Full Text 01

2010:013 CIV
MASTER'S THESIS
Evaluating distribution centers

in a global supply chain
A case study at Cargotec Sweden, MacGREGOR Cranes
Eric Åström
Magnus Öhgren
Luleå University of Technology
MSc Programmes in Engineering

Industrial Business Administration
Department of Business Administration and Social Sciences
Division of Industrial Logistics
2010:013 CIV - ISSN: 1402-1617 - ISRN: LTU-EX--10/013--SE

"Not everything that counts can be counted and not everything that can be counted counts."
Albert Einstein
Acknowledgement
We would like to take this opportunity to thank our mentors, Mikael Hägglund and Mats
Saltehag at Cargotec Sweden, MacGREGOR Cranes for their support and guidance. We also
would like to express gratitude to the whole production department for the great
atmosphere and the many laughs. Peter Wallström at Luleå University of Technology has
been a great support for us and we thank you for your guidance and valuable thoughts.
Finally we would like to thank each other for writing this thesis, without our profound
knowledge this would not have been possible.
Örnsköldsvik, December, 2009.
______________________________ ______________________________
Eric Åström Magnus Öhgren
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Abstract
This thesis has been carried out at Cargotec Sweden, MacGregor Cranes who manufactures
marine cargo cranes at production partners in China and South Korea. MacGregor Cranes
source components to their production partners from both European and Asian suppliers.
MacGregor Cranes has implemented a distribution center in Germany. Today when the
production has increased five folded, the amount of Asian suppliers has increased and many
European suppliers have chosen to shift some production to China or South Korea. This has
led MacGregor Cranes to reconsider if a distribution center in Asia could decrease the costs
and increase the Supply Chain efficiency. Therefore the purpose of this thesis is to evaluate
MacGregor Cranes current Supply Chain by mapping it and measuring performance metrics.
A Supply Chain with focus on a distribution center in Asia will be evaluated and then
compared against the existing Supply Chain.
Literature was collected about Supply Chain Management, Supply Chain strategies, ways to
evaluate a Supply Chain and a distribution centers role in a Supply Chain. This literature
search resulted in a theoretical frame of references which thereafter were used as guidance
when collecting the empirical data and when performing the analysis. MacGregor Cranes
Supply Chain was mapped and quantitative data about the Supply Chain was collected from
the enterprise resource planning system SAP R/3. Interviews were conducted in order to
gather information about MacGregor Cranes Supply Chain strategy and how they graded the
importance of different attributes. Primary and secondary information were collected about
how other Nordic companies had managed their distribution center in China.
The analysis of the empirical data revealed that the main advantages with the current
distribution center is that sea freight can be utilized for a large share of the components
sourced in Europe and that MacGregor Cranes has a good Supply Chain flexibility since they
are able to hold and stock components from Europe that not is needed in the production.
The disadvantage is that MacGregor Cranes is relying on their Asian suppliers to store
components and some suppliers have limited storage capacities in terms of space and a lack
of systematic methods to monitor the stock levels. The evaluation of the current Supply
Chain let the authors to recommend alternatives for how a Supply Chain with a distribution
center in China could be set up. This resulted in the recommendations that MacGregor
Cranes in the short term, 1-2 year, should continue to work towards increasing the amount
of suppliers in Asia before implementing a distribution center in China. The authors
recommend MacGregor Cranes to develop the relationship between the suppliers located in
Asia with the main objective to use suppliers as stock keeping units. A long term
recommendation, 2 years or more, is to set up a distribution center in China to supply
components for all production partners. A Vendor Managed Inventory, VMI, concept for
selected components should be implemented at the distribution center, which would give
MacGregor Cranes an opportunity to handle the duality of cost minimization and
maintaining a high service level.
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Sammanfattning
Detta examensarbete har utförts på Cargotec Sweden, MacGregor Cranes, ett företag som
tillverkar marina lasthanteringskranar i främst Kina samt Sydkorea. MacGregor Cranes köper
komponenter till deras produktion partners från både europeiska samt asiatiska
leverantörer. MacGregor Cranes har ett nuvarande distributionscenter lokaliserat i Tyskland.
På några år har produktionsvolymen ökat fem gånger, antalet leverantörer i Asien har ökat
samt flertalet europeiska leverantörer har valt att förflytta sig österut till Kina och Sydkorea.
Detta har fått MacGregor Cranes att reflektera över huruvida ett distributionscenter i Asien
skulle sänka kostnader samt öka effektiviteten av försörjningskedjan. Syftet med detta
examensarbete är därför att utvärdera MacGregor Cranes nuvarande försörjningskedja med
hjälp av en kartläggning samt att mäta prestationsattribut. En försörjningskedja med fokus
på ett distributionscenter i Asien kommer därefter att utvärderas och jämföras med
nuvarande försörjningskedja.
Litteratur kring ämnen som “Supply Chain Management”, “Supply Chain strategies”,
“Evaluation of Supply Chain”, “Distributions centers in Supply Chain” insamlades.
Litteraturinsamling resulterade i en teoretisk referensram, vilken därefter låg till grund för
datainsamlingen. MacGregor Cranes försörjningskedja kartlagdes och kvantitativ historisk
data som förklarade försörjningskedjan insamladrd från materialplaneringssystemet, SAP
R/3. Intervjuer utfördes med syftet att fullständigt förstår strategin i MacGregor Cranes
försörjningskedja samt hur de väger olika attribut i försörjningskedjan. Primär samt sekundär
information insamlades om hur andra nordiska företag har upprättat sina distributionscenter
i Kina.
Analysen av den insamlade data visade att de främsta fördelarna med nuvarande
distributionscenter är att MGC kan utnyttja sjöfrakt i hög grad för de komponenter som köps
från Europa samt att det finns en möjlighet att hålla och lagra komponenter som inte är
behövda i produktionen. Nackdelarna är leverantörerna i Asien är tvungna att lagra
komponenter som inte behövs i produktion vilket blir problematiskt då vissa leverantörer
har begränsad lageryta samt bristfälliga metoder för att övervaka lagernivåerna. Denna
utvärdering av nuvarande försörjningskedja gav författarna en möjlighet att rekommendera
några olika strategiska alternativ för ett distributionscenter i Kina. Fördelar samt nackdelar
med ett distributionscenter i Kina analyserades, grundat på primära samt sekundära källor.
Resultaten sammanfattades i en kort- samt långsiktig rekommendation. En kortsiktig
rekommendation, 1 – 2 år, är att arbeta med att öka graden av asiatiska leverantörer samt
att förbättra processen med lagerhållning hos de kinesiska leverantörerna. En långsiktig
rekommendation, 2 år eller mer, är att utveckla ett distributionscenter i Kina för att
distribuera komponenter till produktionen. Konceptet leverantörsstyrt lager, VMI,
rekommenderas för utvalda komponenter i distributionscentret, vilket kan ge MacGregor
Cranes möjligheten att hantera dualismen mellan låga kostnader och en hög servicegrad.
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Table of Contents
1 Introduction ..................................................................................................................................... 9
1.1 Problem definition................................................................................................................. 10
1.2 Purpose.................................................................................................................................. 11
1.3 Delimitations ......................................................................................................................... 12
1.4 Abbreviations of terms .......................................................................................................... 12
2 Company description..................................................................................................................... 14
2.1 Owner structure .................................................................................................................... 14
2.2 MGC history ........................................................................................................................... 14
2.3 MGC products........................................................................................................................ 14
2.3.1 GLB crane....................................................................................................................... 15
2.3.2 LC crane ......................................................................................................................... 15
2.3.3 GLH crane ...................................................................................................................... 15
2.4 MGC Production .................................................................................................................... 16
2.4.1 The partners .................................................................................................................. 16
2.4.2 The suppliers ................................................................................................................. 16
3 Theoretical frame of references .................................................................................................... 19
3.1 Dispositional of theoretical framework................................................................................. 19
3.1.1 Step 1 ............................................................................................................................. 19
3.1.2 Step 2 ............................................................................................................................. 20
3.1.3 Step 3 ............................................................................................................................. 20
3.2 Concepts of Supply Chain Management ............................................................................... 20
3.2.1 Supply Chain strategies ................................................................................................. 21
3.2.2 Agile Supply Chain ......................................................................................................... 22
3.2.3 Lean Supply Chain.......................................................................................................... 22
3.2.4 Efficient Supply Chain .................................................................................................... 23
3.2.5 Hybrid Supply Chain ...................................................................................................... 23
3.3 Order winners/Order qualifiers in a SC ................................................................................. 23
3.3.1 Order winners ................................................................................................................ 24
3.3.2 Order qualifiers.............................................................................................................. 24
3.4 Distribution center strategies................................................................................................ 24
3.4.1 Service Level Segmentation........................................................................................... 25
3.4.2 Postponement ............................................................................................................... 25
3.4.3 Cross Docking ................................................................................................................ 25
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3.4.4 Third-Party Logistics Provider........................................................................................ 26
3.5 Secondary information about distribution strategies in China ............................................. 26
3.5.1 Phases in outsourcing .................................................................................................... 26
3.5.2 Distribution strategies in China ..................................................................................... 28
3.6 Alternatives for distribution centers in China ....................................................................... 29
3.6.1 Free Trade Zone, FTZ ..................................................................................................... 30
3.6.2 Bonded Logistics Park, BLP ............................................................................................ 30
3.6.3 Differences between FTZ and BLP ................................................................................. 31
3.7 Supply Chain evaluation ........................................................................................................ 32
3.7.1 The SCOR model ............................................................................................................ 32
3.7.2 The SCOR processes ...................................................................................................... 33
3.7.3 Performance evaluation in SCOR .................................................................................. 34
3.7.4 Criticism about SCOR ..................................................................................................... 35
3.7.5 Alternative SC evaluation .............................................................................................. 36
3.8 Combination of SCOR and Chan & Qi’s model ...................................................................... 39
4 Methodology & Tools .................................................................................................................... 40
4.1 Introduction ........................................................................................................................... 40
4.2 Literature search ................................................................................................................... 41
4.3 Evaluation of the present situation ....................................................................................... 42
4.4 Evaluation of distribution center in China............................................................................. 44
4.5 Methodical problems ............................................................................................................ 45
5 Present situation ........................................................................................................................... 46
5.1 Identifying the MGC’s SC strategy ......................................................................................... 46
5.2 Mapping the current SC ........................................................................................................ 47
5.3 Current distribution strategies for MGC ............................................................................... 48
5.3.1 Components from Logistic center Europe..................................................................... 49
5.3.2 Components from suppliers in China ............................................................................ 50
5.3.3 Components from sub suppliers to suppliers ............................................................... 50
5.3.4 Current import process for MGC ................................................................................... 50
5.4 Examples of other companies distribution strategies in China ............................................. 51
5.4.1 Primary information – Volvo Logistics ........................................................................... 52
5.5 Evaluating MGC’s current SC ................................................................................................. 53
5.5.1 Reliability ....................................................................................................................... 53
5.5.2 Responsiveness.............................................................................................................. 54
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5.5.3 Flexibility........................................................................................................................ 55
5.5.4 Costs .............................................................................................................................. 56
5.5.5 Assets............................................................................................................................. 58
6 Analysis of distribution center in China......................................................................................... 61
6.1 Analysis of the present situation ........................................................................................... 61
6.2 Alternatives for a redesigned SC with an LCA ....................................................................... 63
6.2.1 Alternative 1 LCE ........................................................................................................... 63
6.2.2 Alternative 2 LCE/LCA .................................................................................................... 64
6.2.3 Alternative 3 LCA ........................................................................................................... 65
6.3 Evaluation of the alternatives for a distribution center ........................................................ 66
6.3.1 Reliability ....................................................................................................................... 66
6.3.2 Responsiveness.............................................................................................................. 67
6.3.3 Flexibility........................................................................................................................ 67
6.3.4 Costs .............................................................................................................................. 68
6.3.5 Assets............................................................................................................................. 70
7 Conclusions and recommendations .............................................................................................. 71
7.1 Results ................................................................................................................................... 71
7.2 Recommendations for MGC .................................................................................................. 73
7.2.1 Short term ..................................................................................................................... 74
7.2.2 Long term ...................................................................................................................... 74
7.3 Discussion .............................................................................................................................. 75
7.4 Suggestions for further studies ............................................................................................. 77
Bibliography........................................................................................................................................... 78
8 Appendixes ..................................................................................................................................... III
8.1 Appendix A – Calculation of SC strategy ................................................................................ III
8.2 Appendix B – Metrics ............................................................................................................. III
List of figures
Figure 1 Focus of interest ...................................................................................................................... 12
Figure 2 Company structure (Cargotec, 2009) ...................................................................................... 14
Figure 6 A ship set ................................................................................................................................. 15
Figure 3 GLB crane................................................................................................................................. 15
Figure 4 LC crane ................................................................................................................................... 15
Figure 5 GLH crane ................................................................................................................................ 15
Figure 7 No. of cranes in production per partner 2009 ........................................................................ 16
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Figure 8 Percentage of MGC's suppliers................................................................................................ 17
Figure 9 Percentage of purchase order value per region ...................................................................... 17
Figure 10 Budgeted changes in purchase order value .......................................................................... 18
Figure 11 Theoretical framework ......................................................................................................... 19
Figure 12 SCM Network (Christopher, 2005) ........................................................................................ 20
Figure 13 Supply Chain strategies linked to PLC (Chibba, 2007) ........................................................... 22
Figure 14 Phases in outsourcing (Authors own interpretation) ............................................................ 27
Figure 15 The BLP process ..................................................................................................................... 31
Figure 16 The SCOR model categories (Supply Chain Counsil, 2008).................................................... 33
Figure 17 Chan & Qi's model ................................................................................................................. 37
Figure 18 Fuzzy performance grade set ................................................................................................ 38
Figure 19 Hierarcy of SC model ............................................................................................................. 39
Figure 20 Fuzzy numbers of reliability for evaluator 1 .......................................................................... 47
Figure 21 Strategic attributes and weights ........................................................................................... 47
Figure 22 Current SC.............................................................................................................................. 48
Figure 23 The SCOR processes .............................................................................................................. 49
Figure 24 MGC's custom process .......................................................................................................... 51
Figure 25 Late orders per region ........................................................................................................... 54
Figure 26 Critical line ............................................................................................................................. 55
Figure 27 Cost distribution .................................................................................................................... 56
Figure 28 Cost of goods sold, COGS ...................................................................................................... 57
Figure 29 Stock value in LCE .................................................................................................................. 59
Figure 30 Stock turnover ratio in LCE .................................................................................................... 59
Figure 31 VMI process at suppliers ....................................................................................................... 64
Figure 32 General process with LCA ...................................................................................................... 65
Figure 33 Direct warehouse costs ......................................................................................................... 69
Figure 34 Air freights impact on transportation costs .......................................................................... 70
Figure 35 Advantages and disadvantages with a LCA .......................................................................... 73
Figure 36 Late orders ............................................................................................................................. III
Figure 37 Component costs .................................................................................................................... III
Figure 38 Storage cost for LCE ................................................................................................................ III
Figure 39 Transportation costs............................................................................................................... III
Figure 40 Air freight cost ........................................................................................................................ III
Figure 41 C2C.......................................................................................................................................... III
List of tables
Table 1 Order winners and order qualifiers (Mason-Jones et al., 2000)............................................... 24
Table 2 Comparison between FTZ, BLP and EPZ ................................................................................... 31
Table 3 SCOR level I metrics .................................................................................................................. 34
Table 4 Evaluator 1 ................................................................................................................................ 46
Table 5 Attribute weights for evaluator 1 ............................................................................................. 46
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Chapter 1 Introduction
1 Introduction
The introduction is the beginning of this Master’s thesis, which intends to clarify the
underlying issues that have incited the authors to perform this study.
The race for increased efficiency and cost reduction has encouraged companies to outsource
activities such as production or sourcing to low-cost countries as China and South-Korea
(Fredriksson & Jonsson, 2009). One implication of this trend is that companies get involved
in a more extensive flow of components and information across the globe. To handle this
increasing complexity the concept of Supply Chain Management has emerged (Gunasekaran
et al, 2004). Supply Chain Management is defined by Copper et al. (1997) as:
“…The integration of all key business processes across the Supply Chain is what we are calling
Supply Chain Management.”
Supply Chain Management can promotes greater integration in terms of information,

financial parameters and material sharing for organizations with their suppliers and
customers which Fawcett (1995) argues minimize or eliminate functional and departmental
boundaries. One fundamental implication of embracing the Supply Chain concept is that
companies no longer are the units in the competitive battle, Supply Chains compete with
each other (Christopher, 1992). Supply Chain Management focus on delivering value to the
final customer which implies that logistics has to evolve from a cost-saving function to value
adding function since logistics services are fundamental in delivering value to customers
(Remko, 1998).
It has been shown a strong statistical correlation between companies’ financial success and
how well they have developed their Supply Chains (Avanzo et al. 2003). A range of benefits
has been recognized to Supply Chain Management, including cost reduction, increased
market share, and a better relationship with customers (Ferguson, 2000). According to
Lumsden (2006), Supply Chain Management can also enable companies to handle
environmental requirements by improving the Supply Chain with better planning, suitable
consolidation for material flow and new technology.
Evaluating an organization is vital for an effective decision process, however studies about
capturing the Supply Chain as a whole, have usually failed to detain the performance in a
simple manner (Chibba, 2007). The basic purpose of evaluating is to identify weak areas,
take corrective actions and improve continuously (ibid). Lambert et al (1998) argues that the
most prominent issue in Supply Chain Management is to choose the right metrics for
evaluating the entire Supply Chain. Traditional metrics such as ROI, profit and stock turnover
are argued to not be adequate enough to capture the whole Supply Chain (ibid).
A focal point in today’s concept of Supply Chain Management is the correlation between
acting agile towards market demands while in the meantime striving toward lower costs and
low inventory levels (Baker, 2004). Achieving this duality is affecting every step of the Supply
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Chain and mostly the distribution center (ibid). Questions have been raised on how well
companies and Supply Chains align their distribution centers with respect to stated
strategies (ibid). Distribution centers can be utilized for consolidating inbound material
where consolidation is the process of grouping several small shipments into one at a
designated location which can reduce total logistics cost (Tyan et al., 2003).
MacGregor Cranes a company within the Cargotec group which manufactures marine cargo
cranes has since 2004 made the decision to outsource the entire production to low cost
countries. Production has mainly been moved to joint venture partners located mainly in
China and South-Korea. The outsourcing has increased the complexity of the SC, due to a
greater integration of external partners, in terms of the components flow for MacGregor
Cranes and therefore created a need for better ways of managing the SC.
Today MacGregor Cranes is experiencing a volatile market where cancellations and changes
of orders are a part of the daily routine. The company has over the last five years gone
through a period of rapid incline, from a yearly production of 200 cranes to approximately
1000 cranes per year. This, on the other hand, has created issues for the company, such as
sourcing arduousness, meaning suppliers are having a hard time increasing their production
to satisfy the demand set by MacGregor Cranes. Future challenges for MacGregor Cranes are
to expand their operations in Asia and still be able to control the Supply Chain.
In this thesis the focus is on the individual company MacGregor Cranes and their part in the
Supply Chain. MacGregor Cranes’ Supply Chain is defined as the flow of components from
suppliers and sub-suppliers to production partners.
1.1 Problem definition

