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Distribution Network Design for a Cost Competitive Supply Chain

Lans Zlobeck, Hannes LU and Forsberg, Christian LU (2014) MTT820 20141
Engineering Logistics
Abstract
Objectives
The purpose of the thesis is to investigate how a new logistic set-up can lower the transportation cost of OEM articles. Four objectives are identified to that end: identify the OEM articles, map their flow, create simulation tool and examine what logistics set-up is suitable.
Background
The increasing rate of globalization has put immense pressure on the world’s infrastructure. As a result, the transport modes are on the verge of its maximum capacity. In combination with raising oil prices and the introduction of emission rights, logistics cost seem to go nowhere but up. Streamlining your logistics operations and distribution network thus becomes a vital part in staying cost efficient and proactive to future challenges.
The... (More)
Objectives
The purpose of the thesis is to investigate how a new logistic set-up can lower the transportation cost of OEM articles. Four objectives are identified to that end: identify the OEM articles, map their flow, create simulation tool and examine what logistics set-up is suitable.
Background
The increasing rate of globalization has put immense pressure on the world’s infrastructure. As a result, the transport modes are on the verge of its maximum capacity. In combination with raising oil prices and the introduction of emission rights, logistics cost seem to go nowhere but up. Streamlining your logistics operations and distribution network thus becomes a vital part in staying cost efficient and proactive to future challenges.
The OEM articles are accessories of various types at the studied company; these could be insert modules for machines, small baskets and trolleys etc. The OEM articles belong to a sub-area in the two customer segments of the company. The sub-area is merely seen as a complementary offer to the company’s business proposition which is based around machines of sterilizers and disinfectors. As such it has not gotten much attention from management although an attempt to streamline the sub-area of OEM was made with the creation of System Accessories, a sheer trading company that handles the majority of the OEM articles. The rest of the OEM articles are today still handled by the factories, which are all operated as limited companies. This means that each factory handles its own set of OEM articles with little or no co-ordination with the other factories and the business area as a whole.
The studied company is Getinge Infection Control, a business area of the Getinge Group. The Getinge Group has 15 000+ employees and revenues of approximate 25 billion SEK. Getinge Group is stock listed on OMX and have had a strong history of M&A to support its growth. The growth strategy has been successful and led to today’s situation where economy of scale opportunities exists but are not always fully utilized. For 2013, revenues of Infection Control were 5.2 billion SEK and the number of associates just above 3000.
Delimitations
The thesis is limited to investigate the trading company System Accessories and three of the ten production facilities within the business area of Getinge IC. Furthermore, the sales companies who sell the OEM articles have a tendency of maverick buying of OEM articles. These flows are thus not covered in this thesis.
Only 1st tier suppliers and customers are covered in the mapped flow. And these are for the most part only described and dealt with from a national level perspective, this due to the global and hence more strategic nature of this research. Time constraint set for the research has further called upon the imposed delimitations.
Method
The research is conducted from the scientific approach called systems theory. This implies that things are interconnected. Since this thesis is concerned with objectives within the cross-functional activity of logistics, its interface with (the identified and relevant) other areas of operations are also studied. Identified development for Getinge IC and the areas of operations concluded that the research purpose had to be approached from the concept of supply chain management. Both quantitative and qualitative data has been gathered in an abductive approach to that end.
Results & Conclusions
The researchers echo the conclusions made in previous case-study experiences related to network design and in particular the usage of the capacitated plant location model: issues with using the model might arise from lack of information or lack of resources to gather information. We conclude that these factors also influences the results from the simulation tool used in this thesis i.e. the gravity location model.
