Evaluating distribution centers in a global supply chain

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M A S T E R ' S T H E S I S

Evaluating distribution centers in a global supply chain

A case study at Cargotec Sweden, MacGREGOR Cranes

Eric Åström Magnus Öhgren

Luleå University of Technology MSc Programmes in Engineering Industrial Business Administration

Department of Business Administration and Social Sciences Division of Industrial Logistics

2010:013 CIV - ISSN: 1402-1617 - ISRN: LTU-EX--10/013--SE

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"Not everything that counts can be counted and not everything that can be counted counts."

Albert Einstein

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Acknowledgement

We would like to take this opportunity to thank our mentors, Mikael Hägglund and Mats Saltehag at Cargotec Sweden, MacGREGOR Cranes for their support and guidance. We also would like to express gratitude to the whole production department for the great

atmosphere and the many laughs. Peter Wallström at Luleå University of Technology has been a great support for us and we thank you for your guidance and valuable thoughts.

Finally we would like to thank each other for writing this thesis, without our profound knowledge this would not have been possible.

Örnsköldsvik, December, 2009.

______________________________ ______________________________

Eric Åström Magnus Öhgren

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Abstract

This thesis has been carried out at Cargotec Sweden, MacGregor Cranes who manufactures marine cargo cranes at production partners in China and South Korea. MacGregor Cranes source components to their production partners from both European and Asian suppliers.

MacGregor Cranes has implemented a distribution center in Germany. Today when the production has increased five folded, the amount of Asian suppliers has increased and many European suppliers have chosen to shift some production to China or South Korea. This has led MacGregor Cranes to reconsider if a distribution center in Asia could decrease the costs and increase the Supply Chain efficiency. Therefore the purpose of this thesis is to evaluate MacGregor Cranes current Supply Chain by mapping it and measuring performance metrics.

A Supply Chain with focus on a distribution center in Asia will be evaluated and then compared against the existing Supply Chain.

Literature was collected about Supply Chain Management, Supply Chain strategies, ways to evaluate a Supply Chain and a distribution centers role in a Supply Chain. This literature search resulted in a theoretical frame of references which thereafter were used as guidance when collecting the empirical data and when performing the analysis. MacGregor Cranes Supply Chain was mapped and quantitative data about the Supply Chain was collected from the enterprise resource planning system SAP R/3. Interviews were conducted in order to gather information about MacGregor Cranes Supply Chain strategy and how they graded the importance of different attributes. Primary and secondary information were collected about how other Nordic companies had managed their distribution center in China.

The analysis of the empirical data revealed that the main advantages with the current distribution center is that sea freight can be utilized for a large share of the components sourced in Europe and that MacGregor Cranes has a good Supply Chain flexibility since they are able to hold and stock components from Europe that not is needed in the production.

The disadvantage is that MacGregor Cranes is relying on their Asian suppliers to store components and some suppliers have limited storage capacities in terms of space and a lack of systematic methods to monitor the stock levels. The evaluation of the current Supply Chain let the authors to recommend alternatives for how a Supply Chain with a distribution center in China could be set up. This resulted in the recommendations that MacGregor Cranes in the short term, 1-2 year, should continue to work towards increasing the amount of suppliers in Asia before implementing a distribution center in China. The authors recommend MacGregor Cranes to develop the relationship between the suppliers located in Asia with the main objective to use suppliers as stock keeping units. A long term recommendation, 2 years or more, is to set up a distribution center in China to supply components for all production partners. A Vendor Managed Inventory, VMI, concept for selected components should be implemented at the distribution center, which would give MacGregor Cranes an opportunity to handle the duality of cost minimization and maintaining a high service level.

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Sammanfattning

Detta examensarbete har utförts på Cargotec Sweden, MacGregor Cranes, ett företag som tillverkar marina lasthanteringskranar i främst Kina samt Sydkorea. MacGregor Cranes köper komponenter till deras produktion partners från både europeiska samt asiatiska leverantörer. MacGregor Cranes har ett nuvarande distributionscenter lokaliserat i Tyskland.

På några år har produktionsvolymen ökat fem gånger, antalet leverantörer i Asien har ökat samt flertalet europeiska leverantörer har valt att förflytta sig österut till Kina och Sydkorea.

Detta har fått MacGregor Cranes att reflektera över huruvida ett distributionscenter i Asien skulle sänka kostnader samt öka effektiviteten av försörjningskedjan. Syftet med detta examensarbete är därför att utvärdera MacGregor Cranes nuvarande försörjningskedja med hjälp av en kartläggning samt att mäta prestationsattribut. En försörjningskedja med fokus på ett distributionscenter i Asien kommer därefter att utvärderas och jämföras med nuvarande försörjningskedja.

Litteratur kring ämnen som “Supply Chain Management”, “Supply Chain strategies”,

“Evaluation of Supply Chain”, “Distributions centers in Supply Chain” insamlades.

Litteraturinsamling resulterade i en teoretisk referensram, vilken därefter låg till grund för datainsamlingen. MacGregor Cranes försörjningskedja kartlagdes och kvantitativ historisk data som förklarade försörjningskedjan insamladrd från materialplaneringssystemet, SAP R/3. Intervjuer utfördes med syftet att fullständigt förstår strategin i MacGregor Cranes försörjningskedja samt hur de väger olika attribut i försörjningskedjan. Primär samt sekundär information insamlades om hur andra nordiska företag har upprättat sina distributionscenter i Kina.

Analysen av den insamlade data visade att de främsta fördelarna med nuvarande distributionscenter är att MGC kan utnyttja sjöfrakt i hög grad för de komponenter som köps från Europa samt att det finns en möjlighet att hålla och lagra komponenter som inte är behövda i produktionen. Nackdelarna är leverantörerna i Asien är tvungna att lagra komponenter som inte behövs i produktion vilket blir problematiskt då vissa leverantörer har begränsad lageryta samt bristfälliga metoder för att övervaka lagernivåerna. Denna utvärdering av nuvarande försörjningskedja gav författarna en möjlighet att rekommendera några olika strategiska alternativ för ett distributionscenter i Kina. Fördelar samt nackdelar med ett distributionscenter i Kina analyserades, grundat på primära samt sekundära källor.