Characteristics of low-cost-country Supply Chains such as long geographic distances,
increased delivery times and decreased delivery precision may increase costs in terms of
expedited freight, extra inventory and managerial time spent on “fire-fighting” (Levy, 1995).
According to Fredriksson & Jonsson (2009), long distances and delivery times decreases the
Supply Chain flexibility, thus companies need to source more locally and increase their
inventories.
Pettersson (2008) has studied how 30 Swedish companies evaluate their Supply Chain, and
found that most companies have started with some measuring but concludes that there still
is a long way to completely evaluate the Supply Chain. One prerequisite for a successful
evaluation of the Supply Chain is that the required data can be collected. Harrison & New
(2002) has in a study found that half of the companies they contacted had limited
possibilities to measure metrics in an effort to evaluate the Supply Chain as a whole, and 19
percent could not measure at all due to lack of data. They also found that many companies
are reluctant to evaluate the Supply Chain since they perceive that it would require a lot of
manual calculations. Thus there is a need for a more automatic and systematic method to
analyze and evaluate a Supply Chain.
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Studies have shown that companies operating in China consider Supply Chain issues as a
major problem (Jiang, 2002). One of the biggest Supply Chain related problems is the
bureaucratic restrictions which hinders companies from importing goods in a
straightforward manner (ibid). Companies which have outsourced production to partners in
China needs to deal with difficult customs regulations to import goods without being levied
taxes (PwC, 2008). This prevents companies abilities to manage an effective Supply Chain,
thus there is a need for exploring alternative solutions which can enable a more
straightforward Supply Chain.
MacGregor Cranes decision to outsource the production to Asia has increased the Supply
Chain complexity since the materials are sourced from multiple locations, both from Europe
and Asia, with multiple destinations. To cope with this increased complexity, MacGregor
Cranes has implemented a distribution center in Germany. Suppliers located in Europe
deliver to this distribution center, after which batches of components are consolidated and
thereafter shipped by sea freight to the partners in China and South-Korea. Due to complex
customs rules and regulations, components must be refined to a finished product within a
year. This has prevented an effective and flexible Supply Chain for MacGregor Cranes.
The approach with a consolidation point in Hamburg was considered to be effective at the
time of implementation, in 2004. Today when the production has increased five folded, the
amount of Asian suppliers has increased and many European suppliers have chosen to shift
some production to China or South Korea. This has led MacGregor Cranes to reconsider if a
distribution center in China could decrease the costs and increase the Supply Chain
efficiency. MacGregor Cranes has also encountered difficulties to monitor the Supply Chain
due to the global nature of the Supply Chain. Thus there is a need of revealing some areas
for improvement and how these can be enhanced in line with the overall Supply Chain
strategy.
1.2 Purpose
The purpose of this master thesis is to evaluate MacGregor Cranes current Supply Chain by
mapping it and measuring performance metrics. A Supply Chain with focus on a distribution
center in Asia will be evaluated and then compared against the existing Supply Chain in an
effort to analyze consequences of this strategic approach.
To fulfill the purpose this master thesis aims to answer the following questions:
 RQ 1: What are the advantages and disadvantages with the current Supply Chain for
MacGregor Cranes?
 RQ 2: What are the advantages and disadvantages with a distribution center in China
compared to the current distribution center strategy?
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1.3 Delimitations
The work conducted in this master thesis is focused at the Supply Chain of MacGregor
Cranes and the flow of components, therefore the flow of information, communication and
financial parameters will not be studied, which all are subject of the concept of Supply Chain
management (Copper et al. 1997). However, specific material information that affects the
Supply Chain performance will be considered in the thesis. A further delimitation is not to
focus on the entire Supply Chain of MacGregor Cranes, as the figure 1 below illustrates, only
the suppliers and the production partners will be of interest. Sub suppliers, shipyards and
end-customers will not be included. Since MacGregor Cranes 20 biggest suppliers are
considered to give a representative picture of the company’s upstream flow of components,
only these will be analyzed. The relationship with the suppliers in terms of information
sharing and collaboration will not be taken into consideration.
Figure 1 Focus of interest
The analysis has taken all projects from 2007 to 2009 into consideration for every production
partner in China and South-Korea, leaving all production in Europe unanalyzed.. Finally, the
purpose of this master thesis is not to find or estimate the feasibility of new suppliers in
China or South-Korea. The future of the Supply Chain, hereafter called SC, will be based
solely on information given from MacGregor Cranes, thus there is not in this master thesis
subject to reveal this.
1.4 Abbreviations of terms
3PL Third-party logistics

ASC Agile Supply Chain
BLP Bonded logistics park
ESC Efficient Supply Chain
FTZ Free trade zone
HSC Hybrid Supply Chain
LM Lean Supply Chain
LSC Logistics management
MGC MacGregor Cranes
PLC Product life cycle
RQ Research question
SC Supply Chain
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SCC The Supply Chain Council

SCM Supply Chain management
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Chapter 2 Company description
2 Company description
This chapter focuses on the company in which this Master’s thesis has been carried out at.
History and product information are described.
2.1 Owner structure

MacGregor Cranes is a business unit within the group called MacGregor Group. MacGregor
Group forms together with Hiab and Kalmar the company Cargotec. The company structure
of Cargotec is presented below.
Figure 2 Company structure (Cargotec, 2009)
Cargotec is a Finnish company who demerged when Kone Corporation was split into
Cargotec and “New Kone” in 2005. The mission for Cargotec is cargo handling both by sea,
MacGregor, and by land, Kalmar and Hiab.
2.2 MGC history

MacGregor Cranes, hereafter called MGC, was at first a division within the group Hägglunds
& Söner. Hägglunds & Söner was formed in 1899 and was at its peak days a big company in
Örnsköldsvik, Sweden. In the middle of the 1950 three major divisions emerged, Vehicle,
Cranes and Drives. In 1972 Hägglunds & Söner was acquisitioned by ASEA, who in the late
1980s became ABB after it joined forces with Brown Boveri. When ABB was formed, the
Crane division was sold out from the Hägglunds & Sönder group and is today owned by
Cargotec.
In the middle of the 1990, MGC encountered a market dropdown in Europe and identified a
rising market in Asia which contributed to the decision to outsource the entire production to
low cost countries, mainly China, South Korea and Poland. Today MGC have ten production
partners who together will produce approximately 800 cranes in 2009. This figure will rise to
about 900 cranes in the year 2010. At 2008 MGC had a market share of approximately 32 %
of the marine cargo crane market in the world, while the second biggest IHI has a market
share of 28%. The market consists of around 10 big suppliers.
2.3 MGC products

MGC offers a big variety of different cargo cranes to fit the needs set by the marine market.
The cranes are designed to fit vessels like bulk carriers, container carriers and feeders,
14
general cargo and multipurpose as well as transloading for mentioning a few. Below are
some of the cranes from the product portfolio listed.
2.3.1 GLB crane

The GLB crane is designed for bulk carriers. The crane itself is controlled via
an electro-hydraulic system which is build-in in the crane. The lifting
capacity varies from 25 to 36 tons for the standard models with a jib radius
from 18 to 30 meters. Figure 3 GLB
crane
2.3.2 LC crane
The LC crane is designed to fit where dimensions are limited on the
crane, but are still intended to use for various uses, like container or bulk
usage. As the GL crane it’s electro-hydraulic controlled with a build-in
system. The LC cranes lifting capacity is from 36 to 45 tons with an
outreach of 20 to 34 meters.
2.3.3 GLH crane Figure 4 LC crane

The biggest cranes in the product portfolio, the GLH crane or Heavy Lift
as it’s called. It is designed as the GL with an electro-hydraulic system
with a lifting capacity of 120 to 350 tons on an outreach of 20 to 36
meters.
Figure 5 GLH crane
The cranes are of relative simple design, which has lead to a modularize structure for some
included parts, for example pump unit, winch and cabin. A modularization has made the
assembly of the cranes easier for the production partners, but also for planning and
preparation in the Supply Chain, thus fewer component variation exists.
When a crane is sold it is often sold as a ship set, as MGC describes, a ship set is a setup of
cranes on a vessel. A typical setup would be four cranes on one vessel. The customers often
ask for a complete setup of cranes on a vessel to meet their requirements. See Figure 6
below which illustrates 3 cranes on one vessel.
Figure 6 A ship set
15
2.4 MGC Production

The production of MGC has been outsourced to low-cost countries entirely after 2004. The
production facilities are located at Poland, Croatia, USA, India, China and Korea. In 2009 the
majority of the production was focused to the partners located in China and Korea, as MGC
has tried to locate the production as close to the customers as possible. However some
cranes are still being manufactured in Poland and Croatia in 2009 to satisfy the European
market. In the last year another production partner has been established, which is located in
India. This production partner is at the moment not focusing on complete assemblies of
cranes, only on jib arms and foundations. Since a large majority of the cranes are produced
by partners in China and Korea, this thesis only focus on these partners.
A production partner for MGC is a supplier who manufactures the entire crane. While the
partner is responsible for sourcing the steel for the crane, MGC is accountable for sourcing
the components and design. The partners are manufacturing the cranes in accordance to the
directions stated by MGC. Production plans, quality and instructions are at all time managed
and controlled by MGC’s head office in Sweden.
2.4.1 The partners

MGC has nine active production partners, mainly in China and Korea with exception for
Poland and Croatia. Figure 7 illustrate the amount of cranes that have been and are planned
to be produced per production partner in 2009. Approximately 700-800 cranes will be
produced and 99% of those cranes have been and will be manufactured in Asia. LMC, which
is located in Nanjing, China, is the single biggest production partner to MGC and has been
manufacturing cranes for MGC since 1980.
250
200
150
100
50
0
LMC RHM DAL DON HOC SPP MID REM
Figure 7 No. of cranes in production per partner 2009
2.4.2 The suppliers

MGC are using around 100 – 110 suppliers to satisfy their need of components. Most of the
suppliers are located in Europe and Asia. The 20 biggest suppliers are responsible for
approximately 85% of the purchased amount, which is the reason why only the 20 biggest
have been included in the analysis. Supplier, S1, has been standing for 19% of the total
purchase order value and is the single largest supplier for MGC. MCG are relying on a
16
selected few suppliers that supplies major components in the production. The collaboration
with these key suppliers is extensive and is characterized by a mutual relationship, which for
MGC’s part means that these suppliers are crucial for the component supply to the
production.
20,00%
18,00%
16,00%
14,00%
12,00%
10,00%
8,00%
6,00%
4,00%
2,00%
0,00%
S 18
S 10
S 11
S 12
S 13
S 14
S 15
S 16
S 17
S 19
S 20
S1
S2
S3
S4
S5
S6
S7
S8
S9
Other
Figure 8 Percentage of MGC's suppliers
MGC’s current suppliers are shared over three major geographically areas, Sweden, Europe
and Asia. Of the 20 biggest suppliers, are six (6) located in Sweden, eight (8) in remaining
Europe and six (6) in Asia. However, the contribution is not equally distributed over the
three major areas, which is seen in Figure 9 where the purchased order values are
represented per geographically area.
36%
40%
35% 27%
23%
30%
25%
20%
15%
10%
5%
0%
Sweden Europé Asia
Figure 9 Percentage of purchase order value per region
Here, one can see that the suppliers located in Asia are representing around 36 % of the
value purchased, while Sweden and Europe are representing 23% and 27% of the purchase
17
order value. The reason why so few suppliers (six) in Asia, are representing 43% of the total
purchase order value is because they are big module suppliers of winches, slewing bearings,
steel parts, wire ropes and cabins. The suppliers in Sweden and Europe are on the other
hand primarily characterized by the high technical complexity and the involvement of
electronically equipment.
MGC is striving towards increasing the amount of suppliers in China and for 2010 have MGC
budgeted that they will increase the purchase order value to 44% from Asia, reviling Figure
10. This is an increase by nearly 10 % but the majority of the components are still sourced
from Europe.
44%
45,00% 36%
40,00%
35,00%
30,00%
23% 24% 27% 27%
25,00%
20,00%
15,00%
10,00%
5,00%
0,00%
Sweden Europé Asia
Figure 10 Budgeted changes in purchase order value
18
Chapter 3 Theoretical frame of references
3 Theoretical frame of references

This chapter introduces the theoretical framework for which the rest of this study is based
upon.Literature about Supply Chain Managemen), Supply Chain strategies, ways to evaluate
a Supply CHain and distribution centers role in a Supply Chain are prented.
3.1 Dispositional of theoretical framework

Below illustrates the main theoretical framework which is the foundation that has been used
for conducting this master thesis.
Every step in the theoretical framework is connected to the area of Supply Chain
Management, hereafter referred to as SCM, thus the basis of the theoretical framework
depends on SCM. The theories of order winners / order qualifier and distribution center
strategy are described in an effort to pinpoint how certain areas can be improved in the
Supply Chain with respect to the evaluation.
Figure 11 Theoretical framework
3.1.1 Step 1
The first step is to describe theories about the concept of SCM and SC strategies. Different
SC strategies are explained and how they are connected to the product life cycle, PLC.
19
3.1.2 Step 2
In the second step two models are explained, SCOR and Chan and Qi’s model, where both
models, in their depth, can be used for measuring the performance of a SC, thus in this
master’s thesis only the basis of the models are used.
3.1.3 Step 3
The third and final step in the evaluation of the SC, is a combination of the two frameworks,
SCOR and Chan and Qi, with portions from both models tries to capture an evaluation of a SC
3.2 Concepts of Supply Chain Management

SCM is a concept that is an extension of logistics management, LM. LM is according Cooper
et al (1997) the process for planning and implementation of materials that passes through
every single value-adding step in the chain to the customer. SCM includes LM but also goes
beyond that concept and tries to integrate business operations with each other. Several
authors define SCM as the flow from supplier to final customer and include all members of
the chain from the beginning to the end (Chibba, 2007). The fundamental basis for SCM is
the management of relationships to achieve a greater cost-effective outcome for everyone
concerned (Christopher, 2005). The concept of SCM consists of mainly three strong elements
according to Chibba (2007): physical material flow, information flow and financial flow, with
member positioned upstream but also downstream in the value chain. One can refer to a SC
as a dynamic flow, in which decision makers form strategies to manage these flows
accordingly (ibid). SCM should be seen as a network where suppliers and customers interact
on the same premises, not as a two-way chain (Christopher, 2005). In SCM the concept is to
overlook one firm’s achievements to the SC ability to meet the expectations of the
customer’s (ibid).
Figure 12 SCM Network (Christopher, 2005)
It is important to understand that there are different types of channel relationships. There
can be a direct SC where there are only three parts that interact, supplier, manufacturer and
customer (Mentzer et al, 2001). If one look at it in a deeper perspective the network can
reveal that it embraces both the supplier’s supplier and the customer’s customer (ibid). But
as the companies evolve so do the SC, the complexity of the network for many actors on the
global market often stretches from the ultimate supplier to the ultimate customer, claims
Mentzer et al (2001). Christopher (2005) explains that SCM can provide a large amount of
ways to decrease cost and increase efficiency and productivity which will contribute to a
20
reduced unit cost, which enhances the customer’s value and satisfaction as well as for the
member of the SC which ultimately leads to competitive advantages.
Stank et al. (2005) argues that great benefits can be drained when implementing the SCM
philosophy but that one needs to be aware of the sacrifices needed. By implementing a SCM
philosophy, companies must realize that this is something that is not done easily (ibid).
Mentzer et al (2001) also claim that all typical business functions should be included,
without it SCM cannot meet its full potential for the members of the SC. Even if the cross-
functional flows are established, questions arise of who should be managing these flows in a
best possible way (ibid).
The problems associated with SCM have been argued to be that it can create sub-
optimizations in the SC if every part tries to maximize their own interests (Handfield &
Nichols, 2002). A fundamental part of the SCM concept is information sharing throughout
the SC. However can this information sharing be hindered by a lack of trust between the
Supply Chain members and a fear that the information will be revealed to competitors (ibid).
Handfield & Nichols (2002) argue that the greatest challenge with SCM is to establish trust
between the parties in the SC. Legal contractual agreements can be made but this does not ,
per definition, lead to an established trust between the parties.
3.2.1 Supply Chain strategies

It may be difficult to know which strategy to use in a Supply Chain but Chibba (2007) explains
that the use of product life cycle theory, PLC, can help managers identify which strategies to
be used during different phases in the product cycle. Product life cycle summarizes all steps
from product design and development phases to the decision to remove it from the market.
As Figure 13 implies, the product goes through an introduction, growth, maturity and a
declination phase. The development phase in this model is not pointed out. Executive
leaders need to be aware that all of these phases need different strategies related to
marketing, distribution and competition, to make the most profit of the product. However
one also need to be aware that the product is mortal and the PLC could get an abrupt ending
(Grantham, 1997). However Grantham (1997) claims that the PLC, with right strategies and
effort, can face a growth phase after the maturity, which means that this model is not fixed
for all products and their life cycle, but gives a good understanding of which managers can
rely their decisions on.
21
Figure 13 Supply Chain strategies linked to PLC (Chibba, 2007)
Above, Figure 13, describes how different types of products, i.e. innovative, hybrid or
functional can be classified into different phases of the PLC. Chibba (2007) explains that the
PLC describes in return which type of Supply Chain that should be preferred, agile, hybrid,
lean or efficient. The number of different Supply Chain is narrowed down to four due to the
reason that different Supply Chains have similar characteristics of one another (ibid).
3.2.2 Agile Supply Chain

