The Brother International Case deals with a logistic problem. One newly hired professional logistician should reorganize the supply of spares and parts in Europe for a Japanese Firm. In all there are some 65000 different items from small ones like needles to big ones like motors for industrial sewing machines. The majority of the parts come from Japan either by air or by sea freight. There are 20 local sales offices (LSO:S) in 13 different European countries and one headquarter in Manchester, through which all the orders to Japan were delivered till now. The LSO:s act as independent profit centers.
In the following text I will describe how the logistician could reorganize the distribution system, how the stock should be controlled, which information are needed to realize the reorganization and what problems could occur when trying to implement it.
1) Which items should be stored and where in the distribution system should they be stored?
At the moment the LSO:s send their orders daily to the BIE headquarter (hereafter called BIE) which bundles the orders and send them to the factory in Japan. The factory will than send the goods directly to the LSO:s. The average lead time by sea freight is 50 days and 20 by air. The air transport was originally provided for emergency cases. Because of the bad organization or forecasts many emergency orders were duplicates of earlier routine orders which didn’t arrived in time. The emergency orders are produced and send with highest priority leading to a bigger backlog of the normal orders. Therefore the share of air transports climbed up to some 70-90% .
This is obviously a sub optimal solution through air transports are much more costly than sea freight. In addition the ordered sizes are smaller than they may need to be, because each LSO orders their products independently. Even the time advantage of air freight is not fully used since in average the orders need still 20 days!
I start the analyze of the parts in analogy to the Pareto law, which states that there are some 80% of sales / profit generated through some 20% of the products / customers. Furthermore 80% of total cost / service cost are generated from another different 20% of the products / customers. The conclusion is to take special care on this first 20% which stand for the 80% of sale, because they are very important for the profit of the company and to try to drop the 20% of products which stand for 80% of the cost, if they don’t affect the other products in some way like complementary products. In this case we don’t think about service to key customers but distribution cost of products. Therefore we should identified these 20% of products which stand for 80% of stock costs. Of course you we cant take this amount of 20% literal it is just a rough number standing for a part of products which are distributed inefficient at the moment.
In the case of the Manchester LSO there are some 22% of sold products which stand for some 65% of stock value called group one and some 41% of sold products which stand for 3,85% of the stock value called group two (see table 1). What are the reasons for this figures? The products of this 22% were either not often sold, the amount of stock is very high or they have an extremely high value. If we look now in table 2, we see that they are not often sold compared to the other parts. Group one has an average of 8800 and group two 9,89 of sold parts per item. To analyze the amount of stock I calculated a ratio of average stock per item and average demand per item. A figure near one means that there is a high turnover and a low stock compared to the sales. As the figure gets bigger the turnover gets smaller and the stock gets bigger. As we can see in table 2 the average ratio of group one is 4,7 compared to some 31 of group two. There is a big range from 6 to 112 in group two, even in group one there is a range from some 1,5 to 9 so the picture isn’t that clear like the other criteria’s.
Therefore we can see that all criteria’s have a share in the bad effect of group two.
Of course we can’t stop selling spare parts just because they generate only few sales and big inventory cost. But we can derive four different strategies (look at figure 1).
Products like in group one with high demand and low value should be shipped in big quantities to the LSO:s to keep transport costs low. Products with a low demand and a low value should be stored in a central stock. They should be ordered by sea freight and than distributed to the LSO:s on demand. Products with a high demand and a high value should be send directly to the LSO. There is a trade off between sending by air or by sea freight. Its possible that we could save money by sending them by air depending on the internal rate of interest of the firm, the transport time, the value of the item and the average time which this product spends in the stock.
The last group which has an low demand and a high value should be stored at the factory and send by air on demand.
What we learn from this figures is, that we should only stock parts in all sales departments which are ordered in high quantities through the month like the items of group one. Furthermore the items with a low value should be shipped in from Japan. Whereas the products with high price and low volumes should be delivered on demand by air from the factory. As the average lead time of see freight is with 50 days only nearly double as much as air freight (20 days) I conclude that the most time is spend for producing the items at the factory. Therefore there should be a stock for high value items with low demand at the factory side to reduce the lead time for delivery on demand to some days.
They BIE should get all the sales data from the sales departments and forecast their demands for part items. Products which are ordered in quantities big enough to reach the cheapest category of transport cost should be delivered directly regularly to the LSO:s by sea freight following the forecasted demand. All the other products should be send be sea freight to one central stock which than distributes the parts to the LSO:s.
As we can also see in table 2 it is possible to never run out of stock, even with a small ratio of stock/item to demand/item. The first to categories have a ratio of 1 and 3. Even in the third category the wrong items are stocked, which should be improved. The worst example is the last category with a ratio of 112 an still a stock out percentage of some 5%.
Therefore direct shipment to the LSO:s is only economically if the ratio is staying small otherwise these items should shipped to a central warehouse an the delivered to the LSO:s in smaller batches.
Strictly applied this strategy would lead to an decrease of four thousandth of the products in LSO:s stocks, from some 23500 to 8 different items! This would lead to a much smaller depot room. The amount of administrative work would be much smaller, through shorter ways in the storage room time could be saved. Therefore less personal is needed to run the stock. In other words the LSO:s could save quite a lot of money through using a central stock. (see table 2)
- Quote paper
- Tom Kuehner (Author), 2003, Brother International Case European Distribution Strategy, Munich, GRIN Verlag, https://www.grin.com/document/18075