impact and adoption of flexibility in a rigid and

Impact and Adoption of Flexibility in a Rigid and Centralized Distribution Network

- A Case Study on a Global Manufacturing Company

ANTON SÖDERBERG ALEXANDER WALLENBERG

Master of Science Thesis

Stockholm, Sweden 2016


- A Case Study on a Global ManufacturingCompany

Anton SöderbergAlexander Wallenberg

Master of Science Thesis INDEK 2016:119 KTH Industrial Engineering and

Management Industrial Management

SE-100 44 STOCKHOLM

Approved Supervisor

Andreas FeldmannCommissioner

Case Company Contact person

N/A

AbstractFor manufacturing firms to succeed in the global marketplace it is important that they have an efficient supply chain that is well adapted to the characteristics of the products.

This thesis explore the companies' challenge to adapt its supply chain to the characteristics of their products. A case study has been conducted on a global manufacturing company's distribution network. The company, which is in focus of the study, has conducted extensive effort with standardization and centralization of the distribution network to improve the performance indicators. Consequently, the study focuses on examining how the factors, standardization and centralization, impact the performance indicators in the distribution network.

The empirical results show that the company's distribution network is designed to operate efficiently for Make-To-Stock (MTS) products. Nonetheless, the network does not work as efficiently for Make-To-Order (MTO) products. These products are forced through a series of non-value activities. The lack of flexibility in the network leads to manually bypasses, which increases both the workload and risk. Therefore, the performance indicators are improved by a more flexible design adapted to the product characteristics and customer needs.

The study identifies four barriers preventing the company to adapt its distribution network to a more flexible design:• An excessive focus on economies of scale• Imbalance between central and regional capabilities in the organization• Rigid processes and lack of software support• Complexity in transfer pricing and revenue sharing between entities

Finally, the study contributes with suggested actions aimed to increase the flexibility of the company's distribution network.

Keywords: Manufacturing and Distribution Network, Standardization, Centralization, Flexibility

Examiner

Jannis Angelis

Master of Science Thesis INDEK 2016:119




2016-06-23

Approved Supervisor

Andreas FeldmannCommissioner

Case CompanyContact person

N/A

Examiner

Jannis Angelis

SammanfattningFör att tillverkningsföretag ska lyckas på den globala marknaden är det viktigt att de har en effektiv försörjningskedja som är väl anpassad till produkternas egenskaper.

Den här uppsatsen undersöker företagens utmaning att anpassa sin försörjningskedja till sina produkters egenskaper. En fallstudie har genomförts av ett globalt tillverkningsföretags distributionsnätverk. Företaget som står i centrum för studien har arbetat länge och intensivt med standardisering och centralisering av distributionsnätverket för att förbättra nyckeltalen. Följaktligen fokuserar studien på att undersöka hur faktorerna, standardisering och centralisering, påverkar nyckeltalen i distributionsnätverket.

Det empiriska resultatet visar att företagets distributionsnätverk är utformat för att fungera effektivt för produkter som är tillverkade mot lagerbehov. Däremot fungerar inte nätverket lika effektivt för produkter tillverkade mot kundorder då de tvingas genom en serie av aktiviteter som inte är värdeskapande. Bristen på flexibilitet i nätverket leder till manuella lösningar vilket ökar både arbetsbörda och risk. Därför skulle nyckeltalen förbättras av en mer flexibel design anpassad till produkternas egenskaper och kundernas behov.

Studien identifierar fyra barriärer som förhindrar företaget att anpassa distributionsnätverket till en mer flexibel design:• Stort fokus på skalfördelar• Obalans mellan centrala och regionala förmågor i organisationen• Stelbenta processer och brist av mjukvarustöd• Komplexitet i internprissättning och intäktsdelning mellan entiteter

Avslutningsvis så bidrar studien med föreslagna åtgärder som syftar till att öka flexibiliteten i företagets distributionsnätverket.

Nyckelord: Produktions- och Distributionsnätverk, Standardisering, Centralisering, Flexibilitet

Master of Science Thesis INDEK 2016:119




2016-06-23

Contents

List of Figures 3

List of Tables 3

Introduction 6Aim and Objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Research Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Delimitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Thesis Outline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Literature Review 9Supply Chain Network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Configuration and Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Configuration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Centralization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Distribution Network Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Distribution Network Alignment . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Standardization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Flexibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Distribution Network Design Alternatives . . . . . . . . . . . . . . . . . . . . . . 19

Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Methodology 22Research Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Research Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Research Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Reliability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Validity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Ethical considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Result & Analysis 31Configuration of the Distribution Network . . . . . . . . . . . . . . . . . . . . . . . . . 31

Nodes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31Links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Product characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Coordination of the Distribution Network . . . . . . . . . . . . . . . . . . . . . . . . . 34Roles in the Distribution Network . . . . . . . . . . . . . . . . . . . . . . . . . . 34Coordination of the Physical Flow . . . . . . . . . . . . . . . . . . . . . . . . . . 37

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Coordination of the Information Flow . . . . . . . . . . . . . . . . . . . . . . . . 38Performance Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39Flexibility in the Distribution Network . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Manually Bypasses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40Stakeholder Perspectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Cost & Lead-Time Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Discussion 46Standardized and Centralized Distribution Network Design . . . . . . . . . . . . . . . 46Flexible Distribution Network Design . . . . . . . . . . . . . . . . . . . . . . . . . . . 47Barriers to Flexibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48Reflection on Sustainability & Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Conclusion 51Answers to Research Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52Limitations and Future Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Bibliography 55

Appendix 59Interview Template . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59Survey Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

List of Figures

1 Typical Supply Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Complex Supply Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 Global Production Networks Categorization . . . . . . . . . . . . . . . . . . . . . . . 114 Centralized Logistic Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 Centralization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 Party Logistics Pyramid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 Six Distribution Designs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198 Five Network Routing Designs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

9 The Abductive Research Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

10 Distribution Network Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3211 Key Stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3612 Standardized Routing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3713 Example Routing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3814 Survey Result . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4015 Alternative Routings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

List of Tables

1 Performance of Distribution Networks for Different Product/Customer Characteristics 20

2 Table of Interviews, Part1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263 Table of Interviews, Part2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274 Administration and Planing Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

5 Bypass: Geographic Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 426 Bypass: Product Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427 Cost Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 458 Lead-Time Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

9 Survey Result . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

3

ForewordThis report was written as a Master of Science thesis at the department ofIndustrial Engineering and Management at the Royal Institute of Tech-nology in Stockholm, Sweden. The thesis was designed as a 30 creditcourse and was conducted from January to June 2016.

AcknowledgementsWe have many people to thank for assisting us to conduct this thesis.First of all, the case company that gave us great support and insightinto their business. Secondly, KTH with guidance and feedback fromboth our supervisor and examiner. Finally, our friends and family thathave supported us during this project, both with needed distraction andfeedback.

Acronyms

3PL Third-Party Logistics.

C1 Category 1 Products.



DP Distribution Point.

IP Intellectual Property.

ITC International Trade Compliance.

KPI Key Performance Indicator.

MFG Manufacturing Site.

MTO Make To Order.

MTS Make To Stock.

PDP Primary Distribution Point.

RDP Regional Distribution Point.

RQ Research Question.

SCM Supply Chain Management.

SCOT Shipment Completed on Time.

5

Introduction

This chapter gives a brief overview of the theoretical fields the research were based on. Further,the corresponding objective and research questions are presented followed by delimitation and thethesis outline.

This study explored how flexibility impacts the performance in a global manufacturing compa-nies’ distribution network with focus on standardization and centralization. Where a distributionnetwork is defined as interconnected organizations of people, storage facilities, and transporta-tion systems distributing goods and services from manufactures to consumers [Chopra (2003)].

Global distribution network is a topic greatly covered in terms of decisions regarding location,capacity, and configuration of facilities. However, a gap has been identified regarding per-spectives targeting softer issues as site competences, facility relationships, flexibility and risk[Olhager et al. (2015)]. Therefore, scientific studies concerning these issues, helps to obtain newperspectives on distribution network design.

The competitiveness of global manufacturing networks is to a large extend determined by theperformance of the distribution networks as they link production and consumption [Hesse &Rodrigue (2004)]. Hence, the distribution network has long been acknowledged as a fundamen-tal source of the competitiveness of manufactures [Hayes & Wheelwright (1984)]. The rapidlychanging environment makes manufactures face new challenges to design, produce, and dis-tribute products for a global market and simultaneously manage its global network of operationas efficiently as possible [Olhager et al. (2015)]. Therefore, the importance of having a well con-figured and coordinated distribution network has increased. Furthermore, there is a developingacknowledgement of how modern competition is being fought “supply chain vs. supply chain”rather than “firm vs. firm” [Ketchen & Giunipero (2004)]. This enhances the importance of anefficient distribution network.

The global business environment consists of an expanding competition with faster product devel-opment through globalization and technology development. This business environment consistsof customers demanding customized products which drives the trend of mass-customization[Da Silveira et al. (2001)]. In this context a flexible and well-performing supply chain enablesglobal firms to take advantage of these opportunities. However, many global supply chains havea limited focus upon aspects of cost efficiency and economies of scale. These physically efficientsupply chains perform well in markets with predictable demand [Fisher (1997); Harris et al.(2010)]. Though, the trend of mass-customization has created a business environment with highvolatility in which many of these supply chains struggle to perform efficiently [Tomlin (2014)].Consequently, flexibility has gained recognition [Olhager et al. (2015)]. The increased interest forflexibility derives from the importance to align the supply chain with the product characteristics[Harris et al. (2010); Godsell et al. (2011)]. Further, flexibility has been pointed as essential formarket-responsive processes that are adapted to products with an unpredictable demand.

This study was conducted as a case study on a global manufacturing company who expresseda need for increased ability to more efficiently respond to market demand. The emerging trendof global customers with diversified requirements have created a demand for customized prod-

6

INTRODUCTION

ucts. This combined with a geographic shift has created a challenge for the case subject tohandle. The new products were often Made-to-Order (MTO) which involved longer lead timeand customized transport. The case subject’s distribution network was optimized to handleMake-to-Stock (MTS) products which was stored in the warehouses and replenished by periodicreviews. Therefore, the firm had recognized a potential to improve their performance due toa miss-alignment between the supply chain and the product portfolio. The structure of theindustry, where the case subject operates within, require firms to have a complex manufacturingand distribution network due to the regulations and standards preserved.

Aim and ObjectiveThe aim of this research was to explore how flexibility is adapted in a standardized and central-ized distribution network to improve performance. The objective was to understand how thedistribution network is performing, how the performance is improved by increased flexibility,and to identify critical factors that hinders adoption of flexibility.

Research QuestionsGiven the objective, the main research question was derived:

How does flexibility impact the performance of the standardized and centralizeddistribution network?

To answer the main research question, three research questions were defined. The first researchquestion explored the performance of the case subjects standardized and centralized distributionnetwork design. Further, this included an investigation of the distribution networks configurationand coordination. The question was derived as:

RQ 1: How does the standardized and centralized distribution network perform?

The second research question explored how flexibility impacts the performance through e.g.multiple routing options, and it was derived as:

RQ 2: How does flexibility impact the performance of the distribution network?

Furthermore, to be able to realise the net impact of flexibility it is important to consider barriersthat hinders flexibility. Therefore, the third question was derived as:

RQ 3: What are the most crucial barriers to consider when enabling flexibility?

Results directly linked to the main research question was not derived. Instead, by answering thethree research question, a foundation for a discussion on how flexibility impacts the performanceof the distribution network was possible, which in turn answered the main research question.

DelimitationsSupply Chain Management is a broad research subject which cover several sub-areas. This studyfocused on a limited part, the distribution network, due to the time-frame and the complexity.The scope was further limited to analyzing the case subject and provide answers to the researchquestions stated above. The study was primary targeting a selected amount of the case subject’sproduct portfolio. This included products that had a potential for impact on the performanceand that was misaligned with the distribution network design.

7

INTRODUCTION

Thesis OutlineThis thesis follows the structure presented below.

Literature

This chapter provides an understanding in the previous research that is relevant for the addressedresearch questions. The chapter begins with Supply Chain Management (SCM) literature froma general perspective to define the research frame. This is followed with an in-depth researchreview that is more closely linked to the objective of this study.

Methodology

This chapter presents the methodology and the methods used in the study. It discusses theresearch design and specific methods that contributes to understanding of the research process.The last section of this chapter is a discussion of the research limitations in terms of reliabilityand validity.

Results & Analysis

This chapter presents the results from the data collection of the case study. The section focus onthe distribution network and the relevant aspects to consider for configuration and coordination,e.g. products, stakeholders, performance, and business environment.

Discussion

This chapter is based upon the previous chapters and includes a discussion of the results andanalysis from the study. This includes both context specific understandings and aspects thathave the potential to be generalized to a broader audience. The chapter concludes in a discussionof suggestions with both benefits and barriers that needs to be considered and handled.

Conclusion

This chapter summarizes the study by answering the stated research questions. The chapteralso includes a presentation of conceptual and empirical contributions combined with limitationsand future research.

8

Literature Review

This chapter describes the theoretical frame of references that the study originates from. Thechapter follows a funnel approach which initially focus on a broad theory base to provide anoverview of the topic. The focuses later shift into more in-depth research of topics related tothe research questions. The covered topics are; supply chain, configuration, coordination, per-formance and distribution network design.

