Supply chain adaptations for bundled service offers in the automotive aftermarket supply chain Master of Science Thesis in the Supply Chain Management Master’s Program MARGRÉT GUÐMUNDSDÓTTIR EMMELIE GUSTAFSSON Department of Technology Management and Economics Division of Logistics and Transportation CHALMERS UNIVERSITY OF TECHNOLOGY Gothenburg, Sweden 2015 Report No E2015:088 MASTER’S THESIS E 2015:088 Supply chain adaptations for bundled service offers in the automotive aftermarket supply chain MARGRÉT GUÐMUNDSDÓTTIR EMMELIE GUSTAFSSON Tutor, Chalmers: Árni Halldórsson Tutor, Volvo Group: Lina Liljenberg and Cathrine Sandberg Department of Technology Management and Economics Division of Logistics and Transportation CHALMERS UNIVERSITY OF TECHNOLOGY Göteborg, Sweden 2015 i Supply chain adaptations for bundled service offers in the automotive aftermarket supply chain MARGRÉT GUÐMUNDSDÓTTIR EMMELIE GUSTAFSSON © MARGRÉT GUÐMUNDSDÓTTIR and EMMELIE GUSTAFSSON, 2015 Master’s Thesis E 2015:088 Department of Technology Management and Economics Division of Logistics and Transportation Chalmers University of Technology SE-412 96 Göteborg, Sweden Telephone: +46 (0)31-772 10 00 Chalmers Reproservice Göteborg, Sweden 2015 ii Abstract Aftermarket services are considered very important and are no longer an afterthought within companies. In fact, the aftermarket has turned into the main source of profit for companies. For OEMs to be able to upgrade and transform their aftermarket supply chains, they must understand what type of supply chain design that is appropriate given the perfor- mance requirements of the bundled service offers they provide. The current aftermarket supply chain at the case company was not originally designed around the bundled service offers, which puts pressure on the case company to adapt their aftermarket supply chain to be able to meet the challenges that the bundled service offers put on them. The purpose of this thesis is to study the bundled service offers in order to provide rec- ommendations for adaptations of the aftermarket supply chain. In order to deliver the rec- ommendations, an investigation of the key challenges with the aftermarket supply chain in regard to the bundled service offers currently offered by the case company will be con- ducted, as well as a benchmarking study on what other companies identify as supply chain challenges in regard to aftermarket services. The scope of this thesis only includes bun- dled service offers for Volvo Group Trucks in the Nordic market and the focus is on the offers that impact the aftermarket supply chain, the service contracts. There are three dif- ferent types of service contracts provided by the case company; Blue, Silver and Gold. The content in the service contracts differs, which puts different demands on availability of spare parts. This thesis has contributed to the area of aftermarket supply chains when it comes to the understanding of how to achieve operational excellence through operationalization of ser- vice strategies. The conclusion is that from a physical handling perspective, the current aftermarket supply chain at the case company is considered sufficient, but some adapta- tions could be made to further improve it. Furthermore, the operational and organizational principles in terms of administrative handling of the current aftermarket supply chain can be improved. The recommendations consists of five areas of improvements. The first recommendation is prioritization of availability of critical spare parts according to service contract orders. This implies that the contract prioritization should be included in the cur- rent order classes, and the orders should be prioritized according to the service contracts. The second recommendation is prioritizing suppliers according to criticality, which means that suppliers supplying critical parts should be prioritized higher than the ones supply- ing less critical parts. The third recommendation is implementing local hubs close to the dealers, that serve more than one dealer in the area. This means that critical parts would be stored at the local hubs providing improved availability to meet the requirements of the service contracts. The fourth recommendation is to measure the total lead-time from order placed until delivered as a KPI to improve customer satisfaction. The last recom- mendation is improving internal information sharing between the functions sales and ma- terials management when designing the service contracts, but also when supplying the spare parts. Keywords: aftermarket services, uptime, automotive, aftermarket supply chain, bundled service offers, service contracts iii Acknowledgements This thesis has been carried out during spring 2015, by two students from the Master Program