Hub-Model Utilisation in Inbound Logistics

- A Case Study from the Finnish Electronics Industry

Jukka Hemilä
VTT Industrial Systems

ICIL’2005, 14.-18.2.2005, Montevideo, Uruguay

 Agenda

• Introduction
• Methodology
• Literature review
• Case study
• Conclusions

ICIL’2005, Montevideo, Uruguay. 2

 Introduction

• Structural change in the electronics industry

Distributor and Distributor and
assembler assembler
Distributor Distributor Distributor
or or or
Reseller Reseller Reseller

Product / Product / Product /

Brand Brand Brand
Product / Product / Product / owner owner owner
Brand Brand Brand
owner owner owner

Contract Contract
Manufacturer Manufacturer
Supplier
Supplier

Supplier
Supplier

Supplier
Supplier

Supplier

Supplier

Supplier
Supplier

Supplier
Source: Modified from Ollus et al. 1998; Hemilä 2002
ICIL’2005, Montevideo, Uruguay. 3
 Introduction

• Today competition is very complicated and markets demand cost reduction

every day
• Contract manufacturers (and subcontractors) have today very high
production technologies -> where can one generate more profit, when
prices are low and all players have the same high quality?
• Logistics could be one way of making business more competitive. In many
cases, the overall supply chain’s material flow management has been a
problem:
• There are buffer stocks to ensure reliable deliveries, but this also requires
capital to be committed
• Demand forecasting does not work in many cases -> causes overreaction and a
bullwhip effect on the supply chain
• Material management is challenging, especially for small and medium-sized
subcontractors, who do not want to put all their money into materials.
• In Finland, labour costs are quite expensive and the country’s location is far
from global markets -> effective logistics might enhance competitiveness.
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 Methodology
• Process analysis of the supply chain
• Cost difference analysis between two optional cases:
• 1) Using the hub model in logistics and,
• 2) Acting as today without the hub model, the so-called direct model.
• A literature review about logistics development when outsourcing operations
• Framework for Demand and Supply Network Management research project:
Common Research and Development Framework for
Benchmarking Demand-Supply Network Management

Demand-Supply Network management

Logistics Control Methodology Case A Case B Case n

Networked Manufacturing Logistics
and
Network
and
Network
... and
Network
ICT Utilisation

Conclusion and Results Exploitation

Theoretical Contribution
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 Literature review

• Literature review in this case was done on different levels:

• Inbound logistics; project is focused on inbound logistics.
• Our case company has two choices in terms of inbound logistics
• keep logistics and do it by yourself, or
• outsource your logistics = using a hub.
• How to create a cost model for inbound logistics
• Logistics management; Inbound logistics decision making

Inbound Logistics
Inbound
Logistics
Logistics
Cost
Decision
Logistics Logistics Models
Making
Maintaining Outsourcing
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 Literature review, Findings

• Models for logistics management

• Many reasons for outsourcing
• How to create cost models for logistics
• Accrual of costs during a product’s supply chain

Costs After sales

Principal
Sub-
Contractors

Material
Suppliers

Time
Source: modified from Seppänen et al. 2002
ICIL’2005, Montevideo, Uruguay. 7
 Case study

Suppliers Subcontractors Customers

Direct
Principal
model

Suppliers Subcontractors Customers

Hub
model Inbound Principal
HUB

ICIL’2005, Montevideo, Uruguay. 8

 Case study

• We defined a three hierarchy-level model to calculate the cost difference

between the direct model (present state) and the hub model (vision state)
• Examples of different costs in the activity based cost model:

fixed monthly costs order level costs product level costs

procurement and personnel salaries transport (subcontractor – hub – production stopping and product
principal) defects costs due to supplier
quality organisation costs telephone call costs inventory costs
R& D costs related to outsourcing other ordering costs material profits
central management costs receiving costs capital
invoicing costs sending costs work costs / overwork / backlog
reclamation costs scrap costs
customs

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 Case study

• We changed five suppliers from the direct model to the hub model, costs
decreased by about 0.7% per end product.
• The savings were mostly due to decreased invoicing costs.
• Suppliers sometimes sent one invoice per product or subassembly and invoice
control requires much work on the principal’s side.
• The hub model has many other savings that were not counted, and some of
them are hard to calculate. For example, we found additional savings due to
easier inventory listing, simplified logistics and a three weeks’ buffer against
demand peaks.
• After cost difference analysis, next phase is creation of an activity based
costing model for the total cost of supply chain, with decision variables:
• material flow paths and inventory/production level.
• The model includes stochastic demand-level variations, when a penalty
imposed if demand is not satisfied.
• The idea is to find the optimum for decision variables when total costs are
minimised.
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 Conclusions

• Cost reduction is demanded every day and that’s why electronics industry
companies have to find new ways to improve their competitiveness.
• Outsourcing is an effective way to improve competitiveness, but there
should always be a reason for outsourcing.
• Logistics is one of main elements in improving competitiveness
• The hub model (outsourced logistics) is one answer to improve logistics and
the competitiveness of a company.
• The hub model has challenges of its own where ownership of and liability for
materials is concerned.
• For our case company, the future challenge is dynamic hub inventory
control, which includes a model of demand and takes production level
variations into account.

ICIL’2005, Montevideo, Uruguay. 11

 Thank You !

Contact information:

Jukka Hemilä
VTT Industrial Systems
P.O. Box 1301, FIN-02044 VTT, Finland
Mobile phone +358-40-820 8084
E-mail: Jukka.Hemila@vtt.fi

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