Improving Critical Order Delivery for ABC Vehicle Aftermarket

ABC Vehicles is a leading manufacturer of Commercial Vehicles. It has a Pan India sales presence and for
the purpose of spares sale, the country is divided into 24 regions. Each of the 24 regions has got a parts
distributor supplying parts to the retail channel in that region. This is additional to approx. 150
authorized workshops throughout the country, servicing vehicles but not retailing spares.

The company is facing a stiff challenge in the highly competitive HD trucks segment. The management
feels that spares supply to the market especially for the VOR (Vehicle Off Road) orders can be a
differentiating factor in the segment. A team led by Mohan, Spare Parts Logistics Manager and Salman,
Spare Parts Commercials Manager have been given the task to formulate a methodology for ensuring
95% compliance of VOR requirements within 48 hours.

For the purpose of planning stock and freight, parts can be categorized into two Aggregates and Child
parts. Aggregates (A) weigh 10 Kg and cost 20,000 INR each on an average. Child parts (C) weigh 4 Kg
and cost 3,000 INR each on an average.

The weekly demand for aggregates in each of the regions is normally distributed with a mean of 2 and
standard deviation of 5. The weekly demand for child parts in each of the regions is normally distributed
with a mean of 20 and standard deviation of 5.

VOR Orders are shipped by air using Fast-express Pvt. Ltd. which charges by the formula INR (60 + 25x)
per consignment, where x is the weight shipped in Kgs. An average VOR order contains 1 aggregate and
10 child parts. The current service level at the Pithampur DC for both categories of parts is maintained at
95%. Inventory carrying cost for VECV is estimated to be 30%. Replenishment lead time for both
categories of parts is 1 week.

Mohan and Salman are considering recommending disaggregation of VOR parts stock at the 24
distributor locations with inventory being maintained at ABCs cost and supplied to the authorized
service stations or retailers on demand qualifying for VOR orders. Transportation from ABC vehicles
plant location DC to the distributor locations will happen by surface using Fast-express and will be
charged at INR (60+7.1x) per consignment, where x is the weight shipped in Kgs. The lead time for such
shipments is one week. Secondary transportation cost from the distributor to service centers / retailers
would be insignificant in such cases. The stock at distributor locations could be replenished either
weekly or monthly (every 4 weeks).

The strategic implications of disaggregating stock at the area level are well understood, Mohan and
Salman need to suggest a suitable decision to be taken by the management.
Challenge:
1. What would be the addition/ reduction in the cost to be incurred by the organization in short
term (1 year) and long term (5 years) assuming the commercial terms remain the same. Share
the theory/ process employed for calculation.
2. Suggest the decision to the management backed with analysis and grounds for your conclusion.