With this centralized system, the transportation time to customers would be ... Customer Service: The best people, equipment and inventory systems are all ...
UCD Michael Smurfit Graduate Business School
Program Information: Course Module: Lecturer:
Masters in Supply Chain Management BMGTP-43500 Global Logistics Professor Gerry Ryan
CENTRALIZATION OR DECENTRALIZATION THE DILEMMA OF SCHNEIDER ELECTRIC C ASE STUDY REPORT
We declare that the material contained in this project is the end result of our own work and that due acknowledgment has been given in the bibliography to ALL sources, be they printed, electronic or personal.
Group 10 Team Members: Wanjun Li 13205500 Harshaanth Ahuja 13202089 Mohamed Faizal Batcha 13204968 Biao Jiang 13202557 Fan Li 13203883
Table of Contents
Page No(s):
1.
The Company: Schneider Electric............................................................................... 2
2.
Centralized and Decentralized Warehouse System: Advantages & Disadvantages....3
2.1. Centralized Warehouse- Meaning…………………………………………………………...3 2.1.1 Advantages of Centralized Warehouse……………………………………………………4 2.1.2 Disadvantages of Centralized Warehouse……...……………………………………….5 2.2. Decentralized Warehouse- Meaning………………………………………………………..5 2.2.1 Advantages of Decentralized Warehouse………………………………………………...5 2.2.2 Disadvantages of Decentralized Warehouse…...................................................................5
3.
Problem Analysis ........................................................................................................ 6
3.1 The Logistics Network Design………………..……………………………………………..6 3.2 Lead Time……………………………………………………………………………….…..7 3.3 Cost……………………………………………………………………………………….…8
4.
Proposed Strategy........................................................................................................ 8
4.1 Characteristics of Products & Demand…………………...………………………………….8 4.2 Product Holding Cost……………………………….……………………………………….8 4.3 Short Term Solutions………………………………………………………………………..9 4.3.1 Why Choose South Sweden?.............................................................................................9 4.3.2 Importance of I.T Solutions……………………………………………………………...9 4.4 Long Term Solutions………………………………………………………………………10
5.
Conclusion................................................................................................................. 10
References ........................................................................................................................ 11 Appendices……………....………………………………………………………………………………………………………12-15 Appendix 1: Current Schneider Electric Logistics Network System…………………………..12 Appendix 2: New Centralized Warehouse System………………………………………….…12 Appendix 3: Low Voltage Switchgears of Schneider Electric & ABB……………………….13 Appendix 4: Customer Training Courses Provided by Schneider Electric…………………...14 Appendix 5: Important Airports in South Sweden…………………………………………....15
1. The Company: Schneider Electric. Schneider Electric (SE), which is based in France, is a multinational corporation that specializes in energy management. It delivers products, services and solutions to its customers within the four main markets: Energy and infrastructure, Industry, Data Centers and Networks, Buildings and Residential (Schneider Electric, 2014). In 1994, SE was present in 130 countries with more than 5000 sales outlets and 8000 manufacturing and commercial units. In the markets of Nordic countries, SE had operated for different lengths of time and had developed at different paces in different areas based on subsidiaries with a sales office and a national warehouse in each country. The orders from different subsidiaries were sent to the supply warehouse in France and then the goods were delivered directly to customers from France three times a week. With this distribution network, the on-time delivery service performance fluctuated between 60-100% in Nordic countries. In the early of 1995, a centralized system was proposed to improve the efficiency of the logistics through a centralized warehouse in Sweden for Nordic markets. This centralized warehouse would send orders to France based on its inventory control every day, and then receive the goods from France. It would also take orders from different sales offices in Nordic countries, and then deliver products to them. With this centralized system, the transportation time to customers would be reduced in one to three days based on different places, while the transportation cost would be a question since the transport distance has increased. What follows is an in-depth analysis of SE’s current distribution network and proposed centralized system, the advantages and disadvantages of the two models and the further recommendations and solutions.
2. Centralized vs Decentralized Warehouse System: Advantage & Disadvantages. Companies that have a corporate supply chain department and various business units use one of the two methods for making decisions for their supply chain; Centralized decision making wherein the supply chain decisions are centrally made at the corporate level and the decentralized decision making where supply chain decisions are usually made at the business unit level (Rangavittal & Sohn, 2008). 2.1. Centralized Warehouse. According to Kokemuller (2014), Centralizing warehousing is a system where a retailer or its supplier maintains a single centralized warehouse versus several facilities spread out to cover an area. A centralized approach offers a number of benefits compared to a decentralized warehouse system.