Agile Supply Chain, ASC, is the integration between several companies within a SC and how
well it reacts to rapid changes in the environment. The key to enable an ASC is the dynamics
of the relationship and structure, the event-driven and event-based management, and the
high visibility of information from end-to-end (Baramichai et a., 2007). Agility is often a
synonym with flexibility and the ability to adapt in the concept of SC (Li et al., 2008).
“Agility is having the faculty of quick motion; nimble, active, ready.” (Oxford English
Dictionary, 2009)
Flexibility is how well a SC adjusts to the needs and demands of the customer. Li et al. (2008)
continues and describes the ability to adapt as how well a SC can cope with a shift in
demand. Satisfaction is also a quality possessed by an ASC, where satisfaction is the ability of
the SC to react quickly on the unique demands (ibid). To simplify, the characteristics of an
ASC are: Flexibility, Ability to adapt, Satisfaction.
3.2.3 Lean Supply Chain

Lean is the production philosophy developed by Toyota between 1940 and 1970. At the
beginning Lean was only used by the automotive industry but soon spread to other
industries. The success factors behind Lean were to overlook short term goals and focus on
the entire process instead of single processes (Bellgran, 2005). One of the biggest problems
with the lean philosophy is the low grade of flexibility it gives. According to Toyota, the low
22
grade of flexibility is the “basis to all bad things” (Dennis, 2002). The main focus behind Lean
is to reduce waste (Segerstedt, 2009).
“Lean is characterized by scarcity.” (Oxford English Dictionary, 2009)
Waste can be identified in all of the processes within a SC, from production to R&D (ibid).
The main cause to waste is the unused creativity of employees, over processing, high levels
of stock inventory, defects, and the biggest one – overproduction (Liker,2004). According to
Liker (2004) the view on waste has changed over the last years when linking lean with Supply
Chain Management. The cooperation with suppliers has broadened the Lean philosophy to a
Supply Chain perspective where the exchange of information between suppliers is crucial
(ibid). The relationships with suppliers are viewed as long lasting in comparison to what it
has been viewed as. The development is inhibited if the manufacturer is competing with the
supplier and only values lower cost per unit (Womack, 1990). Womack argues that doing so,
the responsibility of waste reduction, which is the focus of Lean, is controlled by several
actors which don’t have the knowledge about the entire process.
3.2.4 Efficient Supply Chain

An Efficient Supply Chain, ESC, often deals with more functional products, such as groceries
for example. These products often tend to be sold in large volumes and are easy to predict
the demand of. The typical manufacturer rarely consider the product innovation due to the
reason that the product often can be placed in the mature phase of PLC, instead they
emphasize their efforts on the operations. (Chibba, 2007)
3.2.5 Hybrid Supply Chain

A Hybrid Supply Chain, HSC, aims to use the benefits from both Lean- and Agile philosophy,
by minimizing the production cost at the same time as keeping the grade of service at a high
level (Mason-Jones, 2000). The ultimate goal is to have a high degree of customer
satisfaction (ibid).
In a HSC there are two forces that contradict each other, keeping the cost at a low range and
at the same time achieving a high degree of service (Mason-Jones, 2000). Companies who
tries to have a high degree of service as the same time with keeping low cost has used what
Krishnamurthy (2007) describes as decoupling points in the SC. These decoupling points
mark the transition in which the SC goes from example lean to agile (ibid). The “Lean-stage”
is often symbolized by products with stabile demand and low variation (Mason-Jones, 2000).
The “Agile-stage” is on the other hand controlled by the demand by customers and often
with great variation (ibid).
3.3 Order winners/Order qualifiers in a SC

The choice of SC strategy can be helped with the product life cycle theory but companies
should also pay attention to the specific product qualities the customers are experiencing
when deciding to buy or reject the product (Harrison and Van Hoek, 2008). Different
products or services may be perceived different by the customers relative to the objectives
23
impact upon them (ibid). To help clear this distinction the concept of order winners and
order qualifiers has been introduced.
3.3.1 Order winners

The factors that directly help the product to win an order on the market are called order
winners. The customers often relate to these factors as key factors for purchasing the
product. Harrison and Van Hoek (2008) explain that if a firm succeeds with raising the
performance on these factors they will increase the likelihood of getting more orders. Thus a
product and a firm would not be able to compete only with low-costs if the order winners
are other factors like flexibility and customization (ibid).
3.3.2 Order qualifiers

Order qualifiers are factors that are considered as “must” factors, which enable a product to
enter a marketplace. These factors are the basic requirements set by the market and must
be fulfilled by the product or the firm. Factors could be quality certification like ISO 9000.
One need to be aware that order qualifiers only enables a firm to enter a marketplace and
not automatically helps the firm to sell the product or service. (Harrison and Van Hoek,
2008)
Harrison and Van Hoek (2008) emphasize the importance of knowing that order winners and
order qualifiers are specific to the individual marketplace. Mason et al. (2000) uses the
concept of order winners and order qualifiers combined with SC strategies. If cost primary is
the order winner is generally a Lean SC most appropriate, but if the service level is the order
winner should an Agile SC be chosen since stockout and obsolescence would result in a
direct loss of customers (ibid).
Table 1 Order winners and order qualifiers (Mason-Jones et al., 2000)

Order qualifiers Order winners
Agile Supply Quality Service Level
Cost
Lead Time
Lean Supply Quality Cost

Lead Time
Service Level
A further notation is that these factors can change over time. Thus during the Product life
cycle, PLC, a product or service can shift order winners and order qualifiers. Often the factors
which are order winners in early stages of the PLC are order qualifiers once the product is in
the maturity phase of the PLC (Harrison and Van Hoek, 2008). Harrison and Van Hoek (2008)
emphasizes that the challenge for the Supply Chain is to understand these changes in the
market and adapt capabilities accordingly to meet the demands set by the market.
3.4 Distribution center strategies

The role of a distribution center in a SC has been argued to be absent by a firm theoretical
framework, where it is often not consider a part of the SC strategy (Baker, 2004). However,
24
the concept of distribution centers differs by using different SC, with different strategies.
Baker (2004) discuss the two concepts, agile and lean, thus on their role that the distribution
center is viewed upon. A general consensus about distribution center is that the level of
inventory should be minimized in the SC (ibid).
Different SC strategies affect the distribution center in one way or another. An agile Supply
Chain, ASC, often holds inventory at few centers, if at all. Inventory in an ASC is described as
the last resort to balancing the supply to the market demands. A Lean Supply Chain, LSC, is
focusing on reducing waste in a SC, and lead time in a distribution center is viewed as waste
(ibid).
Even if some typical SC strategies (ex. LSC) regards distribution centers and warehousing as
non -value adding activities they may be needed anyway. Baker (2004) identifies a need for
inventory in modern Supply Chains. They may on the other hand vary in their nature and in
some cases act as a decoupling point between a lean manufacturing and an agile Supply
Chain. Also noted, global sourcing has led to a greater uncertainty and longer led-times,
which contributes to higher inventories to coup with this phenomenon (ibid).
According to Baker (2004), four different solutions or strategies for distribution centers are
offered from modern Supply Chain concept, which all have different advantages and suits
different conditions. Baker (2004) continues, the general idea that a “one-size-fits-all” Supply
Chain is not adequate and needs to be adjusted in according to the market and its order
winners and order qualifiers (Harrison and Van Hoek, 2008).
3.4.1 Service Level Segmentation

When a firm aligns its logistics operations with one or many customer segments Baker
(2004) calls it Service Level Segmentation. The basis of Service Level Segmentation is to
identify the key values for the customer and align it Supply Chain strategies in accordance
(ibid). Typical solutions could be vendor managed inventories (VMI), which is a warehouse
owned and controlled by the supplier located at the customer (Cetinkaya & Lee, 2000).
3.4.2 Postponement
Postponement is when inventory is held within a flexible position of the SC. This flexibility
leads to inventory held back as work in progress awaiting the final instructions by the
customer. By postponing the finalization of the product the SC gains the advantage of
responding to market demands without over producing. An important notation is that
postponement can take place at numerous locations/points in the SC but most common is
the final distribution center. (Baker, 2004)
3.4.3 Cross Docking

Cross docking is when inbound material is unloaded and then directly, with little or no
storage, loaded upon outbound transportation. This may be done by changing ex. types of
conveyance, or combining products from different locations with the same destination.
25
Cross docking could be applied for products arriving from distribution centers holding slow
moving products with products with high level of turnover. (Baker, 2004)
3.4.4 Third-Party Logistics Provider

A third party-logistics provider (3PL) is a firm that provides operations throughout the entire
SC. 3PL often specialize in ex. warehousing, transportation and operations. They are often
used when SC strives for a higher level of agility which impacts the organizational models.
The use of 3PL is well-matched with the concept of lean Supply Chain, LSC, which is focusing
of reducing SC costs with out-sourcing. (Baker, 2004)
3.5 Secondary information about distribution strategies in China

Secondary information regarding consequences Nordic enterprises have faced when moving
activities to China has been assessed in an effort to complement the primary information
gathered in chapter 5.3 Examples of other companies’ distribution strategies in China.
General information about the processes companies have gone through when outsourcing
to China has been studied as well as more specific information about how they have
designed their distribution strategies.
3.5.1 Phases in outsourcing

Beijer & Sundén (2009) has examined how Swedish companies are expanding their sourcing
efforts in China over time. The companies studied were Scania, Lindemaskiner, Volvo PV,
Autoliv, Finnveden Bulten, Ericsson, Habia Cable and Por Pac. The information gathered
shows several clear phases that these Swedish companies have gone through when taking
the step into China. The first phase that was identified was that the increased competition
and pressure to reduce costs encouraged companies to search for cheaper components or to
move production to China. However since the components manufactured in China were
perceived to have lack of quality, a major part of the components were sourced from
Europe, as in phase 2. This approach was however perceived to be complicated and
expensive so the studied companies have in one way or another strived to increase the
amount of sourced components Asia. To enable this, companies influenced their European
suppliers, who they trusted, to move some of their production to Asia as well. But since
these suppliers also imported a majority of their components from Europe were the prices
still kept high, which forced the companies to start purchasing products which were
completely produced by local Chinese suppliers hence enabling low cost in their entire SC,
Phase 4. In the last phase, Phase 5, suppliers has grown both in knowledge but in capacity
resulting in an ability to produce products which later will be exported to other markets
around the world.
26
Figure 14 Phases in outsourcing (Authors own interpretation)
Volvo PV is an automotive company who established production in Chaozhing, China, in

2006 to fill the demand on the identified growing market. Volvo PV was forced by the
regulations, set by the Chinese government, to purchase at least 40 % of the components
locally to avoid high custom tariffs. Initially Volvo PV only purchased the required amount
set by the government and imported all other components from Europe. The reason for this
process was that the procurement and screening of possible suppliers in China not had been
prioritized since setting up the production was the main focus. Volvo PV had experienced
problems in the quality of the components purchased in China, due to a high degree of
manual operations and problems with communicating quality requirements. When entering
China, Volvo PV had expected the price level to be more attractive than it later was proven
to be, since they experience that the local suppliers took advantage of the fact that Volvo PV
was forced to purchase a certain amount of components from China. However one major
difference between Volvo PV and MGC is that Volvo PV sell their products to the local
market while MGC export all of their products, hence MGC are not required to purchase a
minimum amount of components from China.
Autoliv, a supplier to the automotive industry, established some production in China 1998
when one of their most important customers, Volkswagen, demanded them to enter China.
Volkswagen had just as Volvo PV faced the Chinese regulations of a minimum of 40 % locally
sourced components, but when the Chinese suppliers could not fulfill the required quality
standards, they demanded their European suppliers to take the leap to the Chinese market.
Initially Autoliv imported all components from USA and Europe, thus only performing the
final assembly in China. Autoliv identified an opportunity to increase the efficiency and lower
the costs by shifting more of the procurement to local suppliers in China. But the
identification of potential Chinese suppliers was difficult since few suppliers meet the global
required standards. Autoliv then pursued the same strategy as Volkswagen and tried to
influence key suppliers in USA and Europe to move some of production to China. This
eventually increased the amount of locally sourced components and made Autoliv
considered the large share of imported components as a short term solution.
Ericsson started their production in China 1992 through a joint venture. Early on, Ericsson
strived towards sourcing local components but due to lacking quality and technical
knowledge, all components had to be sourced from Europe. For several years the production
in China purely was an assembly activity, but Ericsson regarded this as expensive and
27
complicated since the flow of components were slow moving and where leading to a high
stock level. It was not until the new regulations by the Chinese government requiring a 40%
of locally sourced components in 1997, that Ericsson started to demand their suppliers to
relocate to China. Since the majority of the components sourced from China then came from
European suppliers which had relocated to China and using the same strategy as Ericsson
with large share of imports resulted this in a minimal cost reduction. Cost savings could only
be made through lower salaries in the assembling. Ericsson solved this dilemma by
establishing R&D in China, and demanding that their suppliers did so as well. This increased
the knowledge and the quality, but also enabled Ericsson to enjoy the advantage of low
salaries in all parts of their SC. During 2006 Ericsson purchased over 80 % of their
components from Asia.
Habia Cable who is a subcontractor to Ericsson started their production in China 2000 due to
demands from Ericsson. Initially they only performed assembly in China, but gradually they
shifted more advanced parts of the production to China while still shipping all inbound
components and raw materials from Sweden. Habia Cable faced a growing demand from
Ericsson to cut prices which forced them to start purchasing from local suppliers. The
components purchased from China were not cheaper than comparable components in
Europe but Habia Cable saw other advantages such as shorter lead times and reduced
transportation and warehouse costs. By shifting procurement to China were Habia Cable
able to increase their delivery reliability and lower the value tied in stock. Additionally were
the complicated custom procedure simplified. Initially Habia Cable experienced problems
with the quality of the Chinese suppliers, but gradually this has improved when the pressure
on the suppliers have increased.
3.5.2 Distribution strategies in China

Yan & Wang (2005) has in their master thesis analyzed the logistic consequences of
outsourcing in China for Nordic enterprises. They have examined large companies from
Sweden and Finland active in the electronic and textile industry.
IKEA has implemented a distribution center in Shanghai, where all components sourced in
Asia are sent. IKEA has launched a portal system mainly for their suppliers in Asia where
suppliers can receive orders, forecasts, quotation tools, carrier integration etc. The major
problem IKEA has had is with the reliability in the transportations, and more specific road
transport leading to delays and shipping losses. IKEA has also experienced a low on-time-
delivery from Chinese suppliers, also leading to delays. Furthermore they have had an
increased cost of warehousing and administration.
Volvo Group manufactures trucks, buses and construction equipment in China and is just as
MGC importing a large share of components. The most significant logistics problem Volvo
has faced is the delays caused by the Chinese customs, reducing the on-time-delivery. Volvo
has implemented a logistics information system which integrates the manufacturer,
suppliers, dealers, consignors and consignee. This system gives Volvo a control over the
28
whole Supply Chain, thus it has improved the lead time from ordering to delivery and the
inventory and operation cost. Volvo Group has not implemented a distribution center in
Asia, each factory has its own warehouse. But Volvo has outsourced some manufacturing to
local suppliers in Asia and has therefore decreased their lead time.
Sony Ericsson has outsourced the majority of their manufacturing to partners in China and
they have about 220 suppliers that deliver components to these factories. Sony Ericsson has
used direct transportations from suppliers to the factories, but has recently implemented a
distribution center in Hong Kong, to which all components are transferred before distributed
to each factory. Sony Ericsson has experienced that the scope of their SC has become more
complex after the outsourcing, and that the Chinese customs is a major problem when
having frequent imports and exports. They have also experienced an uncertainty in the on-
time-deliveries from the Asian suppliers, resulting in delays and higher stock.
Nokia has chosen another strategy than Sony Ericsson since they are manufacturing most of
their products themselves. Nokia experiences that this gives them a better control over the
inbound and outbound logistics, hence achieving cost efficiency and high customer
satisfaction. In 2006 Nokia sourced 60 % of the components from local suppliers in China.
They have a total of four production facilities in China. At their production base in Xingwang,
Nokia has strived to locate their key suppliers in an industrial park. A Central Service
Management System (CSMS) has been implemented among all upstream suppliers which
enables all Supply Chain players to get information about the latest inventory status, and
hence enables them to make consequent supplement. CSMS reduced the need for
administration since it allows Nokia to make on-line customs clearance, reducing former 11
application procedure to 6 for both import and export. Components are sent from the
suppliers within the industrial park exactly when they are needed in the production,
resulting in zero inventories and just in time service. A third party logistics provider is used to
manage the freight forwarding, distribution and customs clearance for both components and
finished products. This approach has been highly successful but have yet not been
implemented at the three other production bases.
To summarize this chapter have most of the studied companies started with importing the
majority of the components from Europe, doing only the pure assembly in China. However
they have been active in increasing the amount of purchases from Asia by both influencing
European suppliers to relocate, and to help the Chinese suppliers to build up necessary
knowledge and technological knowhow. Each company studied has implemented different
strategies to manage the SC in China. On consequence that most companies have faced is
delay in customs resulting in long lead times and high stock. The reliability of the Chinese
suppliers has also been perceived to be lacking.
3.6 Alternatives for distribution centers in China

The intention of this chapter is to describe the customs process in China and the concepts of
free trade zone and bonded logistics parks in an effort to create an understanding of the
29
different setups of a distribution centers that can be utilized in China. This information has
been collected from mainly official Chinese documents, and can therefore not been seen as
purely theoretical material. However since the regulations about the custom process plays
an important part in this thesis has this chapter been included in an effort to make the
reader more comfortable with the concepts.
The Chinese customs has an intricate regulating regime which regulates how components
are imported and exported in China (PwC, 2008). The concept of free trade zone (FTZ) and
bonded logistics park (BLP) has therefore emerged to help ease this complexity for
international companies operating in China.
3.6.1 Free Trade Zone, FTZ

A popular means for consolidation is a designated economic area such as a free trade zone
(FTZ) or an export processing zone (EPZ). A FTZ is often a small piece of geographically
separated areas within a country which has the purpose to magnetize companies with an
export-orientation by offering beneficial trade agreements in comparison to the remaining
part of the country. The feature that attracts foreign investors is the minimization of the
host country’s often complex bureaucracy and the option of receiving tax break for the
products and services within the FTZ. A FTZ can be described as inside territory, outside
customs which means that the zone is open at the forefront, controlled at the second front,
free inside the zones, and tax refund inside the zones. Thus it enables that import duties and
taxes are exempted or suspended until the goods are removed from the bonded zone into
the domestic market. EPZ’s are also bonded but only manufacturing and warehousing is
allowed inside the zone. (Kusago & Tzannatos, 1998)
3.6.2 Bonded Logistics Park, BLP

