Assessing cost-efficiency in a distribution network with different degrees of centralization : A case study at a Swedish pharmaceutical company

Abstract: The supply chain is multilateral concept, involving all actors partaking in fulfilling customer requests. Within the supply chain, the outbound distribution network is key for achieving profitability as it has a direct effect on supply chain costs and on customer value. Assessing the cost-efficiency of the distribution network is thus of great importance to keep track of overall profitability. However, the layout of the distribution network often differs between different regions, where one of the major differences is the level of centralization, i.e. whether or not local distribution facilities are at place or if shipments are sent directly from a central warehouse. This complicates the evaluation of cost-efficiency, as different costs levels are to be expected from different levels of centralization. Therefore, this study aims at investigating how to evaluate the cost-efficiency while taking into consideration different levels of centralization in the regions being evaluated. To achieve the research aim, a case study was conducted at pharmaceutical company Swedish Orphan Biovitrum, as a real life setting is deemed to aid the credibility of the study. The research question was formulated as “How should companies evaluate the cost-efficiency of a distribution network with different levels of centralization?”. Additionally two sub-questions have been formulated, considering how internal data from the company ERP system, as well as data from external sources, can be utilized when performing such an evaluation. A deductive approach has been deployed, where qualitative data was used to understand the company’s distribution network, while quantitative data was analyzed to answer the research question. The quantitative data categories were in turn included based in factors identified in literature to be affecting distribution costs. The results indicated that the cost per sold product is significantly lower for countries with local distribution, possibly providing guidelines on what cost levels to be expected for local and central distribution separately. Costs as a percentage of sales did however not show a significant difference, indicating that such a measure could be used to compare cost-efficiency between countries with local and central distribution. However, it was also identified the variation in customer types can have an integral impact in cost-efficiency, as selling products upstream to a wholesaler has an impact, on both costs and sales, which is not displayed in the measures investigated. Furthermore, the pharmaceutical industry is characterized by regulations and market conditions which differs in almost every country, dictating the possibility for cost-efficiency, thus making countries difficult to compare.