Elevator company case studyAdvanced Supply Chain Planning LABA.Y. 2015/2016Prof. Giovanni Miragliotta

Large Group NN

Ludwing Arroyo Crivelli – 840944 Fernando Jaramillo Navarro – 840586 Federico Edoardo Pantanella – 837908 Fabio Parisi – 838093Jesus Andres Caceres Rivera – 854232 Danilo Torretta – 837978

Agenda• Executive summary• Key facts• Current logistic cost structure• Qualitative analysis of redesign alternatives• Logistic cost structure of redesign alternatives• Selection of the best configuration• Trends analysis• Project 949 evaluation• Recommendations

Executive summary• The industry’s traditional high margins and the poor integration between PROD and SALE BUs are the primary causes of the

weak control and visibility that EC has on its logistic cost structure (52% of logistic costs are under the responsibility of the Vending Companies). This contingency is leading the company to high inefficiencies in the logistic activities, which might be even sharpened if the expected growth of the business in the next years will be confirmed.

• In order to remedy this situation, the as-is scenario and five logistics re-design options have been analysed from both qualitative and quantitative perspectives: the best alternative identified (Cfg. 5) consists in eliminating all the RDCs and building an additional MDC in Hamburg.

• This reconfiguration will allow to save more than 2 mln €/year in logistics, as well as taking back a centralised control on the overall logistic activities and related costs. Moreover, the current limited capacity in the Italian MDC – an evident bottleneck of the system – will be mitigated by splitting the production volume over two MDCs working in parallel. Other benefits can be obtained with this redesign, such as reduced damages’ risk due to the elimination of the handling activities in the RDCs.What is more, if EC will be able to properly reshape its supply base, the expected benefits may rise to app. 4.9 mln €/year.

• The transition to this new configuration should start as soon as possible: meanwhile, in order to deal with possible change management issues (e.g. organisational redesign), Project 949 could help in offsetting the problems generated by the constrained capacity at the Italian MDC.

Key facts

Long supply & production LT

Logistic costs account for more than € 18.4 million 11 independent Vending Companies and 13 RDCs all around Europe under the control of SALE 13,400 elevators delivered each year

- More than 50% of the production volume is managed by SALE

- PROD has no control on 52% of the overall logistic cost structure

- On average, plants are kept in stock for app. 1.5 months in RDCs (it is a Configure-To-Order system!)

- High handling and inventory holding costs

Lack of visibility and control on logistic activities

Sleeping WIP

Capacity constraint at MDC - On average, 996 plants in stock (not considering "other countries") in front of an available capacity of 1,000

- About 2 months from order release to gathering of components in the MDC

Current logistic cost structure

18,445,000 €/year

The average logistic cost per plant is app. 1,450 €, accounting for more than 11% of the average plant value (13,000 €) More than 9.6 mln € are not under the direct control of EC Outbound transportation costs (primary and secondary) represent more than half of the total logistic costs (51%)

Click the button to assess the entity of individual cost

categories

Qualitative analysis of redesign alternativesService level Quality Stock distribution in

the network Logistic costs Visibility Final evaluation

Configurations with RDCs- Zero State- Cfg. 2- Cfg. 4

Good: it is preferable to be near the final destination of the plant when the BS is ready in order to reduce order cycle time.

The additional handling in RDCs causes a higher damage risk that may lead to quality issues.

Several local facilities avoid the necessity to keep the stock in one place only, which could be an issue due to limited capacity.

Higher handling costs.- Additional handling in RDCs.- Loading/unloading and management costs are higher

in RDCs due to economies of scale.Higher inventory-holding costs.- Higher value of inventory in RDCs due to primary

outbound transportation.Lower primary outbound transportation costs.- Better saturation of trucks going from MDC to RDCs.

EC has no visibility on stock in the RDCs and thus no control on their logistics.

Configurations with no RDCs- Cfg. 1- Cfg. 3- Cfg. 5

Theoretically bad, even though maximum transportation lead time is 2.5 days and therefore this aspect is not differential.

Lower damage risk.

Lower overall uncertainty as stock is centralized, but possible issues related to capacity.Two MDCs (Cfg. 5) can solve the trade-off and also mitigate any risk that would cause a disruption of the supply.

Lower handling costs.Lower inventory-holding costs.Higher primary outbound transportation costs.

Full visibility on stock: logistics management within the single facility may become more complex but managing the network becomes overall easier.

Eliminating RDCs seems the best

option

Strengths

MDC in ItalyMost of suppliers are in Italy: inbound transportation costs are supposed to be lower.Minor changes need to be introduced into the distribution network.

MDC(s) located in other

countries.Secondary outbound transportation fares are supposed to be lower thanks to a better geographical position of the MDC.

