Cost drivers in a warehouse line-haulage operation and how to affect them

Abstract

In the early 21st century, deflationary trends applied pressure on margins in a range of different industries and subsequently cost reductions were required. Improving efficiency in the supply chain was identified as one of the key sources of potential cost savings. Subsequently, a trend towards slimmer supply chains with less stockkeeping emerged. However, due to the covid-19 pandemic supply chain has changed and businesses have now started to increase stock levels again. At the AAK plant in Karlshamn, Sweden, a line-haulage operation between internal warehouses and external warehouses is in place together with a Logistic Service Provider (LSP). AAK is a global producer of plant-based fats and oils with an outspoken goal of 10% year-on-year EBIT improvement. Hence, operational costs are important and the local supply chain steering group at the Karlshamn plant has identified that costs are unreasonably high in the line-haulage operation between the internal warehouse and the external warehouses.

The purpose of the study is to conduct a translucent review of AAK’s outbound logistic operations in relation to the internal warehouse and the external warehouses. This included investigating the key cost drivers in the line-haulage operation and how these might be mitigated. It also included scrutinizing the supplier agreement with the LSP, searching for levers of improvement in the pursuit of operational excellence and cost reductions. Lastly, benchmarking has been made against comparable industries and the academic field.

Research was initiated by conducting interviews with stakeholders at AAK Karlshamn to deep dive into the problem and to thoroughly understand operations. Then, theory from purchasing, forecasting, outsourcing, and warehousing was reviewed to create the needed theoretical framework. Empirical data was mainly collected through interviews and internal AAK documents. The AAK documents consisted of invoices from the LSP and internal warehouse data. This data was reviewed and aggregated into data sets, later used for analysis. Furthermore, interviews with subject matter experts at AAK was conducted to compliment and validate data. To benchmark AAK against the industry data was collected through relevant articles, industry reviews and an external interview.

By analyzing the acquired data sets and putting findings in relation to theory, several conclusions could be drawn. It was found that AAK Karlshamn’s lack of data capabilities act as a main hurdle in aligning the operation and enabling data driven decisions. The fill degree at the internal warehouse was found to be too low, resulting in excessive use of the external warehouses, which drives costs. It was also found that the supplier agreement lacks control mechanisms, resulting in a lack of information exchange between AAK and the LSP. Further, it was discovered that AAK has the possibility to reduce costs in the line-haulage operation without lowering dispatched volumes by negotiating the agreement with the LSP. This includes minimum utilization space at external warehouse, late order penalties, weekend dispatchments and irregular working hours. Lastly, it was concluded that, when benchmarked, AAK is well aligned witht he industry in terms of their partnership with the LSP. However, AAK lacks behind in data capabilities.

Popular Abstract

Companies continuously strive to reduce costs in their supply chain. For larger companies parts of the supply chain can easily be forgotten because of their diminishing impact on the total cost. At the AAK plant in Karlshamn, Sweden, a line- haulage operation between internal warehouses and external warehouses is in place together with a Logistic Service Provider (LSP).

AAK is a global producer of plant-based fats and oils. The local supply chain steering group at the Karlshamn site has identified that costs are unreasonably high in the line-haulage operation between the internal warehouse and the external warehouses. The internal warehouse is situated at the AAK Karlshman site and the external warehouses are situated within a five km range from the internal warehouse.

This study includes an investigation of the key cost drivers in the line-haulage operation and how these might be mitigated. It also includes scrutinizing the supplier agreement with the LSP, searching for levers of improvement in the pursuit of operational excellence and cost reductions. Lastly, AAK are compared to companies in comparable industries and the research within the academic field.

Throughout this project several findings have been made. Firstly, it was found that there exists misalignment between the supply chain steering group and operational warehouse staff where the steering group thinks that operational staff uses the external warehouses too much. The operational warehouse staff wants to have a margin of safety to make sure the warehouse is not full since this could result in a production stop. The supply chain steering group on the other hand think that an unnecessary margin of safety is applied

and that the operational staff do not want to have a too full warehouse since an emptier warehouse is easier to operate. The main cause for this problem was found to be inadequate handling of data where data is not easily available which causes decisions to be based on gut feeling rather than on data.

When analyzing movement data at the internal warehouse the fill degree at the internal warehouse was found to be on average 48,7%. Hence, the warehouse is on average less than half full and the fill degree easily could be higher. If the warehouse fill degree would be higher the LSP could be used less, and costs would be decreased. Transport and handling are largest costs associated with the LSP. They are both direct costs associated and together they amount to 64,9% of the total cost. Hence, large savings can be made by simply dispatching less pallets.

Furthermore, it was found that communication between AAK and the LSP should be improved. It was discovered that AAK has the possibility to reduce costs in the line-haulage operation without lowering dispatched volumes by negotiating the agreement with the LSP. This includes minimum utilization space at external warehouse, late order penalties, weekend dispatchments and irregular working hours. Lastly, it was concluded that, when benchmarked, AAK is well aligned with the industry in terms of their partnership with the LSP. However, AAK lacks behind in data capabilities.

All research findings can be found in the published report “Cost drivers in a warehouse line-haulage operation and how to affect them” by Gustav Karlbom and Axel Andersson at The Faculty of Engineering, LTH Lund University.

• author: Karlbom, Gustav and Andersson, Axel
• supervisor: Louise Bildsten
• organization: Engineering Logistics
• course: MTTM05 20221
• year: 2022
• type: H2 - Master's Degree (Two Years)
• subject: Technology and Engineering
• keywords: Internal warehouse External warehouse Line haulage operation Fill degree Logistic service provider
• report number: 5982
• language: English
• id: 9088816
• date added to LUP: 2022-06-16 13:27:47
• date last changed: 2022-06-20 07:47:53