Resultaten sammanfattades i en kort- samt långsiktig rekommendation. En kortsiktig rekommendation, 1 – 2 år, är att arbeta med att öka graden av asiatiska leverantörer samt att förbättra processen med lagerhållning hos de kinesiska leverantörerna. En långsiktig rekommendation, 2 år eller mer, är att utveckla ett distributionscenter i Kina för att distribuera komponenter till produktionen. Konceptet leverantörsstyrt lager, VMI, rekommenderas för utvalda komponenter i distributionscentret, vilket kan ge MacGregor Cranes möjligheten att hantera dualismen mellan låga kostnader och en hög servicegrad.

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List of figures

Figure 1 Focus of interest ... 12

Figure 2 Company structure (Cargotec, 2009) ... 14

Figure 6 A ship set ... 15

Figure 3 GLB crane ... 15

Figure 4 LC crane ... 15

Figure 5 GLH crane ... 15

Figure 7 No. of cranes in production per partner 2009 ... 16

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Figure 8 Percentage of MGC's suppliers... 17

Figure 9 Percentage of purchase order value per region ... 17

Figure 10 Budgeted changes in purchase order value ... 18

Figure 11 Theoretical framework ... 19

Figure 12 SCM Network (Christopher, 2005) ... 20

Figure 13 Supply Chain strategies linked to PLC (Chibba, 2007) ... 22

Figure 14 Phases in outsourcing (Authors own interpretation) ... 27

Figure 15 The BLP process ... 31

Figure 16 The SCOR model categories (Supply Chain Counsil, 2008) ... 33

Figure 17 Chan & Qi's model ... 37

Figure 18 Fuzzy performance grade set ... 38

Figure 19 Hierarcy of SC model ... 39

Figure 20 Fuzzy numbers of reliability for evaluator 1 ... 47

Figure 21 Strategic attributes and weights ... 47

Figure 22 Current SC ... 48

Figure 23 The SCOR processes ... 49

Figure 24 MGC's custom process ... 51

Figure 25 Late orders per region ... 54

Figure 26 Critical line ... 55

Figure 27 Cost distribution ... 56

Figure 28 Cost of goods sold, COGS ... 57

Figure 29 Stock value in LCE ... 59

Figure 30 Stock turnover ratio in LCE ... 59

Figure 31 VMI process at suppliers ... 64

Figure 32 General process with LCA ... 65

Figure 33 Direct warehouse costs ... 69

Figure 34 Air freights impact on transportation costs ... 70

Figure 35 Advantages and disadvantages with a LCA ... 73

Figure 36 Late orders ... III Figure 37 Component costs ... III Figure 38 Storage cost for LCE ... III Figure 39 Transportation costs ... III Figure 40 Air freight cost ... III Figure 41 C2C ... III

List of tables

Table 1 Order winners and order qualifiers (Mason-Jones et al., 2000) ... 24

Table 2 Comparison between FTZ, BLP and EPZ ... 31

Table 3 SCOR level I metrics ... 34

Table 4 Evaluator 1 ... 46

Table 5 Attribute weights for evaluator 1 ... 46

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1 Introduction

The introduction is the beginning of this Master’s thesis, which intends to clarify the underlying issues that have incited the authors to perform this study.

The race for increased efficiency and cost reduction has encouraged companies to outsource activities such as production or sourcing to low-cost countries as China and South-Korea (Fredriksson & Jonsson, 2009). One implication of this trend is that companies get involved in a more extensive flow of components and information across the globe. To handle this increasing complexity the concept of Supply Chain Management has emerged (Gunasekaran et al, 2004). Supply Chain Management is defined by Copper et al. (1997) as:

“…The integration of all key business processes across the Supply Chain is what we are calling Supply Chain Management.”

Supply Chain Management can promotes greater integration in terms of information, financial parameters and material sharing for organizations with their suppliers and customers which Fawcett (1995) argues minimize or eliminate functional and departmental boundaries. One fundamental implication of embracing the Supply Chain concept is that companies no longer are the units in the competitive battle, Supply Chains compete with each other (Christopher, 1992). Supply Chain Management focus on delivering value to the final customer which implies that logistics has to evolve from a cost-saving function to value adding function since logistics services are fundamental in delivering value to customers (Remko, 1998).

It has been shown a strong statistical correlation between companies’ financial success and how well they have developed their Supply Chains (Avanzo et al. 2003). A range of benefits has been recognized to Supply Chain Management, including cost reduction, increased market share, and a better relationship with customers (Ferguson, 2000). According to Lumsden (2006), Supply Chain Management can also enable companies to handle environmental requirements by improving the Supply Chain with better planning, suitable consolidation for material flow and new technology.

Evaluating an organization is vital for an effective decision process, however studies about capturing the Supply Chain as a whole, have usually failed to detain the performance in a simple manner (Chibba, 2007). The basic purpose of evaluating is to identify weak areas, take corrective actions and improve continuously (ibid). Lambert et al (1998) argues that the most prominent issue in Supply Chain Management is to choose the right metrics for evaluating the entire Supply Chain. Traditional metrics such as ROI, profit and stock turnover are argued to not be adequate enough to capture the whole Supply Chain (ibid).

A focal point in today’s concept of Supply Chain Management is the correlation between acting agile towards market demands while in the meantime striving toward lower costs and low inventory levels (Baker, 2004). Achieving this duality is affecting every step of the Supply

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Chain and mostly the distribution center (ibid). Questions have been raised on how well companies and Supply Chains align their distribution centers with respect to stated strategies (ibid). Distribution centers can be utilized for consolidating inbound material where consolidation is the process of grouping several small shipments into one at a designated location which can reduce total logistics cost (Tyan et al., 2003).