We adopted a pairwise comparison approach, focusing on two main discriminant criteria1. Presence of RDCs2. Location of the MDC(s)

Logistic cost structure of redesign alternatives

Every hypothesis on costs is confirmed:keeping RDCs is always more expensive

Click the button to assess the entity of individual cost

categories

EC should eliminate RDCsfrom the distribution network

We are going to focus onConfigurations 1, 3 and 5

Selection of the best configuration (1/2)

PROs

CONs

From the cost analysis, Configuration 1 appears to be the

best option. It also requires minimum change (the MDC will

stay in Italy after all), but the current facility is already saturated. Moreover…

…most of suppliers are currently located in Italy. After moving the MDC to another country, the company may decide to re-locate the supply base,

sourcing from local vendors in order to reduce inbound transportation costs.

Neglecting inbound transportation costs and inventory-holding costs in

the MDC, which are dependent on the location of suppliers, the ranking of

configurations changes. Now, the only discriminant cost category is primary

outbound transportation.

Configuration 5 is the best option as it minimizes primary outbound transportation costs.

Cfg. 1

Cfg. 3Cfg. 5

Selection of the best configuration (2/2)Taking everything into account, we believe EC should implement Configuration 5Minimization of logistic costs NOT dependent on the location of suppliers (primary outbound transportation

costs above all)Two MDCs allow to split the centralized stock, avoiding to incur issues related to constrained capacitySupply chain risk mitigation: continuity of supply is enhanced by the presence of two MDCs

Necessity of higher coordination with 3PLs, as

managing distribution operations on an

international scale (without local intermediaries) may

pose issues

Assets should me modular, providing the ability to easily expand facilities, capacities and

equipment to meet increasing demand

Some pre-requisites

Trends analysis

Future trendsIncrease in

demandIn order to simulate the effects of this trend, we

used as a proxy the predictions on the building

construction output in Europe in the next 5 years, assuming that most of EC’s

sales are due to the installation of new

equipment.

Variations in the fuel price

Being a commodity, the price of fuel is extremely unpredictable. Since the location of suppliers is likely to change in the future, we

focused on primary outbound transportation only and simulated

the effects of increments/decrements in the

corresponding fares.

Implementation of the BIM software in the

construction industryConstruction companies are starting to adopt the BIM software for modelling

building designs. A BIM model presents a 4th dimension, time, which develops a reliable schedule of project activities.

Thanks to BIM, building sites’ uncertainty may be significantly

reduced, alleviating the issue of stock faced by elevators companies.

Therefore, we simulated the effects of a reduction in the stock coverage.

RESULTS OF SIMULATIONS

We simulated how logistic costs vary in the different

configurations according to the changes introduced in

the model inputs.In any case, we verified that

future trends are not supposed to compromise the robustness of the re-

design choice.

Project 949 evaluationSIMULATIONS

We estimated the quantitative benefits of Project 949 simulating two possible future scenarios:Scenario 1. Stock coverage in the MDC for direct deliveries and in RDCs is equal to 1 month. In the MDC for indirect deliveries it is equal to 0.25 months.Scenario 2. Stock coverage in the MDC for direct deliveries and in RDCs is equal to 0.5 months. In the MDC for indirect deliveries it is equal to 0.25 months.

Results show that the sum of handling and inventory-holding costs (the only differential cost categories in case stock coverage is changed) decreases in all configurations in a quite linear way. Going from the as-is situation to Scenario 2, cost savings are app. 1.5 million €/year in configurations with RDCs and 1 million €/year in the others. However, the robustness of the re-design choice is not compromised.

Currently, planning the delivery date is not

100% reliable as production and supply must start 2 months in advance. Several issues delaying building sites’ completion may occur

in the meantime.

Reducing production and

supply lead time may bring higher

visibility on building sites’

readiness

With a reliable forecast of when building sites will be ready for the

receipt and installation of

equipment, WIP is likely to decrease

RecommendationsEC should abandon the current distribution network and implement Configuration 5 in order to:1. Achieve a reduction in logistic costs. Assuming inbound transportation and inventory-holding are not

differential, possible cost savings are app. 4.9 million €/year. Moreover, due to the elimination of RDCs, the company would have full control on all logistic operations and thus on costs.

2. Avoid issues related to capacity constraints and get closer to emerging markets.3. Reduce supply chain risk and enhance the continuity of supply thanks to two parallel facilities.

Finally, Project 949 should be implemented in order to gain higher visibility on clients, make the company’s planning process more reliable and reduce the amount of stock kept in distribution centres. Possible cost savings are app. 1 million €/year for Configuration 5.

Possible criticalities• Initial investments are not expected to be critical• Change management process (e.g. control systems, KPIs, workforce relocation, etc.) should be carried out

carefully On a long-term perspective, the emergence of the "smart elevators" business in Europe might compel a change of the supply base or make some markets more attractive than others.