Supply Chain NetworkA supply chain does not only include the manufacturer and its suppliers but also the distributors,customers, warehouses, and/or retailers. Within each role, such as the manufacturer, the conceptof supply chain includes all functions involved in receiving and fulfilling a customer request. Thedifferent roles in the supply are interconnected by flows. The flows are dynamic and consists ofproducts, information, and funds between different actors [Chopra & Meindl (2016)]. Figure 1illustrates the simplest layout of a supply chain.

Figure 1: Illustration of a typical supply chain. Adapted from Chopra & Meindl (2016).

Thus, a supply chain is often more complex than this description. For example, a distributor mayreceive products from several different manufactures and then distributes the products to severaldifferent retailers. This complex interaction between many actors is more appropriate describedas a supply network. While the complexity of the supply network increases with the interactionbetween actors, the component of the flows remains the same. Therefore, a supply network is acomplex network configuration of systems, sub-systems, activities, and their relationship to eachother. The complexity streams from the number of the suppliers, manufacturers, distributors,retailers, and customers within in the network [Chandra & Grabis (2009)]. The principle of asupple network is illustrated in figure 2.

9

LITERATURE REVIEW

Figure 2: Illustration of a complex supply network. Adapted from Chandra & Kumar (2000).

With the increasing complexity of these networks, the ability to managing supply network be-comes a way of competitiveness by reducing uncertainty and enhancing customer service. Houli-han (1985) defines SCM as the activities that strive to balance conflicting activities as promotion,sales, distribution and production. Therefore, the primary purpose of supply chain managementis to minimize the flow of raw material and finished products at every point in the chain toenhance productivity and cost savings [Coyle et al. (1996)].

Definition of Global Distribution Networks

Distribution networks are interconnected organizations of people, storage facilities, and trans-portation systems that transport goods and services from manufactures to consumers [Chopra(2003)]. The distribution network are diversified in different alternatives to achieve a selec-tion of supply chain objectives. The competitiveness of global manufacturing networks is toa large extend determined by the performance of the logistics networks as they link produc-tion, distribution, and consumption [Hesse & Rodrigue (2004)]. Therefore, distribution haslong been acknowledged as a fundamental source of the competitiveness of manufacturing com-panies [Hayes & Wheelwright (1984)]. Furthermore, the rapidly changing environment makesmanufacturing firms face new challenges to design, produce, and distribute products globallyand simultaneously manage its operation efficiently [Olhager et al. (2015)]. This increases theimportance of a having a well configured and coordinated distribution network. Furthermore,there is a developing acknowledgement that modern competition is being fought “supply chainvs. supply chain” rather than “firm vs. firm” [Ketchen & Giunipero (2004)]. This enhances theimportance of an effective supply chain.

Configuration and CoordinationThere are two important aspects to consider when designing and managing a global supply chain;configuration and coordination. These concepts initially streams from Porter (1986) where hesuggests that these two are key dimensions of a supply chain. Configuration refers to where inthe world each activity is performed, and coordination refers to how linked activities, performedglobally, are coordinated with each other.

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LITERATURE REVIEW

ConfigurationThe increased trend of globalization has created a increased geographic spread in the configu-ration of production sites and networks. This have forced firms to structure their productionaccording its supply strategy. According to Knox et al. (2014) a global production network canthe configuration be divided into the following two categories:

• Multi-domestic — which concerns operation where each market is serviced independently.This category can relate to simple products that are easy to replicate but costly to trans-port long distances. Production can be integrated globally, while the marketing is multi-domestic, reflecting cultural and consumer preference difference. The goal is therefore tobetter answer the demand in every market. This implies that the productivity is indepen-dent because the efficiencies and productivity achieved in different markets are unrelatedfrom each other.

• Global integrated — which concerns operation where the production system is located inseveral countries and commonly involving complex products. The logistics activities arehighly important in this category because production and distribution capabilities needto be effectively resigned. This implies that the productivity is interdependent, as eachcomponent directly impacts the cost and the quality of the final products.

Given the categorization above; the location strategies for global production networks can beidentified as follow, see figure 3, [Knox et al. (2014)]:

Figure 3: Categorization of Global Production Networks. Adapted from Knox et al. (2014).

• Centralized global production — The entire production occurs within one region and theproducts are exported globally. This is particularly for products that need activities whichare difficult to relocate, difficult to reproduce, or depending on massive economies of scale.

• Regional production — In this sub-category does the production take place in each region.The size of production is property according to the related size of the regional market.This production system depends on a regional accessibility rather than economies of scale.

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LITERATURE REVIEW

It particularly applies to well-known manufacturing technologies and/or when productshave high distribution costs.

• Regional specialization — This type of global production network involves a spatial di-vision of the production based on competitive advantages. Each region specializes in theproduction of a specific goods and imports from other regions what it requires.

• Vertical transnational integration — This global production network includes differentstages of production. The production occurs at the location which offering the best com-parative advantages. Raw material is extracted from locations where they are the mostaccessible, while assembly is performed in regions having low labor costs or high skill levelsdepending in the type of products.

The role of a production unit can be either flexible, dedicated, or a combination of these two.Dedicated production capacity can be used for production of a limited number of products.However, this production is more efficient than flexible production. Flexible production, on theother hand, can be used for producing many types of products in the same manufacturing unit.When it comes to warehouses, the role of the facility can be either primarily cross-docking orprimarily storage. For storage facilities, the major purpose of the facility is to store products asinventory. In a cross-docking facility, the primarily focus is to handle in-bound and out-boundactivities as fast possible [Apte & Viswanathan (2000)].

The location has strong impact on the performance. Therefore, it is important to align theconfiguration with the overall strategy. According to the main objectives of the strategy, locationdecision can be divided into two different strategies. The first one is centralization where thefirm can gain benefits of economies of scale. The second strategy is de-centralization where thefirm becomes closer and more responsive to customers. Due to the nature of networks discussedabove, different units within the network have different capacity and capabilities. Hence, a firmdecides how much capacity and which capabilities to locate at each location [Chopra & Meindl(2016)].

Distribution Centers

Distribution centers (or logistics centers) are a geographic units of operations that consistsof activities that relate to logistics, transportation and distribution of goods. These facilitiesemployees several people that conduct these task to effectively optimize the logistics flow. Thereare several different ways to plan a logistics center, see figure 4 for an example from Skowron-Grabowska (2007).

There are several ways to distinguish a distribution center depending on its usage and factorssuch as location and geographical coverage:

• International distribution center: highest degree of organizational and functional develop-ment to enable a global range and international distribution

• Regional distribution center: services regional and major city distribution network

• Local distribution centers: serves a local and smaller city distribution network

• Industry distribution centers: serves only a particular industry or client with a specializedproduct range

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LITERATURE REVIEW

Figure 4: Centralized logistic center with several functions concentrated together such as trans-portation, storage, packing and labeling. Adapted from Skowron-Grabowska (2007).

CoordinationIn this context, coordination refers to how linked activities, performed globally, are executedwith another. This is an important dimension since it enables the distribution network tooptimize internal operations. It has been proved that coordination improves the responsivenessto changes and disruptions in the business environment [Zhang et al. (2014)]. Furthermore,supply coordination is applied to decrease logistics cost through knowledge of customer needsand better customer service. According to Abrahamsson & Brege (1997), logistics coordinationconsists foremost of an administrative coordination, e.g. information regarding order, forecastand customer transaction.

In order to achieve efficient coordination there is needs of mandate to control the logistics.People are often keen to focus on themselves and this is not sufficient if proper coordination isthe goal. The main part of coordination is to actively handle dependencies between differentactivities which can be divided into:

1. Combined dependencies — when they are connected because the use the same resource

2. Mutual dependencies — they are both depend on the others output and therefore need toadjust their actions to the other part

3. Sequential dependencies — when one part is depended of the other output, in this casethe first does not consider the seconds action

These aspects are often considered as the weak link in the supply chain and often prevent theflow from reaching the optimal coordination and the improved performance.

CentralizationCentralization of the distribution network is a important aspect to consider when coordinatingand configuring a supply chain due to the potential benefits of it. According to Oskarsson et al.(2006), the concept of centralization is to combine the different regional storage units and/ordistribution centers to achieve benefits as:

13

LITERATURE REVIEW

• Reduced overhead cost due to the decreased number of storage points

• Reduced inventory levels and capital allocated

• Increased management and overview of the distribution flow due to economies of scale

• Simplified handling of new products

However, centralization can involve negative benefits on the customer service due to increaseddistance to the central hub. There is opportunities to find a combination between a centralizednetwork and a decentralized network, see figure 5. The middle way is to transport the goodsconsolidated as long as possible and draw benefits from centralization but simultaneously striveto achieve flexibility. This system demands high coordination and structure to be possible[Tarkowski et al. (1995)].

Figure 5: Centralization — The figure on the left shows a system with a consolidation on theflow and the right figure is a centralized system. Adapted from Tarkowski et al. (1995).

PerformanceTo be able to define and evaluate performance, it is necessary to first understand the measure-ments in this area. In general, performance is a concept which is hard for researchers to define ina mutual way. Though, Rhea & Shrock (1987) defines physical distribution effectiveness as “theextent to which distribution programs satisfy customers”. Hence, logistics performance refers tothe extent of completion of goals for the logistics department.

Moreover, measures for performance is needed to examine and understand the viability of strate-gies. The strategic decision needs to be based on the potential for improvement in one or moreof the targeted performance metrics. Therefore, logistics research is conducted on the basis thatthere exists a relationship between strategic options (course of actions) and logistics performance(effectiveness) [Chow et al. (1994)]. Performance measures are needed to justify and analyzeboth everyday processes and potential long-term strategic actions.

There are several indicators available for performance measurement. According to [Chopra(2003)], the performance of a distribution network is on the highest level evaluated along twodimensions “Value provided to the customer” and “Cost of meeting customer needs”. The first

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LITERATURE REVIEW

dimension can be depict to seven factors that influences the structure of the distribution network[Chopra (2003)]. These factors are (1) response time, (2) product variety, (3) product availability,(4) customer experience, (5) time to market, (6) order visibility and (7) returnability. Differentcustomer segments prioritize different aspects and receives different amount of value dependingon the distribution design. A client that value high product variety but tolerate long responsetime would gain greater value from a design with a central warehouse with large capacity, ratherthan a design with many but small warehouses with lower product availability. The seconddimension of performance, cost, is an important performance indicator that are analyzed anddefined from several perspectives. In the given context, the supply chain cost derives from themany different process and activities. This lead to a wide range of costs [Lovell et al. (2005)].Looking at a typical supply chain, some of the major supply chain cost can be identified as (1)manufacturing cost, (2) transportation cost, (3) facility cost and (4) inventory cost. Facility costarises at specific points along the supply chain, while inventory cost can be seen as fluid costthat exists from end-to-end of the supply chain. Furter, the transportation cost often representshalf of the total logistics cost [Thomas & Griffin (1996)]. Therefore, much focus is upon thisaspect and ways to optimize it with the use of e.g. transportation options, alternative routesand consolidation.

A more explicit definition, distribution cost, find similar cost drivers but exclude the manu-facturing and include an information cost [Chopra (2003)]. Where the information cost standsfor the cost of implementing and maintaining information and knowledge flows through thedistribution chain, both internally and externally.

A trade-off that often occurs in many supply chains is between lead-time and transportationcost. The lead-time of transportation can differ between the modes that are used. Commonly aretransportation modes with lower transit time associated with a higher cost. On the other hand,a transportation mode with low transit time can increase the service level as well as decreaseinventory cost. This relationship is commonly used to justify the increased use of air freight inglobal manufacturing firms [Lovell et al. (2005)]. Other distribution costs that are associatedwith the logistics activities are consist of taxes, insurance, obsolescence, and storage.

Logistic Solution Provider

As described above, companies use their distribution network design as a competitive advantageand strives to continuously improve the performance. Therefore, the firm faces a strategy de-cision, either to keep the distribution internally or strategically source it to a specialist withinlogistic solutions [Holcomb & Hitt (2007)].

The concept of logistics solution provider includes a logistic partner that operates the logisticsfunctions within the company. There are five levels of logistic providers, see figure 6. Thesimplest form of the logistics solution is the first-party logistics provider (1PL) which are smallbusiness buying and selling in the same location. As the business expands the manufacturer’slogistics border grows. The second-party logistics provider (2PL) provider provides logisticssolution to increase the capacity for a single or a small number of functions. The capacity canbe services as a trucking company or a warehouse operator. The demand for one-stop solutionshas increased and therefore have many 2PL evolved into third-party logistics provider (3PL).By adding service and functionality the 2PL providers can develop into 3PL providers whichprovide a broad spectrum of logistics capabilities. The 3PL solution performs all or a largeportion of the client’ s supply chain logistics activities. The 3PL solution can be developed evenfurther into a forth-party logistics provider (4PL) where is essentially a logistics integrator asone-point contact for the manufacturing’ s logistics outsourcing requirements. The final stage isa fifth-party logistics provider (5PL] solution provides an overall logistics solution for the entiresupply chain [Vasiliauskas & Jakubauskas (2007)].

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LITERATURE REVIEW

Figure 6: Party logistics pyramid. Adapted from Vasiliauskas & Jakubauskas (2007).

Distribution Network DesignThe previous presented theory shows the context, configuration, coordination, and performance.The next step is to present the diversity of design options available and present how thesecan gain competitive advantage. The two focal topics are standardization and flexibility ofdistribution networks. Nonetheless, the first section covers influencing factors that needs to beconsidered.

