Allocation of a European DC to Minimize LUL Shipments for Companies within the Aged Alcoholic Beverage Industry

Abstract: Title: Allocation of a European Distribution Center to Minimize LUL Shipments for Companies within the Aged Alcoholic Beverage Industry Authors: Josefin Berntson, Cecilia Flink Supervisor: Sebastian Pashaei, Department of Industrial Management and Logistics, Faculty of Engineering, Lund University Problem description: The increased demand for distribution as a result of the globalization has increased the distribution cost for many companies and made it crucial for companies to have a good distribution strategy. One strategy to keep down the distribution cost is to aim for full-unit-load (FUL) shipments and gain economies of scale, which companies with small order quantities often struggle with. One potential strategy to decrease less-than-unit load (LUL) shipments is through the establishment of a distribution center (DC) in the companies’ distribution network. With a DC, goods can be shipped in FUL shipments from the manufacturing site to this DC before going out to the customers. To optimize the cost savings by establishment of a DC, the optimal geographical allocation of the DC is crucial. Research questions: (1) What aspects should be considered when establishing a European DC for aged alcoholic beverage to reduce LUL shipments? (2) How can the optimal location of a European DC, aiming to reduce LUL shipments for companies in the aged alcoholic beverage industry, be determined? Purpose: The purpose of the study is to answer the research questions by developing a model that can be used when investigating weather and how the distribution cost within the aged alcoholic beverage industry can be reduced by decreasing LUL shipments through the establishment of an European DC. Methodology: To find a solution for optimally allocating a DC with the aim to reduce LUL shipments, the research questions were answered. The important aspects to consider for this issue were mapped by investigating theory within the topic and conducting an empirical case study at Inver House Distillers (IHD), a Scottish whisky company facing high distribution cost due to LUL shipments. The important aspects were put in a developed two-step model for determining the optimal location for a DC. The model was structured based on literature concerning the gravity model. The two-step model was applied on IHD. The aim with applying the two-step model to the IHD case was to identify practical benefits and flaws of the model. Conclusion: Aspects that have been found to be important for companies within the aged alcoholic beverage industry when finding the optimal location for a European DC to decrease their number of LUL shipments are: • Number of orders per time unit • Cost per average order per km • DC cost • Expected growth • Stable number of customers • Maximum transit time • EU regulations for storage and handling of excise goods • Service level These aspects can be put in the developed two-step model that considers the aspects in either a quantitative or qualitative way, and in combination with considering backhauling and transportation mode the optimal location for a DC can be found.