The Chinese customs uses a system of tax rebates on products that are exported. The value-
added tax (VAT) in China is ranging from 10 to 17 %, but the rebate system makes it possible
to gain a 13% rebate when the goods are exported out from China. One result of this tax
rebate is the growth of bonded logistics parks (BLP). A BLP is a special zone supervised by the
Customs, which function is to offer bonded warehousing, import and export trade, and
centralized Customs declaration. The BLP have preferential taxation policies which gives
advantages for processing companies. The process with a BLP is illustrated in Figure 15.
Goods are exempted from duty and VAT if the goods are exclusively used in the
manufacturing of export products and shipped out from China within one year. The tool for
Chinese authorities to supervise and control the import and export of process trade in the
country is the customs process trade handbook.
30
Figure 15 The BLP process
According to the official Chinese authorities, overseas investments should keep track of all
imported goods by a special account book formed by the Chinese customs. This book is
opened when the production partners start the production of the crane, and is valid up to a
year. When the validity of one year has ended, the finished product needs to be exported.
But there exists one exception that needs special approval of the Chinese customs which
allows the product to be kept in China an additional 6 months.
3.6.3 Differences between FTZ and BLP

The difference between a BLP and a FTZ is that a BLP connects the bonded zones (also
loosely referred to as FTZ) with the ports. Unlike bonded warehouses, which may be located
inside a FTZ, companies using a BLP are allowed to do de-consolidation, consolidation, and
kitting with other cargos for import and export purposes. To receive a tax rebate when using
an FTZ, the company has to export the goods to for example Hong Kong and then have a
trading company re-import the goods back to Mainland China. This gives high logistics costs,
but can be avoided with the use of a BLP. The main difference between an FTZ, BLP and an
EPZ in China is illustrated in Table 2.
Table 2 Comparison between FTZ, BLP and EPZ

FTZ BLP EPZ (export processing
zones
Business functions Mainly production and Warehousing, logistics, Export processing, and
processing, simple processing (no related warehousing
international trade, manufacturing and transportation
warehousing and allowed)
logistics
Administration VAT refunds for Total enclosure, check Total enclosure, check
procedures incoming domestically post supervision, in post supervision, in
purchased goods are operation 8 hours/day operation 24
31
available upon delivery hours/Day

VAT refund policy VAT refunds for The entering of
domestically produced domestically
goods are available purchased goods into
only at the time at the BLP is considered
which the goods exit to be an export, thus
China qualifies for VAT
refund upon entry
3.7 Supply Chain evaluation

As the concept of SCM has gained increased popularity it has evolved a need for evaluate
and measure the SC performance (Chibba, 2007). Traditional measurement metrics such as
ROI and stock turnover has become less relevant for measuring SC since their narrow scope
fails to capture the broader concept of SC (ibid). Evaluation in terms of individual measures
of the SC have traditionally been classified into the four categories cost, time, quality and
flexibility (Jian et al., 2009). However it has been argued that it is important to distinguish
between cost and non-cost measures (time, quality and flexibility) since only relying on cost
indicators can produce a misleading picture of the SC performance (Chen & Paulraj, 2004).
To identify the most appropriate combination of cost and non-cost performance metrics a
measurement system must have a strategy alignment and a systematic thinking (Jian et al.,
2009). Researchers have proposed several methods that possess these abilities such as
Balanced Scorecard, Activity Based Costing and Supply Chain Operations Reference (SCOR)
(ibid). The method which has gained the biggest support in the industry is SCOR.
3.7.1 The SCOR model

The SCOR model has been developed by the Supply Chain Council (Supply Chain Council,
2008). The Supply Chain Council is a global non-profit consortium which was organized in
1996 by 69 voluntary member companies to provide methodology, diagnostic and
benchmarking tools for the member companies (Supply Chain Council, 2008). Today the SCC
has closer to 1,000 corporate members world-wide and has established international
chapters all over the world (Supply Chain Council, 2008).
The SCOR model is a framework for evaluating and comparing Supply Chain activities and
their performance. (Huan et al., 2004). The model provides standardized definitions for
processes, process elements and metrics, thus it enables managers to benchmark the Supply
Chain performance and find relevant areas of improvements (ibid). The advantages of using
the SCOR model has been verified by Geary & Zonnenberg (2000) who reports that
companies using the SCOR model had gained considerable financial and operating
advantages compared to their competitors. According to Huan et al. (2004) is SCOR poised to
become an industrial standard that enables next-generations SCM.
32
3.7.2 The SCOR processes

The SCOR model is built upon the four distinct processes “Plan”, “Source”, “Make”, “Deliver”
(altogether called Level I) which defines the scope and content of the SC, see Figure 16
below.
Figure 16 The SCOR model categories (Supply Chain Counsil, 2008)
The Plan process aims to balance the demand and supply to meet the sourcing,
manufacturing and delivery requirements. The source process procures goods and services
to meet planned or actual demand. The make process transforms goods to a finished
product to meet planned or actual demand. The deliver process provides finished products
and services to meet planned or actual demand. (Supply Chain council, 2008)
These top level processes are further divided into two more levels of increasing details. Level
II is the configuration level that deals with process categories and where processes are
configured in line with operations strategies. The process categories are divided into the
three groups planning, execution, and enable. Processes that are adjusting the resources to
meet the forecasted demand are included in the “Planning” group. The core processes that
transform the planned demand into action are included in the “Execution” group. The
“Enable” group contains the categories that supports the other categories by controlling the
flow of information. (Supply Chain council, 2008)
Finally the lowest level in the scope of the SCOR model, level III, defines a process flow
diagram with process elements for each process category in Level II. Specific performance
metrics are presented for each process which enables the company to fine tune the chosen
operations strategy (Hwang et al., 2008). For the purpose of this thesis, the level III
processes will not be explained further.
33
3.7.3 Performance evaluation in SCOR

The SCOR model provides a basis for evaluating and measuring the SC performance with
hundreds of performance metrics included (Supply Chain Council, 2008). These performance
metrics are divided into five attributes, reliability, responsiveness, flexibility, costs, and
assets (Supply Chain Council, 2008).
 SC reliability – The ability of the SC to deliver the correct product, to the correct
place, at the correct time, in the correct condition and packaging, in the correct
quantity, with correct documentation, to the correct customer.
 SC responsiveness – The speed at which a SC provides products to the customer.
 SC flexibility – The ability of the SC to in an alert way react to marketplace changes in
order to gain or maintain competitive advantages.
 SC costs – The costs associated with operating the SC.
 SC asset management – The effectiveness of a SC in managing fixed and working
assets to support demand satisfaction.
These five attributes can be used in combination with the concept of order winners and
order qualifiers presented in chapter 3.3 Order Winners/Order Qualifiers in a SC. The
company should have identified their specific order winners and qualifiers, and aligned their
SC strategy accordingly. The company can then focus on improving the performance metrics
that best reinforces their chosen strategy. If for example a company has a mature product
with the price as the primary order winner and hence pursuing a lean Sc, they should focus
on improving the attributes costs and assets. But if the company instead would sell a new
innovative product and hence focusing on an agile SC, they should improve their SC
responsiveness and flexibility. (Huan et al., 2004).
The performance metrics are besides the five attributes described above also classified by all
processes at the three levels. Level I and II keeps the management focused while level III
metrics are used to analyze variations in performance against plan. This thesis focuses
mainly on the level metrics I, which are presented below in Table 3.
Table 3 SCOR level I metrics

Performance attribut Level 1 metric Metric definition
Reliability Perfect order fulfillment (POF) The percentage of orders meeting delivery
performance with complete and accurate
documentation and no delivery damage
Responsiveness Order fulfillment cycle time (OFCT) The average actual cycle time consistently
achieved to fulfill customer order
Flexibility Upside SC flexibility (USCF) The number of days to achieve an

unplanned sustainable 20 percent increase
34
in quantities delivered
Upside SC adaptability (USCA) The maximum sustainable percentage

increase in quantity delivered that can be
achieved in 30 days
Downside SC adaptability (DSCA) The reduction in quantities ordered

sustainable at 30 days prior to delivery
with no inventory or cost penalties
Costs SCM cost (SCMC) The sum of costs associated with the SCOR
Level 2 processes to Plan, Source, Deliver
Cost of goods sold (COGS) The cost associated with buying raw
materials and producing finished goods.
This cost includes direct costs (labor,
materials) and indirect costs (overhead)
Assets Cash-to-cash cycle time (C2C) The time it takes for an investment made
to flow back into a company after it has
been spent for raw materials.
Return on SC fixed assets (ROSFA) The return an organization receives on its

invested capital in SC fixed assets. This
includes the fixed assets used in Plan,
Source, Make and Deliver
Return on working capital (ROWC) A measurement which assesses the

magnitude of investment relative to a
company’s working capital position verses
the revenue generated from SC
3.7.4 Criticism about SCOR

Even though SCOR’s popularity constantly is increasing among companies who seek to
evaluate their Supply Chain performance, it has been largely ignored by academics
(Theerunaphattana & Tang, 2007). The model has been criticized for not take into
consideration that different types of Supply Chain strategies affects which metrics that
should be used (Chibba, 2007). The model has also been criticized for the lack of an overall
SC efficiency measurement which takes in consideration all individual metrics (Huan et al.,
2004). It has also been argued that the sheer amount of performance metrics in the SCOR
model confuses companies. For example has Günter & Shephard (2006) summarized 132
single Supply Chain performance metrics related to the five attributes in the SCOR model.
Though these measures offer valuable information for decision-making, it is a difficult task
for managers to select and trade off so many measures (ibid). Instead it has been
recommended that managers should use a few good metrics that can provide a balanced
view of end-to-end SC performance (Gunasekaran et al., 2004).
35
3.7.5 Alternative SC evaluation

Christopher (1992) claims that the development of SCM has implied that SC, not companies,
today compete with each other. The consequence of this is that neither single activities nor
particular processes can be used as a measure of the SC performance (Holmberg, 2002).
Therefore there exists a need to convert the detailed performance of single activities and
processes into a single performance metrics over the whole SC (ibid).
There have been attempts to offer a systematic method for prioritizing and converting
performance metrics into one single with decision-making tools such as analytic hierarchy
process (AHP) (Jian et al., 2009). However it has been questioned whether AHP is the most
appropriate technique since it is argued to not be stable in its theoretical foundation and
hence cause revisions in decisions-makers preferences (ibid). An alternative innovative
performance measure method who has received attention from researchers has been
proposed by Chan & Qi (ibid).
The model proposed by Chan & Qi (2003) is able to prioritize and convert performance data
from single activities into one index over the SC performance. This model is regarded by
Theerunaphattana & Tang (2007) as a significant development towards measuring Supply
Chain performance. Chan & Qi’s model includes both a conceptual performance model and a
performance measurement and aggregation method. The model is based on the fact that
human judgments are imprecise, thus it uses the fuzzy set theory. To deal with vagueness of
human thought, the fuzzy set theory was introduced in the late sixties, which was oriented
to resembling human reasoning in its use of approximate information and uncertainty to
generate decisions (Boender et al., 1989). Fuzzy set theory provides a strict mathematical
framework in which vague conceptual phenomena can be precisely and rigorously studied
(ibid).
The framework in this model is built upon a numbers of key- and sub-processes which
together forms a hierarchy of a SC model. For each key and sub-process, performance
measures are identified and measured, see Figure 17. Each measure is given different
weights to be able to priority different processes as the SC strategy changes. This enables
the company to embrace the concept of order winners and order qualifiers since they
continuously can change the relative weights of the measurements as the order winners and
qualifiers are changing. Thus enabling a way of aligning the SC strategy with the performance
measurement system. (Qian & Qi, 2003)
To calculate these weights it is recommended to form a performance measurement team

(PMT) which mainly serves as evaluators that can provide opinions about the SC strategy.
Obviously the evaluators have varying experiences and backgrounds which imply that the
relative weights of their opinions not necessarily are identical. (Qian & Qi, 2003)
36
Figure 17 Chan & Qi's model
A geometric scale of triangular fuzzy numbers is employed to quantify the relative weights
between the performance measures (Qian & Qi, 2003). The fuzzy number is the natural
generalization of real numbers, thus allowing formal representation for inexact concepts,
subjective judgement, and all types of evaluation (Boender et al., 1989). Fuzzy numbers are
parameterized by the triplet (l,m,u) where l represents the lowest number that the real
number can have, m represent the median number, and u represents the highest number
that the real number can have (ibid).
Chan & Qi’s model uses a geometric scale of triangular fuzzy numbers to quantify the
relative weights between the performance measures. Each evaluator in the PMT is asked to
provide its opinion about preferences between the attributes and metrics, where δ i j
quantifies the qualitative preferences ratio and αij expresses the degree of fuzziness. δi j
ranges from -6 to 6 and αij ranges from 0 to 2.
δi j= 0: no preference for i over j,

δi j = 2: weak preference for i over j,
δi j = 4: strong preference for i over j,
δi j = 6: very strong preference for i over j,
α = 0: no fuzziness,
α = 1: moderate fuzziness,
37
a = 2: significant fuzziness,
The triangular fuzzy number can then be calculated with exponential functions below.
1
𝑅𝑖𝑗𝑙 = exp⁡[ (𝛿𝑖𝑗 − 𝛼𝑖𝑗 )
2
1
𝑅𝑖𝑗𝑚 = exp⁡
[ (𝛿𝑖𝑗 )
2
1
𝑅𝑖𝑗𝑢 = exp⁡
[ (𝛿𝑖𝑗 + 𝛼𝑖𝑗 )
2
These fuzzy numbers can then with help of fuzzy pair wise comparison be derived to the
relative importance weight of the attributes or metrics via the formula below.
𝑁 1 𝑁 𝑁 1 𝑁 𝑁 1 𝑁
𝑗 =1 𝑟𝑖𝑗𝑙 𝑗 =1 𝑟𝑖𝑗𝑚 𝑗 =1 𝑟𝑖𝑗𝑢
𝛼𝑖 = 𝑙, 𝑚, 𝑢 = ( 𝑁 𝑁 1 𝑁
, 𝑁 𝑁 1 𝑁
, 𝑁 𝑁 1 𝑁
𝑖=1 𝑗 =1 𝑟𝑖𝑗𝑢 𝑖=1 𝑗 =1 𝑟𝑖𝑗𝑚 𝑖=1 𝑗 =1 𝑟𝑖𝑗𝑙
The next step is to determine the performance scores which are done by first letting each
evaluator set a measurement scale in the form of an interval (bottom, perfect). Then the
actual performance data can be compared to this measurement scale to calculate a
performance score. By the use of a score scale that ranges from 0 to 10, the performance
data can be converted into performance scores. (Qian & Qi, 2003)
Since the judgment of the measurement scale contains much fuzziness and imprecision this
implies that also the performance score contains some fuzziness. This is address by
translating the performance score with help of the fuzzy triangular number into a fuzzy
performance grade set which is denoted by the fuzzy vector 𝐺 = 𝐴, 𝐵, 𝐶, 𝐷, 𝐸, 𝐹 ,
Figure 18.
Figure 18 Fuzzy performance grade set
The final step is to aggregate the performance grade set and the relative weight of
measures.
𝑎1
𝐴1 ⋯ 𝐴𝑁 𝑎2
𝑃 = 𝑃6∗𝑁 ∗ 𝐴 = ⋮ ⋱ ⋮ ∗ ⋮ = [𝑝𝐴 𝑝𝐵 ⋯ 𝑝𝐹 ]𝑇
𝐹1 ⋯ 𝐹𝑁 𝑎𝑁
38
These results can then be defuzzified into the SC performance index, which is an exact
number SC can be used to understand and benchmark the SC performance.
𝑃𝐼 = 10 ∗ 𝑝𝐴 + 8 ∗ 𝑝𝐵 + 6 ∗ 𝑝𝐶 + 4 ∗ 𝑝𝐷 + 2 ∗ 𝑝𝐸 + 0 ∗ 𝑝𝐹
3.8 Combination of SCOR and Chan & Qi’s model

From the above chapters can it be concluded that the SCOR model is preferred by
practitioners and that Chan & Qi’s model is recommended by some academics. To overcome
this dilemma, Theerunaphattana & Tang (2007) attempt to combine the advantages of SCOR
and Chan & Qi model into one single model.
Both SCOR and Chan & Qi’s model has been criticized for being too complex for managers
since they include too many measures on local performances. Thus Theerunaphattana &
Tang (2007) recommend managers to only use the ten SCOR level I metrics for capturing the
performance of the SC, see Figure 19. The logic for using only the level I metrics are argued
to be that they are smaller numbers of more relevant, integrated, balanced, and strategic
performance measures (ibid).
Figure 19 Hierarcy of SC model
To implement the model Theerunaphattana & Tang argue that the company first need to
adopt a clear defined SC strategy since the strategy affects the relative importance of
performance and attributes, for further details of SC strategies see chapter 4.2.1 Supply
Chain strategies. When the necessary performance measures have been collected the model
uses Chan & Qi’s aggregation algorithm to calculate the relative weights of the strategies
and metrics, to convert the performance data into one single composite index for the overall
SC performance. (Theerunaphattana & Tang, 2007)
39
Chapter 4 Methodology & Tools
4 Methodology & Tools