Distribution Network AlignmentThe following factors are important to consider because they limit the compatibility of certaindesign, e.g. a industry with huge amount of small/low-value orders does not align well with highdegree of flexibility for the delivery service. This have been discussed by Tomlin (2014) wherethe author discusses how previously efficient supply chains struggle to adapt to the changes ininfluencing factors. There are two aspect that needs to be considered, product characteristicsand delivery service.

Product Characteristics

Fisher (1997) explored the need of different supply chains strategies with respect to the typeproduct. He classified products as either primarily functional or primarily innovative. A primar-ily functional product requires a physically efficient supply chain with strong cost focus, whilean innovative product needed a responsive supply chain with focus on market mediation. Theauthor argue on basis theory that an “one-size-fit-all” supply chain is not a viable solution forall customers and products. This theory has been strengthen with further research by Harriset al. (2010).

There are many aspects to consider when deciding on which type of distribution that is mostsuitable for a given product. For example, if a product is MTO or MTS could affect thedecision due to that storage needs more logistics handling to achieve efficiency [Oskarsson et al.(2006)]. A MTO product benefits from direct transportation to the customer meanwhile a morestandardized MTS product gains from replacement in a central storage facility to reduce lead-time. According to Chopra (2003), there are several characteristics of the product which needsto be considered when deciding the structure of the distribution network. These characteristicsare:

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LITERATURE REVIEW

• Number of units (i.e. the size of flow)

• The demand (i.e. the frequency of the flow)

• The size of the units

• Specific needs of the product (e.g. handle with care)

• Geographic concentration of the customer

• Value

• Accuracy of forecasting

These aspects, together with the market characteristic below, are important to consider whiledesigning a distribution network to ensure a good fit and efficient performance.

Market Characteristics

Different market segments demand and prioritize aspects differently. Therefore, the character-istics of a market are important to consider when designing a distribution network. Oskarssonet al. (2006) has pointed six (6) important factor to consider from a distribution perspective ondelivery service. These aspects are:

• Lead-time — the time from the order has been placed until delivery

• Reliability — measure if actual shipment follows the specified delivery estimation

• Dependability — if the shipment contains the right product/s, if it matches the order

• Information — provides a transparent logistics system with inventory levels to meet thecustomer demands and be able to track shipments.

• Flexibility — be able to adapt towards the client with the transportation but also adjust-ment of the order

• Inventory — be able to deliver products without waiting the manufacturing period, thisis only applicable to goods that is made to storage and not customer specific goods.

It is important to consider both these factors, product and market, when devising upon a strategydue the probability of success depend strongly upon it [Fisher (1997)].

StandardizationThe definition of standardization is to change aspects to a state where they are similar, consistentand follows the rules about what is proper and acceptable. Standardization is achieved whenfirms create process, guidelines, and/or rules for the activities in an organization. Further, thisallows firms to ensure that activities are conducted according to the standard of the firm thataligns with the strategy. Standardization has both positive and negative aspects that need to beconsidered before deciding on the level of standardization within an organization. It has beenargued that standardization has become one of the most important measures to enhance corecompetitiveness of firms [Zhuling et al. (2009)]. Thus, early authors discusses if the benefits ofstandardization can “trap” an industry in an obsolete or inferior standard when there is a betteravailable [Farrell & Saloner (1985)].

Nonetheless, there are several strategic objectives why firms should adapt standardization ac-cording to Zhuling et al. (2009):

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LITERATURE REVIEW

• Information standardization can improve the accuracy and timeliness of information.

• Business process standardization strengthens the scientific and objective of processes, andprovides the references with decision-makers.

• Standardization strategy can reduce the economic losses which are caused by informationasymmetry. It avoids frictions and disputes in trades, improves the level of standardizationand generality, and contributes to modular production.

• Standardization strategy can promote scientific and technical innovation, urges that prod-ucts gradually satisfy standards, thereby enhancing the resource utilization and outputrates, reducing the production costs, and strengthening the international competitiveness.

Standardization within a distribution can therefore contribute in many aspects and create a rigiddistribution network. However, the standardization can impede the organizations performanceby limiting flexibility which is presented next.

FlexibilitySingh & Sharma (2014) argues that the success of supply chains depends on effective strategyfor improving coordination among the members to make it more responsive for market needsby optimizing available resources. Further, a definition of supply chain flexibility is “the supplychain’ s promptness and the degree to which it can adjust its supply chain speed, destinationsand volume in response to changes in customer demand” [Lummus et al. (2003)]. These articlesalong with other authors argue for the importance of flexibility in all functions of an organization,including the distribution. This is supported by several papers that discusses efficiency andresponsiveness in a supply chain. Further, this reflects the increasing efforts, to gain customersatisfaction and understanding of the market, is needed to create a effective supply chain. Sincea flexible and agile business is a key strategy in the business context of today in order toconfigure several parameters as partners, relationships, products and markets. Meanwhile, focuson constraints as time, cost, risk and quality and align these factors to meet the requirements ofboth the end customer and the supply chain [Christopher & Towill (2001)].There is also theoriesthat a complex business environment can not be satisfied by a single supply chain and that firmsneed multiple supply chains to be successful [Coyle et al. (1996)].

Flexibility is an factor that can be acknowledged as a complex aspect with many definitions,however [Lummus et al. (2003)] targeted to bridge the gap of misunderstanding with the defi-nition of seven types of flexibility that contribute to the supply chain flexibility. The types offlexibility are (1) operation system, (2) logistics processes, (3) supply network, (4) organizationdesign, (5) information systems, (6) customer satisfaction and (7) supply chain assets. These areimportant to recognize in the whole supply chain and it is noticeable that the aspects includeboth soft and hard business element. The objective to improve the flexibility can neither seenas an isolated issue e.g. an attempt to decrease the lead-time to customer cannot be achievedwith focus on one single part in the value, several aspects and functions must be consideredto achieve significant impact [Bhatnagar & Teo (2009); Zhang et al. (2014)]. Furthermore, toachieve a truly flexible supply chain one must not only configure and coordinate the own firm.The focus should also be external because manufacturing flexibility and supplier flexibility isneeded to achieve the truly flexible supply chain [Avittathur & Swamidass (2007)].

The topic that was focused upon in this study is derived from the need of flexibility in dis-tribution networks. Where distribution network flexibility is defined as routing flexibility withalternative routes to transport goods within the supply chain nodes to the end-customers inresponse to changing environmental conditions [Stank et al. (2005)]. This distribution network

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LITERATURE REVIEW

flexibility can be achieved by accommodating changes in transportation routes, warehouse loca-tions, and the transportation mode due better adapt the end-customers’ requirements to improvethe performance [Bowersox et al. (2002)].

One of the positive aspects gained from an increased flexibility is the ability to better handlerisk. The value of operational flexibility can be exploited, e.g., through global coordination,transfer pricing and knowledge transfer. These aspects together enables the organization tobetter handle functions and situation that occurs. The importance of operational flexibility isderived from leveraging the company’s global supply chain network structure and be able totransfer knowledge and experience of best practices [Frenkel (2005)].

Distribution Network Design AlternativesThe next section presents some distribution network design alternatives based on the previousaspects and theories. There exist several different design alternatives from several differentperspective and only a selection is presented. [Chopra (2003)] has developed six (6) distributiondesigns from a B2C perspective, see figure 7

Figure 7: Six distribution designs. Adapted from Chopra (2003).

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LITERATURE REVIEW

The author has investigated the performance for different product/customer characteristics ofthe different distribution network designs. The results are presented in the following table 1.

RetailStoragewith

CustomerPickup

Manu-facturerStorage

with DirectShipping

Manu-facturerStoragewith

In-TransitMerge

Distri-butorStoragewith

PackageCarrierDelivery

Distri-butorstoragewith last

miledelivery

Manu-facturerstorage

with pickup

Highdemandproduct

++ - - - +- + -

Mediumdemandproduct

+ - +- + +- +-

Lowdemandproduct

- + +- + - +

Very lowdemandproduct

- - ++ + +- - - +

Manyproductsources

+ - - ++ + +-

Highproductvalue

- ++ + + +- ++

Quickdesiredresponse

++ - - - - - + - -

Highproductvariety

- ++ +- + +- ++

Lowcustomereffort

- - + ++ ++ ++ -

Table 1: Performance of Distribution Networks for Different Product/Customer Characteristics.Adapted from Chopra (2003).

Furthermore, [Woxenius (2002)] have described five more specific different distribution networkdesigns. From a shipping industry perspective, this could be more specifically described as adifferent network routing designs.

1. Point-to-Point — are common when the network needs to handle infrequent and specializedorders. Creates often not full-loads and empty backhaul problems

2. Corridor — when shipments follow a routing of several nodes that allows high fulfilmentand simplified oversight. The stops along the corridor work as local/regional distributionpoints where goods can be loaded or unloaded.

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3. Hub-to-spoke — one major site functions as the central hub and has high requirements ofefficiency to be able to handle the major amount gathered from the connecting nodes andthese goods are often under strict time-constraints.

4. Fixed routing — when the design allows shipments to flow in a specific way and canconnect to any node in the system by either efficient or long shipment route.

5. Flexible routing — is the same as fixed routing but also allows shipments to take alternativeroutes to better suit the customer needs under the constraints of the business.

Figure 8: Five Network Routing Designs. Adapted from Woxenius (2002).

Chapter SummaryThese designs conclude the literature review that has provided a knowledge base from a broadSCM perspective to an in-depth perspective of specific strategies can enable flexibility followingthe funnel approach. The broad topics have provided a context frame for the study and giventhe reader a general understanding of the subject. The topics have later shifted to more detailedareas as configuration, coordination and distribution network design to give the reader morespecific and relevant knowledge for the objective of the study. The following chapter presentsthe methodology that provides a understanding of how this study was conducted.

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Methodology

This chapter provides a description of the methodology used in this research. The chapter isdivided into subchapter that explains each step of the methodology in detail. The selected methodsare described in detail and particulars about the sources are included. This section allows thereader to a clear insight in the process and promote repeatability but also the reader to considerthe benefits and limitations of the selected methodology.

Research ApproachThe purpose of this study was to investigate a given situation and examine suggested solutionsto the problem that the case subject is facing. This was made with an exploratory type ofresearch that describes an existing phenomenon [Collis & Hussey (2013)]. However, the studyalso involves aspects from a descriptive type of research in the aspects of performance andcurrent-state analysis. The approach of the research has followed the interpretivism paradigmbecause the standpoint of the research was that the social society is highly subjective and has agreat complexity. Furthermore, the study required qualitative data-collection methods in orderto achieve rich data that findings is derived upon. Therefore, the research could not dependsolely upon quantitative methods that are commonly used in the positivist paradigm [Blomkvist& Hallin (2014)].

An abductive research approach was selected because this approach origins from the under-standing that greatest achievements in science are neither based upon pure deduction or pureinduction research [Kirkeby (1994)]. The historic research in logistics has been dominated bythe deductive methods. However, the need for abductive attempts has recently been emphasizedto develop new research [Kovacs & Spens (2005)]. The objective of this abductive process wasto understand a new phenomenon [Alvesson & Sköldberg (1994)] and suggest new theory in theformat of hypothesis and propositions (H/P) [Andreewsky & Bourcier (2000)]. A lillustrationof the abductive research process is found in figure 9.

The research was conducted through a case study that provided a profounder understanding ofthe studied phenomena [Woodside & Wilson (2003)]. Furthermore, the case study also reliedupon multiple sources of to conduct triangulation [Yin (2011)] which was important to confirmthe quality of the sources used. The case study was an exploratory case study where existingtheory was used to understand the situation and its events [Ryan et al. (2002)]. The informationneeded to produce the answers to the selected research questions require a deep understandingfrom multiple levels which the case study provided. This research also focused on more quali-tative data compared to a majority of previous research in the field. The case study was alsoembedded where two sub case studies was conducted on different levels and sources in the orga-nization [Yin (2011)]. This enabled analysis within, between and across the two subcases [Baxter& Jack (2008)]. The two subcases that were analyzed was the standard distribution flow andthe specialized shipments that are conducted to bypass the system and satisfy the customerdemands. These two subcases enabled two perspectives to achieve vital understanding for theanswers of the addressed research questions.

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METHODOLOGY

Figure 9: The abductive research process. Adapted from Kovacs & Spens (2005).

Research ProcessThe overall research process followed to a large extent the fundamental stages in scientificallybased investigations [Collis & Hussey (2013)].

1. Review the literature and define the research questions

2. Design the research and write the proposal

3. Collect the research data

4. Analyze and interpret the research data

5. Write the study report

This process is described as a continuously model but the research followed an arrangementof iterations and parallel stages. The research was conducted following the general guidelinesof these stages. However, some modification was made and each stage of the modification arepresented in the next section where the project has been broken down to four major steps.

Pre-study

The initial stage of this study was to identify the problem and the scope that enabled a high-perspective review of the literature and the case subject to define the preliminary researchquestions. This stage was important to get an overview of the scope and direction of the studyat hand.

Research Proposal

The second stage of the study involved further investigation of the targeted research subject withanalysis of more in-depth research combined with case specific information that enabled a morecomprehensive picture of the case subject. This included areas as formulation of background,problematization, research questions, delimitations and excepted contribution. This stage re-quired an initial data-collection from the case subject with methods as open-interviews andobservations to acquire case-specific data. This was a crucial process that required substantialnumber of iteration and modifications.

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Data-collection and Analysis

The data-collection and analysis was combined because both stages were divided upon the se-lected research questions (RQ) of this study. The following section describes each researchquestion and which methods that was used to investigate these. Further, the section also de-scribes how the answers of these sub-research questions were used to answer the main researchquestion. These steps followed a natural chronological order and followed the presented orderto some extent. However, the processes were also conducted in parallel to each other to en-sure higher flexibility and productivity. Each step of this process was conducted within a giventimespan to guarantee progress to succeed but also a review and iteration stage to ensure qualitycontrol to kept the results and the objective of the study aligned.

