Madhup M Paturkar, Consultant

Bench Marking in Automotive Industry

Distribution Process: Case Study of Luxury
Car Maker

Synopsis
The industry of industry as Peter Drucker referred to the automotive industry has
been frequent subject of studies.

Distribution plays a key role in taking product to the customer and dealer, even
though the distribution system in Automotive Industry has been less researched.
Average new stock level in US has been over 60 days and $66.7 billion of capital tied
up at any point of time.

This paper analyses the different distribution model implemented by Auto major.
US Auto Major implemented Load Driven Cross Docking
1) Revamping the Logistics Strategy in 2001
2) Reduction in finished vehicle inventory of over $1 Billion
German Car Maker saved $20 Million in 1996-97 by changing distribution strategy
from Push to Pull.
A case Study presented in the paper details the distribution strategy for 3 key markets
in Asia-Africa region for Germany Luxury Car Maker. Distributors in three countries
are analyzed: South Africa, Japan & Australia. This paper also analyses the
parameter for distribution strategy specific to Auto industry as a part of case study.

Key words: Automotive Industry, Distribution Chain, Push vs. Pull, Cross docking.

Literature Survey With respect to operations

The ‘industry of industries’, as Peter
Drucker (1946) referred to the
automotive industry more than half a
century ago, has been a frequent
subject of academic studies.
management concepts, the
proliferation of the Just-in-Time
(JIT) or lean production paradigm
(Schonberger, 1982; Monden, 1983;
Womack et al.,1990) has been a key
tenet in the literature.

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Bench Marking in Automotive Industry Distribution Process
Madhup M Paturkar
Despite the efficiency gains at the
manufacturing level however, overall
vehicle supply systems shows poor
performance in responding to
customer needs, and increasingly rely
on incentives and rebates to sell their
vehicles (Ramcharran, 2001; Holweg
and Pil, 2004). A key reason for this
dichotomy has to be seen in the fact
that – while manufacturing practices
were reengineered – distribution
systems largely remained unchanged.
The large majority of
cars is still produced to forecast, and
sold from dealer inventory. In a
capital-intensive industry such as
automotive, this approach renders the
manufacturer less vulnerable to
swings in demand in the marketplace.
While inventory levels inside the
manufacturing operation have been
reduced, the average new vehicle
stock level in the US has consistently
been above 60 days for the period of
1996-2004. On average, 3,332,950
units were held at any point over this
time frame in the US market, which
(assuming an average sales price of
$20,000) equates to $66.7 billion of
capital tied up at any point in time.
The total distribution system
accounts for about c.30% of the
recommended retail price this seems
surprising, in particular given that
manufacturing only accounts for
c.12% (Holweg and Pil, 2004).
Few academic studies, such as (Kiff,
1997; Blumenfeld et al., 1999;
Karabakal et al., 2000), directly
analyze the drivers behind inventory
in the retail and distribution end of
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the supply chain, although the role of
and reasons for excess inventory has
conceptually been well described
within the wider field of supply chain
dynamics (Forrester, 1958; Sterman,
1989; Lee and Billington, 1992). Of
particular interest to the underlying
study is the paper by Blumenfeld et
al. (1999), which shows that,
analytically, the inventory level at the
retailer is driven by the stock
replenishment lead time, and how
shorter order lead times could reduce
the finished goods inventory.
Inventory in Auto Retail Chain is a
function of some parameters which
are unique to Automotive industry.
These are dealt in some depth is
paper New Vehicle Supply Systems
in the USA and Europe: A
Comparative Analysis by Sander de
Leeuw, Matthias Holweg, and Geoff
Williams
Above analysis does prove the fact
that retail distribution inventory
forms one of the base criteria for
efficiency of the Distribution Chain.
Academia has given few basic
strategy of distribution system to
achieve optimum inventory level.

Cross Docking

Schedule
Driven

Load Driven

Push – Pull System
Theses strategies have been used in
various different industries and
scenario. Each industry has unique
parameters which controls inventory
in supply chain.
 Bench Marking in Automotive Industry Distribution Process
Madhup M Paturkar

Having given brief background of Schedule-driven cross-docking:

analysis done so far in Automotive systems dispatch transportation units
Distribution Chain, we come to the on a channel according to a fixed
objective of this paper. Objective of schedule
this paper is two fold
Load-driven cross-docking systems:
1) To look at the case studies on the other hand, dispatch
which used one of the above transportation units on a channel only
mentioned strategies to when a sufficient volume of goods is
revamp the distribution chain awaiting transportation on that
with use of Mixed Integer channel.
Programming
a. Each case study will Push – Pull System:
give a view of
different scenarios Following are the characteristics of
which are analyzed Push – Pull System
b. Different strategies
which are followed in
organizations.

