed low cost product development methodology.

Figure 1 The proposed low cost product development methodology

Stating The Idea Step heavily related to a information list that very important to know. The information list
consists of problem statement, functions, requirements, idea, desired price and purpose of the product. The low

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cost product development process will use those informations as gatekeeper to keep the product developed align
with the purposes.
After the initial step that is Stating the idea step accomplished, the next step is to identify the customer need
and critical requirement including desired price of customer and requirement price after margin. The target price
would be determined by comparing the customer desired price and requirement price after margin. Then the cost
might be determine.
Build and test step is a iterative process that execute using the information gained from the first two step.
Prototype built according to the critical requirement and target price after margin and then tested using three
criteria. The three criterias consist of target cost, critical requirement and profitable analysis. Because this step is
iterative process, it is possible protoptype obtained more than one prototype, called prototype nominees.
Determining superior prototype as final prototype which would be mass production from the prototype nominees.
The last step is production that consist of developing production process, scaling up, and launch the product to
the market.
The proposed low cost product development methodology verified through expected four low cost products
that developed by the company itself. There are two company that alredy interviewed, those are HiOctan and
Mouton Leatherworks. The rest two still in progress of interviewing. Verifying process using personal interview
with the owner and developer of each company. In addition, comparing the low cost product of each company
with its competitors also used in the verifying process.
The two low cost product determine by one main reason. The main reason is to prove the proposed low cost
product development could be used by any kind of product in any kind of industry. This reason leads to the
background of developing the low cost product development methodology. The reason of developing low cost
product development methodology is to be guidance for small or middle scale industry in developing their own
low cost product and also useful for multinational companys strategy in adjusting product price in order to catch
more segment.

4. Analysis and Result


Before the interview held, information of each company gathered to make sure that the company developed
low cost product rather than its competitor. The main content of interview are company profile, product
description, and the process in developing the low cost product. From the information from the interview, the
companys low cost product development methodology obtained and then compared to the proposed low cost
product development methodology. Each product of each companys low cost product development
methodology would be compared to see the difference to perfection the final low cost product. The comparison
of two subjects should be resulted in final low cost product methodology, either its modified after verifying
process or not modified.
4.1. HiOctan
4.1.1. Company profile
HiOctan is an octan rating booster. HiOctan could raise Premiums octan rating that is 88, into Pertamaxs
octan rating that is 92. It already measured in Petrolab, an independent laboratory from US. It is proven that
Premiums octan rating raised significantly after HiOctan addition. Octan rating might raised nearly Pertamaxs
octan rating or equal or more than Pertamaxs octan rating depend on ratio of HiOctan addition to Premium per
litre.
HiOctan produced by CV Energi Selaras Alam in Bandung. The researching process takes three years until
the researcher admit that the formula is perfect. The researchers are the same person as the owners that graduated
from Civil Engineering ITB and fully employed in the company.
4.1.2. Low cost product development framework
a) Step 0, Stating the Idea
The researchers believe that people could feel Pertamax experience only costs as Premium price. The idea is
to create additive product in order to increase Premium octane rating into Pertamax octane rating. The
researchers believe with basic and simple chemical concept, that is Isomerization, Premium octane rating might
be increase by adding additive liquid to change the arrangement of chemical structure.
b) Step 1, Identify
There are two important points that heavily considered in Identify step to determine target price. Those are
customer need and critical requirement. Table 3.4 is price table that lists the desired price and requirement price
to determine target price of HiOctan. The process of setting price also explained briefly in this table.

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Table 1 Price Table


Desired Price Significantly lower than Pertamax price per liter and a bit above Premium price per liter
Requirement Price Covers cost of goods sold and include margin as profit
Target Price Considering cost of good sold plus margin as profit but also meet the customers desired price
Align with HiOctans purpose is to help Indonesian people to experience high octane rating as
Pertamax in nearly Premium price, price that HiOctan set is not far from products cost of
goods sold. HiOctan desired to set the price as low as possible considering customers
willingness to pay.
There are three prototypes of octane booster product during its research process and
refinement, called Level 1, Level 2, and Level 3.
In the middle of 2010, Level 1 costs IDR 12000 per bottle that contains 80 ml for end user.
How to set the price? Level 1 sold at specific market that is researchers friends only. The requirement of Level
1 is only to increase octane rating, meanwhile machine safety is still not considered.
On 2010, Level 2 costs IDR 18000 per bottle that contains 80 ml for end user in its first
months on the market with more requirement considered and higher octane rating in result.
Level 2 commercialized by multilevel marketing GES with official price IDR 20000 for
end user.
On 2011, Level 3 costs IDR 25000 per bottle that contains 80 ml for end user and branded
as HiOctan which no longer using multilevel marketing.

Table 2 Requirement Table


Increase Premiums octan rating nearly to Pertamaxs octan rating
Requirement Easy to use
Save for vehicle machine, environment, user and to store
Increase Premiums octan rating nearly to Pertamaxs octan rating
Critical requirement
Storage, environment, user and machine safety
How to set critical requirement? Stick to the main function, that is increase Premiiums octan rating and safe using

c) Step 2, Build and Test


Before HiOctan obtained in August 2011, there are three prototypes of this octane booster product during its
research process and refinement, called Level 1, Level 2, and Level 3.
Initial research process starts in 2007 and officially tested in customers vehicle in 2010. It takes three years
to gain Level 1. The requirement of Level 1 is only to increase Premium octane rating close to Pertamax octane
rating by adding Level 1 liquid, meanwhile machine safety are not considered. The researchers background
have no relation with the octane rating booster research. According to their basic knowledge and many trial and
errors on their private vehicle, the researchers out coming with Level 1. In the middle of 2010, Level 1 sold at
price IDR 12000 per bottle that contains 80 ml for end user. Level 1 sold at specific market for one or two
months, which is Researchers friends only. Many feedbacks gained from Level 1s small scale
commercialization, like machine safety, environment safety, packaging safety, and requirement difference
between Pertamax and Premium with Level 1 octane booster.
The first question after Level 1 finding is what is the Pertamax additive? After doing internet research,
Pertamax additives found. From the feedback gained from small scale commercialization and Pertamax additive
information, research and refinement continue to obtain finer and higher quality octane booster. Level 2 obtained
in November 2010 and officially on the market via multilevel marketing GES in January 2011. Level 2 costs
IDR 15000 per bottle with more requirements considered and higher octane rating in result. Level 3 or HiOctan
is refinement result of Level 2. HiOctans requirements are:
Higher octane rating in result that might reach octane rating 93
Oxidation stabilizer, exhaust emission reducer, and toxic exhaust emission reducer
Nicer smell of exhaust
More distribution channel
In HiOctans early time on the market, that is August 2011, the price is IDR 18000. Because of the low price
that the company set, customer becomes skeptical about HiOctan performance. In October 2011, HiOctan price
raised to IDR 25000 per bottle that contains 80 ml for end user followed by more distribution system and

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channel in several big city in Indonesia, such as Jawa, Aceh, Papua, Sulawesi, and Kalimantan. The sales after
price increasement are higher than before.
In January and February 2012, Level 2 had laboratory test in Petrolab, an independent laboratory from US.
The result is satisfying. The Premium octane rating has increase from 88 to 92 after put Level 2 This might
shows that even Level 2s requirement already meet the desired octan rating and other additive effect. Level 3
might have higher quality since the content is higher than Level 2.
d) Step 3, Produce
Production process of HiOctan has used simple bottling process that meets desired capacity per month. With
one mixer and two employees could obtain 30.000 bottles per month. Penembak frekuensi was used for quality
control for each production. The chemical liquid are sold in many chemical store in Bandung. Simple mixer for
industry needed to ease the mixing process of chemical liquid. After packaging or bottling process, HiOctan are
ready to distribute and sale. Figure 3.1 describes framework in developing HiOctan, starts from obtaining Level
1, Level 2 until Level 3 which also called HiOctan.

Figure 2 HiOctan development framework

4.1.3. Comparison
Compare the proposed framework to HiOctans framework, the differences is on Build and Test Step which
is an iterative process. HiOctan takes three years to obtain final prototype and admit that the formula is ready on
the market to compete with Pertamax. In the middle of the iterative process, Level 1 and Level 2 as prototype
nominees are already on the market. So they tested the prototype directly to the customer which might reduce
research cost.

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162 A. Azhar, G. Yudoko, and S. Widagdo Low Cost Product Development Methodology ...

Stating The Idea Step, Identify Step, and Production Step of HiOctan are similar to the proposed framework.
Overall, the product development methodology quaite the same as the proposed low cost product development
methodology.
4.2. Mouton Leatherworks
4.2.1. Company profile
Mouton Leatherworks is a one of well-known company in leather industry. In its first year, Mouton
delivered leather accessories such as Leather wallet and Leather belt at lower price than any other brand in
leather industry. The founder, owner, and designer tasks are fully handled by Aditya Abimanyu. Adit is
graduated student from FSRD ITB 2007 and declare Moutons birthday in 10 October 2010 when Pasar Seni
ITB was held. According to his knowledge about future apparel trends, he designed and developed leather
accessories to be commercialized but still maintain Mouton brand character, which is also the designers
character.
4.2.2. Low cost product development framework
a) Step 0, Stating the Idea
Initial step that Mouton take in developing its products mostly comes from the owner skill as designer, that
is Abi. The design process begin from Abis idea to provide durable leather belt and wallet with reasonable price.
The reasonable price come up to be important value in developing its product because he sees that leather
accessories price in Indonesia is quite high. Some other brand uses import leather as raw material then become
main reason why the price is high.
In the initial step, stating the idea is important because this step would lead the leather accessories to proper
direction. The main function of belt is to tighten pant or skirt. For some people, wearing leather belt is a pride, it
is automatically become esthetic function. So is the other function of leather wallet. The main function of leather
wallet is to organize money and cards in save place, small and light enough to easily put in pocket or bag.
b) Step 1, Identify
Table 3 Price Table
Desired Price Belt: IDR 100.000 200.000
Wallet: IDR 200.000 300.000
Requirement Price Belt: IDR 150.000 200.000
Wallet: IDR 200.000 300.000
Final Price Belt: IDR 175.000
Wallet: IDR 245.000 280.000
How to set the price? Market research
Direct testing to customer-store testing. Evaluating product by collecting purchasing data per-
week e.g. one purchase per-week means the product price is still unreachable, three purchase
per-week means the product price already suits well, and five or more purchase per-week
means the product price is too low. The store testing date is between date 25 in the end of the
month until date 7 in the beginning of the month.
Customer advice
Several prototypes tested by one customer/friend to be wear in one week or several days. The
expected result from this research is to gain advice and suggestion from customer about what
type of detail could eliminated in order to maintain market price.
Set ceiling price
Ceiling price as cost of goods sold plus margin limit to maintain market price for the product. If
COGS for optimal quality is higher than target COGS, Mouton willing to reduce its margin to
maintain market price and good quality.

Table 4 Requirement Table


Requirement Belt:
Original leather
Durable
Wearable
Nice design
Wallet
Organize money and cards

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Durable
Classic
Light, so could easily put in pocket/bag
Critical Belt:
requirement Tighten pants/skirt
Leather and durable
Wallet:
Money and card partition
Leather and durable
How to set Prototype nominees
critical Provide several prototypes to be tested/wore the product for some time with bag lovers, friends, loyal
requirement? customer and anyone who might give good advice and suggestion for the product.
Customer advice
Several prototypes tested by one customer/friend to be wear in one week or several days. The
expected result from this research is to gain advice and suggestion about wearability and durability
from customer.

Problem statement Leathergoods heavily identical to high price and sometimes with unreasonable price
Idea To create local product with local material at lower price with international quality
Stating The Idea Function Tighten pants for belt, and money and cards storing for wallet
Requirement Using genuine leather, durable, good quality and design
Desire price Price is significantly lower than old player or competitor in leather industry

Good design, taste, and quality, and durable Good quality and durable

Desired price Requirement cost

Identify

Lower price than its competitor that mostly old player in leather industry

Build Prototype 1 Build Prototype 2 Build Prototype 3


Test Level 1 Test Level 2 Test Level 3
1. Target Cost 1. Target Cost 1. Target Cost
Filter Filter Filter
2. Critical Requirement 2. Critical Requirement 2. Critical Requirement
Criteria Criteria Criteria
Build & Test 3. Profitable Analysis 3. Profitable Analysis 3. Profitable Analysis
(Iterative Process)

Produce Moutons final product

Developing Production Process


Produce Scaling Up
Launch

Figure 3 Moutons development framework


c) Step 2, Build and Test
In Build and Test Step, Mouton using nomination of prototypes to be direct tested with customer or friend
that Abi believes the certain customer or friend might give valuable advice and suggestion also criticism to refine
the product. Several prototypes those made to be tested already in price range of product. Mouton needs two

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164 A. Azhar, G. Yudoko, and S. Widagdo Low Cost Product Development Methodology ...

until three months to develop new product, include design process, sample making, testing, refinement and then
producing.
d) Step 3, Produce
Mouton only has three workers to do all the production. Their job description includes shopping raw
material, pattern making, sewing, checking the detail and quality control. Moutons strategy is to maintain
demand per-month which is related to production capacity per-month by limiting its production capacity per-
article per-two months. For regular demand product, Mouton only produced 12 pieces per-article per-two months.
For product which has high demand, Mouton might produce more than 12 pieces per-two months. Figure 3
shows Moutons development framework.
4.2.3. Comparison
Mouton state their ideas not only from problem statement, buat also from Abis original design and also still
align to the products function and purposes. Determining product price according to customers desired price
and actual cost. Mouton built prototype to be directly tested to customers or Moutons friends to gain feedback.
Theres no significant difference in developing Moutons low cost product with the proposed low cost product
framework

5. Conclusion
According to two frameworks comparison between HiOctans framework and Mouton leatherworks
framework in opposition to the proposed framework, conclude that there are also four steps in developing their
own low cost product. Determining selling price system is different in each company. The companys prior
considerations are different from one another, depends on the companys vision, mission and objective.
Customers need identification process considered as important step which have many ways in approaching
customer to know what exactly customers need.

6. Further works
There should be four companies to be interviewed, but until this paper submitted, the rest two companies
still on progress. Furtherworks that needed to accomplish are to find two suitable subjects in the need of
verifying the proposed low cost product development methodology. There will be questionnaire to validate the
customers desired prices of the products.

Acknowledgements
Over pas few months, a number of individuals have encoraged and supported and also inspired the
development of this paper. Aditya Abimanyu as owner and designer of Mouton Leatherworks and Angga Satria
as Marketing of HiOctan whose willing to spare his time to be interviewed by the writer.

References
[1] Simchi-Levi, D., Kaminsky, P., and Simchi-Levi, E. (2008), Designing and Managing The Supply Chain: Concept,
Strategies and Case Studies, McGraw-Hill, New York, NY.
[2] Jacobs, F.R. and Chase, R.B. (2011), Operation and supply chain management, McGraw-Hill, New York, NY.
[3] Rosenau, M.D., Griffin, A., Castellion, G.A., and Ancshuetz, N.F. (1995), The PDMA Handbook of New Product
Development, John Wiley & Sons, Inc, Chicago, IL.
[4] Ulrich, K.T. and Eppinger, S.D. (2008), Product Design and Development, McGraw-Hill, New York, NY.
[5] Monroe, K.B. (2003), Pricing: Making Profitable Decision, McGraw-Hill, New York, NY.
[6] Cattani, K.D. and Mabert, V. A. (2009), Supply chain design: past, present, and future, Journal of Production and
Inventory Management, Vol. 45, pp. 47-57.

