Hub-Model Utilisation in Inbound Logistics - A Case Study from the Finnish Electronics Industry Jukka Hemilä

Transcription

1 Hub-Model Utilisation in Inbound Logistics - A Case Study from the Finnish Electronics Industry Jukka Hemilä VTT Industrial Systems ICIL 2005, , Montevideo, Uruguay

2 Agenda Introduction Methodology Literature review Case study Conclusions ICIL 2005, Montevideo, Uruguay. 2

3 Introduction Structural change in the electronics industry Distributor or Reseller Distributor or Reseller Distributor or Reseller Distributor and assembler Distributor and assembler Product / Brand owner Product / Brand owner Product / Brand owner Product / Brand owner Product / Brand owner Product / Brand owner Contract Manufacturer Contract Manufacturer Source: Modified from Ollus et al. 1998; Hemilä 2002 ICIL 2005, Montevideo, Uruguay. 3

4 Introduction Today competition is very complicated and markets demand cost reduction every day Contract manufacturers (and subcontractors) have today very high production technologies -> where can one generate more profit, when prices are low and all players have the same high quality? Logistics could be one way of making business more competitive. In many cases, the overall supply chain s material flow management has been a problem: There are buffer stocks to ensure reliable deliveries, but this also requires capital to be committed Demand forecasting does not work in many cases -> causes overreaction and a bullwhip effect on the supply chain Material management is challenging, especially for small and medium-sized subcontractors, who do not want to put all their money into materials. In Finland, labour costs are quite expensive and the country s location is far from global markets -> effective logistics might enhance competitiveness. ICIL 2005, Montevideo, Uruguay. 4

5 Methodology Process analysis of the supply chain Cost difference analysis between two optional cases: 1) Using the hub model in logistics and, 2) Acting as today without the hub model, the so-called direct model. A literature review about logistics development when outsourcing operations Framework for Demand and Supply Network Management research project: Benchmarking Common Research and Development Framework for Demand-Supply Network Management Demand-Supply Network management Logistics Control Methodology Networked Manufacturing Logistics Case A and Network Case B and Network... Case n and Network ICT Utilisation Conclusion and Results Exploitation Theoretical Contribution ICIL 2005, Montevideo, Uruguay. 5

6 Literature review Literature review in this case was done on different levels: Inbound logistics; project is focused on inbound logistics. Our case company has two choices in terms of inbound logistics keep logistics and do it by yourself, or outsource your logistics = using a hub. How to create a cost model for inbound logistics Logistics management; Inbound logistics decision making Inbound Logistics Logistics Maintaining Logistics Outsourcing Logistics Cost Models Inbound Logistics Decision Making ICIL 2005, Montevideo, Uruguay. 6

7 Literature review, Findings Models for logistics management Many reasons for outsourcing How to create cost models for logistics Accrual of costs during a product s supply chain Costs After sales Sub- Contractors Principal Material s Time Source: modified from Seppänen et al ICIL 2005, Montevideo, Uruguay. 7

8 Case study s Subcontractors Customers Direct model Principal Hub model s Subcontractors Customers Inbound HUB Principal ICIL 2005, Montevideo, Uruguay. 8

9 Case study We defined a three hierarchy-level model to calculate the cost difference between the direct model (present state) and the hub model (vision state) Examples of different costs in the activity based cost model: fixed monthly costs order level costs product level costs procurement and personnel salaries transport (subcontractor hub principal) production stopping and product defects costs due to supplier quality organisation costs telephone call costs inventory costs R& D costs related to outsourcing other ordering costs material profits central management costs receiving costs capital invoicing costs sending costs work costs / overwork / backlog reclamation costs scrap costs customs ICIL 2005, Montevideo, Uruguay. 9

10 Case study We changed five suppliers from the direct model to the hub model, costs decreased by about 0.7% per end product. The savings were mostly due to decreased invoicing costs. s sometimes sent one invoice per product or subassembly and invoice control requires much work on the principal s side. The hub model has many other savings that were not counted, and some of them are hard to calculate. For example, we found additional savings due to easier inventory listing, simplified logistics and a three weeks buffer against demand peaks. After cost difference analysis, next phase is creation of an activity based costing model for the total cost of supply chain, with decision variables: material flow paths and inventory/production level. The model includes stochastic demand-level variations, when a penalty imposed if demand is not satisfied. The idea is to find the optimum for decision variables when total costs are minimised. ICIL 2005, Montevideo, Uruguay. 10

11 Conclusions Cost reduction is demanded every day and that s why electronics industry companies have to find new ways to improve their competitiveness. Outsourcing is an effective way to improve competitiveness, but there should always be a reason for outsourcing. Logistics is one of main elements in improving competitiveness The hub model (outsourced logistics) is one answer to improve logistics and the competitiveness of a company. The hub model has challenges of its own where ownership of and liability for materials is concerned. For our case company, the future challenge is dynamic hub inventory control, which includes a model of demand and takes production level variations into account. ICIL 2005, Montevideo, Uruguay. 11

12 Thank You! Contact information: Jukka Hemilä VTT Industrial Systems P.O. Box 1301, FIN VTT, Finland Mobile phone ICIL 2005, Montevideo, Uruguay. 12