2.1.1 The advantages of Centralized Warehouse:
a) Logistic Advantage: Lower Fixed Distribution Costs: Since fewer resources are needed to run one warehouse as opposed to several, centralization has a positive effect on costs relating to warehousing activities. Lower Variable Costs: Variable costs of warehousing such as labor, transport etc, can be kept at a minimum or at a constant when the total amount of inventory decreases overtime. Lower Inbound Costs: It means that distributors or a warehouse of a company can save on shipments from manufacturers as a centralized warehouse can take in large quantities at a single location, versus having shipments go to multiple locations. This enables better value not just to the company but also to the end customer and ensures higher profit margins (Kokemuller, 2014). Integration of Activities: Centralization helps in integrating all the warehouse and logistical activities under one roof and these results in lower management costs. As such the company can concentrate on other core competencies. Lower Learning Costs: Since all products are centrally located in one warehouse, old products can be phased out quickly and the distribution system can adopt faster to volume fluctuations.
b) Service Advantage: Shorter & Secure Lead Times: A centralized warehouse helps in achieving shorter and secure lead times on all the products. The warehouse can send goods and other consignments to customers much faster thus reducing lead time. Higher Delivery Precision: Since all the products are centrally located in one warehouse, more deliveries can be carried out correctly. The number of deliveries and the time windows can be matched simultaneously. Differentiation: A centralized warehouse can store products of various shapes and sizes. The possibility of customizing solutions increases with a centralized system. Better Information: With all the products being centralized, it is easier to manage inventory levels. Consequently the customers can be supplied with more precise and accurate information on delivery times by the company. Customer Service: The best people, equipment and inventory systems are all centrally located in a centralized warehouse. This is beneficial as the warehouse can focus on the needs of the customers and provide good customer service (Kokemuller, 2014).
2.1.2 Disadvantages of Centralized Warehouse: a) Delay in sending materials to the departments and branches. b) Increase in material handling cost as staff will be required for transportation from stores to the various production units (materialsmanagement.info, 2014). c) Greater risk of loss by fire because if a fire breaks out, entire stocks can be lost bringing production to a halt (materialsmanagement.info, 2014). 2.2. Decentralized Warehouse. Decentralized Warehouse is when there are multiple warehouses, each warehouse is treated as a separate entity rather than a whole. The warehouses have their own locks and keys. The stock is organized in a way that will help in optimizing the inventory (Lee, 2014). 2.2.1 The advantages of Decentralized Warehouse: a) The storing and controlling function can be easily accomplished. b) Delays in material handling will be eliminated thus ensuring savings in material handling costs. c) The chances of loss by fire are reduced with a decentralized warehouse. d) The need for any internal transport costs between the distribution centers is minimized under a decentralized warehouse. e) Finally, needs of individual departments can be easily fulfilled with a decentralized setup. 2.2.2 The disadvantages of Decentralized Warehouse: a)
Higher Costs of supervision as more experienced people are needed to supervise the day to day functioning of the warehouse.
b) A decentralized warehouse requires a very high amount of investment as facilities have to be set
up in multiple locations with the latest equipment, technology and inventory management systems. c)
More time spent in stock taking.
d) Higher cost of staff and stationery.
3. The Problem Analysis Network planning and location of the facilities of a company is important in order to ensure the company is able to serve the customers better and also in a timely manner. During the planning stage, the company needs to consider all major logistical costs, namely transportation, inventory, and facility costs and also the company needs to consider practical restrictions, such as capacity and customer service beyond the cost (Ballou, H. and Srivastava, K.) Schneider Electric (SE) management plans to move from one end of logistics planning which is a decentralized system to the other end of the planning system which is a centralized system in Europe. The comparison of this strategy can be categorized in to three categories which are different in terms of the logistics network, the lead time and finally the cost. 3.1 The Logistic Network Design Nordic Countries (Denmark, Finland, Norway and Sweden) SE operation is based on subsidiary that consists of sales office and national warehouse in each country (Appendix 1). When a customer places an order in any or the Nordic Countries to any of the SE subsidiaries sales office, the subsidiaries will deliver the materials from their warehouses. Once the material needs to be replenished, the subsidiaries team will send the order to the parent company’s warehouse in France. Each item has its own standard lead time and each subsidiary will place an order based on the item lead time and estimate demand from the customers. The current network as shown in Exhibit 1.
