LUT University School of Engineering Science Industrial Engineering and Management Supply Chain and Operations Management Master’s Thesis Logistics Network Study for Spare Parts Distribution in APA area Pekka Pellikka 2018 Supervisor: Professor Janne Huiskonen Instructor: Anselmi Tuominen ABSTRACT Author: Pekka Pellikka Title: Logistics Network Study for Spare Parts Distribution in APA area Year: 2018 Place: Lappeenranta Master’s Thesis. LUT University, School of Engineering Science, Industrial Engineering and Management, Supply Chain and Operations Management. 159 pages, 31 figures, 46 tables and 4 appendices Supervisor: Professor Janne Huiskonen Instructor: Anselmi Tuominen Keywords: logistics network study, global distribution, spare parts, APA area, distribution development, strategic network design, service business, supply chain management The purpose of this thesis was to investigate KONE GSS’ spare parts distribution and related structural elements i.e. distribution network, warehouses and transportations. The case company has encountered challenges in its APA area distribution in terms of responsiveness, efficiency and profitability, which are now pursued to be tackled by this study. In this respect, various distribution systems and their structural solutions can serve customers differently. Nevertheless, the costs usually form various trade-offs with the capital and service factors between which, in equilibrium, companies must create a suitable distribution implementation for themselves. The aim of the thesis was to model and explore the case company’s current state of distribution, and on this basis try to find out what could be the best way to distribute spare parts in this target area for the future. In the study, the current state of distribution was initially analyzed and, based on this, various conclusions were made, on the grounds of which in conjunction with the frameworks provided by the theory alternative distribution network solutions were outlined. These design alternatives were then modeled with an Excel-based modeling tool built for the study, which combined optimization with traditional scenario calculation. Subsequently, the outcomes of the alternatives were compared and analyzed from the viewpoints of both service ability and financial and operational performance, while also performing sensitivity analyzing. In addition, the suitability of the alternatives was evaluated from other perspectives such as strategic fit, ease of implementation as well as functionality of the distribution system and risks involved. As a result of the study, a two-step distribution network development roadmap was introduced, whereby for a start the existing centralized network structure along with its distribution operations would be cleansed and optimized. After this, as the demand of the region reaches its expected growth and when the operations of the frontlines begin to stabilize in the future, it is advised to move to a more straightforward hybrid network structure, which in the long run could increase the operational performance and profitability of spare parts distribution to a whole new level. In comparison to the current state, this recommendation is able to achieve significantly better service ability at lower operational costs and higher capital efficiency, which in many ways will contribute to the underlying maintenance service, while also increasing the value experienced by the end customers. TIIVISTELMÄ Tekijä: Pekka Pellikka Työn nimi: Varaosajakelun logistiikkaverkostotutkimus APA-alueella Vuosi: 2018 Paikka: Lappeenranta Diplomityö. LUT-yliopisto, School of Engineering Science, Tuotantotalous, Toimitusketjun johtaminen. 159 sivua, 31 kuvaa, 46 taulukkoa ja 4 liitettä Tarkastaja: professori Janne Huiskonen Ohjaaja: Anselmi Tuominen Hakusanat: logistiikkaverkostotutkimus, globaali jakelu, varaosat, APA-alue, jakelun kehittäminen, strateginen verkoston suunnittelu, palveluliiketoiminta, toimitusketjun hallinta Tämän diplomityön tarkoituksena oli tutkia KONE GSS:n varaosajakelua ja tähän liittyviä rakenteellisia tekijöitä eli jakeluverkostoa, varastoja sekä kuljetuksia. Kohdeyrityksessä on kohdattu APA-alueen jakelussa haasteita palvelevuuden, tehokkuuden ja kannattavuuden suhteen, joihin työllä pyritään nyt puuttumaan. Tähän liittyen erilaisilla jakelujärjestelmillä ja näiden rakenneratkaisuilla voidaan palvelle asiakkaita eri tavoin. Näiden osalta kustannukset muodostavat kuitenkin pääoma- ja palvelutekijöiden kanssa tavallisesti erilaisia vastakkainasetteluja, joiden välillä tasapainotellen yritysten on luotava itselleen sopiva jakelutoteutus. Työn tavoitteena olikin mallintaa ja tutkia case yrityksen jakelun nykytilaa, ja tämän pohjalta pyrkiä selvittämään mikä voisi olla paras tapa jaella