Sub-RQ1: How does the standardized and centralized distribution network perform?

It was crucial to first investigate the relationship between performance and distribution from ageneral perspective. This was a complex area that was of vast size and this question alone couldbe a whole report. Therefore, a narrow scope with focus upon the focal points, standardizationand centralization, was selected. This stage was conducted by both analyzing relevant literatureand information from the case subject. The firm specific data was collected through review ofinternal documents, guidelines and processes with a combination of a survey and interviews withrelevant stakeholders.

Sub-RQ2: How does flexibility impact the performance of the distribution network?

This question focused primary on extensive literature review of the topic of flexibility both froma high supply chain perspective to an in-depth distribution perspective. This was combinedwith an analysis of the case subject, focusing on the result from the previous question. This wasfocused on how flexibility (or lack of flexibility) has positive or negative impact of performance.This data-collection focused on semi-structured interviews with key stakeholders. This stagealso included a more quantitative approach with a cost and lead-time analysis based on a modelof the distribution design. This model allowed an analysis of the consequences of differentdistribution flows in terms of cost and lead-time.

Sub-RQ3: What are the most crucial barriers to consider when enabling flexibility?

The final sub-RQ required the results and analysis from both previous sub-questions to befinalized. This stage consisted largely of context specific analysis of the case subject due to thelack of literature in the area. This data-collection consisted of semi-structured interviews withkey personal from several functions to be able to identify different perspectives on how to enableflexibility. This stage also consisted of several presentations where a preliminary strategy forenabling flexibility was presented and the questions and feedback was analyzed.

Main RQ: How does flexibility impact the performance of the standardized andcentralized distribution network?

The three stages described above answered the underlying questions to the main question ofthis study. The answers to these three questions were necessary to be able to answer the mainquestion. Therefore, the main RQ was answered last. The main RQ was answered to the majorextent on the result and analysis of the previous questions. Additional data-collection in formof interviews, observations, and literature to ensure that the final question was answered withthe highest quality in the terms of validity, reliability, and generalizability.

Writing

The stage of writing the report is often considered a great challenge and requires significantplanning [Collis & Hussey (2013)]. This was handled with planning of continuously writing whileconducting the different stages of the research. This provided two positive aspects, reduced the

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METHODOLOGY

workload in the final stages and improved quality through multiple iterations of the differentsegments of text.

Research MethodsUsage of several different methods was conducted to collect data. Both qualitative and qual-itative methods where used to take advantages of the strengths of the different approaches asmentioned above. It is crucial to be skeptical about the credibility of the data and the methodused to obtain it [Blomkvist & Hallin (2014)]. Therefore, the data-collection contained severalstages of validation of the data to ensure the quality of the end-product, this report.

Literature review

This method includes an analysis of the research from both a broad and a narrow perspective.This was done by a systematic search with selected data sources, time span and selected keywords [Collis & Hussey (2013)]. The initial concepts were constructed to achieve a broad per-spective and included key words that captures the broad perspective, the starting point wasconcept involving general terms on the topic such as "logistics", "distribution", "design" and"network" which was combined with a large time period to capture both early key papers butalso recently published work to achieve understanding of the progress in the field. This provideda massive base of literature that was used as a base and the focus was upon general articlesand literature reviews that provided a needed overview of the targeted area. The second stageinvolved more precis searches to find in-depth articles that were identified as important for thestudy. This was conducted by constructing more detailed concepts of keywords for each researchquestion. These articles focused upon a more recent time frame (2005-present) to find the mostrelevant theory.

Both these two stages followed a framework with initial focus upon the introduction, abstractand conclusion of the papers to maximize the amount of articles analyzed. This enabled highrecall [Shaw et al. (2004)] and allows selection of relevant papers. The second step involveda more detailed reading of the paper to achieve the whole contribution of the paper and thisenabled high precision. The relevant theory and understanding was collected and in the endsummarized in the literature review section to give the reader an understanding for the topicthat was covered.

The selected sources were Scopus and Web of Science and they were selected for their immensedatabase and advanced search tools that allowed targeted searches. These sources were sup-ported by KTH Primo, J-Stor and Google Scholar that was used when the initial sources didnot provide a sufficient result.

Interviews

According to Eisenhardt & Graebner (2007), interviews are a highly efficient way to gather rich,empirical data but its also involves some negative aspects as e.g. biased opinion and misunder-standing. Therefore, interviews of different hierarchical levels and functions in the organizationof the case subject was conducted to gain an understanding from several perspectives to minimizethe risk of bias and misunderstandings [Collis & Hussey (2013)]. These interviews were initiallyconducted with an open or semi-structured design to encourage a high-level view and a flexibleinterview. Additional interviews were conducted with relevant stakeholders and these had amore structured approached to gain specific knowledge needed in the process. The interviewswere conducted with stakeholders on different geographic locations due to a large geographicscope of the project, therefore, interviews were both conducted in person and by teleconference

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METHODOLOGY

technologies. Furthermore, the term "interview" was be substituted to "meetings" in the execu-tion stage to encourage a more open situation for the involved persons. The interview processwere divided in three stages:

1. Initialization: a request was sent that include practical information combined with apurpose and agenda. A template agenda was created to ensure consistently throughoutthe interview, this is found in the appendix .

2. Execution: the interviews were conducted by two interviewers where one is leading theinterview and the other taking notes to ensure no information was missed.

3. Validation: the final stage was consists of data validation by summarizing the findingsand allows the involved parties to correct misunderstandings before they confirmed theoutcome of the interview.

The interviews are presented in chronological order, starting with the first interview. The nameof the interview subject has been replaced by a general role description to ensure anonymityfrom an external perspective.

Role Time Purpose

Global Logistics Leader 120 Learn more about strategic alignment and po-tential RQ

Multiple Distribution roles 120 Receive insight in current performance with re-lated challenges and opportunities

Multiple Warehouse & Distri-bution roles 120 Warehouse visit to receive initial insight in func-

tion and current general statusMultiple Sales & Operations,Distribution & Logistics roles 90 Receive insight in forecast and planning param-

etersMultiple Sales & Operations,Distribution & Logistics roles 240 Attended selected event of conference to receive

insight on specific and more general problemsLean Manufacturing Manager 60 Production visit to receive insight in productionSales Operations Leader, Dis-tribution Planner 30 Learn more about the site and the products

Sales & Operations ProcessLeader 60 Learn more about current situation and problem

Global Process Leader 90 Learn more about current situation and problemGeneral Manager, Global Ful-filment & Logistics 30 Receive feedback for leadership

Logistic Specialist 60 Learn more about the distribution process

Sourcing Analyst 30 Receive information about transport and ware-house costs

Logistic Specialist 60 Learn more about the distribution processSenior Manager, TransferPrice 60 Learn more about transfer prices and finance

Table 2: Table of Interviews, Part1

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Role Time PurposeDistribution Manager, Logis-tic Specialist 60 Receive insight from distribution, both general

and specificLogistic Specialist 30 Learn more about the distribution capabilities

Global Project Leader 150 Initial findings presentation with feedbackwithin distribution and organization

Project Manager Export 30 Receive insight into International Trade Com-pliance aspects

Distribution Planner 40 Receive data and analysis confirmation

Multiple Distribution roles 120 Receive overall feedback from distribution per-spective

Logistics Operations Leader 180 In-depth interview with specific data-collectionand confirmation

Multiple Finance & IT roles 60 Receive overall feedback from finance and ITperspective

Sales Operations Leader 60 Receive data and analysis confirmation

Table 3: Table of Interviews, Part2

Survey

A quantitative survey was conducted with ten interval scale question (1-7) regarding the per-formance of the distribution network. This was done to get deeper understanding in the perfor-mance in terms of products characteristics, prioritizations and how well the distribution designmatched the different product groups. The survey was sent to several key stakeholders fromdifferent functional roles and hierarchical levels to get multiple perspectives. The subjects of thesurvey were limited to individuals that we had interviewed and were deemed as relevant to thesurvey. The survey was conducted by an online application and sent out to the participants bye-mail. When needed, a reminder was sent.

The question for the survey is presented below:

1. How is the current overall performance of the Distribution Network?

2. How is the current lead-time (SCOT) performance of the Distribution Network?

3. How is the current cost performance of the Distribution Network?

4. How is the current inventory performance of the Distribution Network?

5. How is prioritized is lead-time (SCOT) in the Distribution Network?

6. How is prioritized is cost in the Distribution Network?

7. How is prioritized is inventory in the Distribution Network?

8. How well does the distribution suit the C1 product group?



The survey was concluded with an open text option for additional clarification and reasoning ifneeded

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METHODOLOGY

Internal Information Systems

The case subject has gathered business critical information in their information systems (IS).Information from the IS was used to gather raw corporate data. The data selected was carefullyanalyzed to ensure that it was both relevant and accurate to be useful for the study. This datawas consisted of both performance data and shipments data.

Internal documents and presentations

An important base for this study was internal documents from the case subject that provideda thorough background of company within both the operational aspect with process, Key Per-formance Indicator (KPI), and design but also crucial strategic tools as overall strategy, visionand long-term impact plans. This data allowed the study to align with the firm’s culture andambition and made it possible to adapt the suggestions more successfully.

Observations

Observations worked as a complementing method and were used to receive confirming data. Thedata was gathered on more general topics. However, it provided an overview of case subject thatwas needed to understand relationships between stakeholders, functions and other softer aspects.This included site visits and observations of manufacturing, distribution centers, administrativework processes and workshops conducted in the distribution functionality of the case subject.

Administration & Planning

Several administration and planning tools was used during this study. They were necessary toensure structure in the progress because of the time frame of 20 weeks. The tools that havebeen used is

Time reporting Microsoft ExcelGantt Chart Microsoft ExcelReferences Handling EndNoteDocumentation handling Microsoft Microsoft OneDrive

Table 4: Administration and planning tools used during the project.

Feedback session with both the case subject and KTH was conducted on weekly versus monthlybasis to ensure progress and right focus of the study.

LimitationsThis section discusses the limitation of the methodology and methods that were chosen for thisstudy. The investigation of the methodological limitations and rigor was based on a selectedframework of [Gibbert et al. (2008)] that focus upon the measures reliability and validity, wherethe latter is divided into three sub-measures; internal, construct and external validity.

ReliabilityThis measure discusses how the result of the research would change if the project was repeatedand this is a crucial element to consider in order to ensure credibility of the findings [Collis &Hussey (2013)]. This aspect of replication is especially important in a positivist research andnot as important in interpretivist paradigm due to the different situations can be interpreted in

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METHODOLOGY

different ways and also that the researcher influences the research. However, this measure is stillimportant to consider and attempt to gain increased reliability was done in this research withstandardized questions for the interviews, a clear literature review framework that would enablea fellow researcher to conduct a similar research and detailed description of the case subjectscontext. However, due to the complex nature and the researchers’ interpretation and influence,it is hard to ensure that result will be the same. The base of this research consisted mostlyof qualitative data that is often considered subjective and therefore it is harder to establishreliability then with more objective quantitative data that is used less in this study. However,quantitative data was used to increase the reliability and minimize the risk of different analysisfrom different subjective standpoints.

ValidityCollis & Hussey (2013) defines validity as it refers to the extent to which a test measures whatthe researchers wants it to measure and also how the results reflect upon the phenomena thatis objective of the study. This aspect is important to address in order to ensure mistakes (asresearch errors, poor sample or misleading measurements) were minimized. The result of theresearch may contain errors that would make the contribution faulty and have ripple effectthrough case subject and the academia. The research in this project focused both on internal,construct and external validity.

Internal Validity

Internal validity is best established by examining the phenomena through the point-of-view ofvarious parts in the context [Carlile & Christensen (2006)] and this research have a strong focusupon data-collection from various perspectives. This included both external insight but thefocus was mostly on internal insights by both quantitative and qualitative perspectives thatwere gathered with varied methods mentioned earlier in this chapter. These several perspectiveshas enabled triangulation that is an important method to conduct to achieve internal validity[Yin (1994)].

Construct Validity

This refers to the quality of operationalization of the relevant concept and needed to be consid-ered in the data-collection phase to ensure that the study actually investigated what it claimed toinvestigate [Gibbert et al. (2008)]. This gave understanding to the extent to which a procedureprovided an accurate observation of the target phenomena [Denzin & Lincoln (1994)]. A frame-work was followed to ensure construct validity: (1) Establish a clear chain of evidence and (2)triangulation to investigate different perspectives at the phenomenon [Yin (1994)]. This studyfocused upon this stage with detailed documentation of process and data to ensure a readerto insight to the progress from initiation to completion. This was combined with triangulationwith different methods and perspectives to ensure construct validity.

External Validity

External validity was more complex to handle because many researchers believe that the bestway to establish external validity is to test it on different data set and this was not possible forthis research because of its qualitative nature and the short time span. However, attempts togeneralize the findings are presented later in the report. The lack of different data set leads todiscussions of the accuracy of these conclusions. Nonetheless, there was also the motion thatnormative theory could establish validity upon the base of mutually exclusive and collectivelyexhaustive (MECE). This was a possibility for this research. However, to achieve MECE ina global supply chain for a major international firm as the case subject was near impossible.

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METHODOLOGY

Nevertheless, efforts were made to achieve this even if only within the scope of the research[Carlile & Christensen (2006)].