Cite this paper

Azhar, A., Yudoko, G., and Widagdo, S. (2012). Low Cost Product Development Methodology, Proceedings of The 3rd
International Conference on Technology and Operations Management: Sustaining Competitiveness through Green
Technology Management, BandungIndonesia (July 4-6), pp. 157-164. ISBN: 978-979-15458-4-6.

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Available at www.ictom.info

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www.sbm.itb.ac.id www.cob.uum.edu.my

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Sustaining Competitiveness through Green Technology Management
Bandung Indonesia, July 4-6, 2012

Intellectual property rights: Issues and challenges in Malaysian


manufacturing firms
Herman Shah Anuar1,*, Faisal Zulhumadi1, Zulkifli Mohamed Udin1
1
School of Technology Management and Logistics (STML) - College of Business (CoB) - Universiti Utara Malaysia (UUM),
Sintok 06010, Kedah Darul Aman, Malaysia

Abstract. The purpose of this paper is to explore how manufacturing firms implement protection of Intellectual property
rights (IPR). In general, works done in the manufacturing industry involves many applications of inventing or introducing
new products to the market. The construct of this paper is based on comprehensive review of recent literatures on Intellectual
property rights that focusing primarily on patent. Detailed discussions are as followed to give implications in policy making
especially government or related authorities in promoting and enforcing intellectual property rights. Intellectual property
rights policy especially regarding patents should be part of firms business strategy. Implementing IPR will safeguard firms
new invention, innovation or processes in the long run. Intellectual property rights should be treated as new forms of
investment. The patent and related intellectual property rights system will have to respond to the market changes. There is
probability for the system to have its own weaknesses here and there. The major challenge for patent and other IP elements
together with government policies is to ensure a national pay-off from scientific and technological development. In relation to
the impact for the operation performance of the firm, patent system should be able to reduce the manufacturing cost per unit,
increase product delivery, improve product/process flexibility and high quality products being produced. This paper provides
the importance of applying intellectual property rights as firms business strategy. Manufacturing firms has different goals in
determining which business strategy in order to make them remain competitive in the challenging business atmosphere.

Keywords: Internal R&D, external R&D, intellectual property rights, patents, operation performance

1. Introduction
Intellectual property rights are increasingly recognised as key value driver (Ghosh, 2003) and plays
important role in the modern economy as compared to the previous era. It can be seen as a new source of wealth.
Many have understood mistakably of the function that IP can serve for.
Greenhalgh and Rogers (2007) highlights that economist see IPR as a policy tool to ensure adequate private
returns to innovation and creative activities. Firms may use IPR to protect the returns from their investment
from being depleted by imitation.

* Corresponding author. Tel:+60-19-578-6948, Fax: +60-4-928-6860


E-mail address: herman@uum.edu.my
166 H.S. Anuar, F. Zulhumadi, and Z.M. Udin Intellectual property rights: Issues ...

Chiesa and Gilardoni (2004) classify that intellectual property rights (IPR) issues can be seen from three
major perspectives namely patent intent, patent strategy and patent portfolio management. Patent intent discusses
on reason why a patent being filed and how it will be used. Patent strategy focuses on how a certain
technological area being protected. Patent portfolio on the other hand elaborates more on how a firm that holds
strong patent rights manages them in order to generate value out of it.
Intellectual Property Rights (IPR) is a type of property that can generate financial returns which needs to be
applied and granted before it can be used. Benefits of owning the property is, owners work are being protected
against infringement and has the rights over its application. At the same time, IP owner has the authority to
license its work to another person or organisation to use these rights.
The license contains terms and condition on how to use the work. IT also includes how much royalty that
should be paid to the IP owner. The most common types of licensing agreements are exclusive, non-exclusive,
compulsory, and cross licensing. Different types of licensing are design for different requirements that is needed
for firms and IP owners to choose from. IP owner can also benefits IP rights through technology transfer
brokerages, and through sale or transfer of ownership (Singh, 2007).
Studied done by Connolly (2003) focusing on the impact of technology imports on innovation and imitation
across 51 countries found that exist a positive relationship between them. On average, reinforcing IPR on
imitation has a positive effects but innovation which is substitute by patent might give some unfair effects.
Therefore, it drives to explore more into this situation that maybe strong IPR policy would be able to moderate
the relationship between R&D capabilities and operation performance.
Implementing protection of Intellectual property rights should become as a main objectives in todays
business climate. Protection of new inventions, products or processes could generate new channel of profits. It is
crucial for manufacturing firms to understand the value that they can maximize in the future.

2. Literature Review
Park (2002) mentioned that there are two ways IPR can impact on firm potential output. One way is directly
by affecting the technical efficiency of production. The second way is by indirectly stimulating factor for
accumulation especially relating to R&D capital.
This can be done by increasing the returns to investment or by the ability to appropriate those returns. These
two ways (technical efficiency of production and R&D accumulation) have become hot debates among policy
makers and fellow academics. The policy maker would stress on the importance of legal perspectives for the
markets to operate. The new growth and/or knowledge based economy adherents would emphasise the role of
R&D, inventions and technology as the primary engines growth.
Patents are obtained through a costly and lengthy process. In Europe, Japan and the Asia Pacific, the first to
file system applies. Whereas, in the U.S.,first to invent applies. However, patents application must be filed
within one year of first offer for sale of the product or the patent filing will be void (Bastani & Fernandez, 2003).
Attributes of patent will cover few elements that have significant towards operation performance of a firm.
This includes extensive information about the knowledge which comes from the inventor of that invention,
which firm the invention has been assigned, number of claims or contributions has been derived out of it and the
technological classes the invention falls into. Patent owned by a firm becomes as evidence showing that they
have had a piece of knowledge on their own (Nerkar & Paruchuri, 2005).
Benefits of IPR are enormous, according to various types of it. Firm need to choose the appropriate type of
IPR can only yield enormous profit for the firms. As being discussed above, firm decision to protect its
invention and processes should be taken as a long-term investment. It is true that it can be classified into positive
and negative aspect of but, it would rather be safe for firms to protect rather than not. Competitors may have a
chance to imitate but the originality and the beauty of the products or processes patented are still not comparable.
Chances for getting new partnership, join-ventures and many other strategic alliances are widely open for that
patented product.

3. Review and Discussion


In the critical context, research and development (R&D) activities done by university lecturer and research
institutions which does not protected by the IPR protection is hardly being marketed to be commercialized.
Even the creation of R&D being protected by IPR, it is still open to be infringed, copied or imitate by other
parties who dont need to invest money and time for it.

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H.S. Anuar, F. Zulhumadi, and Z.M. Udin Intellectual property rights: Issues ... 167

After IPR registration, then the process of commercialization can be done which later on will give a big
impact to economic innovation. It is common that as consumer, they purchase, use products or services in many
aspects of their life.
This shows that brands, patents, inventions, symbols, trademarks, and design have significant contribution
on consumer choice of buying. When considering two suitable products or services, normally, products or
services with reputable brand will become as a main choice of preference. No doubt those big firms always try to
portray the best image and branding in front of their targeted consumer. From another point of view, big firms
will opt to sell their rights to other firms in the name of strategic licensing, franchise or royalty (Ujang, 2010).
According to Encaoua, et al., (2006), focus on improving human capital is well coordinated by
implementing policies that promotes economic development and growth. At the same time, it creates new
mechanism which will support innovation and encourage R&D investment.
Incentives to R&D can be increase by the introduction of intellectual property system. This has been
identified as one of the main policy instruments. Romers (1993) influential work highlighted that knowledges
public good nature will lead to the less rewarding of R&D investments.
This happen based on unpredictable spillovers and approvability troubles. The system of IPR main objective
is dealing with the non-excludability attributes of knowledge production function. The uncompensated social
gains that come out from spillovers would give explanation for public intervention. This includes subsidizing or
conducting public R&D.
According to Maskus and Yang (2001) there is a strong political tendency in supporting the effort to
strengthen patent/IPR laws and enforcement. It is argued that with such implementation it can avoid trade
distortion from happen and foster innovation in the technological frontier. It is going to have an impact for
innovation to become faster, safer licensing processes and ordered diffusion.
By implementing IPR, the owner of property rights has the authority to prohibit others from using their ideas.
This idea includes production processes and trading products that represent the product. In such a way, it creates
the environment of monopolistic-like market structure which for some authors does not agree with it. When
this scenario occur, it shows that IPR offers protection against market entry and give ample time for firms who
owns them to enter and/or develop an industry or market.
Andersen & Konzelman (2005) argued that without IPR, a sustainable industry will not be allowed to grow
and mature because only IPR provides incentives to invest an invention and innovation.
Many notices have been mentioned through literature on the potential threat of too much protection of IPR.
For example, by providing the owners of ideas with more protection, stronger IPRs may reduce incentives to
innovate and introduce new technologies (Helpman, 1993; Bessen & Maskin, 2000).
The major challenge for the management of Intellectual Property is to create incentives for provision that do
not unnecessarily inhibit distribution. From another perspective, this incentive also can be considered as
fundamentals or first principle of intellectual property (Shadlen, et al., 2005).
In addition, Haned (2009) stressed that a firm may have higher intention to protect its intellectual capital by
implementing rights such as patents, trademarks, industrial design, and any other rights to safeguard their profits
from being taken over by competitors. At the same time this IPR efforts have a significant impact to fund its
future growth.

4. Conclusion
As a conclusion, Akiyama and Furukawa (2009) highlighted that appropriate innovation is safe from
imitation due to stronger IPR protection. At the same time, this effort will result in decreasing certain perfect
appropriate innovation. Innovators also do not need to mask technology they invented due to strict protection
IPR.
Akiyama and Furukawa (2009) pointed out very strong and a very weak IPR policy in developed countries
has impact that should be given serious attention. Therefore, it is hoped that moderate policies of IPR can be
established in the near future.
Bontis (1998) mentioned in Intellectual capital: an exploratory study that develops measures and models,
that intellectual capital does not include intellectual property. From his research perspectives, intellectual
property only serves as assets to a firm which includes copyrights, patents, semiconductor topography rights,
trade and service marks, and various design rights.
An innovation which is produced by the inventor is protected by the law once the patent is being enforced
under monopolistic conditions. If the patent is not enforced, the commodity is open to any kinds of imitation.
Other parties will try to produce it by a competitive fringe. If this occurs, the inventor or innovator gains no
profits at all (Eicher & Garcia-Penalosa, 2008).

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Government incentives can be applied to find its welfare maximisation through various level of IPR
protection (Grossman & Lai, 2004). This also leads to another important branch of literature that examines
consequences of differing IPR regimes on growth, trade and product life cycle.

Acknowledgements
The author would like to thank for the supports given by the Ministry of Higher Education of Malaysia and
Universiti Utara Malaysia especially School of Technology Management and Logistic in contributing for the
success of this research paper. To those who involved directly or indirectly in helping through out of the research,
a token of appreciation is given to all of you. This research paper would not be accomplished without much of
your help.

References
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[18] Romer, P. (1993). Ideas and things: The concept of production is being re-tooled. The Economist (Sept 11), 7072.
[19] Shadlen, K.C., Schrank, A., & Kurtz, M.J. (2005). The political economy of Intellectual Property protection: The case
of software, International Studies Quarterly, 49, 45-71.
[20] Singh, K.A. (2007). Intellectual property in the Nanotechnology Economy, Article on Intellectual Property in the
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Retrieved on 30/05/2011 from http://goo.gl/qNUsh

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Cite this paper

Anuar, H.S., Zulhumadi, F., and Udin, Z.M. (2012). Intellectual property rights: Issues and challenges in Malaysian
manufacturing firms, Proceedings of The 3rd International Conference on Technology and Operations Management:
Sustaining Competitiveness through Green Technology Management, BandungIndonesia (July 4-6), pp. 165-169.
ISBN: 978-979-15458-4-6.

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170

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Available at www.ictom.info

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www.sbm.itb.ac.id www.cob.uum.edu.my

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Bandung Indonesia, July 4-6, 2012

An analysis of market expansion strategy


in game development services
Andrew Pratomo Budianto1, Togar M. Simatupang2,*
1
PT Agate International, Bandung, Indonesia
2
School of Business and Management (SBM) - Institut Teknologi Bandung (ITB),
Jl. Ganesha 10 (Gedung SBM-ITB), Bandung 40132, Indonesia

Abstract. PT Agate International is a company established in Bandung, Indonesia by 2009 and specialized in game
development. The company has two business models, as a game development service provider and as a company that
monetizes their own intellectual property. Current strategy of PT Agate International is to keep stable revenue from game
development services by expanding its game development market geographically and diversify the types of game
development services. Geographically, the analysis will be carried out for international market opportunity. Meanwhile for
service diversification, analysis will be done on game with additional purpose other than entertainment, or so-called serious
games. This serious games analysis will cover serious game for advertising (advergame), and serious game for training and
simulation for corporate employees. From the result of the analysis, this paper is expected to help determine the direction and
future of PT Agate International. Data gathering from interview and observation will be used to get the options for market
expansion, and then each option will be described using business model canvas and analyzed using feasibility study analysis.
After the feasibility study analysis has been done, the implementation activities of each feasible solution will be further
analyzed using activity map. The result of analysis and activity map may help PT Agate International, as well as other
Indonesian small game development studios to decide their market expansion strategy.

Keywords: Game industry, Market expansion, Advergame, Serious game, Feasibility study

1. Introduction
Indonesia is a country ranked the fourth largest population in the world with high internet penetration.
Currently, only 12 percent of Indonesians use the Internet, and only 5 percent user personal computers, but both
of those rates are expected to triple by 2015 (Boston Consulting Group, 2010). From the social media insights, it
is also confirmed that Indonesia holds more than 40 million Facebook users and more than 5 million Twitter
users (Satvika, 2011). All of these facts lead to a conclusion that Indonesia is a great market for gaming industry.
Despite those huge potential, there is not much of game developer activities in Indonesia compared to other
countries such as USA, Japan, Canada, UK, etc.

* Corresponding author.
E-mail address: togar@sbm-itb.ac.id
172 A.P. Budianto and T.M. Simatupang An analysis of market expansion strategy ...

Figure 1 Countries of top 50 game development studios (2008)

The good news is, currently there are more than 60 game developers in many size in Indonesia. Even it
could be said that game industry in Indonesia has been started since 2003, but the significant growth is only
started by 2008-2009 when lot of new local Flash game developers start their business. Nowadays, the numbers
keep increasing and they start developing games for smartphone, tablet, etc. This growth and the market
potential also attract many investors from other countries like USA and Japan. Not to mention foreign game
companies like Gameloft and Gree, making their ways into the Indonesian market.
In Indonesia, many companies still find a shape for their business model. As monetization is now becoming
a separate issue, some companies sell their services for outsourcing or advertising and some other create
products to be monetized through the best platform to distribute the game. Currently some companies which
create products, often port their games here and there in order to maximize the distribution of their game. It is
good to see the targeted niche market regardless whether it is for Facebook, Flash, iOS, Android, Java, Symbian,
Meego, etc. The suitability between user behavior and the game play is also tailored with the specific user
platform character (Mamuaya, 2012).
1.1. PT Agate International: the case company
Those facts leads to the writers interest to analyze case study of PT Agate International, a company
established in Bandung, Indonesia by 2009 and specialized in game development. PT Agate International
business model can be divided into two major models: as a game development service provider and as a
company that monetizes their own intellectual property to the end user (Widhiyasa, 2012).