Exhibit 1: Current Schneider Electric logistic network system.
The new proposed centralized warehouse network system will have a centralized warehouse located in South Sweden. In this new proposed network, each Nordic Country will have their own subsidiary sales office but all the orders will go to the southern Sweden warehouse for the delivery. The Sweden warehouse will make a direct delivery to the customers in Denmark, Finland, Norway and Sweden (Appendix 2). All the inventory for the Nordic Countries will be managed in the warehouse at Sweden. Once the Sweden warehouse needs to replenish the inventory, they will place an order to the main warehouse in France. The proposed network is shown in Exhibit 2.
Exhibit 2: New Centralize warehouse system propose by management
3.2 Lead Time In terms of delivery lead time and delivery performance, in the current network system, the main warehouse in France will make a frequent delivery to all the Nordic Countries in average of three times a week. The transportation lead time is around four to five days and will be stored in the warehouse operated by third party logistics companies. The delivery service performance of SE Finland is about 90 to 95% by using this strategy. In the new proposed centralized warehouse network, the France warehouse will have daily shipments to the Sweden warehouse and it may possibly take around four days to arrive once the shipment is made from the France warehouse. From the warehouse in Sweden, the material will be directly shipped to customers in Denmark, Finland Norway and Sweden through truck and sea based on the
location of the customers. The lead time to deliver from the warehouse to the customer is estimated to be around one to three days depending on the location of the customers. 3.3 Cost In terms of cost, express delivery charge in the current system will cost around addition 30FIM from the normal delivery charge but for the new proposed system, the express delivery charge will be much higher as of 100FIM to 150FIM per shipment. However, this cost is possibly reduced if the shipment method is changed to low cost shipment method like sea shipment since there is very frequent shipment from Sweden to Finland. The increase in the logistic cost is practical since the delivery distance is longer in the new proposed system. 4. Proposed Strategy The solutions to whether to develop a centralised warehouse in South Sweden should be based on the analysis of characteristics of demands, products, and costs and can be classified as short-term and long-term solutions with regard to the lengths of time. 4.1 Characteristics of Product and Demands As you can see in Exhibit 3, Product X is likely to represent low price products in SE’s product line, e.g., low voltage switchgears and the demand of Product X can be as high as 1050 and as low as zero, which leads to a significant standard deviation. Generally, these low end products have plenty of substitutes from competitors and require certain level of supply chain responsiveness. Appendix 3 shows that similar products from Schneider’s competitor, ABB. For Product Y in Exhibit 3, it represents high end product of SE, e.g., electricity generator protector as shown in Appendix 3. For these products, what SE provides to customers is not only the product but also related training as example in Appendix 4, which indicates certain degree of customer loyalty and reliance to these products. 4.2 Product Holding Cost In Exhibit 3, the holding cost for Product Y is about 100 times greater than Product X. This indicates that SE can reduce inventory cost effectively if the inventory level of Product Y is substantially reduced.
Exhibit 3: Demand data for two type of products 4.3 Short Term Solution: In the short-term, SE could establish a centralised warehouse in south Sweden and use it to store high price products like product Y, while keeping Product X decentralised. By doing so, SE could benefit from the reduced costs brought by centralisation of high price product without undermining its service level of low price product. 4.3.1 Why South Sweden. South Sweden is an ideal location for a centralised warehouse because it is at the heart of Nordic area and is a transportation hub for this area, which would ensure a quicker delivery compared to other prospect locations. There are important international ports and airports in south Sweden, e.g., Stockholm airport, Karistianstad airport, Lidkoping-Hovby airport, the port of Sodertalje. An order from Finland or other Nordic countries can be fulfilled from a central warehouse in south Sweden by air, truck or sea as shown in Appendix 5. Plus, Besides, Sweden is also an important market for SE. SE has over 300 employees now in Sweden national warehouse, which are roughly twice as many as employees in any other Nordic national warehouse (Schneider Electric). SE could keep its decentralised national warehouses in Nordic countries to store product X and deliver them to customers while centralising high price product, e.g., product Y. 4.3.2 Importance of IT Solution. Supply chain management is becoming a challenging and complex task for many companies, due to the trend of extending product variety, increasing outsourcing etc (Lee, 2002). In the past years, information technology contributed to the development of supply chain management (Droste, 2007).