External validity is also referred to generalizability that is to which extent research findings canbe extended upon other cases or to other settings [Vogt & Johnson (2011)]. It was essential toachieve a high degree of generalizability in order to make a contribution to both the academiabut foremost the practitioners. The problem with the research at hand is the interpretivistparadigm and the qualitative data that is the main source of analysis because of the differentinterpretations. However, even if a case study is based on in-depth knowledge of a single or fewfirms, it is still possibilities to generalize for the gained knowledge [Gummesson (2000)]. However,this require a though capturing of the characteristics and interactions of the studied phenomena[Norman (1970)]. Due to the low generalizability, the research focused on characteristics of theproblem and task at hand that is not firm specific and this would increase the generalizabilityof the achieved understandings. The research also focused upon the area of distribution in aglobal context and this is interesting many actors and the aspects we consider as e.g. flexibilityand performance are topics that generally generates significant attention.

Ethical considerationsEthical considerations is specified as one of the most important parts of the research. The studyfollowed the ten (10) principle of ethical considerations presented by Bell & Bryman (2007) andthe ethical policy for KTH. The participants was respected and full consent was given prior tothe interviews. The research data was high level of confidentiality and the source of the datawas anonymised. The study maintained a high level of objectivity in discussions and analysesthroughout the research

Chapter SummaryThis chapter has discussed broad aspects as the research approach and detailed aspects as theresearch process and methods used to achieve in-depth understanding in study. This enablesthe reader to get a extensive insight in the process and increase the ability to replicate a studywith similar results. Limitations were also presented together with challenges of the interpre-tivist paradigm and qualitative combined with methods to handle these. The following chapterpresents the findings of the data-collection described above in this chapter.

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Result & Analysis

This chapter presents and analyzes the findings from the empirical data-collection. The initialfocus is on the context of the case subject followed by the changing business environment, andthe consequence of the change on the case subject. The last section provides the results of a costand lead-time analysis of distribution routes.

Configuration of the Distribution NetworkThe empirical data in this section were gathered through interviews and observations of the casesubject. In the first sub-section are the different functions of the nodes within the case subject’sdistribution network presented.

NodesThe distribution network consists of a large number of manufacturing sites which is connectedby five distribution points on three continents; one (1) in Europe, one (1) in North America andthree (3) in Asia. The firm operates from a standardized flow through the nodes that enable aglobal reach. The flow consists of the following nodes:

• Manufacturing Site (MFG) — facilities where the products are produced. This can beseen as the starting point in the distribution network. Each manufacturing site producesa range of products that is only produced in this location that follows the strategy ofregional specialization. The characteristics of the manufactured products are more detaileddescribed later in this section.

• Distribution Point (DP) — these are five facilities with warehouse capabilities to handlethe flow between the manufacturing and the customers. These sites are responsible tohandle the goods with the following activities which together require a minimum of 48hours.

– Inbound handling — activities associated with receiving the goods from MFG oranother DP and handle it with documentation and unpacking.

– Storage handling — activities to handle the inventory and storage of goods.– Outbound handling — activities to handle requests and execution to move the goods

to either another DP or the end-customer, involves picking and packing, and invoicehandling.

As the distribution point process are the same for all products the process can be described asstandardized [Zhuling et al. (2009). Therefore, MTO-products with a dedicated end-customerand a limited time-constraints are handle the same way as MTS-products that are producedand stored according to a forecast. The DPs is categorized into two different roles dependingon its function in the network; it is either a Regional Distribution Point (RDP) or Primary

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RESULT & ANALYSIS

Distribution Point (PDP). The main hub in the distribution network is PDP from which theother DPs trigger its’ demand. Between the MFG and nearest DP there is daily delivers, e.g. atruck every day. The network of facilities are used when products are sold in markets with longdistance to the MFG. The last type of nodes in the network flow is the customer.

• Customer — the importance of a satisfied client is vital for the firm success and the deliveryis an essential step. The case subject delivers both small standardized products that areeasy to handle but also products that is of a greater size and customized to the customer.The latter category of products often needs installation and special handling. Therefore,this category also creates a need for the customer to plan and depend on the arrival ofthe product and a deviation from a delivery date has a substantial negative impact oncustomer satisfaction.

Figure 10 provides an illustration of the overall network structure with the discussed nodes andthe linkage. The design follows the guidelines of a system with Distributor storage with packagecarrier delivery as discussed in the literature see figure 7, [Chopra (2003)]. The case subjectdesign can also be identified in the strategies presented by Woxenius (2002), where the standarddesign is described as a corridor or fixed routing, see figure 8.

Figure 10: An overall distribution network structure for the case subject

LinksThe links in a distribution network is the transportation that allows products and informationto flow between different nodes.

Transport modes

The case subject has three categories of transportation modes available; air, land or sea. Ac-cording to the logistics specialist, the case subject uses air for the majority of the long distance

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RESULT & ANALYSIS

shipments and land for the short distances. The second option (land) is often used when prod-ucts move from MFG to the nearest distribution point and the last miles to the customer. Thelast shipment option of sea is used in rare occasions when items are made to stock. The selectionbetween these options is based upon a trade-off between cost and transit time. The selectionof a majority in air indicates transit time priorities which have been strengthen throughout themeetings. However, the benefits of sea transport with lower cost have recently been internallydiscussed but require further development of coordination.

Third-party Logistics Provider

The selection of shipping prioritization is the second aspect which allows opportunities to createcompetitive advantages and diversification. The subject uses a Third-party logistics (3PL)solution which handles the transport and warehouses in the distribution network. The transportproviders offers two options, standard and deferred, for prioritization at different cost basis thateffect the transit time. However, a prioritization parameter was also be found in the planningof distribution, including internal shipments to RDPs, for storage as safety stock that allowsreduced lead-time when the product is sold, but increase working capital and increase 3PL costin form of storage utilization.

The availability of transport are high and the number of flights, trains, boats, and trucks in mo-tion is almost plenteously. All the distribution points are also strategically located close to majorinternational airport hubs which allow several flights a day to the target destination. Therefore,it is often simple to find a suitable transport option within a reasonable time. However, this isonly true for normal size goods, e.g. an EU-pallet. Goods that are oversized needs to be sentwith a larger aircraft, with greater loading capacity. According to the meetings with the logisticsspecialists are these flights not as frequent. These flights usually depart for a specific destinationonly once a week. This has a significant negative impact on the lead-time for over-sized goods.

Product characteristicsThe case subject is of a greater size with several MFG units which produces a massive amountof products from a large amount of product groups. This creates a large and diversified prod-uct portfolio. Therefore, the products are divided into three product categories regarding itscharacteristics and inventory policy:

• Category 1 (C1) — This category of products are MTS and are held as inventory withan appropriate level of safety inventory. A order of a product in this category should beshipped from the stock within 72 hours or on requested ship date.

• Category 2 (C2) — This category should be stocked without safety inventory. When theproduct is available in stock it is handled as Category 1 item, otherwise they are treatedas a Category 3 item (see below).

• Category 3 (C3) — This category is products that are MTO and often customized to thecustomer’s request. This implies that they cannot be shipped to customer faster than thelead-time of the supply chain.

According to interviews, the product portfolio is being transformed from a majority of C1 toC3 products due to customers’ demand for more customized products. The new characteristicsof the products are typically; larger, heavier, of a higher value, and entail a longer lead-timethan other products. Hence, the data-collection highlights a need, through both quantitativeand qualitative data, to differentiate the supply chain in order to receive increased flexibilityand enable the firm to adjust the distribution network according its product characteristics.

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RESULT & ANALYSIS

The C3 products are never MTS. Therefore, these products should not be handled as inventory.However, the current design with multiple nodes is optimized to handle inventory and this createsa strategic miss-alignment. The studied product portfolio consists to 75 % of C3 products and25% of C1 products.

Coordination of the Distribution NetworkThe role of distribution can initially be seen as a straight-forward task. However, the flow ofproducts is a complex (but essential) task for firms to handle [Zhang et al. (2014)]. Therefore,distribution activities cannot be isolated to only the distribution function. These activities needsinvolvements from several other stakeholders in the firm to ensure that the flows are handledcorrectly and satisfies customer needs. These stakeholders, mentioned below, have all beenidentified to have a critical role in the distribution network of the case subject.

Roles in the Distribution NetworkThe following actors has been identified as key stakeholders in the case subject.

Manufacturing

The first key stakeholder, to be mentioned, is the manufacturing, which includes both operationand planning. This stakeholder is important to involve because it is tightly linked to the dis-tribution in the value chain. Therefore, close corporation and coordination is needed betweenthese two to ensure efficiency and effectiveness. The performance of the distribution is stronglyaffected by manufacturing in all the three stated performance aspects. SCOT is in this contextmost relevant when products are made-to-order (C3) where the total lead-time consists to amajority of manufacturing time and less when products are made to stock (C1). However, theimpact of the other two performance aspects are also important to consider. Cost can increasewhen special shipments are needed because of urgency caused by delays. Inventory is highlyimpacted by incorrect manufacturing planning.

Finance Department

The overall objective of this stakeholder is to oversee and monitor the financial processes withinthe firm. The finance department is a powerful stakeholder in the organization with a central roleand with good connection to the top management. This enables the finance department to havea great impact on decisions that are made. One of the functionalities of the finance departmentare to set and follow the transfer price between entities. This impacts the profitability of eachentity within the firm. Hence, the distribution flows must be simple to trace. In the perspectiveof the traceability for the finance department, the simplest way to achieve good traceability isto only let entities/parties in the supply chain to only interact with one relative partner. Thiscreates, what in isolation can be seen, a single link chain where the products easily can betracked all the way back to its origin source, which also is the Intellectual Property (IP)-rightholder. According to interviews with the finance department, the transfer prices should be fairprices so that each part in the chain receives a reasonable margin to cover cost associated withits activities. The investigation of the case subject shows that it is easy the reward, in terms ofrevenue, the distribution and the re-distribution for its activities. To reward the manufacturingand especifically the IP-right holder is a more challenging task. The IP-right holder is in thegeneral the entity who has funded the R&D-process of a product. The IP-right can either bea home grown IP-right which has been developed within the company itself, or it can be anIP-right that has been acquisitioned into the company. However, the IP-right holder shouldreceive a fair and sustainable reward from this process. The process of tracking and setting

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RESULT & ANALYSIS

these transfers prices back to origin is a highly manual process in the case subject. In theperspective of IP-right is it also important to notice that that the IP-right holder should beincluded in the distribution loop. Otherwise the rewards transferred to the IP-right holder willbe transferred as royalties. This can lead to some tax implication for the supply chain surplus.

IT Department

The third key stakeholder is the IT-department. The organization of the case subject is complexand contains massive amounts of data and information. This business information is essentialfor coordination throughout the whole firm, including the distribution. This requires the IT-department to be involved to assist the different functions with information and software toenable functionality and provide support to enable higher productivity. The IT departmenthas provided IT-system to support the distribution organization to efficiently share information.However, the IT system is rigid and has created constraints, e.g. there is only one transactionalflow allowed for a certain manufacturing site to a certain geographic region.

The case subject uses a major IT-vendor as a supplier. This enables standardization and alsopossibilities to improve the system with more supportive functions. Additional functionality inthe system has somehow improved the performance. However, it has not been fully implementedbecause it would increase the complexity of the system. The complexity has increased the need ofknowledge and training of employees and have negative impact on the performance. Therefore,it is important to use the possibilities within IT in a way that optimize the overall performance.Furthermore, the IT-aspect is also a constraint because the limited amount of IT resources.Therefore different department competes in the beginning of each year for the resources neededto implement business critical functionality. Only the highest prioritized receives support fromthe IT-department.

Sales Department

The sale department is a key stakeholder because of their central role in the value chain andtheir close interaction with the customer. Their position in the flow of processes from customers’order to delivery allows them to decide upon essential decisions that constrain the distribution.These decisions include which entities the order will go through and expected delivery date tothe customer.

International Trade Compliance

The global reach of the case subject makes the International Trade Compliance (ITC) a keystakeholder. There exists many regulations and restrictions to follow when a firm manufactures’products in one country and sell them in another. When a firm violates any of the traderegulations, the firm becomes subject for major fines, prosecution and processes that can harmthe reputation of firm. According the the interviews with the ITC department, the two mainaspects to consider are customs forms and licences. The first aspects refer to the country specificdocumentation needed for import and this often requires explicit and extensive informationabout the transported goods. The second aspect refers to licences that can be required fromboth the exporting and importing countries and it is provided by governmental organizations.These licenses are not needed for all product, only products that are export controlled. Thelicences process requires experience and knowledge which is absent in certain DP. This leads tobypasses for products that are shipped to the Asian RDPs. These are shipped directly to thecustomer from the European DP where the knowledge exists.

