Case International Operations Planning

Task 8 Do French cars keep running?

Tutorguide Task 8: Logistics cost optimising stock

Introduction: After-Sales Vehicle Parts Distribution Critical for Success

(Article by Robert J. Bowman; http://www.glscs.com: Global Logistics & Supply Chain Strategies, 2008)

While well-built cars, trucks and construction equipment are important to retaining customers brand loyalty, readily available after-sales parts and service are even more crucial. Heres how in Europe Volvo, Toyota, and Peugeot-Citroen, support the less glamorous aftermarket side of the business. Automakers like to think of themselves as existing on the cutting edge, but in one respect they are decidedly old-fashioned: In an age of disposable merchandise, they stand or fall on the quality of their after-sales service. An indifferent dealer, a poor repair job, a delayed part it doesnt take much to shift customer loyalty to another car company. Managers of the aftermarket pipeline are expected to have critical parts close at hand. At the same time, they are under intense pressure to keep distribution costs down, especially in relation to their direct competitors. For many producers, the answer to this apparent paradox rests in centralized warehousing tied to sophisticated information systems. Europe has proved an especially fertile breeding ground for such solutions, and the emergence of the European Union has encouraged companies to consolidate regional distribution at a handful of points. Nevertheless, there are numerous obstacles to centralization, even within the relatively harmonized EU. Peugeot and Citroen The European distribution strategy of Peugeot and Citroen also assigns top priority to aftersales service. Research by the French automaker shows that 45 percent of customers maintain brand loyalty when they are happy about parts and service yet unhappy about the car. Only 14 percent stay with the brand when the situation is the other way around. In other words, dissatisfaction due to the vehicle itself is now less important than poor quality of service, said Jean- Louis Faucher, managing director of spare parts logistics for the PSA Group (Peugeot and Citroen). Repair professionals are equally adamant about high-quality service. They named parts availability as the number one criterion for choosing suppliers, with delivery time second, Faucher said. Price was in seventh place.

Dissatisfaction due to the vehicle itself is now less important than poor quality of service. Jean-Louis Faucher of the PSA Group

Together, Peugeot and Citroen produce around 2 million cars a year in 2000 and already around 3.5 million in 2006, 60 percent of them for export. Ten percent of the $3bn in annual turnover comes from spare parts sales. With new players crowding the after-sales sector, the PSA Group relies on distribution efficiency to retain market share. Any part ordered by 4 p.m. is delivered the following day before 9 a.m. to any service point in France. The daily fill rate is currently running at 97.6 percent for urgent or emergency orders, and 96.1 percent for routine stock renewals. Quality control was reinforced by ISO 9002 certification, helping the PSA Group achieve a 50 percent cut in ordering and handling errors. Average orderdelivery times have been nearly halved as well, with 95 percent of deliveries now completed within

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Case International Operations Planning

five days or fewer. The fill rate for emergency orders, involving vehicle breakdowns, has remained at 99 percent for the past four years, Faucher said. As the quality bar is raised, the PSA Group faces demands for more frequent shipments to developing markets such as Hungary, Poland and Slovenia. Meanwhile, the number of parts worldwide is increasing, despite efforts at standardization. Faucher predicted a steep rise in parts reference numbers, from just over 145,000 in 1996 to nearly 175,000 by 2006. All of this is taking place against a backdrop of internal cost-cutting, with much of the burden falling squarely on logistics. Through steady advances in logistics quality, the company has been able to offset the rising cost of overall customer service, while softening the impact of flat growth in aftersales service. The PSA Group has just two primary warehouses carrying complete parts inventories, both in France. The facility at Vesoul stocks both Peugeot and Citroen parts for France, Europe and overseas. Melun covers France and overseas for Citroen alone. Rounding out the network are 24 secondary warehouses, half of them operated directly by local branches of Peugeot and Citroen. Faucher expects the logistics network further to evolve, guided by a matrix that matches complexity of the repair job with order priority and frequency of delivery. Together those factors will determine the most efficient routing for the shipment of service parts. The system is dubbed the 2-3-4 combination, for two types of orders (routine and urgent), three types of transit times (ranging from five days to a matter of hours), and four types of frequency (from once a week to twice a day). The revamping of PSAs parts logistics structure calls for the conversion of primary and relay warehouses to handle both Peugeot and Citroen parts. The primary warehouses also will be retooled to concentrate on stock renewals and distinct geographical areas. Within four years, said Faucher, the automaker expects to achieve reductions of 15 percent in operating costs, and 20 percent in the value of its parts inventories.