Figure 2. The logo of PT Agate International

These two business models have its advantage and disadvantages. As game development service provider,
PT Agate International could benefit from its upfront payment and instant revenue, but the profit is bounded by
standard game development profit margin and the customers budget. In the other hand, monetizing companys
own intellectual property directly to end users though gives chance for higher profit but also followed by a
higher risk. This high risk is due to three factors: revenue will be received only after the product is launched to
the market, meaning that initial investment is required for product development. The second risk is due to the
tight competition in international market, the game will requires extra quality standards, and this mean
substantial initial investment. The last factor is an additional process is required to market the game, which was
new to PT Agate International which only focused on developing game.Because of those issues, to keep the
balance between risk and revenue, PT Agate International dividing its line of production, most production lines

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is allocated to do game development services, while the remainder will be allocated to develop own game.
However, with this model, the game development service business model will be the backbone to maintain the
companys sustainability, at least until PT Agate International has develop a successful product that become
another cash cow (Ismawan, 2012). Some examples of the companys product are presented as follows.

Figure 3. Cube Colossus


Best game in Flash Gaming Summit 2010 San Francisco

Figure 4. Football Saga


Self-published to international market

Figure 5. Earl Grey and this Rupert Guy


1 million hits in its first week launch to international market

Figure 6. Vindicta
3D games multiplayer game with rich 3D graphics

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Another issue from PT Agate International as a local game developer is the Indonesian game industry is still
new; most of local industries still do not familiar with the idea of games in helping their business process
(Ismawan, 2012). Therefore, in order to sustain the game development service business, local game company has
to expand its market while educating them at the same time, this market expansion strategy will then be the main
research focus of this paper.
The purpose of this paper is to help PT Agate International, as well as other Indonesian small game
development studios to decide their market expansion strategy. In order to achieve the purpose, we will start by
identifying the business issue, including how the research method will be done and the analysis of business
situation. Then, we will present the alternatives and the analysis of business solution of the issue. After that, we
will briefly discuss the conclusion with a discussion of theoretical and managerial implication and directions for
further research.

2. Business Issue Exploration


Production process in PT Agate International is divided into two: the company as a game development
service company or a company that develops their own product or intellectual property and then monetizes it by
themselves.Broadly speaking, the difference in the business of PT Agate International as a service company or a
company that develops and monetizes their product is just prior to the commencement of the production
process.However, in practice the product that is made by the company is highly variable. Even each product has
its own business model. Because of the variations and most of the production lines from the company is made to
order, as well as a main topic of this thesis, the discussion will focus on PT Agate International as a game
development service provider.
2.1. Literature Review
Despite its huge potential, Indonesias game industry is still new and there are not many literatures
discussing about it. And specifically in market expansion strategy, lot of game development company in
Indonesia still doing trial and error method in exploring it. In his presentation about Indonesias Game Industry,
Widhiyasa (2012) describes some ideas for Indonesian game developer to collaborate with Japans market in
outsourcing service, co-development, talent exchange, or publishing access to Japans market. In advergame
industry, Wiana (2012) also stated that Indonesian advertisement expert and brands owner start to realize that
giving experience through game give more positive impact to the brand rather than only giving one-way
information about the product. Both of literatures show that the opportunity for Indonesian game development
studio to expand its market into international outsourcing and explore more about advergaming business in
Indonesia is highly possible. About training and simulation game, however despite its popularity in global
market (Alhadeff, 2007), the idea is still new in Indonesia and no specific literature is found by the author.
2.2. Research Method
In order to conclude the best market expansion strategy for PT Agate International, data gathering from
observation and interview from the companys CEO and marketing division about current companys situation
and strategies is used to get the options of marketing expansion options.
Firstly, we analyzed the current situation of Indonesian game industry and also the issue that the company
facing in expanding its business. From the interview, we got that the company already has some market
expansion strategy, though it is still subjective and further research has to be done before executing the ideas.
Below are several possible options of companys strategy in expanding its market (Ismawan, 2012):
Game development service for international market
International game market is more educated on game development and is growing continuously. PT
Agate International also believes that as long as Indonesian game developer company can maintain the
quality they deliver to international market, there are no reasons for them to not entering international
market. The cost to develop a game in Indonesia is several times lower than other famous game
development countries such as USA and Japan. There are other challenges such as geographical
distance, time difference and language barrier, but those issues are still tolerable.
In-depth exploration of advergame development service
Currently, most of the companys advergame development is still custom digital advergame. However
the local market will be educated overtime following the global trend, if PT Agate International wants
to be the market leader, then they have to explore and research more about this service.
Training and simulation game development

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Training and simulation game is globally popular and proven to succeed in giving value to its users.
However the idea is new in Indonesia and very potential to be implemented.
After interviewing on the companys options, the writer analyze the options using feasibility study from
market, technical and financial point of view and together with the company, each feasibility study point of view
will be scored and then prioritized using feasibility study matrix. After that, selected strategy will be paired with
activity map to give a visualization of the final implementation.
2.3. Analysis of Business Situation
2.3.1. Growth of Game Industry
In the last 10 to 15 years, there has been remarkable transformation within game industry. Technological
advancement and cultural shift in software industry also cause the advent of online, social, and mobile game
(Muller-Veerse et al., 2011). These factors then multiply the market size of game industry within very short time.

Figure 7.Global video games market, million US$ (PWC, 2009)

Figure 3 shows estimates of the total size of the global video games market up until 2013. In the period 2004
to 2013, the global video games market is expected to grow from less than 30 billion to over US$ 70
billion.From thosereport, it can be assumed that game industry is estimated to increase in the coming years. It
can also be expected that the growth of game industry will result in the increment of the need for game
development, and Indonesia as a country with relatively low production cost automatically gives competitive
advantage to Indonesian game development companies. These phenomena encourage the emergence of many
new Indonesian game developers.
2.3.2. Game with additional purpose other than pure entertainment
With the increasing number of gamers from any gender and age range, the industry is becoming attractive to
other industries as well. Various industries that are proven to use game to satisfy their needs for example: the
advertising industry, human resource training, and education. This kind of game, which serves additional
purpose than pure entertainment, is then often defined by serious game.
There are many definition of serious game, one of them define serious game as games that do not have
entertainment, enjoyment, or fun as their primary purpose. However, this definition does not say that serious
game are not entertaining, enjoyable, or fun, just that there is another purpose (Michael and Chen, 2006).
An adequate question to ask is how serious games differ from entertainment games. Discussing the issue
from a design and development perspective; contrary to many markets for entertainment games, the hardware
used in many of the markets for serious games is years old and therefore less than optimal. The serious games
market is also more likely to possess a wide variety of hardware and operating systems. Furthermore, this market
includes, not only experienced gamers, but also possible first-time players and the games must therefore be even
more accessible (Michael and Chen, 2006).
Hardcore gamers generally want the richest possible experience from their games. For serious games,
however, it is more important that the model or simulation can be used to solve a problem, than providing rich

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experiences of the kind sought by hardcore gamers. Further, for serious games it is essential that the most
important elements of learning are in focus, and that the assumptions necessary for making a simulation
workable are correct, otherwise the simulation will teach the wrong kinds of skills. Entertainment games, on the
other hand, allow players to focus on the fun parts and to use a number of techniques (random numbers, time
compression, etc.) for simplifying the simulation processes. In serious games, it may be important to rethink the
use of such simplifying techniques. For example, serious games should respond more to the conscious decisions
made by players than to chance, and therefore randomness may be inappropriate. Another example is
communication, which often is perfect (i.e., without delays and misunderstandings, etc.) in entertainment games,
whereas some serious training applications should rather reflect that communication seldom is perfect (Michael
and Chen, 2006). The differences between entertainment games and serious games are summarized in the
following table (Susi, Johannesson and Backlund, 2007):
Table 1 Differences between entertainment games and serious games
Serious games Entertainment games
Task vs. rich experience Problem solving in focus Rich experience preferred
Focus Important elements of learning To have fun
Simulations Assumptions necessary for workable simulations Simplified simulation processes
Communication Should reflect natural (i.e., non-perfect) communication Communication is often perfect

2.3.3. Problem formulation


With the above facts, we can conclude that the current condition of the gaming industry is very attracting,
which led to many new comers in Indonesia gaming industry. In addition, it also encourages the trend of
gamification, which is to add game elements in various aspect of human life.
These situations, indirectly gives challenge to Indonesian game developers. The first challenge is how to
capitalize on the growing industry. With so many changes in the global industry, the local game developers have
to adapt and seize every opportunity. Missing the opportunities can mean losing the competition. Moreover,
Indonesian game industry is not limited to local companies, international companies also interested in investing
to Indonesia, and they generally do have more budget than local companies. This results to additional challenge
for local developers to keep the local market from domination of foreign companies.
In addition, the emerging of new competitors forces PT Agate International to diversify its business model,
to find the new blue ocean and to streamline its current business model. This is not so easy, because every
market expansion has its own risks; meanwhile the game development service is one of main source of revenue
for PT Agate International. Because of this situation, then in-depth analysis of market expansion strategy is
becoming the main focus of this paper.
Since the establishment of PT Agate International, there have been many changes in its business model. The
first business of the company is to focus in developing Flash games to be sold to international sponsor. Over
time, in 2010 the market was shaken by changes in Google Adsense placement rules by Google Inc. These
external factors are then forced PT Agate International to find new business model, so that by year 2010 PT
Agate International start to open game development services for any type of consumers needs. Start from game
development for pure entertainment purpose, to game development with additional purpose such as
advertisement.Then, since PT Agate International start to learn about the industrys growth and the need to
ensure the cash-flow by diversifying its business model, by 2010 PT Agate International decided to develop new
market for its game development service.

3. Business Solution
Within this paper, feasibility study will be used to solve marketing expansion issue. The feasibility study
itself is defined as an analysis of possible alternative solution to a problem and a recommendation on the best
alternative. It can decide whether a process be carried out by a new system more efficiently than the existing one
(Siddiqui, n.d.).
Main areas that is subject to feasibility study, however is different depend on the issue itself. In PT Agate
International case of market expansion, feasibility study will cover three main areas:
Market feasibility analysis
This will analyze the characteristic of the related market. The size of the market and whether the market
can sustain the business model in the long run.
Technical feasibility analysis

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The technical aspect will explores if the product developed for the related market is feasible with the
limits of current technology and development capabilities of PT Agate International.
Financial feasibility analysis
Financial analysis will look into the project costs and benefits. It will analyze whether the products
value is higher than the products development cost, and the profitability rate for the market.
After each market expansion options are analyzed from market, technical, and financial analysis, each
options will be compared each other using feasibility analysis matrix tool. Each options will scored on each
feasibility perspective and the scores will be used to determine the priority of each option.
3.1. Game Development Service for International Market Analysis
The fact that global gaming market is rapidly growing in all over the world as written in the previous topic
led outsourcing business to become an even more integral part of the game development cycle. Table 2 shows
several highlight of game development outsourcing in various countries (Tholons, 2009).
Table 2. Outsourcing in various countries
Highlights Hindrances Outsourced Processes
China Large population which can be Focus on online game Artwork development (for
tapped as potential labor pool (and development local industry Japan market)
market) (limited game genre) Low level concept and art
Outsourced artwork development Hesitation by work
from Japanese market developers/publishers because Animation & rigging (for
of IP concerns US market)
Low service delivery maturity
Japan Presence of multinational Focus in game development of End-to-End development
developers and publishers such as PC and console games for local for local industry
Nintendo, Konami, Sega, and industry Programming
Capcom Low cultural affinity to US &
Established 2D/3D industries Europe
2D/3D Animation remain focus
Korea 60% of household subscribe to Focus on online game End-to-end development
broadband services high potential development for the local for local industry
for online gaming industry (limited game genre) Artwork development
Outsourced artwork development (from Japan market)
from Japan market
Eastern Proximity to lucrative Western Rising cost of labor Porting
Europe European market Capacities of scale End-to-end development
Key destinations include Czech Brain Drain symptoms Programming
Republic, Russia, Ukraine and IP concerns (Russia) Quality assurance and
Poland testing
Phenomenal growth in last 5 years
Highly skilled labor pool (though
small)

Currently, one of PT Agate International service is to develop game for entertainment purpose in any genre
and any platform. PT Agate International offer its expertise in game development to create a custom game based
on the customer needs. This request of game development could be divided by the clients geography, whether it
is from Indonesia or other country. Right now, as PT Agate International has do quite lot of marketing effort in
Indonesias gaming industry, PT Agate International is relatively well known in Indonesia. In other words, when
there is an opportunity for a game development project, PT Agate International has a good chance to be
contacted by the client.
However the international market characteristic is quite different, this market has lot of competitors, demand
relatively higher quality, has geographical communication barrier, and yet offers higher reward. All of these
factors will then define whether it is a good decision or not for PT Agate International to expand to this
market.Feasibility study of game development service for international market is done as specified in Table 3.
3.2. In-depth Exploration of Advergame Development Service Analysis
Ever since its beginning, Internet has held websites that propose many games using the Adobe Flash
technology to play casual games. That is games which require minimum involvement and difficulty from the
players part; the player should be able to enjoy the game right away (Courson, 2009). These characteristics,
combined with worlds internet penetration transform many non-gamers to casual gamers, and expanding the

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target market of gamers. Then, it did not take long before the gamers market intersect with brands target market
and brand start to get interest to align their advertisement through game.
Table 3. Feasibility study of game development service
Feasibility Criteria Game Development Service for International Market
Market Feasibility The global gaming market is rapidly growing in all over the world
Global online gaming revenue is expected to increase by more than +10% annually between
2010 and 2016
Outsourcing is becoming more popular in game development
Technical Feasibility Difficult due to international standard, but it is not an issue as long as the team is capable
Difficult to coordinate (time difference and geographical distance)
Financial Feasibility Cost per man month (including overhead) in Indonesia is very low compared to other
country. Cost per man month to produce games in North America is around USD $9,000, in
Europe and Japan it is USD $8,500 per man month, in China are less than USD $4,000, in
Indonesia is even lower than USD $3,000

Advergaming is the use of interactive gaming technology to deliver embedded advertising messages to
consumers. Advergaming incorporates branding directly into the gaming environment. Advergame enable a
brand to rule the consumer in to interact with the brand (Zodal, n.d).
Advergaming enables to catch the attention of a specific target when they are young, and to increase the
brand recognition throughout their lives. What is interesting is that advergame can give benefit to the brand at
many different times of the products lifecycle: when the product is launched, advergaming solutions are used to
bring traffic to the website of the product or of the company; when competing against many competitors,
advergame create a special attachment for the potential customers to a specific brand rather than another, when
sales are starting to plummet, an advergame can retain a certain audience for a few extra days/weeks/months
(Zodal, n.d).
By using the games interactivity, brand could deliver the advertising messages. Players in other hand are
able to get the brand experience via the game. Some benefits generated by using advergame are (Zodal, n.d):
Engagement
Advergame enable interactivity and experience through game. Players and customers experience fun in
an interactive way; therefore they experienced the brand as well.
Exposure
With repeated interaction in game mechanics, players are exposed to the brand.
Data Gathering
With game, any data or surveys that involve customer could be gathered in a soft way. When the data
gathered, brand could create a better product; do better marketing, and more engaged to costumer.
Activity driver
Game is able to motivate players to do something in real life: changing their behavior, visit store, or
even purchasing the product. This is done by reward system within the game.
Table 4. Feasibility study of In-depth Exploration of advergame development service
Feasibility Criteria In-depth Exploration of Advergame Development Service
Market Feasibility Indonesia has around 250 million citizens, high internet penetration (current internet penetration
is 20% and expected to grow to 60% by 2015) and rising GDP (current GDP per capita is US
$ 3,979), digital advertising industry is expected to rise as well as demand for advergame
Technical Feasibility Technical development is straightforward, similar to pure entertainment game
Communication issue between marketing mindset and game developer mindset
Relatively short development time (adjusting to brands marketing campaign)
Financial Feasibility Advergame is still experimental in Indonesia, customers tend to be cautious in using their
budget
Customer often generalized advergame to common software development cost, which is usually
lower

