Designing and evaluating distribution networks for luxury beds : A case study of Hästens Beds’ European distribution from the perspective of cost and delivery service

Abstract: Hästens Beds is a Swedish luxury bed manufacturer, located in Köping, Sweden. They have a strong global presence, with Europe being the most mature and proven market. European retailers, called Hästens Partners, are serviced from the central warehouse in Borås which also handles all non-European export to Hästens’ other warehouse facilities in Hong Kong and the United States. As a part of Hästens’ planned growth journey, they are interested in reevaluating their European distribution network from a total cost and delivery service perspective. Hence, the purpose of this master’s thesis is to evaluate alternate distribution network designs in Europe for Hästens to reduce total logistics costs without impairing the delivery service level.  Extensive literature studies and initial interviews were conducted to understand both the theoretical field and the Hästens’ case-specific context. Based on this, three main research questions and a corresponding method resulted in a three-step approach to answer the purpose of the study.  In order to generate network structures and then analyze them, it was first necessary to determine the factors that should be included. Cost functions were created based on curve fitting, based on identified cost drivers for the included cost parameters of warehousing, transportation, and inventory carrying. Furthermore, the customer order lead time was concluded to be very generous. This had the consequence of the distribution lead time not putting any constraints on the network design. Lastly, access to transportation infrastructure, especially a port for handling the non-European export, and the general cost disparity between neighboring regions were concluded to be other important factors for the specific case of Hästens.  Center of gravity analyses based on the identified cost driver for outbound costs, m3-km, were then used to generate 13 candidate warehouse locations. In some cases, these locations were altered to better align with the identified important factors of good access to transportation infrastructure and cost disparity. The most strategically viable combinations of the number and echelons of warehouses could be limited to three combinations, all consisting of a single echelon with one, two, or three warehouses respectively. Therefore, three network optimization scenarios were created, minimizing the total cost of inbound and outbound transportation, which led to the generated network alternatives.  Finally, the total logistics costs were calculated and analyzed for the three alternative structures and a model replica of the current structure by utilizing the cost functions for each included cost parameter. The alternatives were also discussed based on delivery service theory and quantified with regard to distances to Partners. After applying sensitivity analysis and discussing the results’ implications for Hästens, Alternative 2' was formed with warehouses in Borås and Rotterdam. All the alternatives’ total logistics costs and average distances to Partners are quantified below.  [TABLE] As can be seen, the cost savings from Alternative 1 compared with the current network are marginal, and the costs of Alternative 2 and 2' are highly similar. Further, preliminary analysis showed that Alternative 2' would not be economically profitable until at least a 500% increase in European outbound transportation volumes. The conclusion that could be drawn from this was that Hästens is not yet suited to scale up its European distribution network to operate more than one warehouse. However, when future sales volumes allow for it, a European distribution center in Rotterdam could be profitable and provide European customers with greater delivery service.