The goal for this chapter is to introduce the reader into the methodology that has been used
in this report. The authors describe chronologically the way this study has been carried out.
4.1 Introduction
The purpose of this master’s thesis is to answer the following research questions:
 RQ 1: What are the advantages and disadvantages with the current supply chain for
MacGregor Cranes?
The approach the authors have utilized in the quest to answer these research questions will
be described below.
The work with this thesis started with a precision of the purpose and the goals with the
thesis. Initially the goal was to evaluate a distribution center in China and identify a
conclusion whether if this was feasible or not. To enable an answer regarding these
questions the authors decided it was needed to create a picture of the current situation of
MGC and the advantages and disadvantages with the current setup with a distribution
center in Europe. The authors limited the goal in collaboration with the mentor at MGC to
only include the flow of component and specific information concerning the components.
Therefore the financial and general information flows between companies are not included.
When the purpose and the goals of the thesis had been decided, the authors could continue
with planning the research approach of the thesis. There are two different kinds of
approaches to use when conducting a research, inductive or deductive (Graziano & Raulin,
2004). A deductive approach is when using already existing theory as basis for the prediction
of a new specific case (ibid). In other words, a deductive approach goes from the broader
perspective towards a more narrow specific observation. Inductive studies are on the other
hand, the contradiction to deductive studies, where detailed information are studied and
moved towards a generalization (ibid). Theory is therefore created as a result of empirical
studies.
The research approach in this master’s thesis was mainly chosen as a deductive approach in
which theory of SCM and SC evaluation measurement were used to create a specific
knowledge about MGC current SC. The deductive approach was also chosen due to the
existence of previous studies in this area which have contributed to a generalized knowledge
of how an evaluation of a SC could be carried out. Already existing theories regarding
distribution strategies were a valuable asset in the thesis and the authors used this as
guidance especially in the second research question.
40
There exist several research strategies for investigating a specific problem. Yin (1994)
mentions five strategies: case studies, experiments, surveys, histories and archival analysis.
The research approach selected for this thesis is a case study since the goal aims to create a
deeper knowledge of a specific area, in this master’s thesis, of MGC’s SC and the flow of
component create recommendations about advantages and disadvantages with a
distribution center in China. The disadvantage with a case study is that a case never fully can
represent the reality, thus a part of caution and consideration needs to be taken (Yin, 1994).
However, the advantage of a case study is that just as surveys that they are conducted in
real time, and several methods can be used, (ibid) which this thesis are using.
4.2 Literature search

The authors started to collect literature about Supply Chain Management (SCM), SC
strategies, ways to evaluate a SC and a distribution centers role in a SC. The aim of the
literature search was to find relevant literature that could help fulfill the purpose and to
answer the research questions, which is supported by Denscombe (2003) who claims that all
research should be started with a literature study to clarify the current research and to
minimize the risk of analyzing areas that already have been covered. Scientific databases
were used to find literature and the search were bases on specific keywords. The keywords
have been used alone and in combination with the other keywords and are listed below.
 “Performance measurement”
 “Supply Chain Management”
 “Evaluating Supply Chains”
 “SCOR”
 “Distribution strategies”
 “Distribution center in supply chain”
 “Free trade zone”
 “Customs process China”
The scientific databases used to find the literature were Emerald, Elsevier Science Direct,
and Google Scholar. Furthermore Luleå University of Technology’s search engine Lucia has
been used to find published books and e-books. When the authors attempted to find
literature about the specific customs process in China, they encountered that no literature
were available in the scientific databases. Official documents from the Chinese government
that described the regulations regarding imports, exports, tariffs and free trade zones were
then assessed. Even though this information does not come from a scientific database which
means that they are therefore not peer-reviewed, the authors has therefore strived only to
use official documents by the Chinese government in an effort to ensure the reliability of the
information. These documents are not an attempt to create a picture of the reality, thus
they are what the reality should follow.
41
This literature search resulted in a theoretical frame of references which thereafter were
used as guidance when collecting the empirical data and when performing the analysis. The
validity in the theoretical frame of references is attempted to be assured by the use of
multiple sources and what the authors consider a broad literature review. The advantage of
using multiple sources is that it enables a triangulation of the area in which the authors have
chosen to focus on, by seeing the problems in numerous ways.
When the literature study had been performed and the theoretical frame of references had
been laid out, the collection of primary and secondary data were planned with the purpose
to complement information that not sufficiently was described in the literature. Primary
information is what Arbnor & Bjerke (1994) describes information which is collected for the
specific study. Secondary information is on the other hand information which has been
collected by another purpose then what it has been used for (ibid).
4.3 Evaluation of the present situation

To answer the first research question the authors first mapped MGC’s current SC. This was
based on information from MGC about where their suppliers and partners were located,
how much that were produced, how much was purchased and how large was the purchase
order values.
The SCOR model (Supply chain council, 2008) identified in the theoretical frame of
references was used to map the processes in MGC’s SC in an effort to assess more detailed
information about the processes and material flow in the SC, with the aim to highlight areas
for improvement. Even if the thesis uses a widely accepted model, the SCOR model (Supply
chain council, 2008), there is not likely that this case study could be replicated with the same
results since the measurement are pending over time even with the same method. External
factors for example difficulties of finding material in time can result in a high stock value,
meaning the result of the study are due to the surrounding factors of the SC. Reliability
accordingly to Bryman & Bell (2007), is concerned with the question if the study can be
repeatable with the same results. Often reliability is described as how accurate the
measurements of the research are and can thus be described as the credibility of the report
(ibid). Arbnor & Bjerke (1994) claims that a high reliability is not always what sought in a
thesis, due to the subjectivity of the reality is hard to capture, thus reliability will be hard to
measure.
Furthermore, to answer the first research questions quantitative historical data about the SC
was collected, where all of the information was collected from the enterprise resource
planning system (ERP). Bjereld et al. (1999) described that a quantitative study tries to
answer the questions “how many” and “how much” which enable the results to be
expressed in numbers (ibid), which was the authors searched for in the first step of the
master thesis.
42
The authors attempted to collect historical data about each attribute described in the SCOR
model. The SCOR model provides a basis for evaluating and measuring the SC performance
with help of the five attributes, Reliability, Responsiveness, Flexibility, Costs, and Assets. The
Supply Chain Council (2008) provides definitions about how each attribute should be
collected which the authors attempted to follow when the historical data was collected. The
authors first contacted the IT department to find out which information that could be
withdrawn from the ERP system. However the authors faced problems with measuring the
SC since it was not possible to collect all data that perfectly matched the definitions of the
attributes in the SCOR model. Therefore some metrics had to be modified in accordance to
the information that was available. Bryman & Bell (2007) describes validity is if the study
measures what it was intended to measure. The validity of this thesis can be describes as
how well the authors measured the SC in contrast to the measurements in the SCOR model.
Parts of the data that was taken from the Enterprise resource planning system, ERP, SAP R/3
was compared to actual information that was available at MGC. The transportations costs
that were collected from the ERP system were compared to actual information available
from invoices from MGC’s transport carriers. The authors also compared the calculated
warehouse cost to the invoices MGC had received from their 3PL managing the LCE. These
comparisons were performed in an effort to triangulate the data, thus ensuring whether the
information from the ERP system was accurate to use.
Analyze methods can be categorized into three groups according to Miles & Huberman
(1994), data reduction, data display and conclusion drawing/verification. Data reduction is
that the collected information is grouped and categorized. Data display organizes the data so
it is presented in an easy way. Lastly conclusion drawing/verification is the final step of a
research (ibid). Microsoft Excel offered the authors a tool to easy categorized and present
the collected information from the ERP system, SAP R/3.
Interviews were conducted in order to gather information about MGC’s SC strategy and how
they graded the importance of different attributes of the SC. The respondents were selected
based on their position in the organization, where the aim was to interview people with the
formal authority of influencing the SC strategy. Therefore the Procurement manager and the
Director of Global Production were interviewed. The interviews were conducted separately
with each respondent to ensure that the results captured that specific person’s view on the
SC.
The interviews and the information from the ERP system, SAP R/3, where what Arbor &
Bjerke (1994) calls information collected for the specific purpose of the thesis – primary
information.
In an effort to answer the second research question about the advantages and
disadvantages with a distribution center in China, primary and secondary information were
collected about how other companies had managed their distribution center in China.
43
Generally, primary data is preferred when there is limited data about the subject or when
data can be collected in a creditable way (Arbnor & Bjerke, 1994). A possibility the authors
evaluated was to contact MGC’s competitors to assess how they have manages their
component flow, benchmarking in other words, but this approach was considered to be
associated with a high risk that the competitors not would be trustworthy in their responses
or not give proper and valuable answers. Therefore the authors contacted the Swedish
Trade Council in Shanghai to find Swedish companies that were doing business in China. A
handful companies were selected based on similarities such as production and supply chain
as to MGC, and also on how they deal with imports to China from Europe. These companies
were contacted to see if they were willing to participate for an interview. However a
majority of the companies respond that they either were purchasing all components from
China or that the components from Europe were delivered from a small amount of suppliers
so that they were delivered directly to production without passing a distribution center. The
only company that was willing to participate for an interview and had a distribution center in
China was Volvo Logistics, therefore only one external respondent were used in the primary
data collection. Even if the authors strived towards having several companies to interview,
only one were used, due to high criteria’s was set for the companies and the unwillingness of
several others.
Since the respondents identified in the primary data collection were limited, the authors
collected information from other sources about how companies had managed their
distribution center in China. This information was collected from two thesis’s which were
based on a total of 10 responding companies. These two thesis’s were chosen because they
both were produced at institutions with high reputation and since they were based on
several individual case studies. These other sources can be as Arbnor & Bjerke (1994) calls
seconday information which has been collected for a different purpose then what has been
addressed in this master thesis.
4.4 Evaluation of distribution center in China

When the empirical data had been collected from the ERP system, SAP R/3 and the
evaluation of MGC’s current SC had been performed, the authors analyzed the current
situation and compared it to the theoretical frame of references. This analysis revealed the
advantages and disadvantages of the current SC which gave the authors an opportunity to
recommend alternatives for how a SC with a distribution center in China could be set up,
thus following the analysis method described by Miles & Huberman (1994) previous in this
chapter.
The authors could then in an attempt to answer the second question about the advantages
and disadvantages with a distribution center in China, analyze the consequences a
distribution center could have. These analyses were based on the information collected from
the primary and secondary sources and from interviews from MGC employees. Calculations
of how much a distribution center in China would cost were made based on information of
44
how much a Chinese Third party logistics, charges for the services with consolidation and
storage. Transportations costs could be calculated based on the rates MGC currently are
paying for sea and air freight.
The current distribution strategy of using a 3PL in Germany was then compared to the
alternative of using a distribution center in China instead, leading up to stated
recommendations for MGC.
4.5 Methodical problems

This study has been conducted as a case study which means that it is with a single case hard
to represent the entire reality. To create a greater generalization about the findings in this
master thesis, the authors claims that several cases needs to be conducted with equivalent
results, thus one case study conclusion is to be handle with caution.
The main problems for the authors were that the initial measurements which were intended
to be analyzed were not able to be captured, which demanded new paths to be found.
At the interviews the respondent did not take part of the question before the interview
which could be a weakness, due to the respondents could not prepare with solid information
and many thoughts and questions were raised during the session.
45
Chapter 5 Present Situation
5 Present situation
This chapter illustrates the empirical material collected about the present situation for the
Supply Chain of MacGregor Cranes, MGC. The findings about MGC’s SC strategy are first
presented, followed by a description of MGC’s current components flow. The result from the
interview with Volvo logistics is presented and the chapter ends with the calculations of the
current performance attributes of MGC’s SC.
5.1 Identifying the MGC’s SC strategy

To get a picture of how MGC ranks different attributes in their SC, interviews with selected
key managers were conducted, and the algorithm method described by Chan & Qi was used
to perform numeric calculations. The interviews assessed information about how the
managers rank their SC strategy and the importance between the SC performance metrics.
The results from these interviews have been used to calculate the weight and performances
described below. This section will describe the results of how MGC rank several SC factors in
their strategy, which was performed with help from the model by Chan & Qi where the
managers ranked respective attribute against each other.
Table 4 Evaluator 1
(δi j1,αij) Relia. Respon. Flex. Costs Asse.

Relia. 0 0 4 0 2 1 -4 0 0 2
Respon. -4 0 0 0 -2 1 3 0 3 1
Flex. -2 1 2 1 0 0 3 0 4 0
Costs 4 0 3 0 3 0 0 0 2 0
Asse. 0 2 -3 1 -4 0 -2 0 0 0
From this information the fuzzy numbers l,m,u could be calculated by first utilizing the
exponential functions described by Chan & Qi (2008). These calculations were thereafter
used with the following formula to derive pairwise the relative importance weight of each
attribute.
𝑁 1 𝑁 𝑁 1 𝑁 𝑁 1 𝑁
𝑗 =1 𝑟𝑖𝑗𝑙 𝑗 =1 𝑟𝑖𝑗𝑚 𝑗 =1 𝑟𝑖𝑗𝑢
𝛼𝑖 = 𝑙, 𝑚, 𝑢 = ( 𝑁 𝑁 1 𝑁
, 𝑁 𝑁 1 𝑁
, 𝑁 𝑁 1 𝑁
𝑖=1 𝑗 =1 𝑟𝑖𝑗𝑢 𝑖=1 𝑗 =1 𝑟𝑖𝑗𝑚 𝑖=1 𝑗 =1 𝑟𝑖𝑗𝑙
This gave the result of the importance of each attribute as the specific evaluator perceived it.
Below are the results of the attribute weights described for evaluator 1.
Table 5 Attribute weights for evaluator 1
Weights Relia. Respon. Flex. Costs Asse.

l 0,150 0,150 0,136 0,248 0,045
m 0,177 0,177 0,216 0,357 0,072
u 0,206 0,206 0,340 0,507 0,113
46
These attribute weights responds to the fuzzy numbers as described in Figure 21.
Figure 20 Fuzzy numbers of reliability for evaluator 1
The average of these fuzzy numbers for each attribute gave a representation of how each
evaluator evaluates how important these attributes are compared to each other. Interviews
were performed with two managers at MGC, thus the average value of the answers from
these two managers were used as a measure of MGC’s SC strategies. The results from
evaluator 2 are presented in the appendixes.
The result from the interviews in Figure 20 shows that the single most important attribute
for MGC is costs. Reliability, meaning how well a SC delivers in time and in the right
quantities, is also an important factor in current operations. Flexibility is regarded as an
important feature, since it was argued by the managers to create an opportunity to claim
orders with a short time span as well as decreasing the production without suffering a great
deal from the losses. Responsiveness was not considered as one of the most important
attributes in MGC strategies, since the lead times of a crane seldom is the crucial part of
building a ship. Assets, were as the key managers puts it, “if we’re good at all of the other
attributes we will have positive assets” therefore it is not ranked high single handed.
5%
32%
Relia.
36% Respon.
Flex.
Costs
9% Assets
18%
Figure 21 Strategic attributes and weights
5.2 Mapping the current SC

The mapping of MGC’s current SC can be seen in Figure 22, which shows the component
flow from suppliers to production partners. The red dots indicate the 20 biggest suppliers
47
and the yellow as where the production partners are located. Figure 22 shows how
components are consolidated in Hamburg and thereafter sent by sea or airfreight to
partners in China or Korea. This distribution center is called Logistic Center Europe, hereafter
referred to as LCE. Components sent from suppliers in China and Korea are not consolidated,
but sent straight from suppliers to production partners.
Figure 22 Current SC
5.3 Current distribution strategies for MGC

MGC’s SC, and more specific the component flow, can be broken down into the level II
processes that are presented in the SCOR model, Figure 23, which is in line with how the
Supply Chain Council (2008), hereafter SCC, describes level II processes. Figure 23 illustrates
the relationship between suppliers, MGC, and production partners in which how the
material flows. “Sub-suppliers controlled by MGC” are suppliers who delivers necessary
components to enable suppliers to produce in accordance to MGC’s requirements.
48
Figure 23 The SCOR processes
The components sourced from Europe are consolidated in LCE and hence gives MGC an
opportunity to manage the component flow. This enables MGC to utilize the transportations
efficient and should in theory give a low transportation cost per project, meaning sea freight.
But as illustrated in Chapter 2, 57% of the total purchase order value is from suppliers in
Europe which means that MGC does not have possibility to utilize consolidated
transportations for almost half of their total amount of components.
From the Head Office in Sweden, the SCOR processes P1, P2, P3 and P4 are managed. Plan
source (P1) are the processes regarding procurement from sub-suppliers and suppliers,
where Plan delivery (P2) on the other hand are the processes concerning shipping from
suppliers to LCE and shipment from LCE to production partners. Plan make (P3) are the last
process in the Supply Chain where MGC plan the production at their partners in detail.
5.3.1 Components from Logistic center Europe

The components which are supplied by vendors located in Europe delivers to LCE in
Hamburg. The components in LCE are shipped to partners approximately 2 months prior to
the assembly of the crane. They are transported directly to one of MGC’s production
partners in China or Korea by preferably sea freight. It happens frequently that all
components not have been delivered to LCE at the time when the sea freight must be sent,
which forces MGC to use air freight for the remaining parts to keep the production schedule.
Since air freight is ten times more expensive then sea freight, MGC continuously tries to
minimize the amount of components that are shipped by air freight from Europe.
The advantage of using a LCE for MGC is that they can ship the components whenever they
are needed and could be stored without a time limitation. The downside of having the
consolidation point in Hamburg is the long transportation times from Germany to Asia and
49
all the implications with the complex customs regulation. But the strategy of using a
consolidation point instead of direct shipment from Europe obviously leads to a greater
amount of capital tied in stock. Historically data points out that capital tied in stock has
grown steadily over the last years, which is shown in Figure 29 and Figure 30
5.3.2 Components from suppliers in China

MGC has strived towards a greater amount of suppliers in China since they are based closer
to the production partners. European suppliers have also relocated some production to
China which has increased Chinese supplied components. The approach MGC has utilized
with the deliveries in China is direct transportations from suppliers to partners. MGC’s role in
this process has been minimal as the transports have been arranged between the suppliers
and partners, and hence only required MGC approval for the transportation. This approach
has been considered to be effective in times of certainty and stability. But as the market
situation has changed rapidly the last year this has created problems for MGC when projects
has been delayed or cancelled. When MGC is sourcing components from their suppliers
located in China, certain rules and regulations needs to be followed. When the deliveries of
the components are to be made they need to follow the procedures stated by the customs
handbook. This means that components only can be sent to MGC’s production partner once
they have a customs book open.
The situation has occurred where components have been ready from the supplier but the
production for that specific project has been postponed. This means that if the components
are sent from the suppliers to the partners, thus opening the customs book, it has been
difficult to process and export the project out from China within a year. The alternative
approach is to wait with the delivery from the suppliers.
5.3.3 Components from sub suppliers to suppliers

MGC has some module manufacturers, i.e. supplier who manufactures complete modules,
who on the other hand has sub-suppliers that manufactures parts for the module. According
to Chinese regulations, MGC’s supplier needs to open a new customs handbook for their
module and to be able purchase from the sub-suppliers. MGC has outsourced some
procurement of stock components to a Chinese supplier which has increased the flexibility of
component flow in oppose to purchasing them in Europe.
5.3.4 Current import process for MGC

