Centralization of inventory management for spare parts

Abstract: Background Arriva DK currently has a decentralized organization where each depot is responsible for the inventory control of their spare parts. This type of organization often presents challenges when it comes to control and management. Arriva DK suffers from high order costs due to lack of coordination between the depots and the suppliers. To address these issues Arriva wants to introduce a central warehouse. Purpose The aim of the thesis is to optimize inventory management by creating simulation models that from a cost perspective explore the effects of introducing a central warehouse for spare parts. To provide Arriva DK with simulation models of the supply chain and inventory management, both with – and without a central warehouse. Method The thesis is built on Hillier and Lieberman’s Operations research method. Data used in the thesis consist of both primary and secondary quantitative and qualitative data. Literature studies have also been done and are the basis for the theory. Two simulation models were built. The first model represents an optimized decentralized situation that uses joint replenishment. The second model represents a system with a central warehouse, which also uses joint replenishment. Thereafter the models were compared to determine if an investment in a centralized system is profitable. Conclusions The results from the simulation study showed that the total cost for the CW-model is higher than the DC-model in all scenarios. Both the holding- and order cost will be higher with a central warehouse. The major advantage of using a central warehouse is that the number of orders to the suppliers will be reduced by more than 50%. This along with the suppliers only have to deliver to one location will result in price reductions on the products. Even with small discounts, will a central warehouse be profitable since the procurement cost represents such a large part of the total cost.