MacGregor Cranes a company within the Cargotec group which manufactures marine cargo cranes has since 2004 made the decision to outsource the entire production to low cost countries. Production has mainly been moved to joint venture partners located mainly in China and South-Korea. The outsourcing has increased the complexity of the SC, due to a greater integration of external partners, in terms of the components flow for MacGregor Cranes and therefore created a need for better ways of managing the SC.

Today MacGregor Cranes is experiencing a volatile market where cancellations and changes of orders are a part of the daily routine. The company has over the last five years gone through a period of rapid incline, from a yearly production of 200 cranes to approximately 1000 cranes per year. This, on the other hand, has created issues for the company, such as sourcing arduousness, meaning suppliers are having a hard time increasing their production to satisfy the demand set by MacGregor Cranes. Future challenges for MacGregor Cranes are to expand their operations in Asia and still be able to control the Supply Chain.

In this thesis the focus is on the individual company MacGregor Cranes and their part in the Supply Chain. MacGregor Cranes’ Supply Chain is defined as the flow of components from suppliers and sub-suppliers to production partners.

1.1 Problem definition

Characteristics of low-cost-country Supply Chains such as long geographic distances, increased delivery times and decreased delivery precision may increase costs in terms of expedited freight, extra inventory and managerial time spent on “fire-fighting” (Levy, 1995).

According to Fredriksson & Jonsson (2009), long distances and delivery times decreases the Supply Chain flexibility, thus companies need to source more locally and increase their inventories.

Pettersson (2008) has studied how 30 Swedish companies evaluate their Supply Chain, and found that most companies have started with some measuring but concludes that there still is a long way to completely evaluate the Supply Chain. One prerequisite for a successful evaluation of the Supply Chain is that the required data can be collected. Harrison & New (2002) has in a study found that half of the companies they contacted had limited possibilities to measure metrics in an effort to evaluate the Supply Chain as a whole, and 19 percent could not measure at all due to lack of data. They also found that many companies are reluctant to evaluate the Supply Chain since they perceive that it would require a lot of manual calculations. Thus there is a need for a more automatic and systematic method to analyze and evaluate a Supply Chain.

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Studies have shown that companies operating in China consider Supply Chain issues as a major problem (Jiang, 2002). One of the biggest Supply Chain related problems is the bureaucratic restrictions which hinders companies from importing goods in a straightforward manner (ibid). Companies which have outsourced production to partners in China needs to deal with difficult customs regulations to import goods without being levied taxes (PwC, 2008). This prevents companies abilities to manage an effective Supply Chain, thus there is a need for exploring alternative solutions which can enable a more straightforward Supply Chain.

MacGregor Cranes decision to outsource the production to Asia has increased the Supply Chain complexity since the materials are sourced from multiple locations, both from Europe and Asia, with multiple destinations. To cope with this increased complexity, MacGregor Cranes has implemented a distribution center in Germany. Suppliers located in Europe deliver to this distribution center, after which batches of components are consolidated and thereafter shipped by sea freight to the partners in China and South-Korea. Due to complex customs rules and regulations, components must be refined to a finished product within a year. This has prevented an effective and flexible Supply Chain for MacGregor Cranes.

The approach with a consolidation point in Hamburg was considered to be effective at the time of implementation, in 2004. Today when the production has increased five folded, the amount of Asian suppliers has increased and many European suppliers have chosen to shift some production to China or South Korea. This has led MacGregor Cranes to reconsider if a distribution center in China could decrease the costs and increase the Supply Chain efficiency. MacGregor Cranes has also encountered difficulties to monitor the Supply Chain due to the global nature of the Supply Chain. Thus there is a need of revealing some areas for improvement and how these can be enhanced in line with the overall Supply Chain strategy.

1.2 Purpose

The purpose of this master thesis is to evaluate MacGregor Cranes current Supply Chain by mapping it and measuring performance metrics. A Supply Chain with focus on a distribution center in Asia will be evaluated and then compared against the existing Supply Chain in an effort to analyze consequences of this strategic approach.

To fulfill the purpose this master thesis aims to answer the following questions:

 RQ 1: What are the advantages and disadvantages with the current Supply Chain for MacGregor Cranes?

 RQ 2: What are the advantages and disadvantages with a distribution center in China compared to the current distribution center strategy?

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1.3 Delimitations

The work conducted in this master thesis is focused at the Supply Chain of MacGregor Cranes and the flow of components, therefore the flow of information, communication and financial parameters will not be studied, which all are subject of the concept of Supply Chain management (Copper et al. 1997). However, specific material information that affects the Supply Chain performance will be considered in the thesis. A further delimitation is not to focus on the entire Supply Chain of MacGregor Cranes, as the figure 1 below illustrates, only the suppliers and the production partners will be of interest. Sub suppliers, shipyards and end-customers will not be included. Since MacGregor Cranes 20 biggest suppliers are considered to give a representative picture of the company’s upstream flow of components, only these will be analyzed. The relationship with the suppliers in terms of information sharing and collaboration will not be taken into consideration.

Figure 1 Focus of interest

The analysis has taken all projects from 2007 to 2009 into consideration for every production partner in China and South-Korea, leaving all production in Europe unanalyzed.. Finally, the purpose of this master thesis is not to find or estimate the feasibility of new suppliers in China or South-Korea. The future of the Supply Chain, hereafter called SC, will be based solely on information given from MacGregor Cranes, thus there is not in this master thesis subject to reveal this.

1.4 Abbreviations of terms

3PL ASC BLP ESC FTZ HSC LM LSC MGC PLC RQ SC

Third-party logistics Agile Supply Chain Bonded logistics park Efficient Supply Chain Free trade zone Hybrid Supply Chain Lean Supply Chain Logistics management MacGregor Cranes Product life cycle Research question Supply Chain

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SCM

The Supply Chain Council Supply Chain management

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2 Company description

This chapter focuses on the company in which this Master’s thesis has been carried out at.

