Modeling supply chain costs in the automotive manufacturing industry The case of Valmet Automotive

This thesis examines mathematical modeling as a means to improve profitability. The research is focused on studying supply chain cost drivers and their potential in regard to cost reduction in the automotive manufacturing industry, where the role of supply chain management is significant because of the capital intensive, fast paced, and high volume nature of the business. Hence, supportive tools for decision making are highly valuable. Therefore, the objective of this study is to develop a total supply chain costing model that can be used to add value to business primarily in the automotive manufacturing sector. Despite its significance, surprisingly little research has been published on the subject of supply chain costs in manufacturing in general, let alone modeling of supply chain costs in the automotive manufacturing industry. Research into costing has been published in management accounting literature, but supply chain management is rarely represented. Simulation and optimization models have been developed, even in the automotive sector, but they are usually very case specific, and discuss mostly manufacturing or distribution related modeling problems. Therefore, this thesis aims to contribute to filling the research gap in modeling total supply chain costs in automotive manufacturing by extending the knowledge of both modeling methods and supply chain cost drivers in the automotive sector. This research is conducted as a case study of a Finnish automotive contract manufacturer, Valmet Automotive Inc., that expressed the need to develop a supply chain costing model to streamline its supply chain processes and generate cost savings through improved understanding and control of its supply chain cost drivers. A literature review of the topic informs the theoretical basis for constructing the costing model. In addition to theory, the mechanics and mathematical formulas of the model are developed based on participant observations and informal interviews with supply chain professionals at the case company. Moreover, verification and validation of the costing model is carried out together with the case company’s supply chain managers. The output of this thesis is a validated total supply chain costing model that was taken into use at the case company. Experimentation proved that the developed model can be used to add value to the case company’s business in forms of cost saving, supply chain process streamlining and performance follow up. Moreover, supply chain managers can utilize the costing model as a strategic planning tool and as a supportive tool for decision making. Lastly, by providing an innovative case study of modeling supply chain costs in the automotive manufacturing industry, this thesis has contributed to the research into supply chain cost drivers and their modeling in the automotive manufacturing context.