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Auto Spare Parts Distributor Network Optimization


The ASP spare parts distribution strategy has inventory and customer service level problems that James Bond wants to solve using two alternative sets of methods, which include centralized and decentralized distribution strategies. There is need to do an inventory planning to achieve the economies of scale in response to the seasonal fluctuations on demand and reduce the holding costs. That is in addition to the use of repetitive orders methods to ensure effective replenishment of inventory stock. The study assesses both the centralized and decentralized methods to determine the best distribution method.

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What key factors should James Bond consider when deciding about optimizing ASP’s distribution network? [10%]

The company has to focus on strategies for reducing costs on inbound and outbound logistics besides establishing the storage and throughput capacity constraints for the storage and distribution nodes across the networks (Christopher and Peck 4). For James Bond, there is need for better workforce efficiency coupled with better cost management strategies. There is a need to reconfigure the network to realign the system with the distribution objectives of low distribution costs and availability of stock so that the optimization process provides acceptable returns on investment. James Bond must adopt model that faithfully represents the actual logistic processes.

These include keeping inventory levels above 99% while ensuring that the model represents a balance among the inventory levels, inbound, outbound transportation, and labor costs. A review of the models shows that scenario 2 allows for a periodic review of policies and the use of a centralized model located in Wuhan or Shanghai. Besides, the variability that details the number of items to be distributed using appropriate values as tabulated. James Bond must be able to explicitly interpret the model figures for the Beijing, Shanghai, Guangzhou, Wuhan, Chengdu, and Xi’an cities (Håkansson and Persson 2).

A critical review of the cases study shows that accurate data should be provided that is characterized by timeliness and clarity. There is a need for James Bond to ensure that data integration must be used across the network to ensure accurate and timely availability of data across the network nodes such as inventory levels and products designated for specific points for optimization support. The other items for James Bond to consider are the delivery of the products for easy management control. This could enable the management to make key decisions and plan against established performance indicators. The management will be able to achieve better cost management, lower working capital, and improved solution quality on inventory and logistics management.

What is the total annual inventory holding cost of all items if

DCs remain decentralized? [15%]

Total inventory holding cost is the sum of the ordering cost and carrying cost of inventory. In this case, if the DC remains decentralized, the total annual inventory costs are shown in table 1. Annual cost of outbound for all DCs is $ 90,829,864. From a managerial perspective, the distribution network should be designed in such a way to reduce constant or frequent transportation of products or to avoid transshipments. This can be achieved by use of selective inventory control that could enable the ASP to constantly review the inventories as per the value and usage as per the schedule, consider those items that are vital, critical, and desirable and determine stock levels and conduct a lead time analysis. If the approaches are coupled with the appropriate determination and use of the inventory turnover ratio, the management will be able to determine the excessive inventory levels at certain points (Monczka et al. 4). Besides, the ration can be sued to determine sluggish inventory amounts to reduce transshipments. Besides, a decentralized inventory will enable the management to respond in time. That could eliminate risks, minimize handling costs, and eliminate internal transportation costs.

Table 1

Total Overall Holding Cost (scaled for all items) $90,829,864

DCs are consolidated into a single centralized DC? [15%]

Table 2

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Total Overall Holding Cost (scaled for all items) $73,968,004

However, if the distribution is consolidated into a single centralized DC, the inventory costs could be $73,968,004 compared with that of the decentralized DC, which is $90,829,864. This could lead to lower operation costs despite the size of the distribution network. The rationale could lead to lower utility expenditure and lack of synchronized information and data on the inventory levels could be avoided. The single order quantity point could lead to a lower stock-in-hand ratio that could results from close monitoring of the movement of the items in one store (Sheffi 4). It is clear that there is an overinvestment in inventory at certain parts and under-inventory at other distribution points. The centralized system could lead to short lead times, shorter time in procedural inventory and supply time (Jin and Liao 4). It is recommended that the company can use the aggregate demand of the end customers to determine the economic order quantity to reduce demand variability and transit inventories.

What are the total outbound and inbound transportation costs of all items of

DCs remain decentralized? [15%]

Table 3

Annual cost for inbound TL per DC Beijing Shanghai Guangzhou Wuhan Chengdu Xi’an
53440 77440 65280 75520 40960 29440

Table 3 shows a summary of the costs for the decentralized distribution system. From the managerial point of view, the annual costs for inbound TL per DC for the company in all the centers are shown in table 3. It is worth noting that long replenishment cycles because of the failure to address the problems of replenishment in time are the direct causes of the problems. In this case, Shanghai has the highest inbound cost of 77440) and Xi’an has the lowest cost of 29440. Because of the differences in the logistics cost, it is imperative for the organization to consider taking action to accurately establish timely inbound shipments, complaints that have been raised, the level of inventory accuracy, and shipments that happen with errors to take corrective measures.

As a manager, the key performance indicators that can be measured to ensure that the DC are aligned with the data and organizational objectives include order fill rates, variability, back-order duration, cycle time, perfect order fill rates, and line item fill rates. Adjustments based on the periodic review of outbound and inbound logistics could be subjected to management scrutiny including the processes to encourage those people working in different distribution nodes to commit themselves for better service delivery. Basically, the outbound and unblood logistics costs are different as shown in tables 3 and 4.