In 2010, PT Agate International expands its services aside from entertainment game development; to a game
that can be used for advertising purpose, or commonly called by advergame. Since then, PT Agate International
start to develop custom advergame based on brands or digital marketing agencys request. This business model

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is proven to works and giving the company one of the main source of revenue. However, the business is still has
potential to be explored. For example, PT Agate International could develop advergame for generic use, and then
sell the service to modify just part of the developed game (not custom developing from scratch), or PT Agate
International can also combining its advergame with cinematic movie and aligned it with the brands commercial
advertisement. The in-depth exploration strategy needs to be analyzed for its feasibility, whether the business
will sustain in the long period. Feasibility study of In-depth Exploration of advergame development service is
done as seen in Table 4.
3.3. Training and Simulation Game Development Service Analysis
Because game can be constructed to reflect any set of values, challenges and goals in the workplace, it is a
natural tool for learning to solve business problems. Businesses have long adopted military and sports metaphors,
and those metaphors have spilled over into everyday life. Back then, people talk about negotiating to a win-win
solution with their teenage children as they do with their workplace competitors. Now, they also speak of what
level they have achieved in their careers or project-schedules at work as they do on Playstation. Now that
peoples familiarity and comfort-levels with digital games are high enough, and their price point is low enough,
game-based learning is spanning the life-work bridge (Sealund, n.d.).
The idea of training and simulation game is to give more engagement compared to tradition training material
such as training document or video, and with less time and cost compared to offline training. Figure 4 is a
simulation on how training game is able to reduce the cost, based on assumptions (Corti, 2007):
1. Assumes average costs/employee for classroom training at $200 (does not include lost time and
productivity)
2. Assumes initial training game investment of $750K and internal variable costs of $2/employee.
Inclusion of lost time and productivity would increase the savings as less time is spent using the serious
game than in classroom training.
At the 2006 Serious Games Summit, a session on business and deals featured Six Games for Cisco:
Incentives and Rewards to Increase learning. Findings showed that about 75% respondents rated learning games
favorably, and learning games score higher than slides on engagement in learning and retention in content. After
this pilot of six games, Cisco has at least four new games in development for training their employees (Sealund,
n.d.).
Because of these facts, PT Agate International believes, it can give value propositions to corporate which
use traditional training system. Moreover, in addition for its usage to regular employee training, some other
possibilities for training game usage are:
1. Assessment tool
It is useful to quickly gather data about each employee performance index. For example, the score from
the game will reflect employees real life performance.
2. Recruitment process
The game can also be used to filter the job application.

Figure 8. Cost for classroom training compared to training game solution

Another interesting game utilization in the real world that is proven to be succeeding internationally is
training and simulation. This idea is still pretty new in Indonesia but it is said to be a promising business.
Nevertheless, prominent feasibility analysis is needed because several efforts and resources are needed to expand
PT Agate International service business to this market. Feasibility study of training and simulation game
development service is done as shown in Table 5.

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Table 5. Feasibility study of training and simulation game development service


Feasibility Criteria Training and Simulation Game Development Service
Market Feasibility Niche market, blue ocean strategy
Need to be explored and educated about training and simulation game
Technical Feasibility Compared to other serious game, training and simulation game does have more difficulty. The
main reason is because often it has to be designed as real as possible to the real world
environment
Financial Feasibility Still new business, no proven financial calculation exists
High profile customers, can expect high budget
Use of training system can be shared across different companies within the same industry

3.4. Market Expansion Feasibility Analysis


After analyzing each options using feasibility study on three main criteria, best option will be selected using
feasibility study matrix as illustrated in Table 6.
From Table 6 it is shown that all options of market expansion are getting a good score (assuming 70 is the
upper threshold), however the priority is:
1. Game development service for international market
2. In-depth exploration of advergame development service
3. Training and simulation game development
This priority then will be used as decision making of market expansion in case there is resource limitation in
regards to do the market expansion. As long as the resource is available, based on current condition and available
data, all the options are worth trying. However the priority is subject to change due to the rapid change of
gaming industry.
Table 6.Market expansion feasibility matrix
Game Development In-depth Exploration of Training and Simulation
Feasibility Criteria Wt. Service for International Advergame Development Game Development
Market Service Service
Market Feasibility 40% 80 80 60
Technical Feasibility 30% 70 80 70
Financial Feasibility 30% 90 70 90
Ranking 100% 80 77 72

3.5. Market Expansion Strategy Activities


Each market expansion strategy has its own challenges and its own way to be implemented. After analyzing
the strategy through observation and discussion with PT Agate International, the writer learn the challenges for
each strategy implementation and the idea to overcome it using the companys current capability. For example;
how to build expert team to overcome the demand for international standard, how to increase the marketing
power using affiliate partnership in advergame, and how to raise credibility in developing training and
simulation game. Further implementation detail of each strategy based on the feasibility study in PT Agate
International is explained in the following activities in Figure 9.
Figure 9 explains activities in implementing game development service for international market strategy.
Entering international market results in some challenges such as: higher customer expectation, higher
competition, geographical distance and time difference.
Several activities are proposed to overcome these challenges, such as using practicing online marketing and
communication in order to solve the communication issue and to build credibility through good marketing tools
because most of the prospects are not able to visit the company and meet the developers directly. Another
challenge is the demand for international quality standard, currently there are limited resources within the
company that are able to build international quality game. Though the developers will improve its capability
overtime, there have to be pro-active action from the company to invest on people and build special team and
production line ranging from core development team, quality control team, and tester to handle sophisticated
game development.

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Figure 9. Game development service for international market activity map

In the other hand, companys 3 years-experience and portfolio a expected to be a foundation of companys
credibility to convince international prospects, and the fact that PT Agate International is based in Indonesia
results in competitive development cost and the demand for special team to build high quality product will
promise higher price thus led to high profit business model.

Figure 10. In-depth exploration of advergame development service activity map

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Figure 10 explains activities in implementing in-depth exploration of advergame development service. The
challenges in advergaming market in Indonesia is that the industry still relatively new. This will result in the
demand for more marketing resources. In the other hand, the strategy to explore advergaming will expect to
increase the quantity of projects and research need to be done. This will result in the need for more development
resources.
To overcome these challenges, there are several suggested activities such as creating advergame template to
reduce the need of programming resources, this advergame template is expected to provide shorter development
time and lower cost thus increase the customer satisfaction and give the company competitive advantage
compared to other advergame developer in Indonesia. Meanwhile, to overcome demand in marketing resources,
comprehensive marketing tools will be created to reduce the effort in educating the market and marketing
affiliates system will be built to add marketing resources without increasing the companys capacity.

Figure 11. Training and simulation game development service activity map

Figure 11 explains activities in training and simulation game development service. The first activity is to do
research on training and simulation game, to find out what type of training game is suitable for what type of
industry, and what technology is suitable for each training and simulation practices. This activity is also expected
to give initial prototype portfolio to convince the prospects.
The other challenges of this training and simulation game is because the service are highly customizable, it
is also niche and new market. This led to the need of personal approach to the market, that is government and
corporate. The last activities is to do co-invest development for training and simulation games that are able to be
used in several companies within the same industry, this is expected to produce training and simulation game
that can be sold in larger quantity with lower cost.

4. Discussion
4.1. Theoretical implications
This paper draws solution using feasibility study matrix from market, technical, and financial perspective,
and then use activity map to find and confirm the effective activities to implement the solution. The proposed
solution can then be used by PT Agate International to select their 2012/2013 strategy, it is expected that the
solution results in optimum long term profitability and the activity map results activities that are comprehensive
and effective to initially start the whole strategies.
4.2. Managerial implications
From the managerial perspective, results of this paper will give input for the company in deciding its
strategic choices. It will implicate in business model that is run by the company, and thus implicate the
organizational structure of PT Agate International. From the marketing perspective, the company may have to
split its marketing division to 3 divisional structures that is to tap international market, local government and
corporate market, and adding more resources to handle the affiliates in local advergame market.

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Meanwhile, Figure 5, 6, and 7 also explain the activities to overcome challenges in each strategy
implementation. These activities will also impact on the companys organizational structuring strategy. However,
in the long run the managerial implications is possible to be larger than changes in organizational structure, if the
marketing expansion strategy is proven to succeed, it is also possible for the company to separate the production
line for each market to be independent strategic business unit.

5. Conclusions
Global gaming industry is growing so fast and Indonesia, with all its potential also benefitted from this
global phenomena. PT Agate International is also a gaming company that is founded in the right time and in the
right place. However, despite all the benefit, Indonesian gaming market is still a new area. The market still has to
be educated about the existence of gaming industry, that Indonesian game developers are exist, and their gaming
expertise can help to improve other industries as well.
To develop and expand its market, PT Agate International can start with three options: expand its game
development service for international market, exploration of its advergame development service, and start
developing serious game for training and simulation. The implementation these three strategies is crucial,
because it is resource consuming, and game development service business is PT Agate International main source
of revenue.
These three options however have its own plus and minus. For example, the first option in expanding
outsourcing service to international market is interesting because international market promises higher reward,
though it demands higher quality and have geographical communication barrier. The second option, to explore
the advergame development service is also interesting because it is straightforward and the market still has lot of
potential, though the profit margin is not as high as international market. The third option, to explore the use of
gaming for training and simulation also very interesting because it is totally new market and the company has the
opportunity to be the leader in this market, some example of activities to overcome these challenges are: the
company will have to set up 24 hours customer service for international client, the marketing team should build
marketing affiliate / partnership program to give the company more marketing reach, the development team may
have to prepare its expert team to create international quality standard and to initiate research, research and
development team for building advergame package and to research on training and simulation game. Hopefully
using these activities, the company is able to successfully expand its market.
From the conducted feasibility analysis, it is concluded that all given marketing expansion options are
feasible to be implemented with such priority and set of activities. However, this is just a proposed theory and
research based on current environment. To further confirm that the analysis is truly works and applicable to other
companies in the same industry environment, comprehensive evaluation have to be done over the
implementation of the strategy as a future work.
Finally, the writer hopes that analysis and suggestion in this paper is useful for PT Agate International to
overcome the growth of the industry and also helping other local game developers to catch up with the global
gaming industry.

Acknowledgment
The authors would like to thank PT Agate International where the research has been carried out.

References
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Cite this paper

Budianto, A.P., and Simatupang, T.M. (2012). An analysis of market expansion strategy in game development services,
Proceedings of The 3rd International Conference on Technology and Operations Management: Sustaining
Competitiveness through Green Technology Management, BandungIndonesia (July 4-6), pp. 171-184. ISBN: 978-979-
15458-4-6.

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Supplier Selection for Food Industry: A Combination of Taguchi


Loss Function and Fuzzy Analytical Hierarchy Process
Renna Magdalena1,*
1
Department of Accounting - Faculty of Economics - Universitas Pelita Harapan (UPH) Surabaya,
Jl. Jend. A. Yani no.288, Surabaya 60234, Indonesia

Abstract. Supplier selection is an important part of supply-chain management process by which firms identify, evaluate,
and establish contracts with suppliers. Deciding the right supplier can be a complex task. As such, various criteria must be
taken into account to choose the best supplier. This study focused on the supply in the packaging division of a food industry
in Denpasar-Bali. A combination of Taguchi Loss Function and fuzzy-AHP (Analytical Hierarchy Process Fuzzy Linear
Programming) was used to determine the best supplier. In this analysis, several suppliers criteria were considered, namely
quality, delivery, completeness, quality loss and environmental management. By maximizing the suppliers performances
based on each criterion and aggregating the suppliers performances based on the overall criteria, the best supplier was
determined.

Keywords: Supplier selection, Taguchi Loss Function, AHP, Fuzzy Linear Programming, Environment

1. Introduction
Nowadays, supply chain management has received renewed interest in the industrial world. In particular,
supplier selection problem is of great importance because it has a significant influence on the quality of the
goods produced. Therefore, it is necessary to consider the essential parameters before arriving at the right
decision for the supplier.
Previously, supplier selection process has been based solely on price criterion, which resulted in companies
engaging many short-term agreements with suppliers with the lowest price quotation. As time progresses,
however, more emphasis has been put on several additional criteria other than the price.
According to Sarkis and Talluri (2002), the buyer-supplier relationships based solely on price criterion are
no longer applicable. The importance of supplier selection requires re-thinking of its procurement strategy and
careful evaluation of the procurement decisions in order to be able to select the right supplier. The evaluation and

* Corresponding author. Tel.: +62-31-5825-1007; fax: +62-31-5825-1020


E-mail address: renna.magdalena@uphsurabaya.ac.id
4 R. Magdalena Supplier Selection for Food Industry ...

selection of suppliers in the modern context needs to incorporate more criteria, such as supplier quality, the risk
of rejection of goods, and delivery time.
This study examines the problems encountered by a food industry in Denpasar, Bali which currently selects
a packaging supplier based solely on price criterion. The company management deems it necessary to assess
other criteria in the supplier selection process. This research refers to the works by Indrapriyatna et.al. (2010),
Sevkli et al. (2008) and Pi and Low (2005). The proposed method is an integration of fuzzy-AHP method and
the Taguchi Loss Function for the process of selecting suppliers in a packaging division of this food industry in
Denpasar. AHP is used to determine the relative importance of selection criteria. Taguchi loss function is used to
determine the potential losses that occur as a consequence of the allocation of goods to each supplier based on
predefined selection criteria. Fuzzy theory is used due to the fact that the characteristics of supplier selection
problems tend to be fuzzy. The often encountered fuzziness (vagueness) in the selection process is a result of
uncertainty and incomplete information from the selection criteria (Amid and O 'Brien, 2006).