History and product information are described.

2.1 Owner structure

MacGregor Cranes is a business unit within the group called MacGregor Group. MacGregor Group forms together with Hiab and Kalmar the company Cargotec. The company structure of Cargotec is presented below.

Figure 2 Company structure (Cargotec, 2009)

Cargotec is a Finnish company who demerged when Kone Corporation was split into Cargotec and “New Kone” in 2005. The mission for Cargotec is cargo handling both by sea, MacGregor, and by land, Kalmar and Hiab.

2.2 MGC history

MacGregor Cranes, hereafter called MGC, was at first a division within the group Hägglunds

& Söner. Hägglunds & Söner was formed in 1899 and was at its peak days a big company in Örnsköldsvik, Sweden. In the middle of the 1950 three major divisions emerged, Vehicle, Cranes and Drives. In 1972 Hägglunds & Söner was acquisitioned by ASEA, who in the late 1980s became ABB after it joined forces with Brown Boveri. When ABB was formed, the Crane division was sold out from the Hägglunds & Sönder group and is today owned by Cargotec.

In the middle of the 1990, MGC encountered a market dropdown in Europe and identified a rising market in Asia which contributed to the decision to outsource the entire production to low cost countries, mainly China, South Korea and Poland. Today MGC have ten production partners who together will produce approximately 800 cranes in 2009. This figure will rise to about 900 cranes in the year 2010. At 2008 MGC had a market share of approximately 32 % of the marine cargo crane market in the world, while the second biggest IHI has a market share of 28%. The market consists of around 10 big suppliers.

2.3 MGC products

MGC offers a big variety of different cargo cranes to fit the needs set by the marine market.

The cranes are designed to fit vessels like bulk carriers, container carriers and feeders,

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general cargo and multipurpose as well as transloading for mentioning a few. Below are some of the cranes from the product portfolio listed.

2.3.1 GLB crane

The GLB crane is designed for bulk carriers. The crane itself is controlled via an electro-hydraulic system which is build-in in the crane. The lifting capacity varies from 25 to 36 tons for the standard models with a jib radius from 18 to 30 meters.

2.3.2 LC crane

The LC crane is designed to fit where dimensions are limited on the crane, but are still intended to use for various uses, like container or bulk usage. As the GL crane it’s electro-hydraulic controlled with a build-in system. The LC cranes lifting capacity is from 36 to 45 tons with an outreach of 20 to 34 meters.

2.3.3 GLH crane

The biggest cranes in the product portfolio, the GLH crane or Heavy Lift as it’s called. It is designed as the GL with an electro-hydraulic system with a lifting capacity of 120 to 350 tons on an outreach of 20 to 36 meters.

The cranes are of relative simple design, which has lead to a modularize structure for some included parts, for example pump unit, winch and cabin. A modularization has made the assembly of the cranes easier for the production partners, but also for planning and preparation in the Supply Chain, thus fewer component variation exists.

When a crane is sold it is often sold as a ship set, as MGC describes, a ship set is a setup of cranes on a vessel. A typical setup would be four cranes on one vessel. The customers often ask for a complete setup of cranes on a vessel to meet their requirements. See Figure 6 below which illustrates 3 cranes on one vessel.

Figure 6 A ship set

Figure 3 GLB crane

Figure 4 LC crane

Figure 5 GLH crane

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2.4 MGC Production

The production of MGC has been outsourced to low-cost countries entirely after 2004. The production facilities are located at Poland, Croatia, USA, India, China and Korea. In 2009 the majority of the production was focused to the partners located in China and Korea, as MGC has tried to locate the production as close to the customers as possible. However some cranes are still being manufactured in Poland and Croatia in 2009 to satisfy the European market. In the last year another production partner has been established, which is located in India. This production partner is at the moment not focusing on complete assemblies of cranes, only on jib arms and foundations. Since a large majority of the cranes are produced by partners in China and Korea, this thesis only focus on these partners.

A production partner for MGC is a supplier who manufactures the entire crane. While the partner is responsible for sourcing the steel for the crane, MGC is accountable for sourcing the components and design. The partners are manufacturing the cranes in accordance to the directions stated by MGC. Production plans, quality and instructions are at all time managed and controlled by MGC’s head office in Sweden.

2.4.1 The partners

MGC has nine active production partners, mainly in China and Korea with exception for Poland and Croatia. Figure 7 illustrate the amount of cranes that have been and are planned to be produced per production partner in 2009. Approximately 700-800 cranes will be produced and 99% of those cranes have been and will be manufactured in Asia. LMC, which is located in Nanjing, China, is the single biggest production partner to MGC and has been manufacturing cranes for MGC since 1980.

Figure 7 No. of cranes in production per partner 2009 2.4.2 The suppliers

MGC are using around 100 – 110 suppliers to satisfy their need of components. Most of the suppliers are located in Europe and Asia. The 20 biggest suppliers are responsible for approximately 85% of the purchased amount, which is the reason why only the 20 biggest have been included in the analysis. Supplier, S1, has been standing for 19% of the total purchase order value and is the single largest supplier for MGC. MCG are relying on a

0 50 100 150 200 250

LMC RHM DAL DON HOC SPP MID REM

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selected few suppliers that supplies major components in the production. The collaboration with these key suppliers is extensive and is characterized by a mutual relationship, which for MGC’s part means that these suppliers are crucial for the component supply to the production.

Figure 8 Percentage of MGC's suppliers

MGC’s current suppliers are shared over three major geographically areas, Sweden, Europe and Asia. Of the 20 biggest suppliers, are six (6) located in Sweden, eight (8) in remaining Europe and six (6) in Asia. However, the contribution is not equally distributed over the three major areas, which is seen in Figure 9 where the purchased order values are represented per geographically area.