2) To take a look at push-pull

Distribution Strategy of
Luxury car maker and to find
out parameters governing
Push – Pull system for Auto
Industry.
Basic Concept
Cross Docking
Cross Docking is a distribution
system in which merchandise
received at a warehouse or
distribution center is not stocked but
immediately prepared for onward
shipment. In other
words, close synchronization of all
inbound and outbound shipments is
crucial.
There are two ways Cross Docking
can be done:
These advantages and disadvantages
of Push and Pull supply chains have
led companies to look for a new
supply chain strategy that takes
advantage of the best of both
world; enter a hybrid of the two
systems, Push-Pull Supply Chain
systems.

Push – Pull Supply Chain
In a Push-Pull strategy, some stages
of the supply chain, typically the
initial stages are operated in a push-
based manner while the remaining
stages are operated in a pull-based
strategy. We typically refer to the
interface between the push-based
stages and

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Bench Marking in Automotive Industry Distribution Process
Madhup M Paturkar
the pull-based stages as the push-pull
boundary.
Characteristics

the Push part is applied to the
portion of the supply chain where
long- term forecasts have small
uncertainty and variability. On the
other hand, the Pull part is applied to
the portion where uncertainty and
variability are high.

designed on the premise that
inventory is essential

Push-pull boundary needs to
be defined as per industry
requirement
 Push-Pull Boundary
Case Study 1:
A US Car maker, a wholly owned
subsidiary of German Car
Manufacturer, imports, markets and
distributes vehicles in the United
States. The vehicles are assembled in
Mexico or Germany and distributed
to a network of approximately 750
dealer sites across the United States
The existing system had been
developed around two implicit
assumptions. The first is that the
dealer (retail operator) is the
"customer" of the Car Maker
distribution process, not the end user.
The second assumption was that,
significant vehicle inventory (60-90
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days of sales) carried by the dealer
operator creates an incentive
(financing cost avoidance) to
increase the rate of sales. Thus the
distribution system operated as a
"push" system. It had all the dis-
advantages as described previously.
New principles the following
performance criteria were established
that the reengineered process would
have to meet;
1. Maximize the percentage of
customers who received their first
choice of vehicles.
2. If a customer's first choice was not
in a dealer's inventory, a first choice
vehicle would be delivered to the
dealer from manufacturer inventory
within 48 hours.
3. Significantly reduce the total
system (dealers and Car Maker) costs
associated with transportation,
financing and storage. Primarily
through inventory reduction.
new system would be designed to
support a "pull" type of distribution
strategy.
Problem Description
Vehicles for sale in the U.S. are first
shipped to one of the five U.S. ports
that act like distribution
centers. These five ports have also
facilities, called processing centers.
They are then shipped to the dealers
at major market areas by a
combination of rail and truck
transportation.
 Bench Marking in Automotive Industry Distribution Process
Madhup M Paturkar
Team focused on improving the flow
of vehicles from plants to dealers in
terms of cost and customer
service. The basic idea was the
establishment of more distribution
centers closer to metro markets so
that the following benefits could be
realized:
• the chance of meeting a customer's
first choice vehicle increases
• first choice vehicles are delivered
with shorter lead times,
• part of the current expensive truck
routes could be replaced by cheaper
rail routes, and
• the burden of carrying high
inventory for multiple dealers is
reduced through pooling
various popular vehicles at a single
nearby distribution center,
The main issues that need to be
addressed were the determination of
new distribution center locations.
For analysis purposes, the total
distribution cost into three
components:
1. plant to processing center cost
2. processing center to distribution
center cost
3. distribution center to market area
cost
4. inventory holding costs as finance
charges
Clearly, the number and locations of
processing centers and distribution
centers are major factors that
affect both customer service and
distribution cost measures. Moreover,
there is choice for the type of
facility to be installed; Type I
facilities are smaller in capacity and
cheaper. Type II facilities are larger,
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Modeling Approach
The objective function consists of
two components: 1) total
transportation cost, which depend on
the
mileage between locations, modes of
transportation, and truck load factors
(explained below) and 2) fixed
facility installation and overhead
costs at processing centers and
distribution centers, which depend on
the
location and capacities. Truck load
factors refer to the average number of
vehicles that a truck carries in a
typical shipment. A truck carries a
maximum of ten vehicles. Inventory
holding costs are ignored in the MIR
Constraints are specified to assure
that
a) market demands are satisfied,
b) capacity limitations for facility
types are not violated,
c) market orders can be shipped
within a specified time window, and
d) maximum number of distribution
centers and processing centers to
install are not
exceeded.
Scenario Analysis
1) Team assumed that all vehicles
have to go through processing
centers, which is currently the case.
Then increased the parameter for the
rnaximum number of distribution
centers one at a
time, until opening a new distribution
center is no longer profitable, and
obtained the curve shown in Figure
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Bench Marking in Automotive Industry Distribution Process
Madhup M Paturkar
2) Team did analysis under the
condition that vehicles do not have to
go through processing
centers, but can be directly shipped to
the distribution center, and produced
a curve similar to that in Figure.
3) Team investigated the effects of
decreasing the number of processing
centers as well as the effects
of letting other distribution centers
act like processing centers by simply
imposing additional constraints in
the MIP
Conclusions
Major findings of our quantitative
analysis based on the optimization
and simulation results included
the following:
1) Since railroad transportation is
cheaper than trucks, a cost-optimal
policy includes far more
distribution centers than the current
one. An optimal solution estimates
over $20 million
annual savings in transportation
related costs.
2) Distance to existing processing
centers adds about $6 million per
year to an optimal
solution.
3) Fixed costs of installing and
operating pool facilities are
insignificant as compared to savings
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in transportation costs.
The simulation outcomes
demonstrated that a decentralized
distribution center concept could
achieve
the new performance criteria. This
concept was complimented with
other revised distribution subsystems
(forecasting, ordering, invoicing,
etc.) .
Case Study 2:
A automobile Major announced an
alliance with Logistics group with a
goal of reducing by 40% the time
required to get vehicles to
dealerships. After a year it
announced that its average delivery
time had reduced by 4 days, a
reduction in finished vehicle
inventory of over $1 billion.
The distribution network is based on
a disciplined hub-and-spoke system
utilizing both rail and ground
transportation. The newly
reengineered network improved
reliability and speed to dealers by
considering vehicle demand,
assigning production volumes from
each plant to the appropriate rail and
truck haul-away carriers in line with
this demand and then, determining
the optimum sourcing lanes, loads
and delivery schedule for each of the
6,000 dealers.
Most new automobiles manufactured
in the US are transported by rail from
manufacturing plants to special
railroad centers called ramps and
then by truck to local dealers. This is
typically a load-driven system.
Newly assembled automobiles are
 Bench Marking in Automotive Industry Distribution Process
Madhup M Paturkar