2. Literature Review
2.1. Analytical Hierarchy Process
Analytical Hierarchy Process (AHP) is a method discovered by Saaty (1994) (Nydick and Hill, 1992). It is a
method for ranking several decision alternatives and selecting the best one when the decision maker has multiple
objectives, or criteria, on which to base the decision (Taylor, 2010). The decision maker makes a decision based
on how the alternatives compare according to several criteria.
The decision maker will select the alternative that best meets the decision criteria. Numerical scores are
assigned to rank each decision alternative based on how well the alternative meets the decision makers criteria.
Guller (2008) said that AHP is very useful for managers to formulate the desired decision-making criteria,
provide a guideline to determine the level of importance of different decision-making criteria, and then obtain
the best decision.
2.2. Taguchi Loss Function
Taguchi loss function (Quality loss function) is a method of measuring loss as a result of the product not
meeting the standard specifications (Taguchi, 1989). The purpose of calculating loss is to quantitatively evaluate
the quality loss caused by the variation. Loss Function considers the willingness of consumers to obtain a more
consistent product and the companys desire to produce products with low cost. Minimization of losses suffered
by consumers is a strategy that encourages uniformity of the products and reduces costs of production and
consumption. Taguchi loss is useful for the company to identify not only the rejected and reworked scrap but
also the possibility of environmental pollution, the use of not long-lasting products, or other negative effects.
Loss for the company is the cost due to deviation from the target value.
The concept behind the Taguchi's Quadratic Loss Function (QLF) is to calculate the amount of loss for the
company. QLF is a mathematical model that links quality loss to the value of money resulting from the deviation
of the quality of the specification from the desired target. Loss in question is the cost of maintenance, the cost of
failure, adverse effects to the environment such as pollution or excessive production cost. Based on the loss
function approach, the quality characteristics measured by Taguchi can be divided into three categories, namely:
Nominal the best: It is a quality characteristics value which can be positive or negative. Values are
measured by predetermined target value. The closer it gets to the target value, the better the quality.
Lower the better: It is a non-negative measurable characteristics with respect to the ideal value of zero.
The nearer it gets to zero, the better the quality.
Higher the better: It is a non-negative measurable characteristics value with respect to the ideal value of
infinity. The closer it approaches infinity, the better the quality.
Formulation for the loss function is as follows:

a. Nominal the best (L) = k (S2 +[y- m]2] ) (1)

b. Lower the better (L) = k (S 2 y 2 ) (2)

1 3 S 2
c. Higher the better (L) = k 2 1 2 (3)
y y

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R. Magdalena Supplier Selection for Food Industry ... 5

where:
A0
k=
20

L = loss m = target A0 = cost due to loss


y = measured value S2 = variance of distribution 0 = tolerance
k = loss constant y = average distribution
2.3. Taguchi Loss Function
Fuzzy Linear Programming is a method of linear programming using the consideration of human thinking in
distinguishing qualitative information. By using this method, the conditions arising from the dominant
subjectivity and intuition can be resolved, not only based on the assumption of certainty as in the typical linear
programming. Bellman and Zadeh (1970) suggested a fuzzy programming model for decision making in a fuzzy
environment. Later, their method was first used by Zimmermann (1978) to solve fuzzy multi-objective linear
programming problems. In addition to Zimmermann, there are also other studies which used fuzzy-AHP
approach, such as Sevkli et al. (2008) and Indrapriyatna et al. (2010). In this sub-section, the general fuzzy
multi-objective model for supplier selection for m criteria is described in the following equation:
n
max Z K Cki . X I Z k0 , where k 1,2,3,...., m (4)
i 1
n
and constraints: X
i 1
i 1 (5)

where:
Zk = objective function for criteria k
Cki = supplier value for criteria k
Xi = the i-th supplier
min max
Every objective function value, Zk, changes linearly from Z k to Z k . So it may be considered as a
fuzzy number with the linear membership function zk as shown in Figure 1. Z k and Z k are obtained
min max

through solving the multi-objective problem as a single objective.

Fig.1: Fuzzy linear membership function

If Equation (4) is added to the value of non-negativity of the Xi suppliers, it will be the following linear
Program (Zimmermann, 1978):
m
Max Z wk k (6)
k 1
subject to:
k Zk (7)
Xi 0

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w
k 1
k 1, wk 0 (8)

Where wk and Zk represent the solution of membership function, weighting coefficients that present the
relative importance among the fuzzy goals and membership function of the objective function. k is the
minimization of the objective function Zk.
AHP method is often combined with Fuzzy Linear Programming in the decision-making process. Fuzzy
objective and fuzzy constraint used in the optimization of Fuzzy Programming vagueness serve to accommodate
the information that occurs in the supplier selection problem with no precise criteria (Zimmerman, 1978).
The combination of AHP-Fuzzy Linear Programs has been demonstrated by Sevkli et al. (2008). Pi and Low
(2005) combined the AHP with the Taguchi Loss Function in the selection of suppliers. Indrapriyatna, et al.
(2010) utilized AHP-Fuzzy-Taguchi combination in his works. This study adds another criterion (environmental
management) and utilize Taguchi Loss Function (Zimmerman, 1978), which will then be integrated with the
AHP and resolved by fuzzy linear programming.

3. Research Methodology
The steps to find a good supplier for the company by integrating the Taguchi Loss Function with Fuzzy
AHP are schematically described as follows (workflow of this research is shown in figure 2 ):

Fig. 2: Diagrammatic representation of the research workflow

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R. Magdalena Supplier Selection for Food Industry ... 7

1) Determine the suppliers and select the criteria for the supplier selection. This step can be done by
interviewing the purchasing Head, the QC head, and the head of production.
2) Develop hierarchical structure of the supplier selection. Perform pairwise comparison of each of the
selection criteria and pairwise comparison of the supplier (for each criterion) that can later be used to
calculate the weight of the criteria and the weight of the suppliers for each criterion. From the pairwise
comparison, Consistency Ratio (CR) can be calculated. If CR 0.1, then the results of the evaluation
criteria correspond to acceptable suppliers.
3) Calculate the value of loss by looking for data from the last three months by using equation (1), (2) or
(3) based on predetermined criteria. Subsequently, the weighted Taguchi loss for each supplier is
calculated. The value of weighted Taguchi loss is the sum of the multiplication of the weight criteria
with the loss criteria. Normalized value of the weighted Taguchi loss is obtained by dividing the value
of the total loss weighed Taguchi with the Taguchi loss weighted value of each supplier
4) Construct the supplier selection model according to the criteria, weighted Taguchi loss, constraint and
min max
suppliers. Find the lower bound Z 0 and upper bound Z 0 to solve the multi-objective supplier
selection problem as a single-objective linear programming model. Use lower bound and upper bound
of the objective functions to find the membership function for each criterion in equation (4) and
equation (5).
5) Based on AHP-Taguchi Loss weighted model, formulate the equivalent crisp model of the fuzzy
optimization problem according to equations (6), (7) and (8). Solve problem using Scilab software.
6) Find the optimal solution of the original multi-objective supplier selection problem.

4. Result and Discussion


Based on interviews with the Head of Purchasing, Head of QC Section and Head of Production, it was found
that all packaging suppliers offer similar prices. This implies that the price criterion is no longer relevant to be
used as a basis in selecting suppliers. Based on some historical data, it is agreed that there are four criteria to be
used in the selection of suppliers, i.e. quality, delivery, completeness and environmental management.
Quality is measured from how close the goods are to the manufacturer's specifications. Delivery is measured
from the ability of suppliers to deliver the goods on time according to the agreed arrangement. Completeness is
measured from the degree of matching between the amount of goods provided by the suppliers and the amount
ordered by the company. Finally, environmental management is measured from the physical condition of the
suppliers workplace with respect to the company standards. In our case, the company has three possible
suppliers for packaging: Supplier1, Supplier2 and Supplier3.
Calculation of weights was carried out using the AHP supplier. After selected the suppliers and established
the suppliers criteria, pairwise comparisons were carried out to find out the normalized weighted value of each
supplier and each criterion. Pairwise comparison for each supplier for each criterion can be seen in Table 1.
Pairwise comparison for each criterion can be seen in Table 2.
Table 1. Pairwise comparison for suppliers
Quality Delivery
Supplier 1 2 3 weight CI=0.003 Supplier 1 2 3 weight CI=0.037
1 1.00 0.50 0.33 0.163 1 1.00 0.33 3.00 0.272
2 2.00 1.00 0.50 0.297 2 3.00 1.00 4.00 0.608
3 3.00 2.00 1.00 0.539 3 0.33 0.25 1.00 0.120
5.00 4.50 1.83 1.000 CR = 0.005 4.33 1.58 8.00 1.000 CR=0.064

Completeness Environmental Management


Supplier 1 2 3 weight CI=0.027 Supplier 1 2 3 weight CI=0.009
1 1.00 0.25 0.50 0.133 1 1.00 0.25 0.33 0.123
2 4.00 1.00 4.00 0.655 2 4.00 1.00 2.00 0.557
3 2.00 0.25 1.00 0.211 3 3.00 0.50 1.00 0.320
7.00 1.50 5.50 1.000 CR=0.047 8.00 1.75 3.33 1.000 CR=0.016

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Table 2. Pairwise comparison for criteria


Criteria Quality Delivery Completeness Environmental weighted
Quality 1.000 2.000 2.000 3.000 0.423
Delivery 0.500 1.000 2.000 2.000 0.271
CI= 0.015
Completeness 0.500 0.500 1.000 1.000 0.162 CR =0.017
Environmental 0.333 0.500 1.000 1.000 0.144

For quality criteria, the normalized weighted value of Supplier1, Supplier2, and Supplier3 are 0.163, 0.297,
and 0.539, respectively, and the Consistency Index (CI) is 0.003. For delivery criteria, the normalized weighted
value of Supplier1, Supplier2, and Supplier3 are 0.272, 0.608, and 0.120, respectively, and the CI value is 0.037.
For completeness criteria, the normalized weighted value of Supplier1, Supplier2, and Supplier3 are 0.133,
0.655, and 0.211, respectively, and the CI value is 0.027. For environmental management criteria, the normalized
weighted value of Supplier1, Supplier2, and Supplier3 are 0.123, 0.557, and 0.320, respectively, and the CI value
is 0.009. The value of Consistency Ratio (CR) is obtained by dividing CI with Random Index (0.58). If CR <
0.1, it means the degree of consistency is satisfactory. Since CR for all of our results it means that the
management evaluation for all criteria is acceptable or consistent. The normalized weighted value for each
criterion, i.e. quality, delivery, completeness, and environmental management, are 0,423; 0,271; 0.162; and
0,144, respectively.
Based on the January-March 2012 records in the Purchasing Department, the following data for goods
deficit, amount of defective products as received from suppliers, suppliers performance based on delivery
criteria and environmental management data were obtained as shown in Table 3. Historical data for defective
products were used for the Quality criteria. If supplier delivers a product matching the specification, the assigned
value is 0, and 1 if otherwise. Delivery historical data were used for delivery criteria. If supplier delivers on-
time, the assigned value is 0 and if the delivery is late, the assigned value is 1, with unit of weeks as the
reference. Goods deficit data were used for the completeness criteria. If supplier deliver goods precisely as
ordered, 0 is assigned, and 1 if the amount is less than that in the purchase order. For these four criteria, the loss
calculation used the-lower-the-better method. Historical data for supplier environmental management criteria
were obtained from the auditing process on the suppliers working environment. This assessment was carried out
by a professional in the field of environmental audit. If the suppliers physical condition meets the company
standards, 0 is assigned, and 1 if otherwise.
Criteria specification limits and the corresponding penalties imposed on the suppliers should there be
violations against the rules are shown in Table 4. The specification limits and the penalties were determined by
the company according to the contract agreed upon with the supplier, based on the memo from the Head of
Purchasing Department.
Table 3. Historical data
Goods Deficit Data Defective Products Data
Supplier Supplier
Month A B C Month A B C
January 1 1 0 January 1 0 0
February 0 0 0 February 0 1 0
March 0 0 0 March 1 0 1

Late Delivery Data Non-recyclable Products Data


Supplier Supplier
Month A B C Month A B C
January 0 0 0 January 1 1 1
February 0 0 1 February 0 1 1
March 1 0 0 March 0 1 0

Table 4. Criteria specification limits and costs due to violations


Criteria Target Tolerance Loss calculation Cost
Quality 0 (no defective products) max 3 lower the better 85000
Delivery 0 (punctual) at most 4 days lower the better 75000
Completeness 0 (amount of goods as ordered) max 3 lower the better 85000
Environmental
0 (meets the standard) 1 (sub-standard) lower the better 60000
management

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R. Magdalena Supplier Selection for Food Industry ... 9

The loss values of each criterion were calculated from equation (2), while the weighted Taguchi value is the
loss value multiplied by the weight value of each criterion. The calculation of loss, weighted Taguchi, and
normalized values are summarized in Table 5.
Table 5. Loss value calculation for each criterion
environmental weighted
quality delivery completeness management Taguchi normalized
1 52469 10417 20988 133333 47617 0.231
2 20988 0 20988 600000 98678 0.479
3 20988 10417 0 333333 59701 0.290

Based on pairwise comparison of suppliers for each criterion and calculated normalized loss, a multi-
objective fuzzy linear programming model to select packaging supplier was developed. This stage involves
construction of multi-objective linear programming model as a single-objective supplier selection problem using
only one objective each time. The multi-objective linear programming of our application is presented as max Z1
to Z5.

Max Z1 = 0.163 X1 + 0.297 X2 + 0.539 X3


Max Z2 = 0.272 X1 + 0.608 X2 + 0.120 X3
Max Z3 = 0.133 X1 + 0.655 X2 + 0.211 X3
Max Z4 = 0.123 X1 + 0.557 X2 + 0.320 X3
Max Z5 = 0.231 X1 + 0.479 X2 + 0.290 X3
S/T
X1 + X2 + X3 = 1
X1, X2, X3 0

Then, the linear membership function is used for fuzzifying the objective functions and the constraints for
min max
the above problem. The data set for the values of the lower bounds Z k and upper bounds Z k of the
objective functions are provided in Table 6.
Table 6. Data set for the membership functions

Z kmax (=1) Z kmin (=0)


Z1-Quality 0.539 0.163
Z2-Delivery 0.608 0.120
Z3-Completeness 0.655 0.133
Z4-Environmental Management 0.557 0.123
Z5- Loss 0.479 0.231

In this stage, the membership functions for five objective functions and the constraints are provided to
maximize the performance of suppliers related to each main supplier selection criterion. To exemplify, we take
the performance assessment criteria to show the membership function of Z1. The objective of each membership
function is to maximize the supplier criteria and minimize the loss value. The membership functions are
formulated as shown earlier in Figure 1. The membership functions of supplier selection model for food industry
are formulated as shown in Figure 3.

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Fig. 3: The membership function of supplier selection model for food industry

The fuzzy multi-objective formulation of the application as in equations (4) and (5) is shown below.

Max Z1 = 0.163 X1 + 0.297 X2 + 0.539 X3 Z10


Max Z2 = 0.272 X1 + 0.608 X2 + 0.120 X3 Z 20
Max Z3 = 0.133 X1 + 0.655 X2 + 0.211 X3 Z 30
Max Z4 = 0.123 X1 + 0.557 X2 + 0.320 X3 Z 40
Max Z5 = 0.231 X1 + 0.479 X2 + 0.290 X3 Z 50
S/T
X1 + X2 + X3 = 1
X1, X2, X3 0

After the membership functions were obtained, with the help of equations (6), (7), and (8), the single
Taguchi Loss Function-Fuzzy-AHP can be constructed as follows:

Max w1 (0.423 1 + 0.271 2 + 0.162 3 + 0.144 4) + w2 (5)


S/T

i
Z kmax Z k ( x )
Z kmax Z kmin

Xi = 1
Xi 0
0 1, 2, 3, 4, 5 1

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w1 is weight for criteria and w2 is weight for the loss, where w1 + w2 = 1. Based on discussions with the head
of purchasing and production, the obtained value for w1 is 0.8 and the value for w2 is 0.2, such that:

Max 0.3384 1 + 0.2168 2 + 0.1296 3 + 0.1152 4 + 0.2 5


S/T
0.539 (0.163X1 0.297 X 2 0.539 X 3 )
1
0.539 0.163
0.608 (0.272 X 1 0.608 X 2 0.120 X 3 )
2
0.608 0.120
0.655 (0.133 X1 0.655 X 2 0.211X 3 )
3
0.655 0.133
0.557 (0.123 X 1 0.557 X 2 0.320 X 3 )
4
0.557 0.123

5 0.479 (0.231X1 0.479 X 2 0.290 X 3 )


0.479 0.231
X1 + X2 + X3 = 1
X1, X2, X3 0
0 1, 2, 3, 4, 5 1

After the model of Taguchi loss function is created, the problem is solved using Scilab software to obtain X1
= 1, X2 = 0 and X3 = 0, meaning that the selected supplier is Supplier 1. When each value of Xi is substituted
into the objective function, Zi values are obtained.