Figure 9 Percentage of purchase order value per region

Here, one can see that the suppliers located in Asia are representing around 36 % of the value purchased, while Sweden and Europe are representing 23% and 27% of the purchase

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order value. The reason why so few suppliers (six) in Asia, are representing 43% of the total purchase order value is because they are big module suppliers of winches, slewing bearings, steel parts, wire ropes and cabins. The suppliers in Sweden and Europe are on the other hand primarily characterized by the high technical complexity and the involvement of electronically equipment.

MGC is striving towards increasing the amount of suppliers in China and for 2010 have MGC budgeted that they will increase the purchase order value to 44% from Asia, reviling Figure 10. This is an increase by nearly 10 % but the majority of the components are still sourced from Europe.

Figure 10 Budgeted changes in purchase order value 0,00%

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3 Theoretical frame of references

This chapter introduces the theoretical framework for which the rest of this study is based upon.Literature about Supply Chain Managemen), Supply Chain strategies, ways to evaluate a Supply CHain and distribution centers role in a Supply Chain are prented.

3.1 Dispositional of theoretical framework

Below illustrates the main theoretical framework which is the foundation that has been used for conducting this master thesis.

Every step in the theoretical framework is connected to the area of Supply Chain Management, hereafter referred to as SCM, thus the basis of the theoretical framework depends on SCM. The theories of order winners / order qualifier and distribution center strategy are described in an effort to pinpoint how certain areas can be improved in the Supply Chain with respect to the evaluation.

Figure 11 Theoretical framework 3.1.1 Step 1

The first step is to describe theories about the concept of SCM and SC strategies. Different SC strategies are explained and how they are connected to the product life cycle, PLC.

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In the second step two models are explained, SCOR and Chan and Qi’s model, where both models, in their depth, can be used for measuring the performance of a SC, thus in this master’s thesis only the basis of the models are used.

3.1.3 Step 3

The third and final step in the evaluation of the SC, is a combination of the two frameworks, SCOR and Chan and Qi, with portions from both models tries to capture an evaluation of a SC 3.2 Concepts of Supply Chain Management

SCM is a concept that is an extension of logistics management, LM. LM is according Cooper et al (1997) the process for planning and implementation of materials that passes through every single value-adding step in the chain to the customer. SCM includes LM but also goes beyond that concept and tries to integrate business operations with each other. Several authors define SCM as the flow from supplier to final customer and include all members of the chain from the beginning to the end (Chibba, 2007). The fundamental basis for SCM is the management of relationships to achieve a greater cost-effective outcome for everyone concerned (Christopher, 2005). The concept of SCM consists of mainly three strong elements according to Chibba (2007): physical material flow, information flow and financial flow, with member positioned upstream but also downstream in the value chain. One can refer to a SC as a dynamic flow, in which decision makers form strategies to manage these flows accordingly (ibid). SCM should be seen as a network where suppliers and customers interact on the same premises, not as a two-way chain (Christopher, 2005). In SCM the concept is to overlook one firm’s achievements to the SC ability to meet the expectations of the customer’s (ibid).

Figure 12 SCM Network (Christopher, 2005)

It is important to understand that there are different types of channel relationships. There can be a direct SC where there are only three parts that interact, supplier, manufacturer and customer (Mentzer et al, 2001). If one look at it in a deeper perspective the network can reveal that it embraces both the supplier’s supplier and the customer’s customer (ibid). But as the companies evolve so do the SC, the complexity of the network for many actors on the global market often stretches from the ultimate supplier to the ultimate customer, claims Mentzer et al (2001). Christopher (2005) explains that SCM can provide a large amount of ways to decrease cost and increase efficiency and productivity which will contribute to a

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reduced unit cost, which enhances the customer’s value and satisfaction as well as for the member of the SC which ultimately leads to competitive advantages.

Stank et al. (2005) argues that great benefits can be drained when implementing the SCM philosophy but that one needs to be aware of the sacrifices needed. By implementing a SCM philosophy, companies must realize that this is something that is not done easily (ibid).

Mentzer et al (2001) also claim that all typical business functions should be included, without it SCM cannot meet its full potential for the members of the SC. Even if the cross- functional flows are established, questions arise of who should be managing these flows in a best possible way (ibid).

The problems associated with SCM have been argued to be that it can create sub- optimizations in the SC if every part tries to maximize their own interests (Handfield &

Nichols, 2002). A fundamental part of the SCM concept is information sharing throughout the SC. However can this information sharing be hindered by a lack of trust between the Supply Chain members and a fear that the information will be revealed to competitors (ibid).

Handfield & Nichols (2002) argue that the greatest challenge with SCM is to establish trust between the parties in the SC. Legal contractual agreements can be made but this does not , per definition, lead to an established trust between the parties.

3.2.1 Supply Chain strategies

It may be difficult to know which strategy to use in a Supply Chain but Chibba (2007) explains that the use of product life cycle theory, PLC, can help managers identify which strategies to be used during different phases in the product cycle. Product life cycle summarizes all steps from product design and development phases to the decision to remove it from the market.

As Figure 13 implies, the product goes through an introduction, growth, maturity and a declination phase. The development phase in this model is not pointed out. Executive leaders need to be aware that all of these phases need different strategies related to marketing, distribution and competition, to make the most profit of the product. However one also need to be aware that the product is mortal and the PLC could get an abrupt ending (Grantham, 1997). However Grantham (1997) claims that the PLC, with right strategies and effort, can face a growth phase after the maturity, which means that this model is not fixed for all products and their life cycle, but gives a good understanding of which managers can rely their decisions on.