In this study 1252 articles were identified as active sells articles. Active articles refer to an article that had been sold in the studied period of 2011-2013. The articles were identified in different ways for the different studied companies since they use different ERP-systems. Either a specific list of historic sell data for the OEM articles was available at the companies, or a complete sell list including other articles as well was obtained. The latter list was then matched against a raw data file containing the relevant OEM articles. Hence a segmentation of the OEM articles in the sell statistics could be made. A similar approach was made for the bought articles. These numbers differ since some of the articles are value-added at the factories, but are seen as OEM articles in this thesis due to the future development of Getinge IC. The relevant bought articles used in this thesis are: 1096.
From the combined statistics of bought and sold articles, compilations of number of purchase orders for inbound and outbound flow could be made, capturing the main flow of OEM articles. The results can be seen in Table 1 for inbound, table 2 for outbound. Based on simulations made with procurement and sell data related to the identified OEM articles, points of gravity locations have been identified using the gravity location model for both the inbound and outbound flow. Against the theoretical frame of reference on distribution systems and bill of distribution set-ups it was concluded that a one-terminal structure with a demand facing DC would be a suitable set-up for the studied flow of OEM articles. This conclusion was arrived at using both simulation data and statistics related to the suppliers and customers. Together with qualitative data related to the future development of Getinge IC with regards to supply chain management, it was argued that the indicated point from the outbound gravity location model would be most reliable as the location of a new DC. The center of gravity location from that model points at a position in central Germany.
Recommendations
It is concluded that a DC located in the central of Europe would be a suitable logistics set-up for the OEM articles. The used simulation tool, a refined gravity location model, points at the center of Germany. Imposing a DC in the distribution system for OEM articles which this thesis suggest, of course results in new costs associated with this type of facility and its desired activities. The authors emphasize the need of further research for Getinge IC to identify if nearby existing facilities in the group could be used as a DC or if a currently used 3PL or new one should be contracted for a the purpose of a DC. Building an entirely new facility for the purpose of a DC is not recommended in this case. The investigation should consider aspects such as: transports cost to and from location, cost of facility in the area, labor costs in region etc.
A study should be undertaken concerning what articles to include in the new DC, and which should continue to be handled by direct transport. Furthermore, a study related to how the maverick buying (and thus sales) of Getinge IC’s three Sales & Services companies would affect the proposed solution needs to be done. (Less)
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author
Lans Zlobeck, Hannes LU and Forsberg, Christian LU
supervisor
organization
course
MTT820 20141
year
type
M1 - University Diploma
subject
keywords
Distribution network design, Network optimization, distribution system, logistics, supply chain management
report number
5772
language
English
id
4832501
date added to LUP
2014-12-02 12:57:59
date last changed
2014-12-02 12:57:59
@misc{4832501,
  abstract     = {{Objectives
The purpose of the thesis is to investigate how a new logistic set-up can lower the transportation cost of OEM articles. Four objectives are identified to that end: identify the OEM articles, map their flow, create simulation tool and examine what logistics set-up is suitable.
Background
The increasing rate of globalization has put immense pressure on the world’s infrastructure. As a result, the transport modes are on the verge of its maximum capacity. In combination with raising oil prices and the introduction of emission rights, logistics cost seem to go nowhere but up. Streamlining your logistics operations and distribution network thus becomes a vital part in staying cost efficient and proactive to future challenges.
The OEM articles are accessories of various types at the studied company; these could be insert modules for machines, small baskets and trolleys etc. The OEM articles belong to a sub-area in the two customer segments of the company. The sub-area is merely seen as a complementary offer to the company’s business proposition which is based around machines of sterilizers and disinfectors. As such it has not gotten much attention from management although an attempt to streamline the sub-area of OEM was made with the creation of System Accessories, a sheer trading company that handles the majority of the OEM articles. The rest of the OEM articles are today still handled by the factories, which are all operated as limited companies. This means that each factory handles its own set of OEM articles with little or no co-ordination with the other factories and the business area as a whole.
The studied company is Getinge Infection Control, a business area of the Getinge Group. The Getinge Group has 15 000+ employees and revenues of approximate 25 billion SEK. Getinge Group is stock listed on OMX and have had a strong history of M&A to support its growth. The growth strategy has been successful and led to today’s situation where economy of scale opportunities exists but are not always fully utilized. For 2013, revenues of Infection Control were 5.2 billion SEK and the number of associates just above 3000.