Z1 = 0.163, Z2 = 0.272, Z3 = 0.133, Z4 = 0.123, Z5 = 0.231


1 = Z 1 = 1
2 = Z 2 =0.689
3 = Z 3 =1
4 = Z 4 =1
5 = Z 1 =1

The obtained values for each membership function show that the achievement levels of Z1 quality criteria,
Z3 completeness criteria, Z4 environmental management criteria and Z5 loss are higher than Z2 delivery
criteria. In other words, the achievement level of the objective functions corresponds to the priority of supplier
selection criteria (based on decision makers preferences) and indicates that Supplier 1 is selected as the
optimum supplier.

5. Conclusion and Recommendation


The aim of this study was to perform supplier selection to choose the best supplier by integrating the
Taguchi Loss Function with Fuzzy-AHP with respect to several criteria, namely the quality, delivery,
completeness, and environmental management.
Based on the results of data processing, it can be concluded that by integrating the Taguchi loss function
with Fuzzy-AHP, Supplier 1 was found to be the best packaging supplier alternative.
Future studies are expected to add other criteria, such as risk factors and uncertainty factors. In addition,
further research can use other methods such as combining fuzzy-AHP method with a utility function.

References
[1] Amid, A., Ghodsypour, S. H., and OBrien, C. (2006), Fuzzy Multiobjective Linear Model for Supplier Selection in
a Supply Chain, International Journal Production Economics, Vol. 104, pp. 394407.

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12 R. Magdalena Supplier Selection for Food Industry ...

[2] Bellman, R.G. and Zadeh, L.A. (1970), Decision making in a fuzzy environment, Management Science, Vol. 17 No.
2, pp. 141-64.
[3] Guller, M. E. (2008), Incorporating Multi-Criteria Considerations into Supplier Selection Problem Using Analytical
Hierarchy Process: A Case Study, Journal of Yasar University,Vol. 3 No. 12, pp. 1787-1810.
[4] Indrapriyatna, A. S., Meuthia, Y., Fatrias, D, Gusti, Monalisa, G. (2011), Integrasi Taguchi Loss Function dengan
Fuzzy Analytical Hierarchy Process dalam Pemilihan Pemasok, Jurnal Teknik Industri, Vol. 13, No. 2, pp.65-73.
[5] Nydick R., and Hill R. P. (1992), Using the Analytic Hierarchy Process to Structure the Supplier Selection
Procedure, International Journal of Purchasing and Materials Management, Vol. 28 No. 2, pp. 31-36.
[6] Pi, W. N., and Low, C. (2005), Supplier Evaluation and Selection Using Taguchi Loss Functions, The International
Journal of Advanced Manufacturing Technology, Vol. 26, pp. 155160.
[7] Saaty, T. L. (1994), Fundamentals of Decision Making and Priority Theory, RWS Publications, Pittsburgh.
[8] Sarkis, J., and Talluri, S. (2002), A Model for Strategic Supplier Selection, Journal of Supply Chain Management,
Vol. 38 No.1, pp. 18-29.
[9] Sevkli, M., Koh, S. C., Lenny, Zaim, S., Demirbag, M., and Tatoglu, E. (2008), Hybrid Analytical Hierarchy
Process Model for Supplier Selection, Journal of Industrial Management and Data Systems, Vol. 108 No.1, pp. 122-
142
[10] Taguchi, G., Elsayed A. E., and Thomas C. S. (1989), Quality Engineering In Production System, Mc-Graw Hill
Book Company.
[11] Taylor, B. W. (2010), Introduction to Management Science, 10th ed, Prentice Hall, New Jersey.
[12] Zimmermann, H. J. (1978), Fuzzy Programming and Linear Programming with Several Objective Functions,
Journal of Fuzzy Sets and Systems, Vol. 1, pp. 45-55.

Cite this paper

Magdalena, R. (2012). Supplier Selection for Food Industry: A Combination of Taguchi Loss Function and Fuzzy
Analytical Hierarchy Process, Proceedings of The 3rd International Conference on Technology and Operations
Management: Sustaining Competitiveness through Green Technology Management, BandungIndonesia (July 4-6), pp.
3-12. ISBN: 978-979-15458-4-6.

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Available at www.ictom.info

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www.sbm.itb.ac.id www.cob.uum.edu.my

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Sustaining Competitiveness through Green Technology Management
Bandung Indonesia, July 4-6, 2012

Comparison of Environment Impact between Conventional and


Cold Chain Management System in Paprika Distribution Process
Eidelweijs A. Putri1,2,*, Kiyoshi Dowaki1, Gatot Yudoko2, Kenji Koido1
1
Department of Industrial Administration (IA) - Tokyo University of Science (TUS),
1-3 Kagurazaka, Shinjyuku-ku, Tokyo 162-8601, Japan
2
School of Business and Management (SBM) Institut Teknologi Bandung (ITB),
Jl. Ganesha 10 (Gedung SBM-ITB), Bandung 40132, Indonesia

Abstract. Pasir Langu village in Cisarua, West Java is the largest central production area of paprika in Indonesia. In
agriculture sector, the boycott of product including for paprika commonly occurs and would become a major problem.
Through the behavior, the paprika is unfit for market in retailer side finally. In average, for every 200 kg of paprika the
rejection number is 3 kg. This situation caused money loss for wholesalers and waste. In one year they can lose
approximately IDR 11,700,000 because of paprikas boycott. The cold chain is a logistic system that provides a series of
facilities for maintaining ideal storage conditions for perishables from point of origin to the point of consumption in the food
supply chain. The cold chain refers to the transportation system which is managed by the temperature sensitively. That is, we
consider the supply chain due to cold energy and refrigerated packaging and the logistics to secure the integrity of the product
shipment. Therefore, the paprika wholesalers in Pasir Langu village recently are developing cold chain management system
to maintain quality of paprika so that number of rejection can be reduced. The objective of this study is to compare
environmental impact between conventional and cold chain management system in paprika distribution process using Life
Cycle Assessment (LCA) methodology and propose Photovoltaic (PV) system in paprika distribution process, and we
propose the environmentally friendly distribution system so as to secure the quality of products. The result implies that the
cold chain system produces more CO2 emission compared to conventional system. However, due to the promotion of PV
system, the emission would be reduced. For future research, it is necessary to reduce CO2 emission from transportation
process since this process is biggest contributor of CO2 emission at whole distribution process.

Keywords: LCA, Environmentally friendly distribution, Paprika, Cold chain, PV system

1. Introduction
The demand pull created by an agro-industrial enterprise stimulates businesses well beyond the closest links
with its direct input suppliers and product buyers; a whole range of ancillary services and supporting activities in
the secondary and tertiary sectors of the economy are also positively impacted. Because of the generally

* Corresponding author. Tel.: +81-906-0100-499; fax: +81-4-7122-4566


E-mail address: eidelweijs@sbm-itb.ac.id
14 E.A. Putri, K. Dowaki, G. Yudoko, and K. Koido Comparison of Environment Impact ...

perishable and bulky characteristics of agricultural products, many agro-industrial plants and smaller-scale agro-
processing enterprises tend to be located close to their major sources of raw materials [1]. In addition, the
boycott due to poor quality of agriculture products such as rotten and overripe one, etc commonly occurs and
becomes a major problem in distribution process of agriculture products.
This condition also happens for paprika. In Indonesia, paprika is categorized as valuable vegetable. Pasir
Langu village in West Java province is the largest central production of paprika in Indonesia. The boycott of
paprika is occurring in a retailer side because of rotten one. In average, for every 200 kg paprika the rejection
number is 3 kg and it is likely to be equal to IDR 45,000. That is, the paprika wholesalers would lose their
money of approximately IDR 11,700,000. The aspects due to paprika not only caused the financial loss for both
farmers and wholesalers but also produce the waste.
Therefore, the paprika wholesalers in Pasir Langu village develop the cold chain management system to
maintain paprika quality recently. Cold chain is a logistic system that provides a series of facilities for
maintaining ideal storage conditions for perishables from point of origin to the point of consumption in the food
supply chain [2]. The cold chain refers to the transportation system which is managed by the temperature
sensitively. That is, we consider the supply chain due to cold energy and refrigerated packaging and the logistics
to secure the integrity of the product shipment [3]. A cooling process of fresh fruit and vegetables before
processing them removes heat around them, and that would inhibit decay and help maintain moisture content,
sugars, vitamins, and starches, while the quick freezing of processed fresh fruit and vegetable maintain the
quality, nutritional value, and physical properties for extended periods [4].
On the other hand, due to the promotion of cold chain management system, that is, the system, which
requires electricity for pre-cooling and storage in cold circumstance and fossil fuel for refrigerated transportation,
would generate more CO2 emission compared to the conventional one. The impact of agriculture on the
environment is an extremely important issue since the ecological influence for natural resources is already
overstrained. In general, the agricultural impact on nature is well known and the agricultural environmental
indicators have been developed for national monitoring systems. Thus, the efficient methods to comprehend the
agricultural impacts on the environment indicators with sustainable factors are significantly required [5].
Therefore, the objectives of this study are to propose the cold chain management system and estimate CO2
emission against the conventional one by using LCA methodology. In addition, in order to abate its impact, we
propose the advanced system of paprika distribution process with PV system. The result from this study would
be contributed to the development of cold chain management system so as to keep environmentally friendly
condition and to maintain the paprika quality.

2. Method
2.1. LCA Methodology
LCA is a technique that aims at addressing the environmental aspects of a product and their potential
environmental impacts throughout that products life cycle. The term product refers to both goods and services.
A products life cycle includes all stages of a product system, from raw material acquisition or natural resource
production to the disposal of the product at the end of its life, including extracting and processing of raw
materials; manufacturing; distribution; use; re-use; maintenance; recycling; and final disposal (i.e., cradle-to-
grave) [6].
The most well-known application of LCA can compare the total environment impact of a product or service
with an alternative (comparable) product or service. LCA is often considered as a tool that provides the answer
to the question of which product has least environmental impact [7].
The tasks with suppliers and supply chain issues are rapidly increasing as an important strategic
consideration. Traditionally, enterprises manage suppliers in order to optimize the supply chain, the flow of
information, the materials and funds, and the logistics of supply and distribution, minimize cycle times and costs
in order to integrate processes and functions for the supply chain. A life cycle management framework is for the
improvement which is continuous and based on a full system or a life cycle perspective; thus, the supply chain
management practices are an entry gate for a life cycle management [8].
A LCA methodology was used to analyse distribution process of paprika in Pasir Langu village. The system
boundary of paprika distribution process in Pasir Langu village is shown in Fig. 1. In the distribution process,
there are four main processes such as cultivation, transportation from greenhouse to wholesaler, packaging, and
transportation from wholesaler to retailer. Based on these conditions, the CO2 emissions from our proposed
systems were estimated and the environmental impact was argued.

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Fig. 1: System Boundary of Paprika Distribution Process in Pasir Langu Village

2.2. Scenarios and Data Collection


In this study, there are three scenarios of calculating CO2 emission both for conventional and cold chain
management system. These scenarios are based on the differences of distance from greenhouse to wholesaler and
from wholesaler to retailer. First scenario is calculating the farthest distance, second scenario is calculating the
nearest distance and third scenario is calculating the average distance.
The data collection was conducted through an interview, a field observation, and a review of secondary data.
The interviews in Pasir Langu village were conducted with key workers from paprika business such as farmers
and wholesaler in order to clarify the factors on paprika distribution process in the life cycle stage. The field
work regarding paprika distribution process in Pasir Langu village was implemented in April to September 2011.
The observations include the site visits to paprikas greenhouse and wholesaler. Secondary data was collected by
websites, books, national and international journal.

3. Result and Discussion


3.1. LCA Conventional System
A LCA methodology in this study was used to calculate the CO2 emission from four main processes at
paprika distribution system in Pasir Langu village (see Fig. 2). Eq. (1) was used to calculate CO2 emission.

ECO2 j = Ai x FEi (1)

where, Ai is the direct or indirect energy input of i-th energy source (electricity, fertilizers, and fuel), FEi is the i-
th specific emission factor. The suffix of j is represented as the elements of cultivation, transportation from
greenhouse to wholesaler, packaging, and transportation from wholesaler to retailer, respectively. There are three
scenarios for estimating CO2 emission based on the differences of distance both in transportation from
greenhouse to wholesaler and transportation from wholesaler to retailer.

Fig. 2: Paprika Distribution Process: Conventional System

(1) Cultivation
According to the farmers interview, the greenhouse area was assumed to be 1000 m2, in which 4,000
paprika plants can be plant. A cultivation period of paprika per one cycle would require 8 months or 32 weeks.
Every paprika plant consists of 5 step harvesting processes and 3 pieces of paprika with average weight of 150 g

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would be yielded in each process. That is, the annual average yields for every 1000 m2 greenhouse would be
9,000 kg.
A cultivation process consists of two main processes, seedling and planting. Both seedling and planting
processes was done in the same greenhouse, so for electricity and fertilizers usage was calculated as one unit for
both processes. In the paprika cultivation process, the following factors are necessary; charcoal husk as a media
planting, poly bags which are made by plastics, water, seed, pesticides, fertilizers, and electricity which uses for
some equipment of a pump and a lamp operation. From those inputs, the indirect CO2 emissions of fertilizers and
electricity should be considered and the rests are ignored.
The farmers in Pasir Langu village generally use AB Mix fertilizers which consists of N, P, and K in
cultivation process and the annual consumption is 960 kg/yr. Also, they have to pay IDR 200,000 in average on
electricity fee of 5 greenhouses to government electricity company (PLN). Using the data from the government
electricity company, we estimated the average electricity consumption of 87.91 kWh/yr for each greenhouse.
Here, note that the price per kWh is IDR 455 and the annual electricity consumption is 703.297 kWh in the total.
Table 1 is shown factor emission for each variable.
Based on those data, the CO2 emissions of both consumption of electricity and fertilizers are 2.098 gCO2 per
paprika and 3.2 gCO2 per paprika, respectively. Using Eq. (1), the total CO2 emission from cultivation process is
5.298 gCO2 per paprika.
Table 1: Factor Emission
No Variable Factor Emission Source
1 Electricity 0.179 kgCO2 / kWh [9]
2 Fertilizers (N,P,K) 0.2 kgCO2 / kg fertilizer [10]
3 Gasoline 2.31 kgCO2 / L [11]
4 Diesel 2.68 kgCO2 / L [11]

(2) Transportation from greenhouse to wholesaler


In average, a truck with 1 ton capacity goes to 10 greenhouses for collecting paprika every day. The load
capacity is 50 kg due to the limitation of space. The farthest distance is 1.5 km, the nearest is 0.5 km, and the
average from greenhouse to wholesaler is 0.95 km, and it is assumed that the frequency of truck is 4 operations
of 0.5 km case, 3 ones of 1 km case and 3 ones of 1.5 km case every day. The fuel consumption of the truck is 15
km/L. Using Eq. (1), the CO2 emissions of transportation from greenhouse to wholesaler for the farthest, the
nearest, and the average distance are 0.693 gCO2 per paprika, 0.231 gCO2 per paprika, and 0.439 gCO2 per
paprika, respectively.
(3) Packaging
The packaging process is doing at wholesaler in Pasir Langu village. The packaging house, in average, has
to pay IDR 150,000 per a month for electricity. Therefore, assuming that price per kWh is IDR 455, the average
electricity consumption per a month for packing and sorting them is 329.67 kWh per a month, that is, 10.989
kWh per a day. In one day, the packaging house can receive around 500 kg paprika in order to be sorted and
packed. Thus, using Eq. (1), the total CO2 emission from packaging process is 0.590 gCO2 per paprika.
(4) Transportation from wholesaler to retailer
The wholesaler distributes paprika for export and local market through retailer and directly to the traditional
market. For the export market, there is the case that paprika from Pasir Langu village is export to Singapore. The
paprika for local market is distributed through local distributors who distribute to restaurants and/or
supermarkets. The wholesaler has to send paprika three times per a week for each market. The distance from
Pasir Langu village to exporter is 60 km, and that of local distributor is 20.4 km and that to the traditional market
has 29 km. Thus, the total distance from wholesaler to retailer is 36.467 km in average.
The Wholesaler sends the products of 100 kg to 400 kg to exporter. Those of 200 kg to 500 kg for local
distributor, and of 100 kg for traditional market are delivered. In the distributing paprika to retailer, a truck is
required 15 km/L of gasoline. This 1 tons truck has an average load weight of 233.3 kg paprika for each trip. As
we mentioned before, there are three scenarios to calculate CO2 emission based on the distance from wholesaler
to retailer. Using Eq. (1), the CO2 emissions from transportation process from wholesaler to retailer for each
scenario are 5.940 gCO2 per paprika, 2.020 gCO2 per paprika, and 3.610 gCO2 per paprika, respectively. As a
result, the total CO2 emissions at paprika distribution process for each scenario are shown in Table 2.