parked in load lanes at the plant faster transportation modes and

according to their destination ramp. reduced inventories.
Whenever a sufficient number of
vehicles destined for a single ramp Plant Operations
accumulate in a load lane, the
vehicles are loaded onto a railcar. Mixing Center Operations

At the final destination ramps, At the mixing center, automobiles are

vehicles are off-loaded from the
railcars. When a sufficient number of
vehicles destined for dealerships in a
given area accumulates, the vehicles
are loaded on a rig and delivered.
unloaded from arriving railcars into
load lanes according to their
destination ramps. When sufficient
vehicles accumulate for a given
Orillia

Laurel

A US Automobile major ran a pilot Portland

Omaha

study to examine the potential for Salt Lake

Denver

Kansas City
Louisville
Benicia

special cross-docking centers (called Mira Loma Belen

St.Louis

Norfolk

mixing centers) in the rail network. El Mirage

Amarillo

Alliance
Oklahoma City

Reisor
Atlanta

The pilot included 5 plants in the Houston

eastern US and 15 rail ramps in the

west and mid-west (see Figure 1).
Prior to the pilot, each plant
dispatched railcars to each ramp via
the loose car network. In an effort to
reduce the 14 to 15-day average
delivery time from the plants to the
dealerships, Company introduced a
mixing center in Kansas City,
Missouri and routed all vehicles from
the 5 plants to the 15 ramps through
this mixing center.
It is shown how the mixing center (a
Hub and Spoke) promised to reduce
the total inventory of vehicles at the 5
plants destined for the 15 rail ramps
from over 500 to under 150 (35 at the
plants and about 105 at the mixing
center). The real motivation for the
mixing center concept arose from the
anticipated reduction in the average
days required to deliver vehicles.
Team analyzes the potential of the
mixing center concept in terms of
Plant
Ramp
destination ramp, they are loaded
onto an empty railcar and sent on.
Any remaining vehicles wait at the
mixing center.
Thus, a mixing center serves as a
load-driven cross-dock. Like all
cross-docks, it introduces additional
handling of the product in order to
reduce overall transportation costs
and, more importantly in this case, it
introduces additional transportation
distance. Routing shipments through
a mixing center can, nevertheless,
reduce transportation time and cost in
two ways:
Faster Mode: Consolidating
shipments out of each plant destined
for a number of ramps to a single
mixing center can generate sufficient
volume on the channel to warrant
using faster unit trains. Unit trains,