Delimitations
The thesis is limited to investigate the trading company System Accessories and three of the ten production facilities within the business area of Getinge IC. Furthermore, the sales companies who sell the OEM articles have a tendency of maverick buying of OEM articles. These flows are thus not covered in this thesis.
Only 1st tier suppliers and customers are covered in the mapped flow. And these are for the most part only described and dealt with from a national level perspective, this due to the global and hence more strategic nature of this research. Time constraint set for the research has further called upon the imposed delimitations.
Method
The research is conducted from the scientific approach called systems theory. This implies that things are interconnected. Since this thesis is concerned with objectives within the cross-functional activity of logistics, its interface with (the identified and relevant) other areas of operations are also studied. Identified development for Getinge IC and the areas of operations concluded that the research purpose had to be approached from the concept of supply chain management. Both quantitative and qualitative data has been gathered in an abductive approach to that end.
Results & Conclusions
The researchers echo the conclusions made in previous case-study experiences related to network design and in particular the usage of the capacitated plant location model: issues with using the model might arise from lack of information or lack of resources to gather information. We conclude that these factors also influences the results from the simulation tool used in this thesis i.e. the gravity location model.
In this study 1252 articles were identified as active sells articles. Active articles refer to an article that had been sold in the studied period of 2011-2013. The articles were identified in different ways for the different studied companies since they use different ERP-systems. Either a specific list of historic sell data for the OEM articles was available at the companies, or a complete sell list including other articles as well was obtained. The latter list was then matched against a raw data file containing the relevant OEM articles. Hence a segmentation of the OEM articles in the sell statistics could be made. A similar approach was made for the bought articles. These numbers differ since some of the articles are value-added at the factories, but are seen as OEM articles in this thesis due to the future development of Getinge IC. The relevant bought articles used in this thesis are: 1096.
From the combined statistics of bought and sold articles, compilations of number of purchase orders for inbound and outbound flow could be made, capturing the main flow of OEM articles. The results can be seen in Table 1 for inbound, table 2 for outbound. Based on simulations made with procurement and sell data related to the identified OEM articles, points of gravity locations have been identified using the gravity location model for both the inbound and outbound flow. Against the theoretical frame of reference on distribution systems and bill of distribution set-ups it was concluded that a one-terminal structure with a demand facing DC would be a suitable set-up for the studied flow of OEM articles. This conclusion was arrived at using both simulation data and statistics related to the suppliers and customers. Together with qualitative data related to the future development of Getinge IC with regards to supply chain management, it was argued that the indicated point from the outbound gravity location model would be most reliable as the location of a new DC. The center of gravity location from that model points at a position in central Germany.
Recommendations
It is concluded that a DC located in the central of Europe would be a suitable logistics set-up for the OEM articles. The used simulation tool, a refined gravity location model, points at the center of Germany. Imposing a DC in the distribution system for OEM articles which this thesis suggest, of course results in new costs associated with this type of facility and its desired activities. The authors emphasize the need of further research for Getinge IC to identify if nearby existing facilities in the group could be used as a DC or if a currently used 3PL or new one should be contracted for a the purpose of a DC. Building an entirely new facility for the purpose of a DC is not recommended in this case. The investigation should consider aspects such as: transports cost to and from location, cost of facility in the area, labor costs in region etc.
A study should be undertaken concerning what articles to include in the new DC, and which should continue to be handled by direct transport. Furthermore, a study related to how the maverick buying (and thus sales) of Getinge IC’s three Sales & Services companies would affect the proposed solution needs to be done.}},
  author       = {{Lans Zlobeck, Hannes and Forsberg, Christian}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Distribution Network Design for a Cost Competitive Supply Chain}},
  year         = {{2014}},
}