One benefit that IT system can provide is more flexibility and product variety (Bruun and Mefford, 2004). So, it is plausible to implement an IT system help SE manage the challenges. 4.4 Long Term Solution: As analysed above, the potential benefits that SE can get from implementation of a centralised warehouse in South Sweden come mainly from lower inventory costs for high price products. According to Dankbaar (1997), alternatives to lean production have not found widespread acceptance and even critics of lean production admitted that ‘‘lean production will be the standard manufacturing mode of the 21st century’’ (Rinehart et al., 1997, p. 2). So strategically, in the long-term, SE should consider to take a transition from decentralised inventory to centralised inventory, because lean is becoming a trend for companies (Shah and Ward, 2007). Practically, for a certain company, whether to centralise the low price products depend on the benefit it can get and the costs it should take. Anyway, we suggest SE consider the feasibility of centralisation of low price products and eventually all inventory in the future. 5. Conclusion Based on analysis mentioned above, the warehouse centralized process for Schneider Electric is inevitable. But the senior managers should also carry out centralized strategy flexible. Not only considering the benefits from centralization, but also preventing the risk during this process. In order to enhance the stability of operation of this company and meet demand of local customers, a centralized warehouse should be built in South Sweden. In a short term period, the object of this warehouse is to store and distribute those products with high price and random demands. National warehouse will also act an important role in distributing other products with lower price and stably demand in this period. South Sweden is a preferable location for its conveniently situation and market. In other word, in this period of time, both centralized warehouse and national warehouse are working in this period. When Schneider Electric accumulating enough experience to finish all products centralization and distribution, this process will enter into the second step, in a long term perspective, the national warehouse will be obsolete. All products including random demand and stable demand will deliver to centralized warehouse and through centralized warehouse to customers. It is no doubt that centralization will help Schneider Electric greatly reduce its cost and lower the delivery lead time. But the precondition is Schneider will have enough experienced stuffs working in centralized center and its technology system can support its business. Obviously, both of those two requirements will need time to accumulate.
References: Abrahamsson. M, 1992- “Timed direct distribution - Driving forces and logistical competitive advantage with central storage of producer goods”, Doctoral Dissertation, Department of Management and Engineering, Linkoping University, Sweden. Advantages & Disadvantages of a Centralised Store available at http://www.materialsmanagement.info/stores/centralized-stores-advantage.htm. Accessed on 3rd April 2014. Ballou, H. and Srivastava, K. (2008), ‘Business Logistic/ Supply Chain Management 5 th Edition.’ Pearson. Bruun, P. and Mefford, R. (2004). Lean production and the Internet. International Journal of Production Economics, 89(3), pp.247--260. Dankbaar, B., 1997. Lean production: denial, confirmation or exten- sion of sociotechnical systems design? Human Relations 50 (3), 653–670. Droste, A. (2007). Lean thinking, banish waste and create wealth in your corporation. Taylor & Francis. Kokemuller N, 2014- “The Advantages of a Centralized Warehouse”, Chron-Hearst Newspapers available at http://work.chron.com/advantages-centralized-warehouse-16128.html. Accessed 5th April 2014. Lee, H. (2002). Aligning Supply Chain Strategies with Product Uncertainties. California management review, 44(3). M. Lee, 2014- “Centralising and Decentralising Warehouse Operations”, for Royale International Couriers available at http://opentoexport.com/article/centralising-and-de-centralising-warehouseoperations/. Accessed 12th April 2014. Rangavittal. G & Sohn T.H, 2008- “The Impact & Dynamics of Centralization in Supply Chain Decision-Making”, MIT Engineering Systems Division, pp.1-89. Rinehart, J., Huxley, C., Robertson, D., 1997. Just Another Car Factory? Cornell University Press, Ithaca, NY. Shah, R. and Ward, P. (2007). Defining and developing measures of lean production. Journal of operations management, 25(4), pp.785--805. Schneider Electric (2014) Schneider Electric Europe. http://specifique.org/?port=schneider-electric-europe (Accessed 2 April 2014)
Available
at:
Appendix 1: Current Schneider Electric Logistics Network System.
Appendix 2: New Centralized Warehouse System Proposed by Management
Appendix 3: Low Voltage Switchgears of Schneider Electric
Low Voltage Switchgears of ABB
Appendix 4: Customer Training Courses Provided by Schneider Electric
Appendix 5: Important Airports in South Sweden