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Figure 13 Supply Chain strategies linked to PLC (Chibba, 2007)

Above, Figure 13, describes how different types of products, i.e. innovative, hybrid or functional can be classified into different phases of the PLC. Chibba (2007) explains that the PLC describes in return which type of Supply Chain that should be preferred, agile, hybrid, lean or efficient. The number of different Supply Chain is narrowed down to four due to the reason that different Supply Chains have similar characteristics of one another (ibid).

3.2.2 Agile Supply Chain

Agile Supply Chain, ASC, is the integration between several companies within a SC and how well it reacts to rapid changes in the environment. The key to enable an ASC is the dynamics of the relationship and structure, the event-driven and event-based management, and the high visibility of information from end-to-end (Baramichai et a., 2007). Agility is often a synonym with flexibility and the ability to adapt in the concept of SC (Li et al., 2008).

“Agility is having the faculty of quick motion; nimble, active, ready.” (Oxford English Dictionary, 2009)

Flexibility is how well a SC adjusts to the needs and demands of the customer. Li et al. (2008) continues and describes the ability to adapt as how well a SC can cope with a shift in demand. Satisfaction is also a quality possessed by an ASC, where satisfaction is the ability of the SC to react quickly on the unique demands (ibid). To simplify, the characteristics of an ASC are: Flexibility, Ability to adapt, Satisfaction.

3.2.3 Lean Supply Chain

Lean is the production philosophy developed by Toyota between 1940 and 1970. At the beginning Lean was only used by the automotive industry but soon spread to other industries. The success factors behind Lean were to overlook short term goals and focus on the entire process instead of single processes (Bellgran, 2005). One of the biggest problems with the lean philosophy is the low grade of flexibility it gives. According to Toyota, the low

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grade of flexibility is the “basis to all bad things” (Dennis, 2002). The main focus behind Lean is to reduce waste (Segerstedt, 2009).

“Lean is characterized by scarcity.” (Oxford English Dictionary, 2009)

Waste can be identified in all of the processes within a SC, from production to R&D (ibid).

The main cause to waste is the unused creativity of employees, over processing, high levels of stock inventory, defects, and the biggest one – overproduction (Liker,2004). According to Liker (2004) the view on waste has changed over the last years when linking lean with Supply Chain Management. The cooperation with suppliers has broadened the Lean philosophy to a Supply Chain perspective where the exchange of information between suppliers is crucial (ibid). The relationships with suppliers are viewed as long lasting in comparison to what it has been viewed as. The development is inhibited if the manufacturer is competing with the supplier and only values lower cost per unit (Womack, 1990). Womack argues that doing so, the responsibility of waste reduction, which is the focus of Lean, is controlled by several actors which don’t have the knowledge about the entire process.

3.2.4 Efficient Supply Chain

An Efficient Supply Chain, ESC, often deals with more functional products, such as groceries for example. These products often tend to be sold in large volumes and are easy to predict the demand of. The typical manufacturer rarely consider the product innovation due to the reason that the product often can be placed in the mature phase of PLC, instead they emphasize their efforts on the operations. (Chibba, 2007)

3.2.5 Hybrid Supply Chain

A Hybrid Supply Chain, HSC, aims to use the benefits from both Lean- and Agile philosophy, by minimizing the production cost at the same time as keeping the grade of service at a high level (Mason-Jones, 2000). The ultimate goal is to have a high degree of customer satisfaction (ibid).

In a HSC there are two forces that contradict each other, keeping the cost at a low range and at the same time achieving a high degree of service (Mason-Jones, 2000). Companies who tries to have a high degree of service as the same time with keeping low cost has used what Krishnamurthy (2007) describes as decoupling points in the SC. These decoupling points mark the transition in which the SC goes from example lean to agile (ibid). The “Lean-stage”

is often symbolized by products with stabile demand and low variation (Mason-Jones, 2000).

The “Agile-stage” is on the other hand controlled by the demand by customers and often with great variation (ibid).

3.3 Order winners/Order qualifiers in a SC

The choice of SC strategy can be helped with the product life cycle theory but companies should also pay attention to the specific product qualities the customers are experiencing when deciding to buy or reject the product (Harrison and Van Hoek, 2008). Different products or services may be perceived different by the customers relative to the objectives

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impact upon them (ibid). To help clear this distinction the concept of order winners and order qualifiers has been introduced.

3.3.1 Order winners

The factors that directly help the product to win an order on the market are called order winners. The customers often relate to these factors as key factors for purchasing the product. Harrison and Van Hoek (2008) explain that if a firm succeeds with raising the performance on these factors they will increase the likelihood of getting more orders. Thus a product and a firm would not be able to compete only with low-costs if the order winners are other factors like flexibility and customization (ibid).

3.3.2 Order qualifiers

Order qualifiers are factors that are considered as “must” factors, which enable a product to enter a marketplace. These factors are the basic requirements set by the market and must be fulfilled by the product or the firm. Factors could be quality certification like ISO 9000.

One need to be aware that order qualifiers only enables a firm to enter a marketplace and not automatically helps the firm to sell the product or service. (Harrison and Van Hoek, 2008)

Harrison and Van Hoek (2008) emphasize the importance of knowing that order winners and order qualifiers are specific to the individual marketplace. Mason et al. (2000) uses the concept of order winners and order qualifiers combined with SC strategies. If cost primary is the order winner is generally a Lean SC most appropriate, but if the service level is the order winner should an Agile SC be chosen since stockout and obsolescence would result in a direct loss of customers (ibid).

Table 1 Order winners and order qualifiers (Mason-Jones et al., 2000)

Order qualifiers Order winners

Agile Supply ^Quality

Cost Lead Time

Service Level

Lean Supply ^Quality

Lead Time Service Level

Cost

A further notation is that these factors can change over time. Thus during the Product life cycle, PLC, a product or service can shift order winners and order qualifiers. Often the factors which are order winners in early stages of the PLC are order qualifiers once the product is in the maturity phase of the PLC (Harrison and Van Hoek, 2008). Harrison and Van Hoek (2008) emphasizes that the challenge for the Supply Chain is to understand these changes in the market and adapt capabilities accordingly to meet the demands set by the market.