Supply Chain Management at Chalmers University of Technology. The thesis was supported by Volvo Group Trucks Operations Logistics Services. We want to direct gratitude towards our supervisors at both Volvo Group and Chalmers University of Technology. As a starting point, Lina Liljenberg, Dealer Inventory Manager for Europe North, served as the Volvo Group supervisor, and mid-way into the process Cathrine Sandberg, Project Manager, took over the position as supervisor. We direct our gratitude towards the supervisors who have made our work easier by providing contact details to personnel within the Volvo Group, but who have also assisted and guided us throughout the thesis process. We also want to show our gratitude towards Árni Halldórs- son, Professorat Chalmers University of Technology, for assistance throughout the whole process regarding frameworks and outline of the report. These comments have greatly improved the manuscript. A total of 26 stakeholders have given input to this thesis, mainly through interviews. We want to thank each and every one of these stakeholders for forming our thesis to what it is today. The stakeholders provided us with their time to participate in interviews and gave us essential information for the thesis as well as a great insight into the Volvo Group. This assisted the research immensely. Margrét Guðmundsdóttir and Emmelie Gustafsson, Gothenburg June, 2015 iv Abbreviations AHT Average Handle Time ETA Estimated Time of Arrival JIT Just In Time KPI Key Performance Indicator OEM Original Equipment Manufacturer OES Original Equipment Supplier PI Performance Indicator SKU Stock Keeping Unit TCO Total Cost of Ownership UN United Nations VOR Vehicle Off Road v Contents 1 Introduction 1 1.1 Background ................................. 1 1.1.1 Topic ................................ 1 1.1.2 Industrial context .......................... 2 1.2 Problem description ............................. 3 1.3 Purpose and research questions ....................... 6 1.4 Scope and delimitations ........................... 7 1.5 Outline of the thesis ............................. 8 2 Literature and frame of references 10 2.1 Characteristics of the aftermarket supply chain ............... 10 2.2 Configuring the aftermarket supply chain design .............. 14 2.2.1 Physical flow of material between actors ............. 14 2.2.2 Matching supply chains to product types (bundled service offers) 15 2.2.3 Centralization versus decentralization ............... 18 2.2.4 Speculation versus postponement ................. 21 3 Methodology 26 3.1 Research design ............................... 26 3.2 Current situation .............................. 28 3.2.1 Literature and frame of references ................. 28 3.2.2 Interviews with employees ..................... 29 3.2.3 Documentary data ......................... 30 3.2.4 Secondary evidence ........................ 30 3.2.5 Study visits ............................. 30 3.3 Assessment ................................. 31 3.3.1 Empirical scope ........................... 31 3.3.2 Research question 1 ........................ 31 3.3.3 Research question 2 ........................ 32 3.4 Recommendations .............................. 32 3.4.1 Research question 3 ........................ 32 3.5 Reliability and validity ........................... 32 4 Current situation 35 4.1 Bundled service offers ........................... 35 4.1.1 Selection of bundled service offers that impact the aftermarket supply chain ............................ 35 4.1.2 Service contracts .......................... 35 4.2 Current aftermarket supply chain of the case company ........... 38 4.2.1 Aftermarket supply chain design .................. 39 4.2.2 Warehouse structure ........................ 39 vi 4.2.3 Demand and inventory planning .................. 41 4.2.4 Refill from supplier to central warehouse ............. 41 4.2.5 Refill from central warehouse to support and regional warehouses 42 4.2.6 Dealer inventory management ................... 43 4.2.7 Backorder recovery ......................... 44 4.2.8 KPIs ................................ 45 5 Assessment of aftermarket challenges in relation to service contracts 47 5.1 Unit of analysis ............................... 47 5.2 Aftermarket challenges from literature ................... 49 5.3 Aftermarket challenges from the case company .............. 50 5.4 Aftermarket challenges from the case company and literature in relation to the service contracts ........................... 55 6 Assessment of benchmarking study 59 6.1 Aftermarket challenges from benchmarking study ............. 59 6.2 Aftermarket challenges from benchmarking study in relation to the service contracts ................................... 65 7 Recommendations 68 7.1