Designing Rush Orders’ Surcharge and Discount Scheme in Volvo Construction Equipment (Volvo CE) by Using Game Theory
(2022) MIOM01 20221Production Management
- Abstract
- Background:
Despite the surcharge for the rush orders and discounts for the normal orders, some dealers of Volvo Construction Equipment (Volvo CE) in the EU region frequently make rush orders. Currently, there are three types of orders implemented by Volvo CE: Emergency Order (EO) which is processed at the same day the order is received by the Distribution Centre (DC), Day Order (DO) which is processed the next day after the DC receives it, and Stock Order (SO) which is started to be picked and packed according to each dealer’s predetermined schedule. The first two order types are the rush orders in question, while SO is the normal type of order. There are dealers whose rush order percentage is more than 50%, indicating that it makes... (More) - Background:
Despite the surcharge for the rush orders and discounts for the normal orders, some dealers of Volvo Construction Equipment (Volvo CE) in the EU region frequently make rush orders. Currently, there are three types of orders implemented by Volvo CE: Emergency Order (EO) which is processed at the same day the order is received by the Distribution Centre (DC), Day Order (DO) which is processed the next day after the DC receives it, and Stock Order (SO) which is started to be picked and packed according to each dealer’s predetermined schedule. The first two order types are the rush orders in question, while SO is the normal type of order. There are dealers whose rush order percentage is more than 50%, indicating that it makes more rush orders than normal orders. According to some interviewees from Volvo's Service Market Logistics (SML) division, this practice could cause a mess to Volvo's planning process in the long term.
Research Questions:
RQ1): How Volvo CE should design their surcharge and discount rates of the three order types?
RQ2): How will the proposed solution perform?
Purpose:
The goal is to suggest the discount and surcharge rate for three types of orders implemented by Volvo CE. The report also attempts to provide suggested stock levels for the DC and dealers in response to the policy changes made by Volvo CE.
Methodology:
In this master thesis, interviews, data collection from internal system and literature review are conducted through a deductive approach. Attempts to answer RQ1 use Stackelberg Game and multi-echelon inventory system perspective, while answering RQ2 will use simulation study.
Result:
Two scenarios are devised. Scenario 1: DC has target fill rate and implements 5% EO surcharge, 0% DO surcharge, and 0% SO discount to the dealers. Scenario 2: DC has a backorder cost and implements 15% EO surcharge, 6% DO surcharge, and 10% SO discount to the dealers. Based on the analytical solution only, these two scenarios can reduce the total costs of the DC. Scenario 1 can reduce the total costs by 1.12%, while Scenario 2 can provide a 13.37% decrease in the DC’s total costs. However, if the solutions are put into the business process simulation, it is known that the solutions proposed unfortunately cannot significantly increase the average annual profit of the DC.
Conclusion & Recommendation:
As the solutions cannot provide a significant improvement in the simulation, there are several explanations behind that. Firstly, the rush orders may not only consist of the inability of the dealers to satisfy the demand immediately. The second explanation could be that the simplifications on the model could not fully represent the current implemented system at Volvo CE. Lastly, there could be any more suitable demand distribution of the input that represents the demand. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/9085589
- author
- Gaza, Ahmad Avisiena LU and Feng, Yangxiujie LU
- supervisor
- organization
- course
- MIOM01 20221
- year
- 2022
- type
- H2 - Master's Degree (Two Years)
- subject
- keywords
- Inventory control, Multi-echelon inventory system, game theory, Stackelberg game
- report number
- 22/5684
- language
- English
- id
- 9085589
- date added to LUP
- 2022-06-10 14:43:05
- date last changed
- 2022-06-10 14:43:05
@misc{9085589,
abstract = {{Background:
Despite the surcharge for the rush orders and discounts for the normal orders, some dealers of Volvo Construction Equipment (Volvo CE) in the EU region frequently make rush orders. Currently, there are three types of orders implemented by Volvo CE: Emergency Order (EO) which is processed at the same day the order is received by the Distribution Centre (DC), Day Order (DO) which is processed the next day after the DC receives it, and Stock Order (SO) which is started to be picked and packed according to each dealer’s predetermined schedule. The first two order types are the rush orders in question, while SO is the normal type of order. There are dealers whose rush order percentage is more than 50%, indicating that it makes more rush orders than normal orders. According to some interviewees from Volvo's Service Market Logistics (SML) division, this practice could cause a mess to Volvo's planning process in the long term.
Research Questions:
RQ1): How Volvo CE should design their surcharge and discount rates of the three order types?
RQ2): How will the proposed solution perform?
Purpose:
The goal is to suggest the discount and surcharge rate for three types of orders implemented by Volvo CE. The report also attempts to provide suggested stock levels for the DC and dealers in response to the policy changes made by Volvo CE.
Methodology:
In this master thesis, interviews, data collection from internal system and literature review are conducted through a deductive approach. Attempts to answer RQ1 use Stackelberg Game and multi-echelon inventory system perspective, while answering RQ2 will use simulation study.
Result:
Two scenarios are devised. Scenario 1: DC has target fill rate and implements 5% EO surcharge, 0% DO surcharge, and 0% SO discount to the dealers. Scenario 2: DC has a backorder cost and implements 15% EO surcharge, 6% DO surcharge, and 10% SO discount to the dealers. Based on the analytical solution only, these two scenarios can reduce the total costs of the DC. Scenario 1 can reduce the total costs by 1.12%, while Scenario 2 can provide a 13.37% decrease in the DC’s total costs. However, if the solutions are put into the business process simulation, it is known that the solutions proposed unfortunately cannot significantly increase the average annual profit of the DC.
Conclusion & Recommendation:
As the solutions cannot provide a significant improvement in the simulation, there are several explanations behind that. Firstly, the rush orders may not only consist of the inability of the dealers to satisfy the demand immediately. The second explanation could be that the simplifications on the model could not fully represent the current implemented system at Volvo CE. Lastly, there could be any more suitable demand distribution of the input that represents the demand.}},
author = {{Gaza, Ahmad Avisiena and Feng, Yangxiujie}},
language = {{eng}},
note = {{Student Paper}},
title = {{Designing Rush Orders’ Surcharge and Discount Scheme in Volvo Construction Equipment (Volvo CE) by Using Game Theory}},
year = {{2022}},
}