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Auto Spare Parts Distribution Mechanism and Strategy


The current problem of spare parts throughout China, at its current position is due to inefficient practices. In order to shift the service levels to achieve an efficient frontier and enable the company to realize high returns on investment, a new distortion method has been proposed. Typically, the cost of service will be expected to reduce if Mr. James Bond accepts and adopts the proposed changes to the spare parts distribution mechanism (Jin and Liao 453). It has been observed that the current distribution strategy has led to an increase in inventory and transportation costs, supplier lead times problems, and a complex web of distribution channels.

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What key factors should James Bond consider when deciding about optimizing ASP’s distribution network? [10%]

For Bond, the first and most important step is to do logistics activity profiling that could enable the manager to tell how and where changes can be introduced into the inbound and outbound logistics and supply system. The goal is to reduce the cost of making changes and increase the efficiency of the supply chain system. Among the key elements that will appear in the profile include the customer future order/demand quantities, warehousing costs, and transportation network, future supply quantities, and inventory activity profiles. James Bond should redesign the distribution network and evaluate the other supporting activities to reduce the order delivery time so that he can optimize the spare parts distribution channel.

This is because the time taken to deliver the spare parts across different distribution centers is wasted, but redesigning the network could reduce the existing inventory costs and distribution schedules. Besides, it is important to integrate technology into the supply chain management system to be able to collect accurate and real time data for effective decision-making. There is also the need to establish an alliance that is aimed at optimizing third-party logistics for those who are responsible for providing transportation services to reduce the distribution costs across the supply chain network. It is important for James Bond to consider segmenting different regions according to demand forecasts for different types of spare parts so that the right spare parts can be supplied at the right time. The case study shows that James Bond lacks the channel performance measures that could provide the management with right measurements to evaluate the performance of the supply chain system based on effective cycle time metrics.

Often, the environmental costs could be optimized, but in this scenario, no issues related to cost optimization through better use of packaging or other means to reduce the adverse effects on the environment have been mentioned. In theory and practice, transportation planning is important to ensure that efficiency of the supply chain system. From a managerial point of view, flexibility in terms of structuring production and distribution have not been implemented, which means that extra costs could be reduced if the system is revised to address production and distribution methods. The other range of elements to integrate into the supply chain system include use of stochastic optimization techniques to assess and evaluate the most effective approach of delivery reliability, order delivery lead time, and responsiveness of the network.

What is the total annual inventory holding cost of all items if:

DCs remain decentralized? [15%]

According to the case study and its results provided in the excel spreadsheets, the total annual holding costs is the product of the holding cost per unit per year with the average inventory level. For the centralized DC is $73,968,004 while that one for the decentralized distribution is $90,829,864. Despite the benefits of a decentralized DC, which include ability to address the control and storing functions, elimination of delays in the saving material handling costs, and a reduction in various categories of risks, it is, however, an expensive approach to distributing spare parts.

From the managerial perspective, high costs of managing the distribution centers, ability to collect and analyze data in real time for decision making, delays decision making because of the flow and availability of data, the high costs of employing more people to work in different centers of the network, and the costs of investment in many storage centers add to the logistics problems and costs. In addition, more time is spent on stationery, staff, and stock taking. Because of the delays in decision-making due to lack of reliable and real time data, there is the possibility of poor network performance and longer lead times.

DCs are consolidated into a single centralized DC? [15%]

The cost of the single consolidated DC is $73,968. Bond can conclude that the centralized distribution center has better returns on investment than the decentralized methods. From a managerial perspective, the decision to use a centralized distribution center instead of adopting the decentralized distribution center is because the overall costs of the reorder quantity, and the time taken to make a reorder when considered for both the centralized and decentralized distribution center leads to the conclusion that the centralized method is more appropriate than the decentralized method (McFarlane and Sheffi 11).

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Here, it is imperative to note that a managerial review of the case study indicates increasing holding and transportation costs that are associated with each distribution center. However, considering the inbound and outbound logistical costs, the cyclic and unpredictable demand patterns, and the unknown lead times as well as pricing that is independent of the order quantity and the carrying costs, the annual ordering costs could decrease despite some increases in the annual inventory carrying costs (Monczka et al. 23). This could lead to an improvement on the economic order quantity that could be lower for the centralized distribution center than that of the decentralized distribution center.

