Strategic network planning at Siemens AG

Source: LOGISTIK HEUTE 09/2017

With the “SIRIUSProducts” Siemens AG Digital Factory Control Products offer central components for industrial switching technology. After projects for internal material flow and inventory optimization, the focus was on the question “How can distribution logistics be made more efficient?”

Industrial switching technology, switching devices, safety devices, motor starters, monitoring and control devices, position and safety switches, industrial communication – approximately 100,000 products with countless configuration possibilities and ten international production locations for local markets make the global distribution logistics at Siemens AG Digital Factory Control Products extremely complex. The heart of the Siemens business unit beats in Amberg in Eastern Bavaria. The location employs 4700 people, including 800 in Research and Development. Organizationally and SAP-technically, the Amberg and Cham plants belong together; the latter is another location also in Eastern Bavaria, with another 700 employees.

The distribution center in Amberg keeps approximately 16,500 items in stock and another 20,000 are dispatched from here. The order volume is approximately 920,000 orders per year, with about 4.9 million order items. Contactors and power switches are high-quality commodity products with which Siemens must stand up to stiff competition with respect to price and prompt delivery.

For the optimization of outbound logistics, the focus was on the largest “regional” distribution center: the Siemens location in Southaven, Mississippi, USA, which keeps 3000 to 3500 different products in stock. Together with its long-time partner for process and IT consulting, Wassermann AG of Munich, the team around Siegfried Hermann, Director Supply Chain Management at the Siemens business unit, was searching for possibilities to optimize the path of contactors and power switches to American customers.
70% of delivery to customer in the USA is handled by electrical wholesalers. In practice, the products are therefore stored three times before they reach the customer: in the warehouse in Amberg, in the Southaven distribution center, and finally at the distributor. A large share of slow-moving products results in inventory costs and the frequent re-packaging on the path to the customer also results in additional costs.

“The challenge was: We wanted better service for our customers, to reduce complaints, improve performance – adherence to delivery schedules and availability – we wanted to increase the turns and serve our customers better than previously,” said Hermann at the presentation of the project at the SCM congress Vision-Days 2017 in Munich. The question that people wanted to investigate against the background of this challenge and with the help of Wassermann AG and its “COLUMBUS” scenario software was: “Why don’t we deliver to our distributors directly from Germany?”

With COLUMBUS, it is possible to simulate logistics network planning scenarios in detail. For Siemens AG Digital Factory Control Products, the data for three scenarios was fed into the software. First, the actual situation was mapped as a reference. The team selected drop shipments as the second scenario, thus omitting the Southaven distribution center completely. The third scenarios provides keeping only 200 fast-selling items, delivered by ship, in stock in the USA.

Two details of the actual situation: Due to the small size of the products, sea freight did not previously play a role. Air freight at economy rates dominated. Approximately 20,000 deliveries per year were already being sent directly from Amberg to American customers. This was an important argument for doing away with or limiting the storage in the Siemens Distribution Center. Hermann emphasized: “We also wanted our Sales colleagues to be on board. Not that logistics does anything that is counterproductive for sales.”

For the simulation in COLUMBUS, several thousand pieces of customer data were imported, thousands of pieces of product data, and several hundred thousand pieces of transaction data, including quantities and weights. From its experiential values from other projects, Wassermann contributed handling costs and picking. “On this basis, the COLUMBUS scenario software allows us to make a whole series of interesting evaluations,” says Dr. Christoph Pitzl, Managing Consultant at Wassermann AG. Therefore it emerged, for example, that the previous sharing of the group warehouse in Southaven – given the geographic distribution of customers – many purchasers of the “SIRIUS” products are located in the classic industrial centers in the Northeast US – was not necessarily advantageous for delivery times.

“As expected, the simulation of the drop shipments produced significantly increased transport costs, in particular due to the use of express rates,” explains Pitzl. Surprising, however, was another result of the COLUMBUS simulations – the handling costs were a much larger factor than the transport costs: A complete reorganization of the USA material supply as drop shipments could achieve savings of approximately EUR 950,000 per year.

But what about the delivery times? Can the service be improved? With the use of express services, the transport time drop from six to seven days to two to three days. 25% of the deliveries from Southaven could come in the same or even significantly less time from Amberg. For this, the team compared delivery times for prior deliveries from Southaven to delivery times with drop shipments via a hub of the KEP service provider in Cincinnati, Ohio. The final result: 10% more customers can be served within three days thanks to the density of customers in Ohio and nearby areas; 16% more customers could even be served within one day.

A clear recommendation arose from the simulation: Conversion to direct delivery from Amberg. It was necessary to find a controlled transition scenario for the pull-out from the Siemens distribution center. The facility still exists, but without the maximum 20% share of the Digital Factory Control Products business unit; other areas will grow here and use the capacities that have been freed up.
The conversion happened rapidly and a detailed evaluation across a period of ten weeks at the end of 2016 showed that the new distribution logistics is faster than before in 98% of the cases – and this despite a pilot strike during one of those weeks. The transport damage rate was just 0.57 percent. During the conversion, Siemens sought to talk to its distributors. The few for whom delivery times increased – like those in Mississippi and Tennessee, for example – who profited from the proximity of the distribution center – had to increase their inventories slightly. However, for these customers as for all others, there is the powerful advantage of availability: Instead of 3500 products, they can now order 16,500 from stock.

“In a market that poses high demands for short delivery times and low costs, no logistics expert would have given up the on-site warehouse and relied on express air freight based on his gut feeling,” says SCM consultant Pitzl. “However, something that would not have made any sense for many other companies and product groups was precisely the right thing for Siemens AG Digital Factory Control Products in this situation. This courageous decision was prepared and encouraged by the prior simulation. For logistics network planning, you should not forgo this kind of IT support, for only with it can the complexity of such global relationships be managed.”