DCs are consolidated into a single centralized DC? [15%]

Table 4

Outbound transportation (TL+LTL) scaled for all items Annual cost of outbound for all DCs 16155822
Annual cost of outbound if centralized (Wuhan) 16504388
Annual cost of outbound if centralized (Shanghai) 16781836

As shown in table 4, the outbound costs can be reduced by use of a centralized distribution network instead of a decentralized network so that costs can be consolidated into a single point instead of being distributed across different distribution centers.

What are the risks and merits of these strategies? [10%]

Using the decentralized and centralized approaches come with risks and merits that are specific to each category. The risks associated with the decentralized approach include the problem of acquisition of real time data and the problem of risk discovery. This could increase the odds of disruptions which eventually could end up increasing the frequency of transshipments and associated costs. The loss of supplier capacity in a decentralized system happens because the system is weak in adhering to policy. In addition, the other risks loss of supplies due to disruptions on a single supply line, which could adversely impact on inventory levels. Besides, there is the risk of poor linkages of the orders with time on the outbound logistics. In general, data accessibility and the lack of an automated system for data collection and sharing impinge negatively on the system distribution performance system.

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However, the merits of the decentralized distribution systems includes lower operation costs because product can be delivered to the destination on time, which enables the management within the supply centers to reduce stocking of unnecessary components. In addition, a greater degree of warehouse collaboration across distribution centers could lead to real time delivery of products without the need for transshipments. On the other hand, the risks associated with a centralized approach include loss of replenishment of stock levels in case center of distribution center fails to operate in time. However, the merits include reduce inbound costs because of the ability to back greater or larger inventories for each product in its supply network. Lower costs result from the use of a smaller number of trucks to transport the products into a single shipment center. In addition, customer level satisfaction could be achieved because resources could be dedicated to the centralized approach in the distribution of the spare parts.

It is worth noting that the risks associated with the decentralized system have greater impact than those associated with a centralized distribution system. Adopting a centralized system will enable the manager to easily measure the service levels in accordance with customer requirements. The ‘on time’ shipment of spare parts can be achieved through a centralized data collection of information that happens in real time. Besides, the service measurement of the spare parts can be achieved as shown in table 5 where the dollar value of the cost of outbound spare parts logistics is expressed as a percentage. Obviously, Wuhan is the most preferred DC in this case.

Table 5

Beijing Shanghai Guangzhou Wuhan Chengdu Xi’an
% change in outbound transportation costs if originating DC is Wuhan 3.00% 3.00% 3.00% 0.00% 1.50% 3.00%

What are your recommendations? [20%]

It could be appropriate for James Bond to factor into the supply chain management system different elements, which include time phased orders that will be used to plan and control the distribution of resources in planning to fulfill continuous spare part demand levels. This is consistent with the gross requirements based on customer needs and expectations or forecast demands and the economic order quantities. A fixed cycle interval will be used to conduct a periodic review of the centralized distribution system. The DC that relies on the centralized system will allow James Bond to link individual reorder points as well as establish group reorder points based on cyclic, linear, or trend demand patterns (McFarlane and Sheffi 6).

In addition, the management should calculate the reorder points to improve service level order schedule such as ‘on time’ shipping of orders on schedule, use of service measurements, use of dollar volumes, house manufacturing service measurement, and make-to-order items. There is need to make lot size considerations, which includes storage costs, physical management systems, risk obsolesce, and use of independent demand. Appropriate use of variance analysis consisting of different for all the DC of the products across the network could enable the manager to collect appropriate data in real time for effective decision making. In addition, the manager should incorporate a spare parts forecasting mechanism that could enable the management to accurately determine the number of spare parts needed. That could also include the inbound and outbound transportation costs, redistribution transport costs, warehouse productivity, and inventory returns for each of the distribution centers to determine how to optimize the DC.

Works Cited

Christopher, Martin, and Helen Peck. “Building the resilient supply chain.” The international journal of logistics management, vol. 2, no. 15, 2004, pp. 1-14.

Håkansson, Håkan, and Göran Persson. “Supply chain management: the logic of supply chains and networks.” The international journal of logistics management, vol. 1, no. 15, 2004, pp. 11-26.

Jin, Tongdan, and Haitao Liao. “Spare parts inventory control considering stochastic growth of an installed base.” Computers & Industrial Engineering, vol. 1, no.56,. 2009, pp. 452-460.

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McFarlane, Duncan, and Yossi Sheffi. “The impact of automatic identification on supply chain operations.” The international journal of logistics management, vol. 1, no. 14, 2003, pp. 1-17.

Monczka, Robert M., et al. Purchasing and supply chain management. Cengage Learning, 2015.

Sheffi, Yossi. “Supply chain management under the threat of international terrorism.” The International Journal of logistics management, vol. 2, no. 12, 2001, pp. 1-11.

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