3.4 Distribution center strategies

The role of a distribution center in a SC has been argued to be absent by a firm theoretical framework, where it is often not consider a part of the SC strategy (Baker, 2004). However,

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the concept of distribution centers differs by using different SC, with different strategies.

Baker (2004) discuss the two concepts, agile and lean, thus on their role that the distribution center is viewed upon. A general consensus about distribution center is that the level of inventory should be minimized in the SC (ibid).

Different SC strategies affect the distribution center in one way or another. An agile Supply Chain, ASC, often holds inventory at few centers, if at all. Inventory in an ASC is described as the last resort to balancing the supply to the market demands. A Lean Supply Chain, LSC, is focusing on reducing waste in a SC, and lead time in a distribution center is viewed as waste (ibid).

Even if some typical SC strategies (ex. LSC) regards distribution centers and warehousing as non -value adding activities they may be needed anyway. Baker (2004) identifies a need for inventory in modern Supply Chains. They may on the other hand vary in their nature and in some cases act as a decoupling point between a lean manufacturing and an agile Supply Chain. Also noted, global sourcing has led to a greater uncertainty and longer led-times, which contributes to higher inventories to coup with this phenomenon (ibid).

According to Baker (2004), four different solutions or strategies for distribution centers are offered from modern Supply Chain concept, which all have different advantages and suits different conditions. Baker (2004) continues, the general idea that a “one-size-fits-all” Supply Chain is not adequate and needs to be adjusted in according to the market and its order winners and order qualifiers (Harrison and Van Hoek, 2008).

3.4.1 Service Level Segmentation

When a firm aligns its logistics operations with one or many customer segments Baker (2004) calls it Service Level Segmentation. The basis of Service Level Segmentation is to identify the key values for the customer and align it Supply Chain strategies in accordance (ibid). Typical solutions could be vendor managed inventories (VMI), which is a warehouse owned and controlled by the supplier located at the customer (Cetinkaya & Lee, 2000).

3.4.2 Postponement

Postponement is when inventory is held within a flexible position of the SC. This flexibility leads to inventory held back as work in progress awaiting the final instructions by the customer. By postponing the finalization of the product the SC gains the advantage of responding to market demands without over producing. An important notation is that postponement can take place at numerous locations/points in the SC but most common is the final distribution center. (Baker, 2004)

3.4.3 Cross Docking

Cross docking is when inbound material is unloaded and then directly, with little or no storage, loaded upon outbound transportation. This may be done by changing ex. types of conveyance, or combining products from different locations with the same destination.

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Cross docking could be applied for products arriving from distribution centers holding slow moving products with products with high level of turnover. (Baker, 2004)

3.4.4 Third-Party Logistics Provider

A third party-logistics provider (3PL) is a firm that provides operations throughout the entire SC. 3PL often specialize in ex. warehousing, transportation and operations. They are often used when SC strives for a higher level of agility which impacts the organizational models.

The use of 3PL is well-matched with the concept of lean Supply Chain, LSC, which is focusing of reducing SC costs with out-sourcing. (Baker, 2004)

3.5 Secondary information about distribution strategies in China

Secondary information regarding consequences Nordic enterprises have faced when moving activities to China has been assessed in an effort to complement the primary information gathered in chapter 5.3 Examples of other companies’ distribution strategies in China.

General information about the processes companies have gone through when outsourcing to China has been studied as well as more specific information about how they have designed their distribution strategies.

3.5.1 Phases in outsourcing

Beijer & Sundén (2009) has examined how Swedish companies are expanding their sourcing efforts in China over time. The companies studied were Scania, Lindemaskiner, Volvo PV, Autoliv, Finnveden Bulten, Ericsson, Habia Cable and Por Pac. The information gathered shows several clear phases that these Swedish companies have gone through when taking the step into China. The first phase that was identified was that the increased competition and pressure to reduce costs encouraged companies to search for cheaper components or to move production to China. However since the components manufactured in China were perceived to have lack of quality, a major part of the components were sourced from Europe, as in phase 2. This approach was however perceived to be complicated and expensive so the studied companies have in one way or another strived to increase the amount of sourced components Asia. To enable this, companies influenced their European suppliers, who they trusted, to move some of their production to Asia as well. But since these suppliers also imported a majority of their components from Europe were the prices still kept high, which forced the companies to start purchasing products which were completely produced by local Chinese suppliers hence enabling low cost in their entire SC, Phase 4. In the last phase, Phase 5, suppliers has grown both in knowledge but in capacity resulting in an ability to produce products which later will be exported to other markets around the world.

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Figure 14 Phases in outsourcing (Authors own interpretation)

Volvo PV is an automotive company who established production in Chaozhing, China, in 2006 to fill the demand on the identified growing market. Volvo PV was forced by the regulations, set by the Chinese government, to purchase at least 40 % of the components locally to avoid high custom tariffs. Initially Volvo PV only purchased the required amount set by the government and imported all other components from Europe. The reason for this process was that the procurement and screening of possible suppliers in China not had been prioritized since setting up the production was the main focus. Volvo PV had experienced problems in the quality of the components purchased in China, due to a high degree of manual operations and problems with communicating quality requirements. When entering China, Volvo PV had expected the price level to be more attractive than it later was proven to be, since they experience that the local suppliers took advantage of the fact that Volvo PV was forced to purchase a certain amount of components from China. However one major difference between Volvo PV and MGC is that Volvo PV sell their products to the local market while MGC export all of their products, hence MGC are not required to purchase a minimum amount of components from China.

Autoliv, a supplier to the automotive industry, established some production in China 1998 when one of their most important customers, Volkswagen, demanded them to enter China.