The general process with the customs in China has been presented above. The customs
situation facing MGC when importing components into China is presented in Figure 24.
50
Figure 24 MGC's custom process
When components are shipped from suppliers to production Partners within China, they are
transported through a BLP zone to enable a tax refund which is possible due to the reason
that all cranes are later exported out of China. Even if the customer is Chinese, is the vessel
that the crane are to be mounted on regarded as a property on international waters, thus
MGC’s products are sold as export goods.
Today MGC has the benefit of partners and suppliers who deals with these customs
regulation and the bureaucracy that implies. However, the main obstacle for MGC is that the
customs handbook prohibits component to be sent well in advance for production at
partners. The customs process handbook is as stated earlier just valid up to one year without
approval, meaning components must be imported, processed and exported within this time
limitation.
With MGC’s current setup of deliveries in China the suppliers delivers directly to the
partners. If MGC is going to start using a BLP to consolidate components until they are
needed in the production, the question of who should own the components in the BLP
arises. If the components when delivered to the BLP are considered to be in MGC’s
possession this implies that MGC then have to take the cost of having assets tied in stock.
Storing the components in a BLP would hence tie up more capital in stock but it will give
MGC a greater possibility of managing their Supply Chain in a more efficient way.
5.4 Examples of other companies distribution strategies in China

In an effort to enable an forecast of how an increase degree of purchases from Asia and how
a distribution center in Asia could impact MGC’s SC, information about how other companies
facing a similar situation, has been collected by both primary and secondary sources. The
secondary information is presented in chapter 4.5 Secondary information about distribution
strategies in China.
51
5.4.1 Primary information – Volvo Logistics

The primary information has been collected through one interview with a manager at Volvo
Logistics.
Volvo Logistics is a service company for mostly enterprises in the Volvo group, like Volvo
Trucks, Volvo Parts, Volvo Construction Equipment for mentioning a few. Volvo Cars who are
outside the group also uses Volvo Logistics as a service provider. The product that Volvo
Logistics offers is inbound logistics, meaning surrounding processes regarding all inbound
goods to the factories in China, wrapping of goods in the factories and outbound of finished
components from the factories.
Volvo has two different arrangements of factories in China, joint venture and wholly own
companies. The joint venture is a partially own company which Volvo shares with a partner
in China. Except from factories, Volvo also has established purchasing organizations in China
in an effort to increase the amount of locally sourced components. The goal is to purchase
everything that is possible in China with the required quality. The trend Volvo has seen is
that a higher degree of locally sourced components leads to lower costs and lower lead time.
Inbound materials are directly transported from either Sweden/Europe

warehouses/suppliers or from local suppliers to the factories. No parts of the material flow
passes through a distribution center located in China or Asia before entering a production
factory. However one single company within the Volvo group, Volvo Parts, established a
distribution center in China, which is located in the free trade zone, Waigaoqiao, Shanghai.
Volvo Parts is an after sales company for other enterprises in the Volvo Group meaning the
components in the warehouse must be able to be ready for the market within a short time
span. The distribution center is not controlled by a 3PL, it is a wholly own company by Volvo
Parts. Components are sourced globally and sent to this distribution center.
Volvo Logistics explains further, that the distribution center for Volvo Parts in Waigaoqiao
has a lower cost in general than a warehouse in Europe in the same size would have. The
service level and the closeness to the market was a crucial factor to why a distribution center
was set up in China. Volvo Parts has managed the often complex bureaucracy in the Chinese
customs by becoming a Rank A enterprise. This Rank A gives Volvo the opportunity to
transport goods from the warehouse to the customer before all customs documentation is
complete. The customs process often takes 2-3 days and therefore by being able to ship the
material without needing to wait for this process gives an advantage in an after sales point
of view. Due to the fact that the distribution center is wholly own and controlled by Volvo
Parts makes the reliability very high, stock level is also kept at a reasonable level with high
degree of stock turnover. Volvo Logistics claims that even with a 3PL the reliability would be
on a high level, since the 3PL often are experts in their area.
The benefit of having the bonded warehouse close to a port or inside the port area is the
high transportation costs from the ports to the warehouses. These high costs depend on the
52
fact that special transports are needed for bonded goods, resulting in higher charge than
regular transportations. The knowledge about the Chinese customs process is important
according to Volvo Logistics because there are different customs regulations for different
provinces. This should be in consideration when establishing a bonded warehouse in China.
5.5 Evaluating MGC’s current SC

In an attempt to accurately evaluate MGC’s current SC, the authors have strived to calculate
the ten metrics described in the SCOR model level I from information taken from MGC’s ERP
system, SAP R/3. The projects were grouped according to the month in which the
components were sent from LCE. Information was then withdrawn from the ERP system and
analyzed in Microsoft Excel. Below will describe how each performance metrics were
calculated and the results from the analysis of the SC.
5.5.1 Reliability
Reliability is by the SCC defined as the percentage of orders meeting delivery performance
with complete and accurate documentation. This is a measure which aims to capture how
well the SC can deliver what it is required to do. In MGC’s case reliability has been defined by
the authors as the percentage of orders from suppliers that were delivered on time and in
right quantities. The difference between the metric stated by SCC model SCOR is that it
measure the accuracy of the delivery from the Supply Chain to the customer. MGC does not
have a formal ability to decide how the partners do their business, thus the reliability of
MGC’s SC has been calculated as how accurate they are in delivering components to the
partner in time. Since MGC sends the component shipments from LCE according to a
predetermined plan, the factor that determines how accurate the component deliveries is
how many components that are ready for shipment according to plan. Thus the critical part
is the reliability of the supplier’s deliveries.
The amount of late orders from suppliers were calculated via information from the ERP
system, where the authors defined a late order as a order that has not been goods receipt
two weeks or later after the determined delivery date, which was defined by the authors. If
many purchase orders are late this both affects MGC’s production plan but also increases
their cost of transportations and administration since the shipments that are being sent are
not complete, hence forces MGC to utilize additional deliveries with sea freight or expensive
air freight.
When calculating the amount of orders which are late in comparison to the total amount of
orders, the amount of late orders from Asian suppliers are averaging 90 % and the amount
from European suppliers were 50 %. The percentage of late orders grew steadily from 2007
to late 2008, where a slow decline in late orders started.
53
100%
90%
80%
70%
60%
50%
40%
30% Asia
20% Europe
10%
0%
Figure 25 Late orders per region
When comparing the amount of late orders in each region, as in Figure 25, it can be seen
that the amount of late orders are higher from Asian suppliers than from European
suppliers. However since this measure is based on when the orders are goods received some
discrepancy can be incorporated since the goods receipt process might be managed
differently in the regions.
5.5.2 Responsiveness
Responsiveness is defined by the SCC as the average actual cycle time consistently achieved
to fulfill customer order (Supply Chain council, 2008). In this thesis where MGC’s SC has been
defined as the flow of components from sub-suppliers and suppliers to production partners,
hence the order cycle time could have been defined as the time taken from an order is
signed until all the components are delivered to a partner. The calculations could therefore
be based on the project milestones which states each distinctive phase of a project, but
since the maintenance of the ERP system has been somehow lacking in some aspect the
requested information could not be withdrawn in almost half of the projects which required
another way of performing these calculations.
The other approach that was employed to calculate the responsiveness was to measure the
lead time for the component with the longest lead time. Since the longest lead time
determines the critical time to source components to a project, it makes sense to use this as
a measure of the SC responsiveness. Historically data was not available, therefore this has
not been taken into consideration.
The critical lead time is currently 27 weeks and is mainly dependent on one critical
component. However, this is not to be mixed up with the official lead time of one order,
since R&D is not taken into consideration which increases the critical lead time.
54
Figure 26 Critical line
The critical lead time is based on the longest single component and its responding lead time.
This specific component is purchased in China and therefore not transported via the
consolidation point in Europe, LCE. Components procured in Europe and transferred via LCE
have a shorter critical lead time that makes up for the longer transportation via sea freight.
The production always starts with cutting and welding of the steel structure before the
assembling begins, thus the production can start 2-3 weeks before the specific component
delivered to the partner.
5.5.3 Flexibility
The flexibility metrics attempts to capture how well the SC can adapt to changes in the
market place. This is a measure that solely is based on subjective assumptions, thus it is
associated with a large share of uncertainty when attempting to reconstruct historical data.
MGC has not been measuring their SC flexibility prior and for this reason the flexibility
measure only could be assessed as it is present.
When assessing the flexibility the strategic purchasing department was contacted in an
effort to identify if some bottlenecks would occur if the production would increase by 20 %.
At present the activity on the market for MGC is slow and hence there exists overcapacity at
both their suppliers and production partners. Therefore the upside Sc flexibility (USCF) is 27
weeks at present.
Downside SC adaptability (DSCA) measures the percentage of sourced components that can
be on hold 30 days prior to delivery. Since MGC are using a logistics center in Hamburg,
where all European suppliers are delivering, is it possible that all components sourced from
Europe to be on hold, thus resulting in a DSCA of 100 % from Europe. In China on the other
hand, where no logistics center yet exists, MGC only have the two options of delivering the
components to the partners and storing them there, or storing delayed components at their
suppliers. If MGC choose to send all components to their partners and storing them there,
would the DSCA be 100 %. However due to component variation is it not feasible to store a
large number of components at production partners, thus it prohibits the overall flexibility of
moving projects in between production sites.
The possibility to store components at suppliers in China or Korea is an option for MGC. Of
the 20 biggest suppliers for MGC, all of the Asian suppliers have agreed in some way or
another to store finished components in their facilities. However, suppliers have not
allocated any major spaces in the facilities for this kind of storage, therefore only some of
the components can be stored. Only two out of 5 suppliers demand some sort of payment,
55
the biggest supplier demands 1% of the purchase order value per month while the other
only have a small fixed cost for the storage. Even if the suppliers are capable of storing
finished goods the capacity is very limited at the moment. Another obstacle for using
suppliers as warehousing is the lacking of routines and processes to keep track of
components, financial parameters and so on. The ERP system, SAP R/3, does not at the
moment support these kinds of actions. DSCA has an 20 % flexibility due to 3 out of 5
suppliers in China and Korea can store finished component. The DSCA is calculated with help
by the purchase order value for different suppliers which give a weight on each supplier.
Then comparing this weight to how many of the suppliers who are able to store finished
components without any extra charge.
Upside SC adaptability (USCA) measures the maximum increase that can be achieved in a 30
days period. The authors attempted to capture this but it could not be done in a accurate
way, since the information about the suppliers maximum capacities is lacking and since it
can result in a different constrain in lead time and other factors at suppliers and MGC’s R&D
department which makes it a complex phenomenon to capture.
5.5.4 Costs
The Supply Chain council defines the costs metric as the sum of costs associated with
planning, sourcing. This master’s thesis has focused the costs as direct costs for the product.
The cost measure is further divided into costs of goods sold and Supply Chain management
costs. From SAP R/3, historical data could be gathered on a monthly basis. The costs were
then allocated according to the number of projects that were delivered that month to
minimize the risk of getting biased data if one month would contain more projects than
normal. Figure 27 describes the cost distribution for one project where it can be seen that
the cost of components is the single biggest contributor to the overall cost.
Components Manufacturing Transportations Storage Other costs
0,34%
4%
8%
27%
61%
Figure 27 Cost distribution
56
The costs of goods sold (COGS) were calculated as all direct and indirect related to making
the product. For MGC the COGS are primarily made up of costs of components, cost of
design, and cost of manufacturing. The development of COGS from January 2007 to
September 2009 can be seen in Figure 28, which shows a clear trend of increased COGS. The
COGS has increased by 25 % from 2007 to 2009, and by 26 % from 2008 to 2009, resulting in
an average increase of 59 % from 2007 to 2009. The graph has been plotted with a 3 period
moving average to adjust for the difference in projects that are produced.
400%
350%
300%
250%
200%
150%
100%
50%
0%
Mar
Oct
Sept
Oct
Sept
Nov
Mar
Nov
Mar
Sept
April
Dec
June
Aug
April
June
Aug
April
June
Dec
Aug
2007 Feb
May
July
Feb
May
July
Feb
May
July
2008 Jan
2009 Jan
Figure 28 Cost of goods sold, COGS
The increase in COGS can be explained by both an increase in sourced components and
manufacturing. Cost of sourced components contributes to a large share of MGC total costs,
where historically the costs of components have been 60 % of the total costs. Component
cost per project has increased by 15 % from 2007 to 2008, and by 25 % from 2008 to 2009.
At the same time has the purchase value from suppliers in Asia increased indicating that
increased sourcing of components from Asia not has lowered the cost of sourced
components. However can it not be excluded that the cost of components had been lowered
if more European suppliers had been used. The costs of manufacturing could from the
information withdrawn from the ERP system be calculated to historically represent 27 % of
MGC’s total costs. The cost of manufacturing has increased 58 % from 2007 to 2008, and by
32 % from 2008 to 2009.
The Supply Chain management costs were calculated as the sum of costs associated with the
SCOR processes described in Chapter 6.2. These costs were primarily transportation and
storage costs. The ERP system for MGC assigns the transportation costs to each project, but
the cost of storage is not assigned to individual projects which implied that this cost had to
be distributed equally on each project manually. To make this distribution an assumption
that all projects occupy approximately 20 m2 of storage space were used for LCE and 30 m2
57
of potential storage area in China. The stock turnover ratio could then be employed as an
approximation of how long time each projects was stored. MGC pays a moving warehouse
fee based on how long each components are stored, how much space they requires, and by
each item line that are withdrawn from the stock. This results in a fixed cost that is solely
dependent on the amount of components that are transferred through the warehouse, and
a moving cost that is solely dependent on the amount of time the components are stored.
From these values the approximate storage costs could be calculated on a montly basis in
Appendix B – Metrics, Figure 38. These approximations of the storage costs were compared
to the actual costs that MGC has been invoiced from the 3PL, thus it could be verified that
the approximations had an accuracy of 95 %, thus giving a relative correct picture.
The two main transportation types MGC are using is sea freight and air freight. MGC are
trying to use sea freight as much as possible since it is almost ten times more economical per
ton shipped than air freight. Therefore the authors also measured the total amount of
transportation costs and also separated the air freight costs since this way of transportation
is most cost driving. The graphs can be seen in under Appendix B - Metrics and under Figure
39 and Figure 40.
5.5.5 Assets
The assets metrics measures how efficient the SC is utilizing the fixed and working
capital.MGC has outsourced the entire production which has lowered the amount of fixed
capital required. MGC has invested in some fixed inventories in LCE but except that the fixed
capital is kept at an minimal level which makes it superfluous to measure the return on SC
fixed assets (ROSFA). The cash to cash (C2C) metric which measures the time it takes for an
investment made to flow back into a company after it has been spent for raw materials
could be calculated by plotting the cost of components and the payments from customers as
shown in Figure 41 C2C in Appendix B – Metrics. The graph shows the data taken from
March 2009 and shows that 97,5 % of the purchase value had been realized before the
payments from the customers breaks even. The same patterns are shown for all months
analyzed. But this information also shows the vulnerability of MGC SC if projects are delayed
or cancelled since they commit the majority of resources before this commitment has been
covered by payments from the customers. If projects are delayed before the costs for
components have been covered, MGC has to pay both storage costs, the alternative costs for
the tied capital and the risk of obsolescence.
To calculate the metric return on working capital (ROWC), the value tied in stock was
calculated as seen in Figure 29, below.
58
600%
500%
400%
300%
200%
100%
0%
2007 January
May
July
September
2008 January
March
November
May
September
2009 January
May
September
March
July
November
March
July
Figure 29 Stock value in LCE
A clear trend of an increase in the stock value is observable, with an increase of the stock
value with 140 % from 2007 to 2008 and an increase of 82 % from 2008 to 2009. However
this pattern could be reasonable since the projects produced also has increased. To
determine the efficiency of the stock, the stock turnover ratio was calculated in Figure 30.
1,6
1,4
1,2
0,8
0,6
0,4
0,2
Figure 30 Stock turnover ratio in LCE
This information tells how often MGC has cycled through its stock. On a yearly basis the
turnover ratio was 11 times in 2007, 9 times in 2008, and 5 times in 2009. This means that
each component on average has been stored approximately 73 days in 2009. As can be seen
has the turnover ratio had a steady decrease since 2007, implying an increased inefficiency.
59
The turnover was calculated as the value of the components that left the warehouse a
specific period divided by the average stock value. The average stock value was calculated as
the value of the stock at the beginning of the period plus the value of the stock at the end of
the period, divided by the period.
60
Chapter 6 Analysis of distribution center in China
6 Analysis of distribution center in China

This chapter aims to analyze the empirical material presented in chapter 5 with help of the
theoretical frame of reference in chapter 3. Three alternatives of distribution center setup for
MGC are presented, and these alternatives are evaluated based on the five attributes
described in the SCOR model.
6.1 Analysis of the present situation

