Why the different alternatives?

The benefits of having more than one distribution center – or positioning the only distri-bution center at a location other than the manufacturing plant – are those of improved lead times and cut ton-kilometers. Operating more distribution centers naturally results in added costs, and finding an optimal solution requires finding a balance between these trade-offs. Of course other factors affect the benefits of all alternatives. Alternative 1 with only one DC, for example, has the benefit of being able to consolidate truckloads of products from both Europe and Tatarstan manufacturing. This simplifies the process, but it comes at the cost of unnecessary back-and-forth transportation. These benefits are discussed in more detail in the next chapter, chapter 5.

The principles of the different alternatives are visualized in figure 4.6.

Figure 4.6. Visualization of the different alternatives. The amount and destinations of the red outbound arrows are symbolical and do not represent actual end nodes, as is the thickness of all arrows. (Map base from Wikimedia 2007)

In the figure, each alternative is shown on its own map of Russia, where blue arrows show the flow of materials entering a distribution center, manufacturing plant or termi-nal, which are all symbolized with red dots. Red arrows indicate outbound transporta-tion to distributors. The width of the arrow roughly estimates the amount of materials transported. The configurations shown in the figure are merely starting points for devel-oping the alternatives, and some changes will be made to them later on in the thesis.

As the figure indicates even in its rough simplicity, all of the alternatives that do not in-clude a distribution center east of the Ural Mountains inin-clude “long arrows” meaning lengthy transportation to distributors there. This is currently at its height as all goods are imported through Saint Petersburg – one of the westernmost corners of Russia.

The principle load-distance differences between the alternatives are visualized in figure 4.7., which shows the relative total ton-kilometers of each alternative based on four dif-ferent sets of data. As all data is gathered from external sources, and the exact locations for the Moscow and Novosibirsk DCs in the calculations are based on the unweighted centers of gravity for distributors that Company X lists on its external website. The val-ue of the graph is in showing that although the different alternatives (each wider col-umn) show differing results, the results are still similar regardless of the data source (narrow columns).

Figure 4.7. Indexed comparisons of the "total TKMs" in Russia of the alternatives

The graph shows inbound and outbound transportation. The figure is drawn from the point of view of distribution centers showing only traffic within Russia. Thus, in the current situation, no inbound transportation is added since the materials are coming from outside of Russia. Equally, the base case includes no inbound transportation, be-cause the materials are either made on location (near the distribution center at the Ta-tarstan plant) or imported. What is relevant is who the “owner” of these transportations is. Inbound transportation (in blue) is paid for and organized by Company X, but out-bound transportation (in red) is defined by the future business model of Company X. If the products are sold on an ex works basis, the amount of outbound transportation is ir-relevant to Company X when costs are considered, and minimizing it is mainly a service element to its customers. However, if the products are delivered to customers, minimiz-ing outbound transportation is also financially in the best interest of Company X.

Each wider column in the figure contains four narrower columns representing a set of data. From left to right, these sets of data are: Company X’s externally listed distributors in Russia, Company X’s externally listed distributors in Russia and other CIS countries, Russian population and Russian gross regional product (GRP). As GRP and population give weighted scores based on the number of federal subjects (which is, of course dif-ferent from Company X’s distributors), all sets of data have been indexed based on the current situation to make them comparable. Thus the figure is not an indicator of abso-lute ton-kilometers; it merely shows approximations of the relative portions of each al-ternative.

The calculations in the previous figure are not based on final locations of each alterna-tive, which will be determined in chapter 5; the locations for the distribution centers near Moscow and Novosibirsk based on the centers of gravity for current Company X distributors in Russia. Thus they result in some non-optimal routing. Yekaterinburg, ly-ing barely east of the Urals, for example, is allocated to be served by the Novosibirsk cluster distribution center in the last two alternatives even though it is much closer to Tatarstan. If Yekaterinburg and other surrounding distributors are allocated to the

“western market”, the locations of the centers of gravity move, and iteration is needed.

These are matters that will be developed more when the alternatives are discussed indi-vidually in chapter 5.

The figure shows that all alternatives except alternative 2 have lower total ton-kilometers than the current situation. This difference is even more significant when the transportation between Europe and Yanino is considered, as 80 % of the volume will be produced in-country, meaning an 80 % drop in transportation between Europe and Ya-nino.

The difference between total ton-kilometers and outbound ton-kilometers is also sub-stantial between the alternatives, as the outbound ton-kilometers are what affect lead

times in a system where products are delivered to customers as oppose to an ex works arrangement. Thus alternative 2 may have a significantly higher portion of total ton-kilometers, but its outbound transportation is much smaller than the base case and alter-native 1 – and especially lower than the current situation. Again, this is a matter of pri-oritizing, and it is clear that shorter lead times can be “bought” with higher transporta-tion costs and investments in more distributransporta-tion centers. The mixing of the base case and alternative 2 combines the main benefits of the two – meaning low total ton-kilometers and low outbound kilometers – but this variation requires a total of three distribution centers, which means more investments and complexity in the distribution network.

The results in figure 4.7. showed results based on demographic and unweighted external Company X data. When actual sales numbers are added, the results are yet again mark-edly different as a result of Company X’s largest distributors being Moscow-based. The results are shown in figure 4.8., where calculations based on actual sales numbers are added in darker hues.

Figure 4.8. Indexed comparisons of the "total TKMs" in Russia of the alternatives in-cluding actual sales numbers in darker hues.

The effect of the concentration of distributors in Moscow is evident in the last narrow columns which are calculated based on real sales data. This is particularly clear in the last alternative, which was created as an attempt to combine the benefits of alternative 2 and the base case. In the light of actual sales data, this alternative, which includes the most distribution centers and complexity, performs poorly because it does not include a

distribution center in Moscow. Instead of combining the benefits, it combines the disad-vantages of the other alternatives. The same applies to the base case and alternative 1, but alternative 2 shows similar results to the four other sets of data – because it includes a distribution center in Moscow. Since the Moscow distributors have such an immense effect on the outcome of the calculations, moving the single distribution center in alter-native 1 from Tatarstan to Moscow is also something to be considered, if the importance of outbound transportation is valued either as a service element to customers or as a means to have lower delivery times and shorter distances to customers if Company X starts to deliver the products to customers. This will be discussed in the results chapter.

The title of this subchapter asked: Why the different alternatives? The obvious answer would be to conclude that these were the alternatives proposed by Company X, but that would be only half the truth. Company X only defined the principles of these scenarios, but their locations (in relation to the Urals, for example) and the variation of alternative 2 are something that has been developed already during the process of this thesis, alt-hough the variation of alternative 2 will be excluded from the alternatives in chapter 5.

At this point of development, figure 4.8. showed the clearest justification for these al-ternatives: they differ from each other. Each alternative has its advantages and disad-vantages, and the balancing between the different trade-offs – lead times versus total costs, for example – is what makes the further inspection meaningful. The alternatives will be discussed in more detail in chapter 5, whereas the next subchapters describe the methodology of this thesis.