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A framework for understanding the cost of servicing customers when orders are at risk of late delivery – A case study at Tetra Pak

Olsson, Alexander LU and Lundqvist, Simon LU (2020) MTTM05 20201
Engineering Logistics
Department of Industrial Management and Logistics
Abstract
Title: A framework for understanding the cost of servicing customers when orders are at risk of late delivery – A case study at Tetra Pak
Authors: Simon Lundqvist and Alexander Olsson
Supervisors: Eva Berg, Division of Industrial Management and Logistics, Lund University Michael Hultberg, Global supply planning manager, Tetra Pak
Examiner: Jan Olhager, Division of Industrial Management and Logistics, Lund University
Background: In order to satisfy the customers’ demands of a flexible product segment a flexible supply chain is essential. Aspects or decisions included in a flexible supply chain are countless. To sustain a flexible and cost-efficient supply chain, decisions must be taken balancing aspects like the cost of increasing the... (More)
Title: A framework for understanding the cost of servicing customers when orders are at risk of late delivery – A case study at Tetra Pak
Authors: Simon Lundqvist and Alexander Olsson
Supervisors: Eva Berg, Division of Industrial Management and Logistics, Lund University Michael Hultberg, Global supply planning manager, Tetra Pak
Examiner: Jan Olhager, Division of Industrial Management and Logistics, Lund University
Background: In order to satisfy the customers’ demands of a flexible product segment a flexible supply chain is essential. Aspects or decisions included in a flexible supply chain are countless. To sustain a flexible and cost-efficient supply chain, decisions must be taken balancing aspects like the cost of increasing the internal production capacity vs improve transportation lead time vs late deliveries.
Problem description: One of the major challenges faced in Supply Chain Management is the understanding of costs throughout the supply chain, especially engineered & make-to-order products and whether to serve a customer based on the real costs. Thus, there is a derived need for a data driven decision making process in distinguishing what orders generate what costs and where to prioritize during periods of high demand.
Purpose: The purpose of this thesis is to develop a framework to assist in the decision-making process of late orders and to increase cost-awareness of the studied product.
Research questions:
RQ1 –What are the cost elements and costs drivers of supply chain activities for the studied product?
RQ2 – Is there a difference in profitability and cost structures between orders based on as-is costs for the studied product?
RQ3 – How can cost modelling of increasing production capacity, freight selection and late deliveries support Tetra Pak in handling late orders?
RQ4 – What are the supply chain complexities related to the scenarios examined in RQ3?
Methodology: An abductive case study is performed. Data was collected both qualitatively from interviews and quantitatively from internal systems. RQ1 was answered by mapping and analyzing the supply chain and its activities. The concepts of cost-to-serve and customer profitability was applied on the studied product in order to answer RQ2. The (1) production environment and (2) logistics landscape were analyzed and traditional cost allocation method was utilized in allocating costs to (1) work centers and (2) sales orders. Using these models estimating the costs of increasing the production capacity and freight costs were constructed. These cost estimation models were combined with the answers to RQ2 and a framework for handling late deliveries was constructed answering RQ3. The complexities encompassing the framework was examined and answered by RQ4.
Results: The cost estimation models are based on production and logistics cost drivers, in the examined case most costs are allocated directly to orders. The demand driven environment cause complexities to be numerous and introduces a large variability in cost estimations. No differences in cost structures and profitability between customer segments where identified, large difference was identified on a product basis.
Conclusion: The cost of increasing the production capacity will vastly exceed the logistic savings in a short time scope. The strength of the framework and developed models is within knowing the costs of the investigated scenarios in order to make a conscious decision to take these costs where a reactive action is a necessity and cost considerations are not warranted. Besides the investigated scenarios the study found significant differences in the cost structure between product segments were identified. However, such an analysis must be put into perspective with the cumulative value of all purchase orders by that customer and potential future purchases. This is especially true for large and multinational companies, where the different business units could have the same customers in many cases. The prioritization of customers should be a task for the top management team and should be based on the aggregate sales from all business units.
