Evaluation of Sea Freight Distribution - a case study from an aftermarket perspective

Abstract: Background: Within research, it has been stated that transportation cost is a large part of logistics cost which is a large contributor to supply chain costs. To reduce transportation cost, choosing the appropriate transportation mode is an important decision both on a strategic and tactical level. There are several models and approaches when choosing transportation mode, including several factors and variables. Choosing the variables and factors varies for all companies. Sandvik Stationary Crushes (Sandvik SC) is a business unit within the Sandvik Group that is experiencing high logistics cost and no previous freight strategy. The business unit has identified transportation mode choice as a cost reducing opportunity. The focus of this thesis is to reduce transportation cost by a unit cost freight model that chooses the transportation mode for replenishment of aftermarket products within Sandvik SC’s global distribution network. Purpose: The purpose of this thesis is to develop a shipment profile for replenishment orders with a sea freight perspective. Research Questions: 1. How can a company determine what transport mode to use in the distribution network with the objective to minimize freight cost? 2. What factors are important to consider when changing transportation mode from air to sea freight? Method: The study has a systems approach to the problem and apply a case study on a case company. To understand the problem and situation for the case company, literature review, data gathering, interviews and observations have been carried out. With the gathered information, a simulation model based on linear programming has been developed. The output of the model is that it chooses which transportation mode, air or sea freight, that implies the lowest transportation cost between global distribution centers. Furthermore, a sensitivity analysis has been carried out to test the validity of the model. The results and the implications of the results have been analyzed and discussed from a sea freight perspective. Additionally, the ii actions taken by the case company, on recommendation from the study, together with real results are compared with the results from the simulation model. Results: The result from the model show that a significant number of items should be shipped with sea freight rather air freight for replenishment order between global warehouses. The change of transportation mode implies great cost savings for the case company. Conclusions: The study concludes that the unit freight cost model reduces cost by changing transportation mode. When choosing transport mode there are other factors than costs to consider for sea freight, such as; reliability, transit time and implementation processes. These factors need to be taken in consideration for the cost saving opportunities to be successful. Actual cost figures from the case company prove that the results from the model are applicable in practice, but with the other factors to consider as well.