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Bench Marking in Automotive Industry Distribution Process
Madhup M Paturkar

consisting of 20 or more railcars with The number of vehicles moving

a common destination, move directly
from the plant to the destination
ramp, bypassing the switching yards.
A mixing center serving several
plants can consolidate shipments to
destination ramps facilitating the use
of unit trains on outbound shipments
as well.
Reduced Wait: Because the daily
supply rates to some ramps are much
smaller than the capacity of a railcar,
automobiles destined for these ramps
may wait several days for a full load
to accumulate. Consolidating
shipments through a mixing center
can eliminate these delays. Further,
the number of vehicles waiting at the
plant influences both the average
delivery time and the size of the lot at
the plant. Typically, automobile
manufacturing plants are surrounded
by suppliers’ facilities and, as a
result, land is scarce and expensive.
Reducing the number of vehicles
waiting at the plant frees up valuable
land for more productive uses.
directly from plant to ramp per unit
times the number of vehicles
moving from plant to ramp via
mixing center per unit time
Result
Problems 1 and 2 have the same
number of plants, centers and the
ramps but they differ in the actual
locations of the nodes. The same is
true for Problem 3 and Problem 4.
The fifth column in Table 1, indicates
the number of continuous variables
and the number of binary variables,
e.g., Problem 1 has 4,800 continuous
variables and 900 binary variables.
The next column is the number of
open centers in an optimal solution
followed by the number of branch-
and-nodes required to find and prove
the optimality of that solution.
Problems 3 and 4 most closely
approximate Company’s new car
distribution system.

Mixed Integer Program Model.

Number Number Number Branch
Number of of of Open & Bound
There are two basic sets of decisions of Plants Centers Ramps Centers Nodes

in designing a “load-driven” cross- 1 10 15 30 5 3

docking network: the location 2
3
10
25
15
10
30
40
3
6
0
0
decisions, which deal with the 4 25 10 40 6 0
5 30 15 60 10 0
number and positioning of cross-
docks, and the routing decisions,
which deal with how flow should be
routed through the selected cross-
docks. Our objective is to minimize
the average delay between the time a
vehicle is produced and the time it
reaches its destination ramp.

The variables in our model are:

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 Bench Marking in Automotive Industry Distribution Process
Madhup M Paturkar

Push-Pull Distribution Push Pull Parameters for Auto

Strategy for Luxury Car Distribution Chain:
Maker
As described earlier about push pull
system common parameters are
System Description:
described below.
The luxury car maker imports the
vehicle in Asia and Africa region.
The modus operandi is company
owned whole sale organization is
created in each country which
interacts with all dealer. This is
referred as Market Performance
Centers (MPC)

Wholesale organization (MPC) is We mapped some these parameters to

responsible to procure vehicle from
factory and sell to the dealer. This
organization is also responsible for
maintaining inventory, generating
forecasts and quota allocation among
the dealers.
the KPI. Details of the KPI are given
below. The KPIs were identified after
discussion with business users which
is monitored for the performance
measure.

Dealers may put the request to this

organization to get exact vehicle
configuration or may procure from
the wholesale inventory.

The overall model runs smoothly but

each whole organization has different
distribution strategy. In next few
sections we will try to:
1) Try to analyze the parameters
specific to Auto Distribution
chain
2) Based on the parameters
defined we find out models
for each MPC
3) To get the best model among
three operating models.
In all analysis below
Dist 1 = MPC South Africa
Dist 2 = MPC Australia
Dist 3 = MPC Japan
Avg days Inventory with Dealer
 Avg. (Today’s date – Goods
Issue Date) for all unsold
vehicles at dealer location.
Only wholesaled vehicles are
considered.
 A higher value of this KPI
would mean locked up cash
and high inventory holding