CBNL, Netherlands In the Netherlands, Oosterhout, the Centre Benelux Nederland (CBNL) is responsible for the delivery of all spare-parts for Citron Benelux dealers, divided into region the Netherlands (approx. 100 dealers) and the region Begium and Luxemburg (approx. 75 dealers). Transportation is done by Gefco, one of Europe's leading logistics groups and one of the top ten in the worldwide logistics industry, and owned by the PSA Group (!). Urgent orders are taken care of with night delivery to almost all destinations. And together with the daydeliveries for big stock orders, all these transportations movements have to be paid to Gefco. They charge a fixed price monthly, based on the average numbers of shipments. The cost are 120.000 monthly. The CBNL warehouse is designed and large enough to deliver for Peugeot dealers as well, but for company reasons (strategic/tactical plans?) this option has been postponed. At this site are stocked 40.000 different spare-parts. CBNL delivers stock-orders within 5 days (40.000 order-lines weekly, servicelevel 95% reliability, while performing 99%!) and urgent orders the next day (26.000 orderlines weekly, servicelevel 97% reliability). Most parts are being restocked from France, Vesoul. Of course they make use of an ERP software, SAP, used for SCM purposes. Everyday several trucks with material arrive from France to replenish the stock at the Oosterhout facility. They also have local suppliers, but, under pressure of the PSA logistics department, the number of local suppliers has brought down to a minimum. Another exception in the delivery system are the tyres, like Michelin, which are directly delivered from Michelin warehouses (but ordered via Citron ordering system).

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Case International Operations Planning

Looking at these large numbers of different spare parts, in all their varieties, small, large, metal, glass, plasics, electronic components, they have to deal with the available space and the monthly cost of stock per item. The stock can furthermore be devided into fast movers, middle fast movers, slow movers and dead stock. CBNL knows which parts belong to which category and gets detailed data out of their WMS. They get information about the numbers delivered per week, stock and urgent deliveries, latest delivery, the price, volume and weight data, etc. The WMS is a decision support system for spare parts management. Based on long experience with daily inventory issues, and looking at cost development, management doubts the liability of their system, that is concerning the way the reorder levels and quantities are calculated. They think that somehow they could save money on the slow movers. Through analysis, the company determined that nearly 20 percent of all spare-parts were fast movers, 45 percent are average or middle fast movers, 32,5 percent are slow moving parts, and 2,5% would be considered as dead stock. The slow movers represent 10% of all orders. Approximately 10,000 parts have a value of less than 100 (50 on average) and have been in the inventory for a sufficient period. Other parts have a value of about 300 on average. About 5,000 items were understocked and could impact customer service levels. More than 25,000 items were appropriately stocked and more than 5,000 items were considered to be overstocked. More importantly, about 1,000 of the overstocked parts were considered obsolete. Instead of 40,000 different stock items, the logistic center actually needed only 39,000. This number is again adjusted by 2,000 new items on stock. (To rectify the situation, the company invested approximately 10,000 to address the understocked items. The overstocked component represented approximately 80,000.) The total cost of holding stock (all infrastructures, facilities, energy included) for past year were 1.3 million euros, of which was 0.5 million euro for slow movers parts only. The cost of holding stock is set at 20% of the value of the items per year and used for both categories under 100 en (largely) above 100. For the first category the ordering cost is set 50 per order, and the lead time is 2 days. They also use a safety stock level of 50% of the average weekly demand. For the second category the ordering cost are 75 per order and a lead time of 1 week.. Based on the degree of servicelevel and lead times of supply, the safety stock level is 25% for category 1 items and for category 2 items its 50% of the average weekly demand.

Task description Core of this task is to let students understand the practical implications of making calculations for optimizing the stock of a company, reducing cost. They have to make use of the so-called EOQ-model (Economic Order Quantity) and reckon with the type of stock, the type of replenishment (delivery times, etc.) Students should practice in calculating order quantities and the total stock cost. In the BT I will come back on this issue when telling students about several aspects of logistics and supply chain management. Step 1 Finding the key logistic issues. Many logistic elements are mentioned in the text: distribution strategy, emergency orders, routine stock renewal, fast movers, slow movers, WMS, night and day delivery, service level, understocked, overstocked, safety level, lead time, ordering costs.

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Case International Operations Planning

Step 2 Finding the central problem. Management indicates a problem they have with their stock levels, especially in relation to slow movers, and want to reduce their cost by finding a way to lower the stock levels. In other words, they want to optimize their stock. Step 3/4 To stimulate the discussion you can ask the following questions: How does the distribution system work? (From France to CBNL, from CBNL to dealers). What is the consequence of such a working method/ service level? Why would management doubt the reliability of the inventory system? What kind of system would CBNL make use of? How does it work? How can it work? Which parameters will have to be important? Is there maybe some kind of formula involved? Step 5 2 3 4 5 Learning goals : What are different reasons for holding stock? What is an order point system and which kinds are there? (reorder level system, cyclical review system). What is the EOQ formula? On which assumptions is the EOQ formula based? Why is this often questionable in practice?! What do ERP, SCM, and MRP1&2 mean?

1 What does inventory management imply?

Theory : Handout, Operations management, given in TG Business Trainings During the business training students will get more insight in logistics management in general, and how inventory management makes a part of it. Step 7: (LG1) Calculate the order quantities, average stock, ordering frequency and total cost of slow movers per category. Slow movers : 17,5% of 38,000 = 6650 parts Category I (<100): * 6650 = 1663 Category II (>100): * 6650 = 4988 Q = (2 x D x K / I) = D: Demand per year, K: Ordering cost, I : Inventory cost (% of inv. Value) D= 33.000 * 50 weeks = 165,000 parts D = 165d*17,5% = 28,875 D-I= D-II= Q-I= Average stock = I = Q + SS (safety stock) Ordering frequency: Total cost: Supply: Av. Stock * I + Ordering cost: x times x cost per order. *** The exact calculation will be given during the trainings, by making use of an Excel-sheet ***

Q-II=

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