Volkswagen had just as Volvo PV faced the Chinese regulations of a minimum of 40 % locally sourced components, but when the Chinese suppliers could not fulfill the required quality standards, they demanded their European suppliers to take the leap to the Chinese market.

Initially Autoliv imported all components from USA and Europe, thus only performing the final assembly in China. Autoliv identified an opportunity to increase the efficiency and lower the costs by shifting more of the procurement to local suppliers in China. But the identification of potential Chinese suppliers was difficult since few suppliers meet the global required standards. Autoliv then pursued the same strategy as Volkswagen and tried to influence key suppliers in USA and Europe to move some of production to China. This eventually increased the amount of locally sourced components and made Autoliv considered the large share of imported components as a short term solution.

Ericsson started their production in China 1992 through a joint venture. Early on, Ericsson strived towards sourcing local components but due to lacking quality and technical knowledge, all components had to be sourced from Europe. For several years the production in China purely was an assembly activity, but Ericsson regarded this as expensive and

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complicated since the flow of components were slow moving and where leading to a high stock level. It was not until the new regulations by the Chinese government requiring a 40%

of locally sourced components in 1997, that Ericsson started to demand their suppliers to relocate to China. Since the majority of the components sourced from China then came from European suppliers which had relocated to China and using the same strategy as Ericsson with large share of imports resulted this in a minimal cost reduction. Cost savings could only be made through lower salaries in the assembling. Ericsson solved this dilemma by establishing R&D in China, and demanding that their suppliers did so as well. This increased the knowledge and the quality, but also enabled Ericsson to enjoy the advantage of low salaries in all parts of their SC. During 2006 Ericsson purchased over 80 % of their components from Asia.

Habia Cable who is a subcontractor to Ericsson started their production in China 2000 due to demands from Ericsson. Initially they only performed assembly in China, but gradually they shifted more advanced parts of the production to China while still shipping all inbound components and raw materials from Sweden. Habia Cable faced a growing demand from Ericsson to cut prices which forced them to start purchasing from local suppliers. The components purchased from China were not cheaper than comparable components in Europe but Habia Cable saw other advantages such as shorter lead times and reduced transportation and warehouse costs. By shifting procurement to China were Habia Cable able to increase their delivery reliability and lower the value tied in stock. Additionally were the complicated custom procedure simplified. Initially Habia Cable experienced problems with the quality of the Chinese suppliers, but gradually this has improved when the pressure on the suppliers have increased.

3.5.2 Distribution strategies in China

Yan & Wang (2005) has in their master thesis analyzed the logistic consequences of outsourcing in China for Nordic enterprises. They have examined large companies from Sweden and Finland active in the electronic and textile industry.

IKEA has implemented a distribution center in Shanghai, where all components sourced in Asia are sent. IKEA has launched a portal system mainly for their suppliers in Asia where suppliers can receive orders, forecasts, quotation tools, carrier integration etc. The major problem IKEA has had is with the reliability in the transportations, and more specific road transport leading to delays and shipping losses. IKEA has also experienced a low on-time- delivery from Chinese suppliers, also leading to delays. Furthermore they have had an increased cost of warehousing and administration.

Volvo Group manufactures trucks, buses and construction equipment in China and is just as MGC importing a large share of components. The most significant logistics problem Volvo has faced is the delays caused by the Chinese customs, reducing the on-time-delivery. Volvo has implemented a logistics information system which integrates the manufacturer, suppliers, dealers, consignors and consignee. This system gives Volvo a control over the

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whole Supply Chain, thus it has improved the lead time from ordering to delivery and the inventory and operation cost. Volvo Group has not implemented a distribution center in Asia, each factory has its own warehouse. But Volvo has outsourced some manufacturing to local suppliers in Asia and has therefore decreased their lead time.

Sony Ericsson has outsourced the majority of their manufacturing to partners in China and they have about 220 suppliers that deliver components to these factories. Sony Ericsson has used direct transportations from suppliers to the factories, but has recently implemented a distribution center in Hong Kong, to which all components are transferred before distributed to each factory. Sony Ericsson has experienced that the scope of their SC has become more complex after the outsourcing, and that the Chinese customs is a major problem when having frequent imports and exports. They have also experienced an uncertainty in the on- time-deliveries from the Asian suppliers, resulting in delays and higher stock.

Nokia has chosen another strategy than Sony Ericsson since they are manufacturing most of their products themselves. Nokia experiences that this gives them a better control over the inbound and outbound logistics, hence achieving cost efficiency and high customer satisfaction. In 2006 Nokia sourced 60 % of the components from local suppliers in China.

They have a total of four production facilities in China. At their production base in Xingwang, Nokia has strived to locate their key suppliers in an industrial park. A Central Service Management System (CSMS) has been implemented among all upstream suppliers which enables all Supply Chain players to get information about the latest inventory status, and hence enables them to make consequent supplement. CSMS reduced the need for administration since it allows Nokia to make on-line customs clearance, reducing former 11 application procedure to 6 for both import and export. Components are sent from the suppliers within the industrial park exactly when they are needed in the production, resulting in zero inventories and just in time service. A third party logistics provider is used to manage the freight forwarding, distribution and customs clearance for both components and finished products. This approach has been highly successful but have yet not been implemented at the three other production bases.

To summarize this chapter have most of the studied companies started with importing the majority of the components from Europe, doing only the pure assembly in China. However they have been active in increasing the amount of purchases from Asia by both influencing European suppliers to relocate, and to help the Chinese suppliers to build up necessary knowledge and technological knowhow. Each company studied has implemented different strategies to manage the SC in China. On consequence that most companies have faced is delay in customs resulting in long lead times and high stock. The reliability of the Chinese suppliers has also been perceived to be lacking.

3.6 Alternatives for distribution centers in China

The intention of this chapter is to describe the customs process in China and the concepts of free trade zone and bonded logistics parks in an effort to create an understanding of the

Evaluating distribution centers in a global supply chain

M A S T E R ' S T H E S I S