A case study of Mionix’s distribution system on how to improve inventory management with focus on customer service and total cost

Abstract: Background - A company’s distribution system is a critical component and businesses need to consider the aspects of customer service and total cost when designing the distribution system. A distribution system can be defined as the process of making products or services available for customers. The rise of e-commerce has increased the challenge of having a cost efficient distribution system together with a high standard of customer service.  The distribution system is put under heavy pressure to deliver goods as quickly as possible and at the lowest possible cost due to globalization and outsourcing. E-commerce involves a new approach of the distribution system with its small order sizes, daily order volumes and small parcel shipments that are often shipped the same day. Inventory management is being regarded as an important part of the distribution system. Inventory management is the ability to balance the demand of products with the supply of products in a cost-effectively way. Companies therefore need to use material planning methods to coordinate the flow of material effectively throughout the distribution system. Purpose - The purpose of this paper is to study Mionix’s current distribution system with focus on customer service and total cost. Based on the findings, this thesis will identify which costs that are possible to influence and reduce.  Secondly, the aim is to study how material planning methods can help Mionix to improve the inventory management function and propose measures for improvement. Method - This thesis has used a positivistic view with a deductive approach. It is a case study that contains elements of both qualitative and quantitative research strategy. In order to fulfil the purpose of the study the authors have conducted a flow and situational analysis in order to identify services and costs in the distribution system that Mionix can influence. Further, the authors conducted a situation analysis of Mionix’s current inventory management function. The authors then calculated and analysed how material planning methods such as EOQ, Total cost, Sensitivity analysis, Ordering points and optimal safety stock and service levels could improve Mionix’s inventory management function. Next, alternative solutions are presented together with the authors’ evaluations and recommendations for the company. The data that was needed to accomplish this was collected by performing interviews, observations and extracting data from computer system e.g. Excel. Conclusion - The authors have identified two distribution channels within the distribution system: the wholesaler channel and the retailers/e-commerce channel. Mionix has the opportunity to influence two particular costs: capital costs and cost of loss of sales, which are included in inventory- and customer service costs according to the total cost model. Material planning methods can improve Mionix’s inventory management function by deciding safety stock levels, ordering points and EOQ for all products in accordance with the theoretical framework. Further, if Mionix use the authors’ recommendation the company can reduce estimated total annual cost by 23% or 26% depending on what mode of transportation that is used