Analysing the Impacts of Using Direct Shipments in the Distribution Network for Spare Parts

Abstract: Distribution is a part of the supply chain and refers to the steps taken to move and store a product from the supplier stage to the customer stage in the supply chain. Direct shipment is a concept within distribution and refers to shipping direct between a supplier and a retailer or customer. Distribution is considered a key driver for overall profitability of a company since it directly affects both supply chain costs and customer value. The design of the distribution network of a product is an important tool in the trade-off between responsiveness and cost-efficiency. Changing the distribution network design will affect the costs of three logistical drivers: Facilities, inventory and transportation. This thesis is conducted in the aftermarket logistics for stone crushers at the company Sandvik and analyses the impacts of using direct shipments in the distribution network for spare parts. The distribution network comprises of European suppliers, a DC located in Europe and RDCs around the world. The purpose of this thesis is to investigate the economic consequences as well as the viability for direct shipments in the distribution network. The research is conducted using the case methodology where 12 of the suppliers are selected and analysed. The economic consequences are analysed by modelling the trade-off between the costs of the different logistical drivers in distribution. Since no suitable model for analysing the cost trade-off between the distribution costs could be found, this thesis has developed a model for the cost trade-off that closely follows the reality at Sandvik by using well-known theory. The viability for direct shipments has been analysed by assessing the supplier compliance for direct shipments mainly through a supplier survey. The result shows that the number of exports and imports is a key factors when it comes to understanding the economic consequences. However, even for a solution where Sandvik is the exporter, which minimises the cost of exports, only a few suppliers are considered to be beneficial of direct shipments. These are the suppliers having the most number of dispatched order lines going to the RDCs at the DC. Although, direct shipments come with a lot of risks and it is therefore concluded that the savings must be very substantial in order to consider this solution. It is also concluded that other supply chain factors can have a huge impact on what distribution setup is the most beneficial, such as price breaks in purchase prices. A few suppliers, especially one, stand for most of the potential cost reductions from direct shipments and it is instead recommended that Sandvik should consider other options to save workload that don’t require them to apply direct shipments. In general, the current setup of the distribution network seems very reasonable. Key words: Supply chain management, distribution, direct shipments, spare parts, distribution modelling, supplier compliance