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Table 2: CO2 Emission in gCO2 per paprika at Paprika Distribution Process: Conventional System
Farthest Nearest Average
Process
Distance Distance Distance
Cultivation (Seedling and Planting) 5.298 5.298 5.298
Transportation (from greenhouse to wholesaler) 0.693 0.231 0.439
Packaging 0.590 0.590 0.590
Transportation (from wholesaler to retailer) 5.940 2.020 3.610
TOTAL CO2 Emission from whole system 12.521 8.139 9.937

Fig. 3: Percentage CO2 Emission of the farthest distance at Each Process: Conventional System.

Fig. 4: Percentage CO2 Emission of the nearest distance at Each Process: Conventional System.

Fig. 5: Percentage CO2 Emission of the average distance at Each Process: Conventional System.

The percentage of CO2 emission from the farthest distance (see Fig. 3) shows that transportation from
wholesaler to retailer is the highest CO2 emission (47.4%), while that of CO2 emission from the nearest distance
and the average distance (see Figs. 4 and 5) shows that cultivation process is highest CO2 emission (65.1% and
53.5%). The emissions of gasoline and fertilizers usage are attributed to the highest CO2 emission.

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3.2. LCA Cold Chain Management System


Next, the cold chain management system (see Fig. 6) is assumed to be implemented in Pasir Langu village
in order to maintain the quality of paprika and reduce the boycott products. Since December 2011, the cold
storage was built in Pasir Langu village. The cold storage is equipment in cold chain. The cold storage is a box
made of insulated walls, ceiling and floor that fitted with an insulated door. It is kept at a pre-set temperature by
refrigeration machinery. In this system, the refrigerated transportation will be used to carry paprika from
wholesaler to retailer.
In the cold chain management system, pre-cooling and storage are required to be done in cold storage. This
process is done at wholesaler after packaging process. The facility area of cold storage in Pasir Langu village is
24 m3 and that is able to store 2,700 kg of paprika for 7 days. At that time, the electricity consumption to operate
the cold storage is 54.601 kWh per a day, that is, 382.204 kWh per a year. Using Eq. (1), the CO2 emission from
pre-cooling and storage is 3.801 gCO2 per paprika.

Fig. 6: Paprika Distribution Process: Cold Chain Management System.

On the other hand, since the refrigerated transportation is also required to carry paprika from wholesaler to
retailer in order to keep temperature condition of paprika, the quality of paprika can be maintained. Based on
interview, the fuel consumption for refrigerated transportation is 4 km/L or 0.25 L/km, so total fuel consumption
for one trip from wholesaler to retailer is 10.05 L. Using Eq. (1), the CO2 emission of the farthest, the nearest,
and the average distance are 25.843 gCO2 per paprika, 8.787 gCO2 per paprika, and 15.707 gCO2 per paprika,
respectively.
Table 3: CO2 Emission in gCO2 per paprika at Paprika Distribution Process: Cold Chain Management System
Farthest Nearest Average
Process
Distance Distance Distance
Cultivation (Seedling and Planting) 5.298 5.298 5.298
Transportation 1 (from greenhouse to wholesaler) 0.693 0.231 0.439
Packaging 0.590 0.590 0.590
Pre-cooling and storage 3.801 3.801 3.801
Refrigerated transportation (from wholesaler to retailer) 25.843 8.787 15.707
TOTAL CO2 Emission from whole system 36.225 18.707 25.835

Thus, the total CO2 emissions at paprika distribution process for cold chain management system for each
scenario are shown in Table 3. The percentage of CO2 emission from three scenarios (see Figs. 7, 8, and 9)
shows that of transportation from wholesaler to retailer would be the highest CO2 emission in the total process
due to the high amount fuel of refrigerated transportation.

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Fig. 7: Percentage CO2 Emission of the farthest distance at Each Process: Cold Chain Management System.

Fig. 8: Percentage CO2 Emission of the nearest distance at Each Process: Cold Chain Management System.

Fig. 9: Percentage CO2 Emission of the average distance at Each Process: Cold Chain Management System.
3.3. PV System for Paprika Distribution Process
Next, it is an extremely important purpose to reduce CO2 emission for the whole system. Here, the specific
CO2 emission of electricity in our target area (Indonesia) is very large due to much of fossil fuel consumption.
However, there would be plenty of solar resource in Indonesia. Recently, the PV (photovoltaic) system would be
generalized as one of countermeasure of CO2 emission reduction. Also, this is one of promising system in the
renewable energy ones. In the near future, the number of environmentally friendly system will be increased in
any countries.
The PV system can convert directly sunlight dissociation energy to electric energy. The electric energy
yielded by PV would be little influenced by the sunlight intensity, so that PV can produce electric energy which
is equivalent to the received sunlight [12]. The daily solar radiation data from NASA Surface Meteorology

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and/or Solar Energy website was used in this study. The average daily solar radiation in Pasir Langu village,
Cisaura is 4.81 kWh/m2/day.
The objective in this scenario is to promote PV system installation in greenhouse, packaging house, and cold
storage in order to mitigate CO2 emission by decreasing electricity usage. This PV hybrid system with electrical
grid of PLN without battery equipment is assumed to yield continuously so as to meet the supply of electric
energy [13]. Here, the PV system would supply the electricity of 30% and the rest electricity of 70% would be
compensated by PLN. Eq. (2) was used to calculate the electricity demand (EB) which would be supplied by PV
system (EA). Eq. (3) was used to calculate the total energy system (ET). Due to Eq. (4), the capacity of PV system
(CPV) whose factor adjustment is 1.1 was estimated, and the total number of PV module which should be
installed to be supplied for energy demand in each process was estimated due to Eq. (5) [12]. In this study, the
capacity of PV module has 100 Wp at 24 V. Table 7 shows the performance results of PV module in the sub-
process of cultivation, packaging, pre-cooling and storage, respectively.
EA = 30% x EB (2)

ET = EA + (15% x EA) (3)

(4)

(5)
Table 4: Performance Results of PV System Calculation
Data Cultivation Packaging Cold Storage
Energy Demand (EB) 2,930 Wh/day 10,989 Wh/day 54,601 Wh/day
Energy from PV (EA) 879 Wh 3,296 Wh 16,380 Wh
Total Energy (ET) 1,010 Wh 3,791 Wh 18,837 Wh
Capacity of PV (CPV) 231W 867 W 4,307 W
Total PV module 3 9 44

The utilization of solar energy by PV system causes very little environmental problem and provides no
greenhouse effect [14]. The solar energy supply due to a clean energy source does not emit pollutant substances
including CO2 gas during its operation. On the other hand, in LCA, the environmental load (ex. indirect factors
of manufacturing and materials and so on) from another viewpoint might have to be considered [15]. However,
we referred to the operation only, that is, assuming that PV system produces electricity, we treated the specific
CO2 emission of PV system as zero emission. As a result (see Table 5), the promotion of PV system in
greenhouse, packaging house, and cold storage, will be able to reduce 1.947 gCO2 per paprika from whole
distribution process, that is, the percentage of 11.9 % from cultivation , 30% from packaging, and 30% from cold
storage, respectively.
Table 5: CO2 Emission in gCO2 per paprika at Paprika Distribution Process: PV system
Farthest Nearest Average
Process
Distance Distance Distance
Cultivation (Seedling and Planting) 4.669 4.669 4.669
Transportation 1 (from greenhouse to wholesaler) 0.693 0.231 0.439
Packaging 0.413 0.413 0.413
Pre-cooling and storage 2.661 2.661 2.661
Refrigerated transportation (from wholesaler to retailer) 25.843 8.787 15.707
TOTAL CO2 Emission from whole system 34.278 16.760 23.888

4. Conclusions and Future Research


This paper has shown the calculation of CO2 emission on paprika cold chain model using LCA methodology.
Based on the result above, the CO2 emissions from cold chain management system are approximately 2-3 times
higher than a conventional system. In general, that would emit higher CO2 gas; however, the advanced system
with PV system would contribute environment aspect. Simultaneously, we would be able to secure the quality of
paprika quality.

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Therefore, it is important to make optimization model in cold chain management system to mitigate CO2
emission. Proposing PV system for greenhouse, packaging house, and cold storage reduce CO2 emission and/or
probably maintain paprika quality.
As other system candidates for paprika cultivation system, Blue-Tower (BT) system also can be used in
order to reduce the CO2 emission. This is due to the biomass resources. In the previous research [16], it was
shown that in Japan, paprika was cultivated in greenhouse which requires electricity, thermal energy and CO2
gas as growth agents. The CO2 emissions from paprika conventional cultivation system of 2 ha to 4 ha were
582.4 to 573.9 gCO2 per paprika, respectively. Inversely, due to promotion of BT-CGS (Blue-Tower-
cogeneration) or BT-CGS (SOFC-HP) case in the paprika cultivation facility, it enables to mitigate CO2
emission as shown in Tables 6 and 7.
Table 6: CO2 Emission and Reduction (BT-GE)
Case name (Cultivation CO2 Emission per a paprika Rate of CO2
scale, BT-plant scale) (gCO2 per paprika) Reduction (%)
GE-Case1 (2ha 15t) 104.6 82.0%
GE-Case1 (2ha 30t) 68.6 88.2%
GE-Case1 (2ha 60t) 98.9 83.0%
GE-Case1 (4ha 15t) 257.8 55.1%
GE-Case1 (4ha 30t) 93.2 83.8%
GE-Case1 (4ha 60t) 67.4 88.3%

Table 7: CO2 Emission and Reduction (BT-SOFC-HP)


Case name (Cultivation CO2 Emission per a paprika Rate of CO2
scale, BT-plant scale) (gCO2 per paprika) Reduction (%)
SOFC-Case1 (2ha 15t) 60.6 89.6%
SOFC-Case1 (2ha 30t) 68.5 88.2%
SOFC-Case1 (2ha 60t) 98.9 83.0%
SOFC-Case1 (4ha 15t) 92.1 84.0%
SOFC-Case1 (4ha 30t) 58.4 89.9%
SOFC-Case1 (4ha 60t) 66.9 88.4%

For future research, it is necessary to reduce CO2 emission from transportation process since transportation
is the biggest contributor of CO2 emission in cold chain management system. The CO2 emission reduction from
transportation process can be done by switching solar system for refrigerated transportation. Also, we need to
consider the scale merit, that is, we have to refer to the relationship between the scale of renewable energy
system and that of cultivation from the viewpoints of environmental impact and/or the cost.

References
[1] FAO, & UNIDO. (2009), Agro-Industries for Development, CABI North American Office, USA.
[2] Global Agrisystem. (2005), Cold Chain, Project Profiles, MP Agros.
[3] Rodrigue, et al. (2009), The Geography of Transport Systems, 2nd ed, New York, Routledge.
[4] Baldwin, C. J. (2009), Sustainability in the Food Industry, Wiley-Blackwell and the Institute of Food Technology.
[5] Haas, et al. (2000), Life Cycle Assessment Framework in Agriculture on the Farm Level, International Journal
LCA, Vol. 5 No. 6, pp 345-348.
[6] UNEP. (2009), Guidelines for Social Life Cycle Assessment of Products, United Nations Environment Programme,
Paris.
[7] Horne, et al. (2009), Life Cycle Assessment: Principles, Practice and Prospects, CSIRO, Australia.
[8] UNEP. (2004), Background Report for a UNEP Guide to Life Cycle Management: A Bridge to Sustainable
Products, United Nations Environment Programme, Paris.
[9] Suhedi, F. (2005), Emisi CO2 dari Konsumsi Energi Domestik, Pusat Litbang Permukiman.
[10] Asisten Deputi Urusan Data dan Informasi Lingkungan. (2009), Emisi Gas Rumah Kaca dalam Angka, Kementrian
Negara Lingkungan Hidup Republik Indonesia.
[11] Gratimah, R. (2009), Analisis Kebutuhan Hutan Kota sebagai Penyerap Gas CO2 Antropogenik di Pusat Kota
Medan, Fakultas Matematika dan Ilmu Pengetahuan Alam, Universitas Sumatera Utara Medan.

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22 E.A. Putri, K. Dowaki, G. Yudoko, and K. Koido Comparison of Environment Impact ...

[12] Bien, et al. (2008), Perancangan Sistem Hibrid Pembangkit Listrik Tenaga Surya Dengan Jala-Jala Listrik PLN
untuk Rumah Perkotaan, Journal Teknik Elektro, Vol. 8 No.1, pp 37-56.
[13] Strong, et al. (1993), The Solar Electric House, Chelsea Green ISBN 0-963783-2-1.
[14] Jivacate, et al. (1994), PV Development in Thailand, Solar Energy Materials and Solar Cells, Vol. 34, pp 57-66.
[15] Battisti, R., and Corrade, A. (2003), Evaluation of Technical Improvements of Photovoltaic Systems through Life
Cycle Assessment Methodology, Journal Energy, Vol. 30, pp 952-967.
[16] Fukumoto, et al. (2011). A Business Feasibility Study on a Paprika with Carbon Footprint Label, Proceedings of
EcoDesign International Symposium.

Cite this paper

Putri, E.A., Dowaki, K., Yudoko, G., and Koido, K. (2012). Comparison of Environment Impact between Conventional
and Cold Chain Management System in Paprika Distribution Process, Proceedings of The 3rd International Conference
on Technology and Operations Management: Sustaining Competitiveness through Green Technology Management,
BandungIndonesia (July 4-6), pp. 13-22. ISBN: 978-979-15458-4-6.

