Comments on the Alternative Distribution Structures

One major deficit in the alternative distribution structures as they originally were formulated is the use of traditional ABC-analysis for deciding on inventory locations. The A-article category may well contain infrequently demanded parts with a high value. To position such items downstream in the supply chain is contradictory to theory since availability increases and cost decreases if these parts are positioned upstream in the chain. Further the ABC-classification is primarily aimed at the needs of the distributing company. In order for the system to satisfy also customer needs the customer value of the different articles must also be taken into account when deciding on inventory levels and locations.

We have seen that it is highly significant to use a proper classification scheme of parts both when deciding on positioning of stock and for managing inventory. Using ABC- analysis may well be sufficient for managing inventories, similarly it may be insufficient for deciding on where to locate inventories.

We recommend using other types of control dimensions than revenue when deciding on inventory locations. Once such dimension closely related to the ABC-analysis is demand. The demand for parts can also easily be assessed and is easy to update. When deciding on positioning of stock it will also be of the utmost importance to recognize local conditions. For example, it will not be suitable to carry A-articles in service technicians’ cars as A-articles are defined at the DC. Car inventory may vary considerably depending on the types of customers and machines served.

In relation to the structure where B-and C-articles only will be held at the DC, there will be a clear need of deciding on how this structure will be sustained. That is, the development of policies for addressing the situation when former A-articles have

become B- and C-articles in time and have to be transferred to the DC. Naturally, this will also imply costs for transportation and quality controls.

When implementing a new distribution structure, some relevant differences between Germany and France will be significant to consider. First, both the alternatives seem to result in larger savings for the German distribution compared to France. The reason is the severe increases in French transportation costs. We have also seen that costs not only are difficult to estimate in advance due to insecurities of what the outcomes will be. They are also hard to estimate since current costs are hard to assess and since many costs also are dependent on other factors than the physical distribution e.g. which information systems that will be necessary to implement.

Second, the French sales subsidiary makes use of the maintenance kits to a much larger extent than the German. One reason for this difference is that a large portion of German customers does not make use of Gambro technicians at all. Therefore it is harder to sell kits that may contain parts perceived by customers not to be required. The use of maintenance kits facilitates forecasting, as the demand for maintenance kits is relatively easy to predict.

A final discrepancy between Germany and France is the customers’ demand on lead time, which is 48 hours in France and 24 hours in Germany. Transportation cost calculations for France is based on the assumption that goods are delivered within 24 hours. Hence French transportation costs can be lowered if 48 hour lead time is accepted. However, increasing customer requirements may lead to increasing demand for shorter lead times. Therefore it might yield competitive advantages if offering this service level before customer preferences have changed.

Considering the future distribution structures both the studied alternatives offer their respective advantages and disadvantages. In this analysis it is easy to focus on the more theoretical aspects of the alternatives and to regard the factors for themselves and not in the proper system. These different perspectives will lead to different conclusions.

From a strict academic standpoint we find that direct distribution of spare parts is the more favourable option for Gambro. It would further increase centralization of control, discussed above, and increase the strategic leverage of distribution as a source of competitive advantage.

However tempting it is to embrace this conclusion, the discussion about efficiency in the beginning of this section must be taken into account. The statement that direct distribution is preferable is purely normative, not taking the practical implications of a transition into account. Since these are significant and it is an absolute condition that external efficiency is upheld at present level during the transition, the conclusion is not immediately applicable in the empirical context.

Both the studied alternatives will theoretically give rise to a higher availability. It is however important to recognize that this increased availability not automatically is transferred to increased service levels to the customer. To fully exploit the increases in availability and to transfer the availability into satisfying customer needs will require significant organizational capabilities, e.g. communication skills, and considerations such as how to design the order process.

The best solution for Gambro is direct distribution, but the transition is best conducted gradually. Aside from what is said above, a logical first step would be to create a transparent distribution process by implementing a common information system. Second, the ability to turn this transparency into an advantage in terms of better performance must be built up. This would best be done by the centralization of the slow moving parts. Such a step would give the opportunity of testing the system towards its main objective while working in a smaller scale and with a slightly bigger marginal for errors. When these capabilities are mastered the prerequisites for full- scale direct distribution are filled.