Keywords: Cost-to-serve, cost modelling, customer profitability, demand driven supply chains, made-to-order, engineer-to-order, supply chain complexities, supply chain decisions. (Less)
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author
Olsson, Alexander LU and Lundqvist, Simon LU
supervisor
organization
course
MTTM05 20201
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Cost-to-serve, cost modelling, customer profitability, demand driven supply chains, made-to-order, engineer-to-order, supply chain complexities, supply chain decisions.
report number
5921
language
English
id
9015599
date added to LUP
2020-06-17 13:49:18
date last changed
2020-06-17 13:49:18
@misc{9015599,
  abstract     = {{Title: A framework for understanding the cost of servicing customers when orders are at risk of late delivery – A case study at Tetra Pak
Authors: Simon Lundqvist and Alexander Olsson
Supervisors: Eva Berg, Division of Industrial Management and Logistics, Lund University Michael Hultberg, Global supply planning manager, Tetra Pak
Examiner: Jan Olhager, Division of Industrial Management and Logistics, Lund University
Background: In order to satisfy the customers’ demands of a flexible product segment a flexible supply chain is essential. Aspects or decisions included in a flexible supply chain are countless. To sustain a flexible and cost-efficient supply chain, decisions must be taken balancing aspects like the cost of increasing the internal production capacity vs improve transportation lead time vs late deliveries.
Problem description: One of the major challenges faced in Supply Chain Management is the understanding of costs throughout the supply chain, especially engineered & make-to-order products and whether to serve a customer based on the real costs. Thus, there is a derived need for a data driven decision making process in distinguishing what orders generate what costs and where to prioritize during periods of high demand.
Purpose: The purpose of this thesis is to develop a framework to assist in the decision-making process of late orders and to increase cost-awareness of the studied product.
Research questions: 
RQ1 –What are the cost elements and costs drivers of supply chain activities for the studied product?
RQ2 – Is there a difference in profitability and cost structures between orders based on as-is costs for the studied product?
RQ3 – How can cost modelling of increasing production capacity, freight selection and late deliveries support Tetra Pak in handling late orders?
RQ4 – What are the supply chain complexities related to the scenarios examined in RQ3?
Methodology: An abductive case study is performed. Data was collected both qualitatively from interviews and quantitatively from internal systems. RQ1 was answered by mapping and analyzing the supply chain and its activities. The concepts of cost-to-serve and customer profitability was applied on the studied product in order to answer RQ2. The (1) production environment and (2) logistics landscape were analyzed and traditional cost allocation method was utilized in allocating costs to (1) work centers and (2) sales orders. Using these models estimating the costs of increasing the production capacity and freight costs were constructed. These cost estimation models were combined with the answers to RQ2 and a framework for handling late deliveries was constructed answering RQ3. The complexities encompassing the framework was examined and answered by RQ4.
Results: The cost estimation models are based on production and logistics cost drivers, in the examined case most costs are allocated directly to orders. The demand driven environment cause complexities to be numerous and introduces a large variability in cost estimations. No differences in cost structures and profitability between customer segments where identified, large difference was identified on a product basis.
Conclusion: The cost of increasing the production capacity will vastly exceed the logistic savings in a short time scope. The strength of the framework and developed models is within knowing the costs of the investigated scenarios in order to make a conscious decision to take these costs where a reactive action is a necessity and cost considerations are not warranted. Besides the investigated scenarios the study found significant differences in the cost structure between product segments were identified. However, such an analysis must be put into perspective with the cumulative value of all purchase orders by that customer and potential future purchases. This is especially true for large and multinational companies, where the different business units could have the same customers in many cases. The prioritization of customers should be a task for the top management team and should be based on the aggregate sales from all business units.
Keywords: Cost-to-serve, cost modelling, customer profitability, demand driven supply chains, made-to-order, engineer-to-order, supply chain complexities, supply chain decisions.}},
  author       = {{Olsson, Alexander and Lundqvist, Simon}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{A framework for understanding the cost of servicing customers when orders are at risk of late delivery – A case study at Tetra Pak}},
  year         = {{2020}},
}