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Conference Proceedings 2012 ISBN: 978-979-15458-4-6
Available at www.ictom.info

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www.sbm.itb.ac.id www.cob.uum.edu.my

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Sustaining Competitiveness through Green Technology Management
Bandung Indonesia, July 4-6, 2012

Is Halal certification process green?


Mohd Rizal Razalli1,*, Suzzaini Abdullah1, Rushami Zien Yusoff1
1
Universiti Utara Malaysia (UUM),
Sintok 06010, Kedah Darul Aman, Malaysia

Abstract. These days, the environmental perspective on operations is becoming more common. In fact, any effort in
improving efficiency in the organization is closely related to sustainability of our environment. The Environmental
Management System (EMS) certification such as ISO 14001 has been accepted as the world standard. In addition to these
ISO standards, there are other certifications such as Halal certification. There is no research that investigates the relationship
between Halal Certification process and its effect on our environment. Hence, our main research question is that is Halal
Certification process can be considered as environmental friendly? In this paper, we argue that Halal Certification also
contributes towards green initiatives. We used EDC-UUM as our case study. EDC-UUM is actively seeking the Halal
certification from Malaysian authority agency or JAKIM. In this study, we assessed the perception of the EDC-UUM staff on
the issue of going green. The findings and implications are discussed in the paper.

Keywords: Halal certification, hotel operations, Sustainability, Green

1. Introduction
Environmental perspective on operations is becoming one of the main concerns of many organizations these
days. This fact has driven the growth of research related to green management [1, 2]. The concept, however, is
still relatively new and that has resulted to simple to complex interpretations by practiced organizations [3].
Moreover, the terms may come in different forms such as green technology, going green, sustainable
development, and environmental and eco-friendly. Even though the terms may differ, they have one common
mission that is to protect the earth from wrongdoing of human behaviour for our future generations.
The negative impact of human behaviour is the central issue in green management. All human activities
must be managed carefully without taking for granted about their consequences and to the welfare of the
environment. Despite the challenges to define green management, many previous scholars have attempted to
provide an exact definition for green management. For instance, after a comprehensive review of literature, the
following definition of green management was proposed.

* Corresponding author. Tel.: + 60-4-928-4595


E-mail address: rizal@uum.edu.my
24 M.R. Razalli, S. Abdullah, and R.Z. Yusoff Is Halal certification process ...

Green management is the organization-wide process of applying innovation to achieve


sustainability, waste reduction, social responsibility and a competitive advantage via continuous
learning and development and by embracing environmental goals and strategies that are fully
integrated with the goals and strategies of the organizations [3].
In the context of Malaysia, the Ministry of Energy, Green Technology and Water defines green technology
as the development and application of products, equipment and systems used to conserve the natural
environment and resources, which minimizes and reduces the negative impact of human activities [4]. The four
pillars of green technology policy include:
Energy - seek to attain energy independence and promote efficient utilization;
Environment - conserve and minimize the impact on the environment;
Economy - enhance the national economic development through the use of technology; and
Social - improve the quality of life for all.
One of the current established accreditations specifically for green or environmental management (EMS) is
ISO 14001: 2004. This is a management tool that can be used by organizations to identify and control the
environmental impact, to continuously improve environmental performance, and to implement a systematic
approach for assessing the environmental objectives and their implementation [5].
Besides this accreditation, less is known about the Halal certification and its relations to protect the
environment. In fact, there is no such study that has been carried out to see how Halal certification could also
relate to the green management. Hence, this paper aims to answer whether or not halal certification process can
be considered as part of the green management practices. In the quest of finding the answer, we have engaged in
a case study approach. We chose one hotel in the northern part of Malaysia as our case. However, we also
carried out a survey to seek their staffs perception quantitatively. The case is described in the later section.

2. Green Management and Halal Certification in the Hotel Industry


2.1. Green Hotels
The concept of green management is also embraced by the hotel industry. In fact, the Green Hotel
Association (GHA) has been established since 1993 to bring together hotels interested in environmental issues
[6]. According to the GHA, green hotels implement environmental programs that save water, energy, and
reduce solid waste to help protect the one and only earth. The implementation of green management in the hotel
industry is critical. The industry is the most environmentally harmful in the hospitality sector to contribute
substantial impact to the environment [7]. These impacts are associated to the waste production, water, and
energy consumption by hoteliers [8].
In addition to conserve the environment, green hotels would also enjoy various economic benefits from
being green. They can benefits from bigger savings and better efficiency through the adoption of environmental
practice in the area of operating cost reduction and operational efficiency [9]. However, a proper strategy and
implementation should be carried out. Some companies may find the green initiatives to result in lower profit
[10]. In terms of the customers, the green hotels would have a substantial potential market [11]. A study
conducted in Malaysia has found that the hotels customers associated being green to product quality, price, and
social responsibility [11]. Because of these benefits, more and more hotels are practicing green and would like
their properties to be recognized as the green hotels. For example, hotels that have received ASEAN Green
Hotel Award in 2010 increased from 5 to 10. Those hotels were the Andaman Langkawi, Shangri-Las Tanjung
Aru Resort and Spa, Mines Wellness Hotel, Shangri-Las Rasa Ria Resort, Renaissance Kuala Lumpur Hotel,
Hotel Melia Kuala Lumpur, Nexus Resort Karambunai, Shangri-Las Rasa Sayang Resort and Spa, Shangri-La
Hotel Kuala Lumpur and the Frangipani Langkawi resort and Spa [12].
2.2. Halal and Its Certification Process
In order to answer our research question, we need to understand the meaning of halal and the halal
certification process. The Halal certification is a complex assessment on food and beverages, consumer goods,
food premises, and slaughter houses. It is a document given to the applicant that guarantee that the items (either
food and beverages, consumer goods, food premises, or slaughter houses) are halal certified or meet the Islamic
principles and can be consumed by Muslim [13]. In Malaysia, the recognized authority by the Malaysian
government for Halal includes Jabatan Kemajuan Islam Malaysia/Department of Islamic Development Malaysia
(JAKIM), Jabatan Agama Islam Negeri/State Islamic Religious Department (JAIN) or Majlis Agama Islam
Negeri/State Islamic Religious Council (MAIN). Now, the Halal Industry Development Corporation (HDC) has
been appointed by the government to serve as a one stop center to manage the issue of Halal certification for

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M.R. Razalli, S. Abdullah, and R.Z. Yusoff Is Halal certification process ... 25

Malaysia. In this study, we focus on Halal certification for the hotel industry which is the food and beverages
produced by the hotels kitchen.
What is Halal? According to Halal Malaysia [14], the definition of Halal as stated in the Trade Description
Order (Usage of the Term Halal) 1975 is as follows:
When the term is used in relation to food in any form whatsoever, in the process of trade or commerce as an
aspect of trading or part of an aspect of trading for the referred to food, the terms Halal, Guaranteed Halal or
Muslim Food or any other terms that may be used to indicate or may be understood as meaning to indicate as
permissible to be consumed by Muslims and allowed in their religion for the referred to food to be consumed,
must therefore mean the following, that is, the food for which such terms are being used:
a) does not stem from or consists of any part of or item from animals that are forbidden to Muslims by
Islamic law, or animals that have not been slaughtered according to Islamic law;
b) does not contain any substance that is considered impure in Islamic law;
c) is not prepared, processed or manufactured using equipment or utensils that are not free from impurities
as defined by Islamic law ; and
d) that, in the preparation, processing or storage stage, does not come in contact with or is stored near any
kind of food that does not meet the requirements of para(s) (a), (b) or (c) or any substances that are
considered impure by Islamic law.
From the above definition, we can conclude that Halal certification would not just include the food itself but
also other areas as well. These three main areas are namely (1) the food and the source of the food, (2) the
process of preparation of the food, and (3) the process and handling the storage of the food. The halal
certification process also includes five processes namely the application/document approval, premise inspection,
panel committee/appeal committee, issuance of Halal certification, and monitoring and assessment [15].
The economic benefits of Halal certification are huge. The industry is estimated to worth around US 632
billion per year [16]. This is due to the increasing demand of Halal food around the globe [15].
2.3. Halal certification and green management: The similarities

Figure 1: Halal certification aspects

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26 M.R. Razalli, S. Abdullah, and R.Z. Yusoff Is Halal certification process ...

The halal certification process would include auditing on various aspects such as items depicted in Figure 1,
while green practices would include aspects such as in Figure 2. From the two figures we can see there are some
aspects that would be related between Halal certification process and green management. Among similarities
identified are (1) waste management, (2) education, (3) water (water supply & drainage), and (4) energy (ceiling,
lighting, ventilation, & temperature).

Figure 2: Green management aspects

3. Methodology
This was a quantitative case study that analysed from the perspective of individual personnel of EDC-UUM.
Almost all staff of EDC-UUM answered our questionnaire related to green and halal certification process. Due to
the scarcity of research on the topic and probably this was the first attempt to relate halal certification and green,
the questionnaire was self-constructed based on the Halal certification audit criteria. The perceived effects of
green and halal certification to performance are measured using various sources particularly from the
Environmental Management System studies [17] [18]. The scale of 1-5 was used ranging from improved
significantly (5) to worse significantly (1). For the level of agreement questions, the scale was ranged from
strongly agree (5) to strongly disagree (1). The questionnaires were also self-distributed and self-collected from
the EDC staff. The quantitative findings would be discussed in relation to the literatures available in the field.

4. Result and Discussion


4.1. EDC-UUM
EDC-UUM is an 8-storey hotel, located near the main entrance of the Universiti Utara Malaysia (UUM)
campus in Sintok. With a capacity of 88 spacious and comfortable guess rooms, EDC-UUM emphasizes value
for money and comfort. It is an ideal venue for business and leisure travelers with modern accommodation and
traditionally warm hospitality. Guest can look forward to affordable accommodation highlights such as a prayer
room, a meeting room, a laundry service, a restaurant and a small convenience store. The EDC-UUM, was
established as a cost centre but later on operating as a strategic business unit (SBU). It commenced its operation
on September 2006. The concept of the hotel is to provide hotel standard products and services and move

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M.R. Razalli, S. Abdullah, and R.Z. Yusoff Is Halal certification process ... 27

forward to fulfill its market needs. EDC-UUM is committed to providing the highest standards in hotel services
and facilities in keeping with its tagline: "Your Smile, Our Joy".
Since EDC-UUM is rather newly established and given as a strategic business unit (SBU) status, the
management decided to maintain its growth. In 2007 the total revenue was RM 1.8 million. The amount has
increased to RM 3.4 million and RM 3.5 million in 2008 and 2009 respectively. Apparently room and food and
beverage are the two major contributors to the EDC-UUM earnings. Hence, to stay competitive, EDC-UUM
should have the right business strategies in the years to come. One of the strategies is to obtain Halal certification
from JAKIM. Throughout the year of 2011 until the beginning of 2012, EDC-UUM has been aggressively
preparing the required documents for Halal certification for its kitchen. The standards of procedures for the hotel
have also been practiced to comply with the Halal certification.
4.2. Survey Results
Table 1 below shows the respondents background in terms of their role and tenure at EDC-UUM and total
years of experience in the hospitality industry. Most of the respondents of the study were not in the managerial
positions, had less than 1 year working experience at EDC-UUM but had 5-10 years working experience in the
hospitality industry. Note that the EDC-UUM has just been established for only 5 years during the time of the
study.
Table 1: Respondents Background

Respondents Background %
Role in the organization
Senior Management 10.9
Junior Management 7.3
Middle Line 27.3
Others 54.5
Total 100
Years of working in the organization
5 years 18.2
4 years 5.5
3 years 14.5
2 years 9.1
1 year or less 52.7
Total 100
Years of working experience
> than 20 years 1.8
15-20 years 1.8
10-15 years 5.5
5-10 years 16.4
< 5 years 74.5
Total 100

Next, we asked the respondents to indicate their agreement on the relationship between green and halal
certification. The result showed that 57.5% of the respondents agreed that Halal certification contributes towards
green. Another 27.3% even strongly agreed to the statement which made a total of 84.8% of the respondents to
perceive that Halal certification had a relationship with green. The specific result is shown in Figure 1.
Further, we investigated the perceived effect of Halal certification on the green performance. Figure 2 shows
the result. We found that majority (more than 50%) of the respondents indicated that Halal certification would
also be beneficial to EDC-UUM in terms of the following items:
Energy saving
Environmentally conscious
Environment accident
Society
Waste management
Coordination activities
Efficiency
Cost saving
Interaction buyers and customers

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28 M.R. Razalli, S. Abdullah, and R.Z. Yusoff Is Halal certification process ...

Personnel qualification
Employee motivation
Multi-skillness of employees
Tenders
Note that some of the respondents also perceived that Halal certification would have negative effects on
green performance. However, this was a small group that represented only less than 10% of the respondents as
stated in Table 2.

Fig 1: Level of agreement on Halal and green

Fig 2: Perceived effect of Halal certification on green performance

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M.R. Razalli, S. Abdullah, and R.Z. Yusoff Is Halal certification process ... 29

Table 2: Total Percentage of level of Halal certification effects on green performance

Green performance Worse (%) Improve (%)


Energy saving 9 62
Environmentally conscious 9 78
Environment accident 9 65
Society 7 76
Waste management 7 76
Coordination activities 7 73
Efficiency 9 80
Cost saving 9 78
Interaction buyer/customer 9 76
Complaint 7 69
Personnel qualification 9 82
Employee motivation 7 80
Multi-skillness of employees 7 80
Tenders 7 75
*moderate effect was uncounted

5. Discussion and Conclusion


Our findings provide evidence for future work in the area of Halal certification. Based on our initial attempt,
we have found that halal certification has somehow related to green. Most of the respondents have indicated their
agreement about the relationship. The top effects of Halal certification that they perceived related to green would
be namely (1) Personnel qualification, (2) employee motivation, (3) Multi-skillness of employees, (4) Efficiency,
(5) Environmentally conscious, and (6) cost saving. From this finding we can conclude that the Halal
certification is closely related to the human resource issue particularly on their training about the Halal
certification. It is interesting to note that halal certification is perceived to have effects on environmental aspect
as well.
As discussed earlier this findings could be associated with the existence of similarities between Halal
certification and green management. The Halal certification, in general, focuses more on the hygienic, quality,
and safety [15] aspects of the food and its preparation, while green management focuses on reducing the
negative impact of human activities towards the environment. Based on this small scale data, we can carefully
conclude that by being hygienic would also protect the environment. After all, Islam teaches us to protect the
environment. And it does not mean we can only do that by having ISO 14000 certification.

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[8] Rahman, I., D. Reynolds, and S. Svaren (2012), How green are North American hotel? An exploration of low-cost
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30 M.R. Razalli, S. Abdullah, and R.Z. Yusoff Is Halal certification process ...

[9] Scanlon, N.L. (2007), An analysisi of assessment of environmental operating practices in hotel and resort
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[10] Molina-Azorin, J.F., et al. (2009), Green management and financial performance: A literature review, Management
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Cite this paper

Razalli, M.R., Abdullah, S., and Yusoff, R.Z. (2012). Is Halal certification process green?, Proceedings of The 3rd
International Conference on Technology and Operations Management: Sustaining Competitiveness through Green
Technology Management, BandungIndonesia (July 4-6), pp. 23-30. ISBN: 978-979-15458-4-6.

The 3rd International Conference on Technology and Operations Management (ICTOM)


Conference Proceedings 2012 ISBN: 978-979-15458-4-6