From the interviews with managers at MGC, the SC strategies could be identified with help
of the algorithm by Chan & Qi. This revealed that MGC focus on costs and reliability, while
flexibility, responsiveness and assets are of smaller importance. MGC’s products, as
described in chapter 2, are functional and of relative simple design with a low grade of
innovativeness and market growth. According to the model presented by Chibba (2007)
should companies with functional simple products operating on a mature market focus on
either an Efficient or Hybrid Supply Chain strategy. These strategies aim to balance the two
forces of minimizing costs and keeping a high grade of service level. Krishnamurthy (2007)
describes that companies who tries to combine low costs with high degree of service can use
the concept of decoupling points in the SC. The interviews with the managers at MGC
revealed that MGC currently are focusing on both minimizing the costs and keeping a high
customer service level through a high reliability which is in with line with the strategies
Chibba’s (2008) model describes. However are MGC currently not utilizing the concept of
decoupling point which Krishnamurthy (2007) describes as a way of combining low costs and
high customer service.
The concept of order winners and order qualifiers were presented in the theoretical frame of
references which aims to describe the specific qualities customers are evaluating when
screening a product or service. Mason et al. (2000) described that an agile SC should have
service level as order winner and a lean SC should have costs as order winner. MGC are as
described above focusing on both costs and service level. An implication of what Mason et
al. (2000) is describing is that companies either should focus on costs or customer service
while MGC on the other hand focuses on both.
Baker (2004) describes that an agile SC often holds inventory at a few distribution centers in
an effort to balance the supply with the market demands, while a lean SC views distribution
center as waste and hence focuses on minimizing the use of distribution centers. MGC’s
present situation with one single distribution center in Europe and storage at each specific
supplier in China corresponds with the Bakers description where MGC in Europe utilized a
lean SC and in China an agile SC.
The present distribution strategy MGC are utilizing with a 3PL to manage the LCE is in line
with what Baker (2004) describes as one specific way of executing a distribution strategy. In
the time of implementing, 2004, this was a way for MGC to lowering the costs of transports
and warehousing. Cetinkaya & Lee (2000) describes Vendor Managed Inventories (VMI) as a
61
way to implement a distribution center strategy. VMI is not presently utilized by MGC, thus
it can be a tool in the effort to achieve the hybrid SC which MGC, according to Chibba’s
model, should aim towards.
Other areas which have been revealed in the analysis of MGC’s current situation are
concerning the attributes described by the Supply Chain Council (2008) in the SCOR model.
These five attributes have been calculated on MGC in chapter 5. The calculations showed
that reliability, which the Supply Chain Council (2008) describes as how well a SC delivers in
terms of quantity and in time, was low. However it is hard today to distinguish if the
suppliers in the SC are delivering on time and in the right quantities, therefore a more
reliable and accurate way of measuring reliability would be needed.
The stock value in LCE has increased steadily the last three years with a combination of a
decreasing in stock turnover, thus proving that the inefficiency of the stock has decreased.
As described by Baker (2004) distribution centers is viewed as waste in a lean SC while an
agile SC views distribution center as a mean to keep a high service level. MGC prioritizes
cost as the most important strategic factor which from the lean SC point of view implies that
the waste has increased in MGC’ SC when the stock level has increased.
The theoretical frame of references described the steps Nordic companies had gone through
when shifting operations to China and also which kind of distribution strategies had been
utilized to manage the component flow. This information was complemented with empirical
information from an interview with a representative from Volvo Logistics. This showed that
companies initially when entering China had imported a large share of components from
Europe since the suppliers in China not were considered to be sufficient primarily in terms of
quality. When analyzing the empirical material about MGC’s current flow of components can
it be seen that MGC still are importing 60 % of the component value from Europe while the
other companies studied had passed this stage by increasing the amount of components
sourced from China. MGC has, just as the companies described in chapter 5 above, faced
problems with finding suppliers in Asia which meets the quality and technological
requirements. MGC strives to purchase components from Asia but when no qualified
suppliers can be found are they forced to use suppliers in Europe. It can further be
concluded from chapter 5 that there does not exist any formal obstacles for setting up a
distribution center in Asia. The official regulations from the Chinese government allow
foreign enterprises to use bonded zones to enable tax refunds and they are allowed
possession of the components stored there. Hence MGC would be allowed to take formal
possession over the components in the storage and the customs handbook can be freeze or
unfreeze as components passes back and forth through the warehouse.
Chapter 3.6 Alternatives for distribution center in China revealed that the most beneficial
alternative MGC has for setting up a distribution center in China is to locate it at a BLP to
enable tax refunds and avoidance of opening the customs handbook when components are
imported. From the interview with a manager at Volvo Logistics it could be understood that
62
so called “bonded transports” are needed to ship goods from ports to a BLP zone. A “bonded
transport” are a certain transportation mode of goods which are not processed by the
customs, thus they are outside customs boarders. These transportation modes are more
expensive than regular transportations. Therefore the location of distribution center in China
should be as close to a port as possible for MGC.
This analysis of MGC’s present situation has revealed that MGC’s strategy is in line with the
model presented by Chibba (2007) regarding how a SC strategy should be formed which
respect to the MGC’s products and the market they are operating in. It has also been
identified that other Nordic companies operating in China have increased the supplier base
in China at a higher degree than MGC. Furthermore has it been concluded that it would be
most beneficial for MGC to set up a distribution center in China in a BLP. The theoretical
frame of references concluded that concepts such as decoupling points and VMI could be
useful for MGC to balance the two forces of cost minimization and service level.
6.2 Alternatives for a redesigned SC with an LCA

Based on the secondary information and interviews from other companies operating in
China and about different alternatives for distribution centers in China, the authors have
identified three possible strategic paths for MGC to manage distribution centers. The three
alternatives are presented below and their respective advantages and disadvantages are
assessed and analyzed with help of the empirical material about the present situation
presented in chapter 5.
6.2.1 Alternative 1 LCE

The first alternative the authors has identified with a distribution center is to keep the
operations with a distribution center in Hamburg, LCE, as it is today with a main focus on
improving the current operations. A BLP could be utilized as a last resort for storing
components purchased in Asia that not can be stored at either supplier or partner. The use
of a BLP should be seen as an unwanted alternative where the preferred solution would be
to store components at suppliers or at partners, hence the BLP could be managed with little
ease and without a need for a more systematic approach. This alternative is associated with
a small risk since no big changes would be needed thus avoiding big implementation costs or
disruptions of the current material flow. But just as the risk is limited so is also the possible
reward limited. This alternative will not contribute to any major changes on the factors as
MGC has identified as important, costs and reliability.
An option the authors have identified as feasible that would increase the flexibility and
visibility with this alternative is to make the process with storage at the Asian suppliers more
systematic. A general process which would work as a VMI located at each supplier that
would be possible is described in Figure 31.
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Figure 31 VMI process at suppliers
The process should start with a regular purchase order to the supplier after which they
manufactures the component and then signalize to MGC that this specific component is
ready for storage. A goods receipt can then be made in the ERP system, SAP R/3 under a
specific storage location for the supplier. The supplier charges MGC for the storage space
preferable per month, but completely invoices MGC when the delivery is made to the
production partner, which is controlled by the head office in Sweden. This process enables
an increased flexibility in the SC, thus MGC can hold their components a longer period of
time before being sent to the partners and at the same time enables MGC to have control
over the amount of components that are available.
The advantage with this alternative is mainly that MGC would know what they would get.
The approach with LCE is well anchored within the organization and the cooperation
between the 3PL and MGC’s employees is validated. Using a LCE will not solve the problems
MGC are facing today with complex custom processes with customs handbooks since a
majority of the components will still be sent from Europe. This alternative will not give MGC
the opportunity to utilize the concept of decoupling points which is according to
Krishnamurthy (2007) a characteristic of a HSC. However the approach with storage at each
supplier is one way of utilizing a VMI, which enables a mix of a lean and agile SC.
6.2.2 Alternative 2 LCE/LCA

The second alternative that has been identified is to keep the LCE as it is today but to
implement an LCA for storing components purchased in Asia. It would also be possible to
consolidate all components in LCE at a weekly or monthly basis and sending them by sea
freight to LCA for longer storage. This approach would mean that the components are stored
a majority of the time in LCA. This would result in a possibility to reduce the operations in
LCE, hence cutting the costs of warehousing at LCE. However this would approach also result
in a setup cost for the LCA and fixed costs for both LCE and LCA. It might also be time
consuming and redundant to first consolidate components in LCE, and then send them to
LCA, unpack them, store, and finally consolidate and then distribute to partners. If the LCE
still would exist it is most reasonable that the components which are consolidated in LCE, are
sent directly to the partners. Hence should the LCA only be used for components purchased
in Asia so that MGC directly becomes responsible for the storage of the components and the
transportations to partners. But this would be a step away from the concept of VMI as MGC
then would take official possession of the components and carry the full cost of storage and
64
warehousing operations. This hence would increase the important factor costs without
leading to any obvious improvements on the reliability.
But as of today this is process managed completely by suppliers and partners, where
suppliers can store components for some time and then communicates directly with the
partner to arrange the transportations. Therefore this approach will increase MGC’s
responsibilities to administrate the process.
6.2.3 Alternative 3 LCA

The third and last alternative that has been identified is to dismantle the operations in LCE
and utilize only a LCA. The purpose of this thesis is not the find the optimal location of an
LCA. Therefore the authors have assumed a location of an LCA that geographically is close to
as many partners as possible. Another possibility would have been to locate the LCA as close
to as many suppliers as possible but since the transportation costs are much higher for
finished projects than for individual components is it reasonable to assume that it would be
more effective to locate the LCA close to the partners. However it is recommended that the
LCA should be located in a BLP and close to a port to avoid expensive transportations. It can
be managed completely by MGC personnel or as a mix of MGC personnel and 3PL as in LCE.
Figure 32 General process with LCA
A dismantling of the LCE without shifting a majority of the procurement to Asia could result
in a significantly increase of small deliveries from Europe, and since these deliveries would
be small could it be difficult to employ consolidation and sea freight hence resulting in an
increase in amount of air freight. Thus it is likely to assume that the transportation costs
would increase if dismantling the LCE without shifting a majority of the suppliers to Asia.
An option that could keep the grade of transportation low is to consolidate components at
each specific supplier and having a logistics provider collecting them at a monthly or weekly
basis and letting them arrange sea freight to LCA. This would lead to less transportations
within Europe since no components are sent via LCE, and still enable the use of sea freight.
65
This kind of consolidation is already utilized for suppliers in Sweden, where a logistics
provider on a weekly basis collects components at each supplier, and by truck delivers these
to LCE so knowledge about this process is available within the organization. Since the LCE is
managed by a 3PL is there no formal obstacles to dismantle it and implement an LCA
instead. MGC are currently employing a BLP in a small scale so the processes and knowledge
for administrating a LCA should be available within the company.
An opportunity available with alternative 3 that would decrease the amount of assets in
stock is to have some components managed as VMI. VMI is a distribution strategy which has
been presented in the chapter 4, and is by Cetinkaya & Lee (2000) described as a warehouse
owned and controlled by the supplier located at the customer. As found from the cases,
especially from Nokia and Sony-Ericsson is it possible to manage a distribution center in
China as a VMI. Nokia has had great experience with this setup, resulting in zero-inventory
and extremely short lead times. MGC is competing in a totally different industry than Nokia
with substantially longer lead times and lower volumes but it might however it could still be
worthwhile to learn from a best practice in the concept of SCM.
MGC are today purchasing 70 % of the component value to stock and 30 % specific to each
project. A VMI approach could favorably be implemented on the components purchased to
stock and which are used in a majority of all cranes. VMI is supported in MGC’s ERP system,
SAP R/3 so it should be feasible to implement it if suitable suppliers could be identified.
6.3 Evaluation of the alternatives for a distribution center

This chapter evaluates the three alternatives for a distribution center that has been
identified in the chapter above. The evaluation is performed based on the five SC attributes
which is described in the SCOR model and attempts to describe the advantages and
disadvantages for each alternative and how these consequences would affect the overall SC
strategies.
From the analysis it can be concluded that there are no laws who prohibits MGC to establish
the LCA in China. The LCA can be used as a BLP, resulting in a tax rebate and an opportunity
to freeze the customs handbook time frame. The LCA can be used for both distributions of
components to production partners and as storage for component to project which are
delayed or on hold. This creates a form of flexibility for MGC, meaning they can increase or
decrease their production in a more convenient way than the current situation. MGC could
also use the LCA for storing finished projects if their customers would prefer to delay the
delivery.
6.3.1 Reliability
Alternative 1 would not change the SC reliability in any significant way more than that it
would enable MGC to focus attention on improving the relationship with the current
suppliers. But since the measures in the chapter above showed that the reliability of the
66
suppliers to deliver in time is low, is it likely that the reliability will continue to be low if
operations are kept as they are today.
Alternative 2 would give MGC a possibility to take better control of the SC in Asia since they
then would be in direct control of the LCA, meaning that they could monitor every
component that is delivered from the suppliers and every component that is sent to
partners. This would give enable MGC to get more accurate data in their ERP system on the
Asians supplier’s reliability to deliver components in time and in right quantities which could
enable an possibility to better manage the SC resulting in a better reliability. Since the LCE
would be kept in this alternative would MGC still be able to monitor the European supplier’s
reliability.
As Yan & Wang (2005) claims, several companies have experienced delays in deliveries
within China, thus is it likely to assume that the reliability of MGC’s SC would decrease with
alternative 3 to just implement an LCA and keeping all component in stock there. Alternative
3 would also in a larger share of smaller shipments from Europe which could be hard to
monitor, hence resulting in a lower reliability. One of the major problems MGC has
experienced with the LCE is that the 3PL provider is using a different enterprise system than
MGC, resulting in some compability problems. MGC has an opportunity to run the LCA with
own employees which would enable the use of the same enterprise system, hence resulting
in real time updates and hopefully a more accurate and up to date information base that
would increase the possibilities to withdraw relevant data and increasing the reliability.
6.3.2 Responsiveness
Alternative 1 would not change the responsiveness in any significant way. Alternative 2
would decrease the responsiveness since the components procured in Asia must be
transferred via an LCA, which would add additional time to the critical line described in
Figure 24.
The responsiveness of MGC’s SC would largely be unaffected by alternative 3 since the

components with the longest lead times already are purchased from China. One situation
that could increase the responsiveness of the SC when utilizing an LCA is if components are
lost or damaged at the partners. If the specific component is kept in stock at LCA could the
replacement be made swift since the 6 weeks it takes with sea freight from Europe can be
cut away and avoids expensive air freight from Europe. There is also an opportunity for MGC
to utilize the stock components as a VMI, thus letting each supplier being responsible for
keeping a determined inventory level. This could then enable MGC to respond quickly to
new orders which could increase the responsiveness, i.e. lead time.
6.3.3 Flexibility
Alternative 1 would with the use of a BLP give a higher flexibility since it would give an
opportunity to store components if all other options were emptied.
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The flexibility in alternative 2 and 3 would increase since both components from suppliers
and finished projects could be stored in the LCA. If the LCA is setup within a BLP, this would
create an opportunity to freeze the custom handbooks time, resulting in greater flexibility
both upstream and downstream. Alternative 3 would also enable MGC to change
components between projects since the customs handbook not are opened until the
components leaves the LCA. However the maximum capacity at the suppliers would not
change with an LCA, so the upside SC flexibility would still be limited to the supplier’s
maximum capacities.
6.3.4 Costs
The costs for the three alternatives have been calculated from information of how much
MGC pays for their current warehouse and information from contracts with 3PL which
controls a BLP, signed by Cargotec. There is a setup cost associated with implementing of a
LCA in terms of both internal efforts and external expertise and guidance. It took 2 years to
fully implement LCE which makes it likely that it would be quite time consuming to
implement an LCA as well.
The costs MGC pays for LCE are both a fixed costs for each item line, equivalent to a
component, that passes through the warehouse and a moving cost for the amount of time
the component is stored and the storage place it requires. In LCE, MGC also has own
employees who are responsible for handling all documentation flows and customs clearance
which is not included in the cost for LCE, but this cost is not taken into consideration when
comparing LCE against LCA. When considering the costs that are directly correlated to
manage components in a warehouse, as in Figure 33, it is clear that alternative 2 with a LCE
and LCA simultaneous is the most expensive alternative. The assumption has been made
that with alternative 2 components are consolidated two weeks at LCE before being sent to
LCA, where they are being stored the required amount of time. If components are stored 2
months will the costs for having both an LCE and LCA be 187 % higher than the current costs
with a LCE.
The alternatives with only a LCE or a LCA have nearly exact the same costs associated. The
figure shows that the costs for a solely a LCE or a LCA is identical when the storage time is 2
months, however the fixed costs with an LCA is slightly higher which makes it more costly to
store components in LCA a short period of time. But since wages is cheaper in China than in
Germany would MGC’s own employees be cheaper in China than the employees at LCE.
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800,00
700,00
600,00
500,00
LCE
400,00
LCE/LCA
300,00 LCA
200,00
100,00
-
Months
0 1 2 3 4
Figure 33 Direct warehouse costs
The transportation costs would be affected with the implementation of an LCA. The
alternative with a combined LCE and LCA would not affect the transportations in a significant
way since components procured in Europe still would be consolidated in LCE before sent by
sea freight to LCA or directly to partners. The alternative with just an LCA would with the
same amount of suppliers in Europe result in a need for more small deliveries. If all deliveries
from suppliers in Europe could be sent with sea freight, the cost of transportations would
not increase. However if the amount of air freights increase will this affect the
transportation costs. To approximate how the cost of transportation will change has the
following calculations been made.
The average weight for a shipment from LCE is of 12 ton for each bigger crane and 4 ton per
each smaller crane from LCE. 80 % of all cranes MGC are producing is bigger cranes so the
average weight that is sent from LCE is 10,4 ton, which the calculations found in Figure 34
are based one. Components are sent by both sea and air freight where sea freight
approximately costs 1000 SEK/ton and air freight costs 10000 SEK/ton. The transportation
costs therefore depends on which mix of sea and air freight MGC are utilizing, but currently
approximately 10 % of the components are sent via air freight. Since air freight is 10 times
more expensive than sea freight is a change in the amount of components sent by air freight
important. An implementation of an LCA might affect the current flow of material, if the mix
of sea and air freight that currently is utilized would be changed. In Figure 34 it is plotted
how the total transportation cost per crane from LCE changes when the mix of air- and sea
freight is shifting. The lowest transportation cost is achieved when not using air freight at all.
From Figure 34 it can be concluded that a small increase in the amount of air freight
significantly increases the cost of transportation.
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A distribution center in Asia with either alternative 2 or 3 would not directly affect the Cost
of Goods Sold, COGS, since MGC not has verified that the purchase costs are dependent on
whether they have a warehouse in Asia or not. However had Volvo logistics experienced that
a higher degree of locally sourced components leads to lower costs and lower lead time
which also could be possible for MGC if increasing the sourcing from Asia.
120 000,00 kr
100 000,00 kr
80 000,00 kr
60 000,00 kr
40 000,00 kr
20 000,00 kr
- kr
Air
Figure 34 Air freights impact on transportation costs
6.3.5 Assets
For alternative 1 the asset attribute not would be changed directly since the operations will
be kept similar to as they are today. With alternative 2 the amount of fixed capital in the SC
would increase since MGC would take over the responsibility of the components that
currently are stored at each Asian supplier. If the components purchased in Asian would be
stored in an LCA the possession of the components would be shifted over to MGC, resulting
in higher stock, meaning more fixed assets. However it has been identified a possibility to
manage some components in an LCA as VMI which would lower the amount of components
MGC formally are storing.
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Chapter 7 Conclusions and recommendations
7 Conclusions and recommendations

