Cutting logistics costs with a centralized distribution model for ABB’s distribution of LV products in Asia Pacific

As the world’s largest automation supplier, ABB has built a value chain geared to the singular goal of achieving results for the customer. Every day ABB ships more than 1,000,000 automation products. Hence, logistics plays an important part for ABB to gain a substantial competitive edge in the global market place. The company must be able to deliver their products at shortest time possible to meet customer demands. If ABB wants to increase their market share and enhance its performance they must determine their competitive priorities. Both pricing and availability of the products are closely linked with the distribution channel. If the distribution channel is efficient then the products will be available in right quantities at the right time to customers. If the distribution channel is also cost efficient then the price of the products can be lowered.

The objective of this study is to understand how the different logistics costs affect ABB’s distribution model and to find the most optimum model to support the Asia Pacific region in order to prevent a sub optimization. Today ABB have a decentralized distribution and the sales units keep their own stock to support local requirements. The total logistics costs constitute of 17.5 percent of the transfer price. A centralized distribution model will create a saving of X MUSD and lower the total logistics cost to 12.6 percent of the transfer price.

In order to fulfil the purpose the author has done a broad literature review about distribution and cost models. The evaluation of today’s distribution model is based on information from a survey sent to concerned production and sales units during October 2005. The simulations for the regional distribution centre are based on parameters from the situation today.

The conclusion of the thesis is that ABB will benefit from a centralized distribution model. Using a model with a regional distribution centre will not just save costs, it will also increase the service level by providing the customers with higher product availability. However, local stocking have its benefits since ABB will be close to customer location and can, if the right products are available, offer a faster delivery than a regional distribution centre. The disadvantage with a longer lead time can be avoided by using investing in new IT infrastructure or use existing technologies for order handling and use direct distribution to large end customers.

Author: Froderberg, Anna

Source: Lulea University of Technology

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