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Bench Marking in Automotive Industry Distribution Process
Madhup M Paturkar

cost for the dealer affecting

his current cash flows.
KPI Usage:
KPI Usage:  Identification of
 Identification of inefficiencies in sales
inefficiencies in sales forecasting process leading to
forecasting process of dealer inaccurate demand forecast.
leading to accumulation of  Explore possibility of
stock at his end. rationalizing the product-mix
 Explore possibility of in the respective MPC market
rationalizing the product-mix so as to reduce this stock age.
for the dealer based on his
competency in selling a KPI Value
particular model
 For models which are
relatively lower on the
product life cycle duration,
target only those dealers who
have lower value on this KPI
Analysis
KPI Value
Distributor inventory has
gone up except for MPC South
Africa. They have greatly improved
on performance over last year.

Avg time to deliver vehicle to Dealer

 Avg. (Goods Issue Date –

Analysis:
Goods Receipt Date). This is
calculated for all the vehicles
Distributor unsold inventory has
sold via MPC for a particular
gone up very high.
month. Only wholesaled
vehicle considered.
Avg days Inventory with Distributor
KPI Usage:
 Avg. (Today’s date – Goods
 Identification of
Receipt Date) for all unsold
inefficiencies and bottlenecks
vehicles. Company cars not
in the sales processes and
considered.
carry out improvements for
 A higher value of this KPI
faster turnaround of vehicle.
would mean locked up cash
 Reuse process efficiencies
and high inventory holding
deployed at other MPCs.
cost.
 Explore possibility of
performing certain tasks prior

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 Bench Marking in Automotive Industry Distribution Process
Madhup M Paturkar

to arrival of vehicle thereby

reducing the lead time. Amendment to configuration
KPI Value
 This KPI denotes percentage
value of vehicle whose
configuration was modified to
suit the customer requirement

Analysis: KPI Usage

All distributors have done well in  Over all forecast or customer
2006 but MPC South Africa is still requirement should be
the bench mark. captured accurately.

Allocation to dealer in Dist. Chain KPI Value

 This KPI denotes that in

whole process of Ordering a
vehicle till vehicle is
delivered when exactly the
vehicle was allocated to the Amendment by dealer shows that
dealer. planning at option level is not
efficient.
KPI Usage MPC Japan planning at configuration
 To give more allowance to is not in synchronized with customer
the dealer based on faster demand
allocation
 To reduce the inventory in Return of vehicles
pipeline.
 This KPI denotes the Ratio of
KPI Value Total vehicles returned to
Total vehicles delivered
during a certain period. Only
wholesaled vehicles
considered.

KPI Usage:
Analysis:
The figure will show the Push Pull
boundary which Distributor follow.
MPC South Africa and MPC
Australia will allocate the vehicles
during Production.
MPC Japan allocates significant
number after vehicle is arrived in
stock. This shows why the MPC
inventory is higher.
 To enforce strict returns
policy for dealers or have a
restriction on the number of
vehicles returned in a given
time frame
 Reuse of dealer management
processes of MPCs which
have low returns to other
MPCs.

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Bench Marking in Automotive Industry Distribution Process
Madhup M Paturkar
KPI Value
Analysis:
Returns are less for MPC Australia
because of dealer strategy and
amendment has gone up from dealer
and hence fulfillment is better
Analysis:
Based on over all figures presented
above following conclusion can be
drawn:
MPC South Africa is more close
to the Pull based
• Most of the orders are logged
by Dealer
• Better on over all parameters
• Distribution system
governed by very high
penalty clauses
MPC Japan follows Push-Pull
system as
• Orders are put to factory by
Distributor
• Lot of local fitment is done
in Country.
• Pull with respect to vehicle
configuration
• Push to dealer later in
distribution chain.
MPC Australia is push based
system
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• Orders are logged by
distributor
• Percentage Modification by
dealer is very high.
• Lead time and inventory in
days is very high.
Conclusion:
Each major corporation follows
different strategy from distribution
point of view
Distribution chain analysis
parameters differ from company to
company but the goal is to make the
distribution system more responsive
to customer needs
The difference in distribution lead
time (in days) is evident with respect
to geography and distribution
strategy adopted.
Common parameter can be identified
is which controls the distribution chain:
To get the first choice of vehicle to
the customer as fast as possible.
About the author
Madhup M Paturkar has over 4.5 yr
of industry and consulting experience
in different industry verticals.
Currently he is associated with Auto
Major for last 2 years in Application
Consulting.
Author is certified Supply Chain
Consultant and has post graduate
diploma in Supply Chain
Management