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RESULT & ANALYSIS

Distribution and Supply Fulfilment

The final stakeholder, to be described, is the executing distribution department which includesseveral functions with different capabilities, e.g. distribution planners, logistics specialists, ware-house operation, and the physical transport. The wide spread of products and customers requiresa variation of capabilities in the distribution network. A wide product portfolio is easier to han-dle when capabilities are centralized to one functionality or location [Oskarsson et al. (2006)].In the rigid and standardized network structure in the case subject, many of the key capabilitieshas been centralized around the central-hub in Europe. For example, in the standardized net-work structure, the MGF ships all goods to the nearest DP. Therefore, the MGF only providesthe products with the packaging which corresponds to the requirements of the manufacturingprocess. However, whether it is a large high-value item or not has a significant impact of theserequirements. Supposing it is a high-value item, the requirements of the packaging is to a highdegree pre-specified together with the product requirements. For example can a large item have acustom-made box that is completed in the MFG and not open until it reaches the end-customer.However, when the product is a small size item of a low value, then the packaging from theMGF is very simple and the products are shipped in large quantities to the DP. In the DP, theproducts are first picked and placed on the shelves and then packed again. In this case, theDP provides a service which can increase the value of the goods sold. As in this example, theservice can be to pack and consolidate products so that it corresponds to its full sales order.Therefore, different services are needed in the DP according to products different characteristics[Knox et al. (2014)]. As long as the products are sent through the standardized distributionnetwork, the requirements and responsibilities of distribution belongs to the distribution orga-nization and are conducted by experienced personal. However, when the flow is bypassed, thencertain function needs to be conducted by inexperienced peoples who has lack of knowledge andtraining.

Figure 11: Key Stakeholders Mapping. Manufacturing precedes Distribution. Finance and ITis involved throughout. Sales are included either before Manufacturing (C3) or after (C1).

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RESULT & ANALYSIS

Coordination of the Physical FlowThe distribution routes are standardized and the flow does depend on the location and distancebetween the MFG and the customer. There are three standardized routes options:

1. The MFG and customer are contained to the same geographic region.

2. The MFG and customer are contained in two different regions, where one is North Americaor Asia.

3. The MFG and customer are contained in two different regions, where one is North Americaand the other is Asia.

These three routes are simply illustrated in figure 10 and figure 12

Figure 12: Standardized routing of goods and information in the distribution network of thecase subject for shipments where the MFG is not located in Europe

To clarify how the routes works in practice a specific example is presented. The example followsa product that is produced in a MGF-unit in the North America and has the final customerlocated in Asia. The standardized distribution route setup is as follow (which is also illustratedin figure 13):

1. The product is manufactured in the North America by parts that are either producedin-house or sourced from a local or global Original Equipment Manufacturer (OEM).

2. The product is send from the MGF to the nearest DP, which is located in the NorthAmerica, by truck. The product goes through a serie of warehousing activities as inbound,storing, and outbound.

3. The product is send from the North American DP to the European DP, which is located inthe northern Europe by air-freight. The product follows the standard warehouse activities

4. The product is send from the European DP to an Asian DP located nearest the Asiancustomer by airfreight. The product follows the standard warehouse activities

5. The product is send from the Asian DP to the end customer and delivered.

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RESULT & ANALYSIS

Figure 13: Example routing from North American MFG to Chinese customer in the distributionnetwork

Thus, this is the standardize route which is pre-defined in all IT-system that supports theorganization. This standard flow allows all products the same flow. This enables shipset (con-solidation) when products from different MFG units are merged into one shipment. In thesecases, the DP functions as a consolidation point for the order. As long the physical goods movethrough the standardized network is each change of state automatically updated on its wayto the customer. These automated and standardized processes are easy to track and monitor,through the IT-system, for all stakeholders in the distribution network.

Coordination of the Information FlowAs mentioned above, the task of monitor and coordinate the flow of products are handled byseveral different parties. Many of the actors are also divided into a central team and regionalteams. The regional team is responsible for the operation closely linked to the customer and thecentral team has a strategic role more linked with the manufacturing.

• Sales and operation planning — The overall planning of the manufacturing and distributionprocess is done by the sales and operation planning team. They mainly monitors the salesand demand of products in different markets to provide accurate forecasts for the differentproduction units.

• Distribution planners — The distribution planners are responsible for the inventory man-agement which also involves manufacturing and warehouses. This team is divided intodifferent product groups where each member is responsible to monitor and plan one ormore products groups.

• Logistics specialist — The responsibilities of the logistics specialist is to execute and planthe movement of goods between different nodes within the network.

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RESULT & ANALYSIS

Many actors outside the Supply and Fulfillment also monitors the flow of products and informa-tion. The Finance Department monitors the flows in the purpose of taxes and revenue sharingbetween entities. The ITC-group monitors the flows to verify that all legal aspects are strictlyfollowed.

There are several reasons for the network design. Historically, many products in the case subjectwere manufactured with a close proximity to the distribution point in Europe. Therefore, thefacility was selected as the central hub in the distribution network. This has enabled the site togrow and develop important experience and knowledge regarding planning and distribution. Thecentralization of capabilities to this facility does still exist. This includes knowledge and expertisethat are needed for global shipments, e.g. knowledge about international trade compliance andcustoms. Therefore, all normal shipments that are shipped through this location (except whenthe MFG and customer are contained the same region). The distribution network also relieson a proper set-up of processes and system that enable the functions to work efficiently. Thesehave been implemented based on the historic design and would need to be reconfigured withany changes in the distribution flow [Bhatnagar & Teo (2009)].

Performance EvaluationThe competition in the industry is substantial from both historic actors and incumbent firms.This creates pressure on the firm to constantly monitor and improve performance throughoutall functions of the organization. The distribution network evaluation focuses on three mainperformance indicators:

• SCOT (Shipment Completed on Time) — Measures in which extent the shipments hasreached the customer on time. This indicator measures how the whole supply chain aremanaged to deliver upon the promised delivery data. The objective for the overall firmwas a SCOT of 90%. The SCOT performance of the targeted scope of this study was 55%.

• Inventory — Measures the inventory levels and the working capital that is tied up asfinished goods. The objective of this KPI is to keep this level low based on two reasons.First, a reduce in working capital can be invested in other opportunities. Second, to reduceto risk of inventory to become obsolete. The inventory levels of the targeted scope waslow due to the high number of C3 products. However, it happened that C3 items were instorage due to shipset, documentation error or customers withdrawing orders.

• Cost — This measurement focus on the cost of delivering the product to the clients’requests. The targeted scope had a relative higher cost because of greater weight and sizethan other product groups. However, this created an opportunity for greater impact ofreduction according to distribution planners. The main focus is upon transportation costwhich represents a majority of the total logistics cost.

All these three measurements are important because they are linked together with dependenceand correlation to each other. This creates a clear trade-off between them. For example, afaster delivery can increase the performance in terms of SCOT, but in the same time reduce theperformance in cost (e.i. shorter lead-time, higher cost). Further, high inventory can improveSCOT due to decreased lead-time, but this contributes to higher warehouse and working capitalcost [Lovell et al. (2005)]. The data-collection showed that all of these are important but differentstakeholders within distribution have different priorities. For example, the logistics specialistprioritizes SCOT and therefore they prefers faster option of transportation to a higher cost.

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RESULT & ANALYSIS

Survey Regarding the Performance

A survey was conducted to achieve understanding of the performance and the result is presentedbelow. Information of the surveys structure and implementation can be found in the MethodChapter .

The survey shows that the organization rates the overall performance above average (4). Theperformance on the three performance indicators was approximately the same. However, theperformance in SCOT (4) and cost (4) was somewhat more higher than in inventory (3). Thisaligned with answer that SCOT (5) was more prioritized in the design and followed by the othertwo. However, the variances on these results were high. The survey also investigated how thedistribution was adapted to the different product groups, the overall result showed similar resultas the first question (4). According to the survey result, the design was best suited for C1products (5) followed by C2 (4) and C3 (3). A graph of the average results is found in graph 14and the detailed result of the survey can be found in the appendix

Figure 14: A summary of the survey results, the y-axis represent the average rating

Flexibility in the Distribution NetworkThe case subject operates in changing environment that involves both new products and marketswhich are essential for the success of the case subject. The whole organization needs to adaptto this change to ensure positive results and this includes the distribution to a large extent.Historically, the main production has been contained to northern Europe and the organizationwas configured thereafter. However, the development has led to development of manufacturingsites in both North America and Asia combined with increased market share in both regions.

The markets of the case subject also follows the global trend of mass customization, where theend-customers of the case subject are demanding more customized products that better alignswith their needs. These products are often of high value and important to the case subject.Therefore, a product that satisfies the client’s needs and the specific request might not matchan existing product in the portfolio and needs to be customized and these products can thereforebe defined as C3 products.

Manually BypassesThe distribution design is rigid and the standardized shipment routes independent of the productgroups characteristics. This creates constraints for the case subject to handle. According to

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RESULT & ANALYSIS

interviews, the organization struggles to handle that products need to go through the same flowregardless the characteristics of the product and/or the order. Provided below is example whatis described as a problem today.

A customer in Japan demands a MTO product that is manufactured in North America. Sincethis is a MTO product that is not in storage in any distribution point. The delivery processin the perspective of manufacturing and distribution network works as follow. The productis manufactured in US, shipped by truck to the DP in US, shipped to DP in Europe by airfright, shipped to DP in Asia by air fright, and then finally shipped to the customer. Thisdistribution process takes unnecessary long time because every DP requires a inbound andoutbound activities which takes 48 hours and every link would according to the standard takea least three (3) days. This leads to that the whole distribution process would take 14 days. Afaster option are to ship to product direct from the DP in North America to the either the RDPin Asia or directly to the customer. This reduce lead-time significant. This option is presentedand quantified further later in this section.

The addressed problem has created a situation that urgently needed to be handled to ensurecustomer satisfaction. Therefore, a manual bypass are conducted. This enable the case subjectin special circumstances to work-around the standard flow and ship the products more directlyto its final destination. This is done by routing the physical shipment directly to the customerbut maintain the transactional flow along the normal route. This allows the shipment to reachthe customer faster. However, this increases the manual workload and the complexity of thecoordination. The distribution department needs to virtually move the goods along the trans-actional route that is the same as a standardized shipment, even though the physical route isnot the same. An error in this process leads to that the customer receive the product withoutan invoice or any other necessary transportation documents. The increased complexity that thebypass creates needs to be carefully handled. Therefore, a workflow for manual bypasses wascreated in 2010 to ensure control of the process and make sure the process followed requirementsthat has to be fulfilled for a bypass shipment to be accepted:

• The order had to be handled in the end of a calendar quarter

• The order value had to be more than $100 000

• The order had to be a business critical delivery

These requirements were initially strictly followed. However, many work-around have recentlybeen conducted due to different circumstances and this has decrease the importance of all threerequirements to be fulfilled. The focus are now placed upon the last criteria. One example ofan order which is business critical can be as follow: One (1) screw might be needed to get acustomer’s production functional again. The order might be in the middle of a quarter and itdoes not cost over $100 000, but it is critical for the end-customers’ business. Therefore, theorder might be allowed to be accepted to bypass the standarized system. The bypass shipmentworkflow includes all necessary steps in terms of ITC that is required to approve the shipment:

• Screening

• License determination

• Red flags (any abnormalities for an order must be reviewed and handled before shipmentcan take place)

The workflow is handled by many stakeholders and requires coordination which takes substantialtime. For example, both finance and key managers have to approve the bypass to be executed.

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RESULT & ANALYSIS

The bypasses are conducted for only specific segments of shipments because the standardized de-sign does perform well in certain products groups and regions. However, there are some segmentsthat experience difficulties to operate and perform with good marks on the three performanceindicators within the standardized design. These segments share two characteristics:

1. The product portfolio consists of a majority of MTO products (C2,C3) which is prioritizeddue to business critical aspect and/or value

2. The regional distance is large which creates a flow with several nodes which increase lead-time and cost.

The targeted scope in the case subject matches these aspects. The targeted scope was a selectionof four (4) product groups that is manufactured in North America. It consists of a majority ofC3 items which is frequently shipped to markets with a large distance, e.g. Asia. The scopehad also experienced a significant increase of bypasses in the last two year, where 8 % of theshipments which constituted 40 % of the value were bypassed in year 2015 to the Asian market.

Manually Bypasses Data

Data of bypass shipments for the scope of the project and for the time period of 1/1-2015 to31/12-2015 The data is confidential and therefore based upon an index of 100

Of Bypass Of TotalCountries Orders Quantity Value Value

Country 1 (Asia) 3 2 31 95Country 2 (Asia) 39 38 25 47Country 3 (Asia) 26 23 24 30Country 4 (Asia) 13 23 10 68

Country 5 13 9 9 53Country 6 3 1 2 23

Country 7 (Asia) 3 4 0 1Grand Total 100 100 100 16

Table 5: Geographic Data

Of Bypass Of TotalProduct Group Items Value Items Value

Product Group 1 (0,0,100) 46 72 65 62Product Group 2 (32,0,68) 29 15 5 20Product Group 3 (1,0,99) 8 6 10 22Product Group 4 (45,0,55) 0 0 0 0

Other (38, 32, 30) 17 7 23 5Grand Total 100 100 8 40

Table 6: Product Data (C1-Item/C2-Item/C3-Item)

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RESULT & ANALYSIS

Stakeholder PerspectivesAccording to the investigation of the subject there are several different reasons for the manuallybypasses. Below are the different perspectives of on this issue summarized.

• ITC — ensures all ITC regulations and laws to be followed, e.g. export licenses. Anexpressed concern was the lack of ITC knowledge and experience in certain DP. This in-enables the DP to ship goods to certain regions, e.g. from North American DP to Asia.Therefore, bypasses create additional risks.

• Finance — Are only concerned with the transactional flow. This flow must be traceableto set proper transfer prices. Since the transactional flow follows the standardized design.The finance are not affected by manually bypasses. However, they are included in theworkflow and this creates additional workload.

• Distribution — substantial manual workloads are conducted to handle the workflow, co-ordinate and the virtual move the goods. The risk for errors are increased due to lack ofexperience. Nonetheless, the bypasses results in increased flexibility which enable reducelead-time, cost and handling risk. These aspects has a positive impact on the performanceindicators.