varaosia kohdealueella tulevaisuudessa. Työssä analysoitiin ensiksi jakelun nykytila ja tehtiin tämän pohjalta johtopäätöksiä, joiden perusteella yhdistettynä teorian tarjoamiin viitekehyksiin hahmoteltiin erilaisia vaihtoehtoisia jakelurakenneratkaisuja. Nämä rakennevaihtoehdot sitten mallinnettiin työtä varten luodulla Excel-pohjaisella mallinnustyökalulla, joka yhdisti optimoinnin perinteiseen skenaariolaskentaan. Tämän jälkeen vaihtoehtojen tulosantia vertailtiin ja analysoitiin niin palvelukyvyn kuin taloudellisen ja toiminnallisen suorituskyvyn näkökulmista, suorittaen samalla herkkyysanalysointia. Lisäksi vaihtoehtojen sopivuutta arvioitiin myös muista näkökulmista, kuten strateginen vastaavuus, implementoinnin helppous sekä jakelujärjestelmän toiminta ja tähän liittyvät riskit. Työn lopputulemana päädyttiin kaksivaiheiseen jakeluverkoston kehityssuunnitelmaan, missä aluksi nykyinen keskitetty verkostoratkaisu jakelutoimintoineen siivottaisiin ja optimoitaisiin. Tämän jälkeen, kunhan alueen kysyntä saavuttaa vastaisuudessa odotetun kasvunsa ja kun maayhtiöiden toiminta alkaa vakiintumaan, siirryttäisiin suoraviivaisempaan hybridirakennevaihtoehtoon, jolla on pidemmällä tähtäimellä mahdollista nostaa varaosajakelun toiminnallinen suorituskyky ja kannattavuus uudelle tasolle. Mitä vertailuun tulee, nykytilaan nähden ehdotuksella pystytään saavuttamaan huomattavasti parempi palvelukyky alhaisemmin operatiivisin kustannuksin ja korkeammalla pääomatehokkuudella, joka monin tavoin edesauttaa jakelun taustalla olevaa huoltotoimintaa, kasvattaen samalla loppuasiakkaiden kokemaa arvoa. ACKNOWLEDGEMENTS This master’s thesis was carried out for KONE Industrial Oy, Global Spares Supply during 2018. I would like to thank KONE Corporation and its executives for the opportunity offered to complete a thesis project on an interesting, challenging and above all developing subject like this. I would like to thank my supervisor Professor Janne Huiskonen and my instructor Anselmi Tuominen who provided good quality guidance and assistance whenever necessary, which jointly enabled the good progress of this multifaceted and practical study. In addition, I would like to thank the entire GSS Supply Chain Planning team, whose day-to-day support was indispensable for the analyses and results of the study. I would also like to thank the staff of the entire KONE GSS department as well as various external parties for useful information and valuable insights into my work. Finally, I would like to express my special thanks to my parents and my sister, whose altruistic support have been very valuable throughout my studies. Thanks also to my friends as well as the closest fellow students of Industrial Engineering and Management, with whom I have shared multiple classes and related group works along with many staggering experiences during my studies. Lappeenranta, December 2018 Pekka Pellikka TABLE OF CONTENTS 1 INTRODUCTION ........................................................................................................ 1 1.1 Background of the study ......................................................................................... 1 1.2 Objectives and scope .............................................................................................. 2 1.3 Delimitations and outcomes ................................................................................... 3 1.4 Structure of the report ............................................................................................. 4 2 GLOBAL SUPPLY CHAIN MANAGEMENT AND DISTRIBUTION ................. 7 2.1 Supply chain management in global business environment ................................... 8 2.2 The role of distribution in a supply chain ............................................................. 10 2.3 How a properly working distribution network can support business ................... 13 2.3.1 Impacts on competitive advantage ....................................................................... 13 2.3.2 Impacts on financial performance ........................................................................ 16 3 DISTRIBUTION SYSTEM AND NETWORK STRUCTURES ........................... 18 3.1 Building blocks of a global distribution network ................................................. 18 3.1.1 Inventories ............................................................................................................ 19 3.1.2 Transportation ....................................................................................................... 22 3.1.3 Third-party logistics (3PL) providers ................................................................... 27 3.2 Strategic trade-offs and structural archetypes of a distribution network .............. 29 3.3 Costs and