What are the total outbound and inbound transportation costs of all items of

DCs remain decentralized? [15%]

Table 1

Annual # pallets carried inbound via TL carrier per DC 5344 7744 6528 7552 4096 2944
Annual cost for inbound TL per DC $53,440 $77,440 $65,280 $75,520 $40,960 $29,440
Beijing Shanghai Guangzhou Wuhan Chengdu Xi’an

For DCs remaining decentralized, table 1 shows that the Xi’an has the lowest annual cost for inbound TL per DC, which is equal to $29,440, while Wuhan has the highest, which is $75,520. Despite choosing Wuhan to be the main center of distribution, some underlying factors make the choice less expensive in the long run as compared to other factors. For instance, the inbound costs could be higher at Wuhan than at many other centers because of the proximity of the centers to the manufacturing points and other variables.

However, by examining the entire logistics and supply chain system, it is possible to note that the demand forecast can be met appropriately if the inventory location is placed at Wuhan than the other distribution centers. Typically, there is the aspect of optimizing the supply chain system to ensure that every dollar that is allocated for the distribution of the spare parts is utilized effectively. That could lead to cost savings as well as higher efficiency. It is also imperative to note that wastes happen at the inventory and transportation levels as well as the time taken to confirm that an order has been made. It is important for the management to establish and maintain the current rate profile of the third party transporters to determine those that are efficient and those that are inefficient.

DCs are consolidated into a single centralized DC? [15%]

Table 2

Outbound transportation (TL+LTL) scaled for all items Annual cost of outbound for all DCs 16155822
Annual cost of outbound if centralized (Wuhan) 16504388
Annual cost of outbound if centralized (Shanghai) 16781836

On the other hand, table 2 shows the outbound transportation (TL+LTL) scaled for all items with specific focus on the two cities. The Annual cost of outbound if centralized (Wuhan) is $ 16504388, while that of the annual cost of outbound if centralized (Shanghai) is 16781836, making a difference of $ 277448, which is a significant saving to make, if Wuhan is chosen as the single DC point. From the case study, it is important to consider the warehousing and space availability as well as the nature of demand and the frequency with which the stock levels can be controlled to meet the demand and the inventory levels as required.

The location system or the impact of the available space at Wuhan will be a major factor to consider when determining the most appropriate architecture of the inbound and outbound logistics for Wuhan. The type of product that is stored in each store must be addressed and the ease with which the products can be moved throughout the system addressed to avoid honeycombing. Besides that, the other key elements to consider include location system rules, product shape and nature, housekeeping to ensure that large amounts of inventory are not kept to keep the inventory costs of deterioration, damage or obsolesce, space, dollars, and labor to perform all inventory activities.

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What are the risks and merits of these strategies? [10%]

Any logistics and supply chain system must be prone to certain risks. The proposed DC strategy is vulnerable to risk pooling due to the centralized nature of the proposed DC system. The use of centralized inventory has the risk of failing to address the changes in demand due to variations in demand at different points. This is likely to cause a decrease in inventory safety stock leading to a decrease in average inventory. However, the proposed centralized DC is cheaper and leads to lower service level costs due to average demand as noted in this paper. However, this type of risks is beneficial when using a centralized instead of a decentralized system. The rationale is that the service level for the centralized system is better if the risks are spread across time, products, and markets. The other risks associated with this type of distribution mechanism include unexpected transit delays, customer demand changes, and warehouse shortages. Recurrent risks also have adverse effects on the supply chain system.

What are your recommendations? [20%]

A critical analysis shows that James Bond should first start by profiling the supply chain activities and the associated costs to determine the most appropriate distribution strategy to use. The second approach is to use the evaluate the relationship between the company and third party service providers so that the most effective relationship is established between the two parties for optimal service delivery. Accurate and current profiles of all activities should be kept using a reliable information system. Review policies, ensure quick decision making strategies are in place, review inventory holding costs and techniques, integrate the EOQ (Economic Order Quantity) Model for better performance, increase perfect orders, and factor the weighted average system into the DC. The other factors to consider when redesigning the system include fluctuations in demand, cost protection, buffer safety inventory, predictability, and risk analysis among others.

Works Cited

Jin, Tongdan, and Haitao Liao. “Spare Parts Inventory Control Considering Stochastic Growth of an Installed Base.” Computers & Industrial Engineering, vol. 1, no.56,. 2009, pp. 452-460.

McFarlane, Duncan, and Yossi Sheffi. “The Impact of Automatic Identification on Supply Chain Operations.” The International Journal of Logistics Management, vol. 1, no. 14, 2003, pp. 1-17.

Monczka, Robert M., et al. Purchasing and Supply Chain Management. Cengage Learning, 2015.

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