ITC highlights the importance of the the correctness of documentation and processes. These areactivities and capabilities that are centralized around the European organization. Finance, onthe other hand, highlights the need for simple and traceable transaction flows. This is especiallyimportant in their perspective since they are responsible for both profit sharing and taxes.Finally, the distribution team highlights the need to have flexibility to be able to perform theirwork as efficient as possible. These statements highlights the challenges to succeed with thealignment of stakeholder perspectives.

Cost & Lead-Time AnalysisA model was developed to evaluate and compare route options. The model calculated the costand lead-time for different routes. The different options was defined by modification of linksand nodes and the calculation consisted of transport cost and warehouse cost. The calculationswere based on historic shipments combined with data from the interviews. The cost calculationswere based upon the logistics cost definition below [Vasiliauskas & Jakubauskas (2007)].

LC = HC + MC (1)

where LC=Logistics Cost, HC=Holding Cost, and MC=Moving Cost.

The initial step was to analyse how the products flowed through the distribution network andcalculate the cost for a historic year, 2015. The initial result was that this was complex due tothe many special cases which not followed the standardized route. Exceptions were:

1. A products had urgently been requested and a manual bypass was conducted. Theseshipment follow the standard transactional flow but the physical route was changed.

2. Selected large items are physical shipped from the manufacturing site to customer or RDPand bypassing the nearest DP. The transactional flow followed the standard route.

43

RESULT & ANALYSIS

3. Not all DP had the capability/authority to handle licensed products. Consequence; li-censed products were bypassed this DP and delivered direct to the customer, both physicaland transactional.

These examples are important to understand because they contributes to the barriers and prob-lems of the standardized and centralized distribution network. Further, they are also needed fora accurate estimate of the cost and lead-time between different options. However, the first andsecond exception followed the same transactional flow. Therefore, it was impossible to detectthese shipments in the data and these exceptions were not considered in the model. The thirdexception was included in model because it was traceable.

The targeted scope was pointed to handle the complex distribution network with multiple MFG,five (5) DPs and an immense number of products. The scope showed characteristics that madeit a good candidate that was greatly impacted by a more flexible distribution design. (1) It hadexperienced a significant amount of bypass, (2) the products were mostly from the C3 groupand of high value, and (3) there were a substantial distance between MFG (USA) and certaincustomer segments (Asia).

The result was calculations were based on historical shipment data to achieve an average pricefor shipments of relevant size, expressed in $/kg. These parameters were later used to calculatethe price with the weight that were shipped during year. This was defined as the base case.A cost/kg was also defined for the non-standard routes based upon historic data from specialshipments. Then the different route options were calculated and compared with the base case.

The cost was calculated separately for the different routes that was used a to investigate flexiblerouting options. The cost was aggregated for each complete routing and three options wereselected as the most relevant and was further investigated:

1. The standard design — to create a base case

2. Option 1 — bypass DP in Europe and ship directly to DP in Asia

3. Option 2 — bypass both DP and ship directly to Customer in Asia

Figure 15: Investigated routing options: standard design, Option 1 and Option 2. Each linkand node in the figure represent a cost which was aggregated to the total route cost.

These alternative design can be described based on design descriptions from the literature. Thestandard design share attributes with a “distributor storage with package carrier delivery” while

44

RESULT & ANALYSIS

option 2 is similar to the design of a “manufacturer storage with direct shipping”. The middleoption is combination between these two [Chopra (2003)].

Type Standard Option 1 Saving Option 2 SavingTransport MC 97.74 62.14 36% 40.39 58%3PL HC 2.25 1.41 38% 0.84 62%Total Cost LC 100 63.55 36% 41.24 58%

Table 7: The consequences on logistics cost from the different route alternatives

Standard Option 1 Saving Option 2 SavingLead-Time 100 64.28 35% 42.85 57%

Table 8: The consequences on logistics lead-time from the different route alternatives

The result from the investigation is showed in Table 7 and Table 8. The investigation showedthat a more flexible design would gain the performance of lead-time and cost.

Chapter SummaryThis chapter presented first the configuration and coordination of the case subject’s distributionnetwork together with its context. The currently used distribution network does not provideenough of flexibility to fulfill performance efficiently for all products. Further, the chapterpresented an approach to increase the flexibility through different routing options which haspositive impact of the logistic cost. The following chapter provides a discussion to address themain research question.

45

Discussion

This section discusses the empirical findings from the result & analysis and links them to theliterature review. First, a discussion is presented about the distribution network design and howthe aspects as centralization and standardization impacts the performance. Second, a discussionabout how flexibility can impact the performance of a distribution network is presented, includ-ing both positive and negative findings. This is followed by suggestions of improvements forthe case subject along with barriers and considerations. Finally, the study is discussed from asustainability and ethical perspective.

Below is a discussion of how flexibility is adapted and how this impacts the performance of astandardized and centralized distribution network. Since the objective was to understand howthe distribution network is performing, how the performance is improved by increased flexibility,and to identify critical factors that hinders adoption of flexibility, has the discussion been dividedas follow. The first section discusses how the standardized and centralized distribution networkperformance and this is directly linked to the first research question. The second section discusseshow flexibility impacts the performance of the distribution network and corresponds to thesecond research question. Finally, the third section discusses key barriers and actions to handlethe barriers, this relates directly to the third research question. Further, the discussion alsoincludes a section about reflections on sustainability and ethics.

Standardized and Centralized Distribution Network DesignThe explored distribution network is rigid and based upon two main concepts; centralization andstandardization. Both concepts have positive and negative aspects that needs to be discussed.Centralization can gather knowledge and enable a core of expertise that provides knowledge tothe organization. It also enable advantages as economies of scale, competence sharing, and asteeper learning curve. Communication and coordination are essential for success in a centralizedstructure. However, the increased distance (both physical and cultural) from the local entitiescreate gaps that are hard to overcome. This can be seen when the smaller regional teamslocated in North America need to coordinate their work with the centralized distribution teamin Europe. The corporation works well when they handle C1 and C2 products which aligns withthe standardized procedures. However, the assistance is not as sufficient when they handle C3products. This causes both delays and errors due to lack of training and experience. This isoften solved by frequent communication. However, this communication can be misinterpretedand the time difference of six (6) hours reduces the time when the parties can communicate witheach other.

The second aspect, standardization, has similar benefits and drawbacks. The high degree ofstandardization maintains the distribution network to a simple level and contributes to a reducedlevel of complexity. This has enable simple processes which works well for C1 and C2 products.These products are produced to stock and replenished in the distribution points to achievea higher responsiveness. The standardized processes has enable economies of scale for theseproducts. However, the standardized processes are not suited for C3 products. As highlighted

46

DISCUSSION

in the survey results, the design is optimized for MTS products (C1, C2) and not for MTOproducts (C3). C3 products have a dedicated end-customer from the throughout the distributionnetwork. Hence, shipments through unnecessary nodes does not create any value. This createsunnecessary costs, lead-time and touching-points. These non-value adding activities leads todeviations and handling errors. Hence, the distribution network are sub-optimized for a sub-setof the product portfolio as discussed by Tomlin (2014).

Performance Evaluation

The distribution performance measurement of SCOT for MTO products (C3) are below average.This combined with the increased demand for these products have created a pressure on thedistribution network to handle these products more efficiently through flexibility. The short termsolution is the manual bypass which has enabled an increased flexibility and decreased; lead-time, cost, and handling risk. The consequences are substantial in terms of manual workload,stakeholder involvement, coordination, and errors. The initial three mentioned activities aboverequire time from employees that can be used in other activities. Nonetheless, the workloadcan be worthwhile because of the benefits. However, the last aspect (errors) is substantial andunexpected problems occurs frequently due to lack of; knowledge, experience, communicationand coordination. These errors have consequences as increased lead-time and cost. Two examplesof the errors are wrong documentation and incorrect virtual movement. The investigation of thecase subject shows that the drawbacks from these bypasses can create more "pain than gain" forthe organization.

Furthermore, Fisher (1997) and Harris et al. (2010) argues that the two type of products,functional and innovative, needs diverse supply chains. The explored network design consist ofphysically efficient processes with focus on standardization and economies of scale to achievecost benefits. The addressed design suits the C1 and C2 products of the firm and allows thedistribution organization to decrease the cost for MTS products, which focus on reliable deliveriesbased on forecasts [Harris et al. (2010)]. Nonetheless, the innovative products (C3) requires amarket-responsive distribution network that focuses on flexibility which the addressed systemdoes not.

Flexible Distribution Network DesignThe case study pinpoints the need for a more flexible and adaptable distribution network tosupport the organization with an aligned and dynamic network design. A flexible design providestailored distribution routes for specific; markets, customers, and products. Further, flexibilityenables the case subject to move away from a single design with a one-fit-all solution intoa flexible distribution strategy. This will enable the firm to distribute C3 products throughdirect shipment routes. This will decreases the number of nodes and links with non-valueadding activities. The model, showed that a reduction of nodes has a positive impact on bothhandling- and transport cost along with lead-time reduction for MTO products. This alsoincludes additional improvements as reduced; manual workload, risks and financial posts (e.g.custom duties). The savings are also supported by the literature; see table 1. Where theperformance variates depending on the design and product characteristics. Further, the adaptionof a diverse distribution network enables the current well-performing design for C1 and C2products to be maintained.

A suggested strategy to achieve a more aligned distribution network consists of the two aspects;flexibility (short-term) and adaptability (long-term). Where flexibility is the ability to handledistribution challenges that deviates from the normal routine. This involves mainly urgent de-liveries and the objectives are then decrease lead-time and risk for these occasions. There arealso other situations which needs flexibility, e.g. shipments to new countries which require new

47

DISCUSSION

documentation. Another essential aspect of flexibility is coordination of capabilities. Centraliza-tion of capabilities gives a strong core expertise, but a reduced ability to respond to local needs[Lummus et al. (2003)]. The local units are the core in a flexible network design and handlesdiversified tasks. An improved coordination within the organizations enables the local unitsto be better supported by the central team. This allows them to better complete diversifiedtasks. Therefore, flexibility is improved with a more decentralized organization that encouragessolutions outside the standardized routines.

The second aspect of this strategy is adaptability which concerns how the distribution designbetter adapts to the business environment. If flexibility is the ability to act instantly, thenadaptability is the ability in long-term modify the structure of the network. Adaptability preventthe distribution network design to depend upon historical aspects. An example of this is providedwith the model, where the distribution flow (based on historic aspects) creates unnecessary; cost,lead-time and risk without any value adding activities.

The strategy suggests flexibility and adaptability to enable the distribution network to betterserve all products and customer segments through re-configuration and improved coordination.This will enable the firm to achieve multiple supply chains that are better adapted to thediversified and dynamic product portfolio. The solution enable MTS (C1, C2) and MTO (C3)products to be distributed through two different supply chains. This leads to decreased; cost andlead-time. Further, it contribute to reduce manual bypasses which increases manual-workloadand risks. Nonetheless, this is a complex change to accomplish since it involves many stakeholdersand barriers that needs to be considered.

Barriers to FlexibilityThe movement, from a rigid and simple distribution network design to a flexible and complexdesign, creates substantial resistance due to the complexity and resources needed. Therefore,four critical barriers were must be considered. The barriers consist of softer organizational issueswhich historically have hindered adoption of flexibility.

• Economies of scale - The case subject is a large and global firm which gains from thebenefits of economies of scale in many processes and activities. In the distribution network,this has been enabled through the rigid and standardized distribution routes to achievelow costs of large and frequent shipments between the distribution points. However, aflexible design needs more route options compared to the rigid and standardize networkdesign. This can possible have negative impact on the benefits from economies of scale.The logistics prices are obtained through annual negotiation with the 3PL provider and onthe basis of volume. Therefore, a reduced volume in the standardized routes can increasethe cost in these routes.

• Transfer Prices & IP-rights - To open the distribution chain, and let different entitiesinteract directly with each other increases the flexibility in the distribution network. How-ever, this makes the monitoring and tracking process more complex, e.g. the monitoring oftransfer prices and revenue sharing. Therefore, tracking processes will create substantialworkload which require additional resources.

• Capabilities & Processes - The capabilities of handling export documents, e.g. licensesand custom files, are centralized to the distribution point in Europe. When products aredistributed directly from the regional distribution point to customers, this site must havethe correct capabilities to fulfill the requirements of; packaging, labeling, export-document,licenses, and taxations-codes. To enable necessary capabilities are especially importantfrom an ITC perspective. Where a mistake results in significant consequences and fines.

48

DISCUSSION

The current rigid design is based on centralization which spreads and shares knowledgethroughout the organization. Unfortunately, communication issues and time differenceshave historically created barriers for this to succeed. This has created a situation with lackof knowledge in the regional distribution points causing an inability to handle tasks whichis be required in a flexible distribution network design. There are also other processes androutines that has the same impact on flexibility and needs to be adapted. For example,the process at the distribution points are standardized for all product regardless of itscharacteristics. The consequences are unnecessary and time-consuming activities (e.g.picking and storage) which are non-value adding.

• IT-systems - In a rigid distribution network, the IT-system follows the rigid and stan-dardized distribution design. This limits the functionality to only support the standardizedshipping routes. A shipment that goes outside the standardized routes needs to bypass thesystem through virtual movements of the transaction, while the physical flow goes directlyto the customer. This solution involves severe risks and manual workload.

