Transportation Costs in Centralized and Decentralized Structure : A case study at Rottne Industri AB

Abstract: Background: Rottne Industri is a Swedish heavy machinery manufacturer whose production process is divided in three manufacturing plants. The production takes place in the facilities of Stensele and Lenhovda while the one at Rottne is also used for the final assembly. Ten suppliers provide steel materials to each facility translating to relatively high transportation costs which may be reduced by adopting a more centralized structure. Purpose: The purpose of this paper is to identify the transportation costs between the steel suppliers and the three manufacturing plants at Stensele, Lenhovda and Rottne as well as the freight transportation costs for components from Stensele and Lenhovda to Rottne. Moreover, the research seeks to analyze the difference in transportation costs if Rottne Industri was to centralize all its activities into one single manufacturing facility at Rottne. Finally, the authors aim to identify the environmental cost related to freight transportation in order to evaluate the total transportation cost difference between the two scenarios. Method: The Master thesis focuses on an instrumental case study on a single company. Qualitative and quantitative research methods are used for the necessary data collection to bring up a broader picture of Rottne Industri transportation costs and how it will change in a different organizational structure. Results: The studied company would reduce its freight transportation cost from 2 471 735 SEK of the current decentralized structure to 398 265 SEK of the centralized one. The environmental cost would decrease by 91% (20 420 SEK) due to the decrease of material flow. Therefore Rottne Industri would reduce its total transportation costs by 84% by centralizing its manufacturing structure, for a monetary value estimated at 2 095 860 SEK. However these results contradict part of the theoretical framework concerning the advantages and the disadvantages of centralization and decentralization, as the new centralized structure appears to be more easily manageable while reducing the transportation costs from the different suppliers. Therefore further researches are required as a broader approach on the effects of switch in the organizational structure at Rottne Industri.