In this chapter the authors attempts to answer the research questions elevated in the
beginning of the report. Recommendations are made of how MGC should focus on managing
their component flow in the short and long term.
7.1 Results
This thesis has highlighted the situation MGC currently are experiencing in their SC. The
thesis has also studied how a redesign of their SC with a distribution center in Asia could
affect the component flow. This first section attempts to answer the research questions.
 RQ 1: What are the advantages and disadvantages with the current Supply Chain for
MacGregor Cranes?
The evaluation of the current SC strategy revealed that MGC currently are considering costs
and reliability as the main order winner. The advantages that have been identified with the
current setup with a distribution center in Hamburg are that the overall component flow in
Europe can be managed in a convenient way. The consolidation of components in Hamburg
enables MGC to utilize sea freights at 90 % of all deliveries which as the calculations shows is
more cost effective than utilizing a larger amount of air freight. The distribution center gives
MGC a high flexibility for the components sourced in Europe, where the empirical findings
show that the downside SC adaptability is 100 % since MGC are able to hold and stock
components that not is needed in the production.
However having the setup of a distribution center in Hamburg leads to a steady increase of
the inventory levels combined with a decreased stock efficiency which both increases the
cost of warehousing and the alternative cost of having assets tied in stock.
One disadvantage that has been identified in this thesis is that MGC currently are relying on
their Asian suppliers to store components that not are needed in the production. Some
suppliers have limited storage capacities in terms of space. The Asian supplier does not have
a systematical method for storing components which create problems for MGC to monitor
the stock level. MGC have stated that one obstacle for the company to expand their number
of suppliers in Asia is due to the lacking ability to store components in China.
The current situation with a large share of imported components into China from Europe has
its disadvantages since the regulations with customs handbook prohibit MGC to have
components in China for a period longer than 12 months which lower MGC’s flexibility. The
customs handbook also limits the ability to shift components in between projects since every
component must be assigned to a specific project when entering China.
From the information collected about other companies operating in China it can be
concluded that MGC still are in the phase 2 as described in the outsourcing process in Figure
14. The other companies that have been studied have taken the next steps towards a
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complete presence in the Chinese market. The studied companies stated that to enable low
costs in the entire SC is it a requisite to also shift a majority of the procurement to Asia.
From this can it be concluded that MGC’s current setup not gives an opportunity to cut the
costs in a drastic way. It was indicated with help of the Product Life Cycle concept by Chibba
(2007) that MGC’s products are in the mature state, thus implying a Hybrid Supply Chain
strategy where the cost should continue to be the main order winner for MGC. However
from the evaluation of the current situation can it be concluded that the cost of
components, warehousing and manufacturing has increased over the three years studied for
MGC.
When identifying MGC’s SC strategy the authors found that Reliability, how well a SC deliver
on time and the right quantities, was important. From the empirical findings it can be
concluded that Reliability, the amount of late orders from suppliers, were high. If this is a
result of the fact that MGC’s suppliers have a low reliability or a result of MGC’s information
from the ERP system, is obsolete cannot be distinguished with the current setup which gives
MGC a low ability to manage the reliability aspect of their SC.
In the short term is it unavoidable that the costs would increase with a distribution center in
China. The calculations in Figure 33 indicates that the alternative with using both a
distribution center in Europe and in Asia, LCE and LCA, will more than double the costs for
storage then with the current distribution center setup. In a short term perspective a
removal of LCE would affect the SC cost negative since the amount of components
purchased in Europe are around 60 % of the purchase order value and around 50% of the
total weight. By removing the LCE, MGC takes a risk of increasing the air freight which has an
approximately ten times higher cost then regular sea freight. Therefore implementing a LCA
in a short term perspective and removing LCE is directly translated to a risk, which MGC
needs to be aware of.
The advantage the authors has identified in a long term perspective with the alternative of a
single LCA is a possible cost reduction in warehousing, labor and component cost, thus
enabling MGC to improve their main order winner cost. However, there are other
advantages as well, such as closeness to the market, which means MGC can respond more
quickly to the demands set by the customers, i.e. Responsiveness and Flexibility will likely to
be higher if having the components available closer to the production partners.
By adopting a LCA in China, MGC can create a decoupling point in the supply chain, hence
implementing the concept of HSC by Krishnamurthy (2007). The LCE has the advantage as a
decoupling point due to the fact that components that are destined for a project can be
redistributed to another project or to another production partner. Meaning, a LCA creates
the flexibility the SC did not have with the current distribution strategy. The
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Responsiveness, i.e. the lead time, will be an advantage in comparison to the current setup,
since the sea transportations between Europe and Asia could be reduced creating a
minimization of the lead time.
The disadvantage with establishing a LCA in a long term perspective could be that other
countries than China can become important markets for MGC, thus a big presence in China
can make it hard to shift operations to other countries. However, to fully understand this a
more deepinvestigation needs to be done. Other disadvantages with establishing a LCA is
that a relocation of the warehouse from Europe to Asia will impact the flow of component.
Without a proper ERP system support, components can be lost or mixed up, creating major
problems for MGC.
As stated earlier, using just a LCA in China creates a risk for the component flow from
Europe. Without a physical distribution center the risk of delays increase, thus the air freight
will increase, resulting in a rapid incline of the costs. The problem MGC are facing with
Chinese suppliers, were the control over the goods is lacking can be the fact in Europe.
As Yan & Wang (2005) identified, many companies who have outsourced to Chinese often
experience a low grade of reliability, meaning the accuracy of delivering in time and in the
right quantities. By increasing the operations in China with a distribution center can affect
the precision of MGC’s SC to deliver components to the production partners, which can be a
disadvantage. The contradiction is that MGC have many years of experience with operations
in China.
7.2 Recommendations for MGC

Based on the information in the section above about the advantages and disadvantages with
the three possible alternatives that has evaluated with different strategies of a distribution
centers, the authors can specify recommendation regarding how MGC should manage their
SC flow in a short and a long term.
The authors have summarized the information in Figure 37, below, which illustrates how
each attribute of MGC’s SC could be affected in a short- and a long term perspective with the
recommendations that are made.
Figure 35 Advantages and disadvantages with a LCA
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7.2.1 Short term

The calculations indicates that the warehouse costs represent 0,34 % of the total cost base
therefore the authors argues that an eventual implementation of an LCA not should be
aimed primarily for reducing the warehouse costs. An implementation of an LCA would in
best case result in a limited reduction of warehouse cost. In worse case is it likely that the
costs of warehouse would increase with an LCA if the LCE still is kept. The potential cost
reduction with an LCA is limited compared to the risk of complicating the flow of
components, hence making it hard to control, resulting in higher air freights.
Therefore the actions the authors are recommending to MGC in the short term, 1-2 year, is
that MGC should continue the work towards increasing the amount of suppliers in Asia
before implementing an LCA. Even if a distribution center in Asia is not to prefer in a one to
two years range, there are other strategies to use to handle the problems with orders which
is to be delayed or on hold. The authors recommend MGC to develop the relationship
between the suppliers located in Asia with the main objective to use suppliers as stock
keeping units, Alternative 1 in Chapter Error! Reference source not found.. By implementing
he concept of Vendor Managed Inventory, VMI, MGC can keep components in stock but
under the supervision by the suppliers. This will not just improve the Flexibility in the SC, it
will also improve the cash flow because the payment is delayed until the goods are sent to
Partners, meaning the attribute Assets according to the SCOR model.
7.2.2 Long term

As of today when the amount of components purchased from suppliers in Asia stands for
40% of the total purchase value, implementing an LCA would not completely diminish the
need of the LCE. It is reasonable to assume that there still would exist a need to consolidate
the components purchased in Europe before they are sent to Asia. If this assumption stands
true MGC would have to keep the LCE even though implementing an LCA, hence resulting in
larger warehousing costs. The transportation would likely be higher according to the
calculations in Figure 34 since the transportations from Europe would stay the same, but the
transportations within Asia would increase since components would be sent to the LCA
before being sent to the partners. The cost for storage would be higher for MGC if they
would implement two warehouses instead of one.
A long term recommendation is therefore to set up a LCA in China to supply all of the
production partners in China, Korea and India but also the production partners in Poland and
Croatia with components, Alternative 3 in Chapter 6. The benefits of using an LCA are that
MGC overtakes the control of the activities happening in Asia both with transportation
between suppliers and production partners and the insight they have into the process
regarding it. They also entails the ability of using solid information regarding supplier’s
reliability, meaning how well they are delivering in terms of lead time and quantity which is
not found at present setup for suppliers in China and Korea. A LCA creates a foundation for a
new SC in Asia for MGC to operate with, thus enabling better processes.
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The author’s recommend that the LCA should be implemented in line with stated strategy,
and be outsourced as the production for example. Therefore a similar setup as is used in LCE
is to prefer, using a third party logistics, 3PL. The advantage of using a 3PL is that if a market
dropdown is experienced, they do not have a high degree of fixed assets, meaning that the
LCA should be constituted by moving prices, resulting in better cash flow.
A Vendor Managed Inventory, VMI concept is stated as a recommendation in a short time

perspective, however, this is something that should be included in the long term
perspective. With a LCA, suppliers who deliver stock components should be given the
opportunity to store components inside the distribution center, available for MGC to use
them, which after MGC gets invoiced.
In a long term perspective the major difference between current distribution strategy, using
LCE and a new distribution center in Asia, LCA is the amount of purchased components from
Asia and mostly China. With an increased amount of purchased in Asia a need of
consolidating increases with a comparison of today’s situation. The likelihood of decreasing
the purchases in Europe is high accordingly to MGC, and therefore the need of still using the
LCE in a long term perspective can be argued. Except the fact that MGC is being able to
purchase a larger share of components from Asia there are other differences from today’s
distribution strategy. A setup with a distribution center in China has a more maneuverability
then the current SC, for example would the ability to shift production both backwards and
forward increases.
In a long term perspective the authors identifies a cost reduction in general, however, this
cost reduction is not anchored in the distribution center itself but the cost of component. If a
larger amount is purchased in Asia the overall component cost will decrease. Cost of
transportation will likely to decrease as well due to shorter distance between suppliers, LCA
and partners than in the current SC where components are shipped from Europe. With a
LCA, the Responsiveness, i.e. the lead time will decrease on some components. However,
the critical lead time at the current SC is due to one segment of component which it not
included in the sea transportation.
When identifying MGC’s SC strategy the authors found that Reliability, how well a SC deliver
on time and the right quantities, was important. By taking Reliability into consideration in a
long term perspective, MGC will probably not increase or decrease their Reliability, since the
LCA is recommended to be managed by a Third party logistics, 3PL, as LCE is today. MGC’s
assets will not be affected in any way either, thus the value tied in stock depends on how
well they plan their activities, meaning a distribution center in Asia will not per definition
improve this.
7.3 Discussion
The literature that has been used in the theoretical frame of references provided a good
basis for performing the evaluation of the current SC with a distribution center in Europe.
75
The SCOR model provided a general accepted framework for evaluating MGC’s SC. However
the authors found it hard to follow the definition of the metrics completely. All of the data
that was required was not available or was not reliable because it was obsolete. Therefore
the authors had to use their own knowledge for interpreting other definitions of the metrics
that was as close to the definitions by the Supply Chain Council but at the same time feasible
to collect. This reveals a weakness in the SCOR model when it attempts to be applicable to
all companies operating on all different markets. The authors believe that SCOR model must
be adjusted in some extent to each specific company situation. The quote “one size fits all”
does not always stand true.
The aggregation method advocated by Chan & Qi was used to identify the different weights
in MGC’s SC strategy. The authors found the method to be suitable to use for capturing the
respondents insecurity about different choices since the respondents in almost every
situation not could give a definitely answer on what they preferred instead of another
option. The authors also attempted to use Chan & Qi’s aggregation method for calculating
one single performance index of MGC’s SC performance. However was this found to be
impossible since most of the metrics described in the SCOR model had not been assessed by
the respondents previous. It was therefore impossible for the respondents to state the
measurement scale in the form of a specific interval of bottom and perfect levels for each
metric. To be able to state such interval the authors believes that a company first must
analyze each individual metric and create an understanding of the operations that affects
the metrics. Otherwise will the specification of bottom and perfect levels for each metric just
be meaningless numbers for which the company does not know how to improve. This thesis
has showed that the aggregation method can be implemented in a real situation, it does
however require some time and efforts to make it useful on a day to day basis.
The fundamental basis behind the concept of supply chain management is according to
Christopher (2005) the search for cost-effective outcome for everyone concerned. The key is
to form a chain from ultimate suppliers to ultimate customers and strive towards a degree of
cost-efficiently. However, the authors have found that this concept is hard to adopt in all
aspect at MGC. There are several factors that prohibit the adoption of the supply chain
management concept in the case of MGC. The main factor that authors found was the
culture aspect, where different cultures among the companies involved in the SC seems to
prohibit the integration of several units. MGC have a hard time to adopt the supply chain
management philosophy since the production is managed by companies from other cultures.
For MGC to integrate the philosophy of Suppy Chain Management and start sharing
information in a greater manner among the other companies in the SC this could result in a
potential risk for MGC that some other company exploit this information in a way that
explicitly benefit that specific company. Therefore the authors concludes that all business
types are not fit to be handles as a whole chain because forces inside the chain will work
against the chain itself.
76
The authors found that the literature on distribution centers and more specific on
alternatives and consequences in China was lacking. Therefore the evaluation of advantages
and disadvantages of a distribution center in China for MGC mainly was based on secondary
information from how other companies have managed their distribution center and from
calculations made about warehousing and transport cost. However the authors believe that
the recommendations that could be made are feasible and that it would allow MGC to
balance the two forces of cost minimization and high service level, which is the classic
struggle, described in the theory of leanness versus agility.
7.4 Suggestions for further studies

The authors of this thesis suggest that it is possible for further studies to focus on more ways
to make the SCOR model more flexible to be applicable to different company scenarios.
More attention should also be focused on ways of evaluating a SC since the methods
described in this thesis mainly seems to focus on creating methods that are theoretical
stable without considering how they could be applied in a real situation.
Further attention should be paid to Nordic companies operating in China from a Supply
Chain point of view since the authors believes that the trend of outsourcing to China is here
to stay. This thesis has suggested alternatives for managing a distribution center in China.
However is this thesis only performed at one single company so further studies could done
to test if these alternatives would be feasible on a larger selection of companies or if
different distribution strategies must be implemented for each specific company. The
authors suggest MGC to investigate further how a VMI approach could be implemented in
their enterprise system and analyze how their suppliers would react to this approach.
Further suggestions to MGC are to take help of professionals experienced in the specific
Chinese market when setting up the distribution center to get more detailed information
about necessary documents and regulations.
As the authors found that a supply chain management concept is not always suitable for all
business types more emphasis should be focused on investigating the pitfalls and nrisks with
the concept. The authors are certain that more than culture differences can affect the
interplay between businesses in a supply chain.
77
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81
Appendixes
8 Appendixes
8.1 Appendix A – Calculation of SC strategy
Attribute weights
Attribute distribution
I
Appendixes
8.2 Appendix B – Metrics

90,00%
80,00%
70,00%
60,00%
50,00%
40,00%
30,00%
20,00%
10,00%
0,00%
April
June
April
April
March
June
June
May
July
May
July
August
May
August
March
July
August
February
February
October
October
October
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September
2009 January
September
November
November
2007 March
2008 January
December
December
Figure 36 Late orders
400,00%
350,00%
300,00%
250,00%
200,00%
150,00%
100,00%
2007 April June Aug Oct Dec Feb April June Aug Oct Dec Feb April June Aug
Feb
Figure 37 Component costs
II
0
5
10
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20
25
2007 Feb
2007 Feb 30
Mar
Mar
April
April
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Oct
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Dec Nov
2008 Jan Dec
Feb 2008 Jan
Mar Feb
April Mar
May April
III
June May
July June
Aug July
Sept Aug
Sept
Figure 38 Storage cost for LCE
Oct
Figure 39 Transportation costs

Nov Oct
Dec Nov
2009 Jan Dec
Feb 2009 Jan
Mar Feb
April Mar
May April
June May
July June
Aug July
Sept Aug
Sept
Appendixes
Appendixes
1000%
900%
800%
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100%
0%
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2008 Jan
2009 Jan
Figure 40 Air freight cost
Figure 41 C2C
IV

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2010:013 CIV

Evaluating distribution centers

Luleå University of Technology

MSc Programmes in Engineering

2010:013 CIV - ISSN: 1402-1617 - ISRN: LTU-EX--10/013--SE

Örnsköldsvik, December, 2009.

Eric Åström Magnus Öhgren

Supply Chain Management can promotes greater integration in terms of information,

1.1 Problem definition

Figure 1 Focus of interest

1.4 Abbreviations of terms

3PL Third-party logistics

SCC The Supply Chain Council

2.1 Owner structure

Figure 2 Company structure (Cargotec, 2009)

2.2 MGC history

2.3 MGC products

2.3.1 GLB crane

2.3.3 GLH crane Figure 4 LC crane

Figure 5 GLH crane

Figure 6 A ship set

2.4 MGC Production

2.4.1 The partners

Figure 7 No. of cranes in production per partner 2009

2.4.2 The suppliers

Figure 9 Percentage of purchase order value per region

Figure 10 Budgeted changes in purchase order value

3 Theoretical frame of references

3.1 Dispositional of theoretical framework

Figure 11 Theoretical framework

3.2 Concepts of Supply Chain Management

Figure 12 SCM Network (Christopher, 2005)

3.2.1 Supply Chain strategies

Figure 13 Supply Chain strategies linked to PLC (Chibba, 2007)

3.2.2 Agile Supply Chain

3.2.3 Lean Supply Chain

“Lean is characterized by scarcity.” (Oxford English Dictionary, 2009)

3.2.4 Efficient Supply Chain

3.2.5 Hybrid Supply Chain

3.3 Order winners/Order qualifiers in a SC

3.3.1 Order winners

3.3.2 Order qualifiers

Table 1 Order winners and order qualifiers (Mason-Jones et al., 2000)

Lean Supply Quality Cost

3.4 Distribution center strategies

3.4.1 Service Level Segmentation

3.4.3 Cross Docking

3.4.4 Third-Party Logistics Provider

3.5 Secondary information about distribution strategies in China

3.5.1 Phases in outsourcing

Figure 14 Phases in outsourcing (Authors own interpretation)

Volvo PV is an automotive company who established production in Chaozhing, China, in

3.5.2 Distribution strategies in China

3.6 Alternatives for distribution centers in China

3.6.1 Free Trade Zone, FTZ

3.6.2 Bonded Logistics Park, BLP

Figure 15 The BLP process

3.6.3 Differences between FTZ and BLP

Table 2 Comparison between FTZ, BLP and EPZ

available upon delivery hours/Day

3.7 Supply Chain evaluation

3.7.1 The SCOR model

3.7.2 The SCOR processes

Figure 16 The SCOR model categories (Supply Chain Counsil, 2008)