The four identified key barriers needs to be managed. Below are suggested actions that showsstrong potential to handle these issues. The consequence of these actions have a positive netbenefit for the case subject and any other firm which faces similar problem.

A more decentralized organization, compared to the centralized one, enables the organizationto function more flexible [Oskarsson et al. (2006)]. A strategy is to strive for a flexible organi-zation through a targeted decentralization combined with improved processes and competencesharing. The targeted decentralization would identify specific function in geographic areas thatis currently under-performing due to lack of regional capabilities. The capabilities can comefrom either relocation or new hire of personnel. This leads to a shift from a purely centralizedorganization to a partly decentralized organization. The central team remains to handle MTSproducts while the local decentralized units handles MTO products (which often requests specialhandling).

There are existing processes that needs to be analysed and modified. One example of these pro-cesses that should be analyzed and modified are the warehouse process of inbound, storage andoutbound for products with a dedicated end-customer and other products with time constraints.A solution for this specific issue would be enable the warehouse to conduct cross-docking .

Since the firm uses a 3PL solution, the impact of economies of scale is reduced compared toa firm which handles all functions in-house. The 3PL solution is better adapted to modifyroutes because they handle these functions for multiple companies. Therefore, the benefits ofeconomies of scale wont decrease significantly. Overall, a modification of the distribution networkrouting have both positive and negative impacts. The net impact depends on the negotiationand collaboration between the case subject and the 3PL providers. Therefore, the recommendedaction is to take advantage of the 3PL solution and minimize the exposure to economies of scaledependency.

According to several stakeholders, a significant problem with an increased flexibility is the com-plexity. The case subject standardized design is based on simplicity. Adaption of flexibilityincludes new routes, new processes and new situations which all impacts the stakeholders. Thebarriers needs to be handled with a implementation of new routes in the IT-system along withIT-support for tracking and monitoring. This is problematic due to organizational resistance andhighlights an interesting point; the stakeholders involvement on configuration and coordinationof the distribution design. Which can be handled by change and organizational management.

49

DISCUSSION

Reflection on Sustainability & EthicsIn this study, the challenges for manufacturing and distribution network to adapt flexibility has been investigated and discussed. The studied topic (global distribution networks) has a signifi-cant impact on the sustainability of the environment Chopra & Meindl (2016). The discussion of flexibility in distribution networks does not only impact the performances of the network. It also affects the sustainability through its environmental impact. By suggesting a more flexible distribution network, with more direct shipment routes of large and heavy products, has the study contribute to sustainability. Below is a discussion of how the suggested improvements of flexibility has a positive impact on sustainability. The distribution network design consist of nodes and links which impacts the environment. A re-design of the network with a more flexible structure impacts the sustainability in two perspectives; shorter total distance shipped and less handling on the ground. The first impact is due to more direct routes to customers which reduce the total distance . The second aspect reduces the handling on the ground with trucks at airport and to/from distribution points. Both these aspects reduces the consumption of fuel which lead to less pollutions and a positive impact on the environment. Furthermore,

The study followed the ten (10) general principles of ethical considerations that needs to be complied with in a management research study and the ethical policy for KTH. The authors did not find any further ethical dilemmas which needed to be discussed.

Chapter SummaryThe discussion covered the distribution network design and explored aspects of standardization and centralization. Further, it discussed whether a more beneficial solution exists in form of a flexible and adaptable distribution network design. Unfortunately, the recommendation was not without flaws. Hence, four important barriers was presented with suggested actions. The following chapter provides a conclusion of the report and answers the research questions based on previous chapters.

50

Conclusion

This chapter begins with answering the research questions from the introduction based findingsand discussion from previous chapters. Further, this is followed by a presentation the empiricalcontribution. Finally, limitations of the research are presented together with a suggestion offuture research.

Answers to Research QuestionsThe aim of this research was to contribute with advanced understanding of how flexibility isadapted in a standardized and centralized distribution network to improve performance. Thefollowing sections presents the answers to the research questions. The section initially presentsan answer to each research question separately and these answers are used to answer the mainresearch question.

RQ 1: How does the standardized and centralized distribution network perform?

The empirical results show that the case subject’s distribution network aligns with the conceptof standardization and centralization. The distribution network performs well for products thatare MTS. Further, these products are suitable for operations facilitating economies and scale,which have been achieved through standardization and centralization of processes and activities.Nonetheless, the network performs poorly for MTO products, which are forced through a series ofnon-value adding activities. The misalignment has negative implications as unnecessary; costs,lead-time, and risks for the distribution of these products which impacts the overall performanceof the distribution network negatively.

RQ 2: How does flexibility impact the performance of the distribution network?

The literature review showed that flexibility is necessary to align the processes and activitiesof the distribution network to customers’ needs. [Harris et al. (2010); Fisher (1997); Godsellet al. (2011)]. Further, the empirical results show that the case subject is forced to conductmanual workarounds due to lack of flexibility caused by standardization. The rigid design hasdisabled them to satisfy diverse customer needs within the constraints of the system. Themanual workarounds exhibits that flexibility is necessary to achieve improved performance ofthe distribution network. This is especially highlighted when the case subject handles MTOproducts with a dedicated end-customer. A more flexible distribution network enables the useof multiple distribution routes to satisfy the diverse demand. The empirical results show that areduction of nodes in the distribution route for MTO products improves the performance.

RQ 3: What are the most crucial barriers to consider when enabling flexibility?

The empirical results together with the discussion identify the four most important barriers thathas hindered adoption of flexibility in the case subject. These four barriers are:

• Economies of scale - The high priority on economies of scale has created initiativesfor sub-optimized decisions that miss-align with the business environment. Therefore, a

51

CONCLUSION

comprehensive perspective is necessary to avoid misaligned distribution strategies.

• Balance between central and regional capabilities - The case subject has a strongcentralization of capabilities which impedes local responsiveness. Flexibility needs moreequal sharing of capabilities between the central and regional organizations.

• Adaptability of IT-systems - The rigid IT-systems has made the organization path-depended with limited access to flexibility. The context around the distribution networkis highly complex. Meaning, that the case subject needs a business-oriented IT-systemswhich support the complex coordination of these activities.

• Complexity of transfer prices and profit sharing - The simple way of tracing transac-tions between entities correspond not to the complexity of a flexible distribution network.Which highlights the importance of stakeholder involvement in decisions regarding config-uration and coordination of the distribution design

MRQ: How does flexibility impact the performance of the standardized and centralized distribu-tion network?

The answer of the main research question is based on the answers above and which has beendiscussed extensively in the previous chapters. Flexibility improve performance for productsthat are MTO. Further, flexibility can be used to better align the distribution network to theproduct characteristics and customer preferences. However, the result show that centralizationof capabilities impedes the adoption of flexibility in a distribution network. A strong focus oneconomies of scale through standardization and centralization is difficult to align with flexibility.Furthermore, standardized processes creates limitations for adoption of flexibility through rigid-ity. Therefore, the importance of a comprehensive view of the distribution network is emphasizedto increase the ability for adoption of flexibility to improve performance.

ContributionThe study was targeted to contribute to an existing research gap in the area of global manufac-turing and distribution network that was recognized by Olhager et al. (2015). They described alack of research in softer issues, e.g. flexibility, power dynamics, and sites competences, whichthis study has contribute to fill. These new understandings further enhances the knowledge inthis area and enable future advanced development in the field. The contribution is both theo-retical and empirical. In the sections below are first the theoretical contribution and then theempirical contributions presented.

Theoretical Contribution

This study gives a theoretical contribution to the supply chain management literature and morespecific to the study of global manufacturing and distribution network design. The theoreticalcontribution has been summarized in the following paragraphs.

Flexibility - The findings of the study identifies a distribution network with a high degree ofstandardization and centralization which is efficient for only a sub-segment of case subject’smarkets and products. The study contributes with analyse of both benefits and consequenceswith a non-flexible (i.e. standardized and centralized) distribution network. This includesthat a high level of standardization creates a need for manual bypasses to satisfy customers.These manual workarounds increases workload and risk in the distribution process. This iscontributions that supports previous research which argues that a supply chain need to be alignedwith the targeted customers’ needs [Fisher (1997); Godsell et al. (2011); Harris et al. (2010)]

52

CONCLUSION

and that a global manufacturing firm often needs several supply chains to be high performing inthis context [Coyle et al. (1996)]. Furthermore, numerous papers were analysed and presentedwith strategies and methods to achieve better flexibility in global distribution networks [Lovellet al. (2005); Chandra & Grabis (2009); Ping et al. (2011); Zhang et al. (2014)]. However, nonepapers were found in this context about what barriers that exists and needs to be consideredfor adoption of flexibility. The case study found four important and highlighted barriers thathindered adoption of flexibility in the case subject.

Site competences - The study has contributed with advanced understanding of the site compe-tences in a global manufacturing and distribution network, with focus upon centralization versusdecentralization of capabilities. These findings covers how centralization of capabilities hindersadoption of flexibility. This provides insight to the ability how to handle the balance betweenglobal efficiency and local responsiveness. Further, the study contributes to how configurationand coordination impacts of different stakeholder. This aspect concerns centralization and stan-dardization. Where these two aspects was show to have a strong impact on the stakeholderssite competence. It has been showed that the site competence limits the ability of flexibility.Therefore, the site competences and capabilities have a strong impact on how a distributionnetwork are configured and coordinated.

Empirical Contribution

The empirical contribution targets the case subject’s challenge to improve the performance ofthe distribution network through flexibility. The case subject’s current non-flexible distributionnetwork design are only suitable for products that are MTS. Therefore, the network designlimits the progress to improve performance. To be able to improve the performance of theoverall network, a more flexible network design is needed. Below are the contribution of threesuggested action to the case subject formulated to succeed with the adaption of flexibility.

1. Increase the capabilities in the local units. This enable the local organizations to betterhandle diversified and complex tasks. Further, this increases the ability to send goodsdirect from the regional distribution point to global customers, which is not possible todaydue to lack of capabilities.

2. Implement flexible warehouse processes. Enable the warehouses to better adjust the pro-cesses to the shipment and product characteristics to minimize the amount of non-valueadding activities. A solution would be to enable cross-docking for selected products andshipments.

3. Increase the stakeholder involvement in the design process. Due to the large and complexorganization of the case subject, it is crucial to achieve high stakeholder involvement in thedistribution network design. The suggestion focuses upon early stakeholder involvementfrom several perspectives in order to objectively find the overall best distribution networkdesign for the case subject.

To summary, by implementing these suggested action the case subject would be better preparedto adapt the needed flexibility. This would further enhance the work process to improve theperformance of the distribution network .

53

CONCLUSION

Limitations and Future ResearchThe study explored how flexibility impacts the performance of a global distribution network andwas conducted as an embedded case study on a single company. Consequently, the findings ofthe study are correlated to the case subject’s unique manufacturing and distribution networkdesign. However, many of the aspect can be generalized to a broader environment because ofthe general topics that was discussed, i.e; standardization, centralization, and flexibility. Theauthors believe that these topics are of great concern to several actors regardless of contextspecific attributes. Nonetheless, the findings do have limitations and cannot be generalizableto all different contexts. Additional case studies in other firm/industries/business environmentare needed to confirm and enhance the validity of the results. Further, the time-frame of thestudy limits the fully understanding of the complexity in the case subject’s distribution network.The focus was on a limited part of the case subject’s product portfolio. However, the targetedproduct portfolio consists of a product mix that gave detailed information of how the distributionnetwork performance for products with different characteristics.

Another limitation of this study is the stage of the change process. This study was conducted asa pre-study to the case subject. This dis-enabled a perspective on the implementation of a shiftfrom a rigid to a flexible distribution design and the result of this modification. Therefore, acase study on either implementation or after would bring advance understanding of the discussedsubjects in this study.

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Appendix

Interview TemplateDistribution process and activities

• What process does the distribution contain?

• What are the activities of these processes?

• How are these activities executed? Manually/Automatic?

• Which activities/processes represent the majority of costs?

• Which activities/processes represent the majority of lead time?

Performance

• How is the performance measured?

• What activities/processes are the drivers for performance?

• How is the performance of the distribution network?

– Overall– For each process/activity– Geographic– Products

Configuration

• What are the main objectives for the distribution network design?

Meeting specific questions

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APPENDIX

Survey ResultsThe question for the survey is presented below:

1. How is the current overall performance of the Distribution Network?

2. How is the current lead-time (SCOT) performance of the Distribution Network?

3. How is the current cost performance of the Distribution Network?

4. How is the current inventory performance of the Distribution Network?

5. How is prioritized is lead-time (SCOT) in the Distribution Network?

6. How is prioritized is cost in the Distribution Network?

7. How is prioritized is inventory in the Distribution Network?




Question/Subject 1 2 3 4 5 6 7 8 9 10Subject 1 4 3 5 2 7 7 7 5 4 4Subject 2 3 4 2 3 2 5 4 6 5 2Subject 3 5 5 6 4 6 3 5 5 5 3Subject 4 5 5 5 3 7 5 3 6 4 4Subject 5 4 4 4 4 6 4 5 4 4 4Subject 6 5 5 3 2 6 2 5 3 3 1Subject 7 3 3 3 3 4 3 2 4 3 1Average 4.14 4.14 4 3 5.43 4.14 4.43 4.71 4 2.71Variance 0.81 0.81 2 0.67 3.29 2.81 2.62 1.24 0.67 1.91

Standard deviation 0.90 0.90 1.41 0.82 1.81 1.68 1.62 1.11 0.82 1.38

Table 9: Survey Result

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impact and adoption of flexibility in a rigid and

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