Grainger: Reengineering the China/U.S. Supply Chain W. W. Grainger, Inc., is a leading supplier of maintenance, repair,

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Grainger: Reengineering the China/U.S. SupplyChain
W. W. Grainger, Inc., is a leading supplier of maintenance,repair, and operating (MRO) products to businesses and institutionsin the United States, Canada, and Mexico, with an expandingpresence in Japan, India, China, and Panama. The company works withmore than 5,000 suppliers and runs an extensive website (www.grainger.com) where Grainger offers nearly 1.5 million products.The products range from industrial adhesives used in manufacturing,to hand tools, janitorial supplies, lighting equipment, and powertools. When something is needed by one of its customers, it isoften needed quickly, so quick service and product availability arekey drivers to Grainger’s success.
Your assignment* involves studying U.S. distribution inGrainger’s supply chain. Grainger works with over 250 suppliers inthe China and Taiwan region. These suppliers produce products toGrainger’s specifi cations and ship to the United States usingocean freight carriers from four major ports in China and Taiwan.From these ports, product is shipped to U.S. entry ports in eitherSeattle, Washington, or Los Angeles, California. After passingthrough customs, the 20- and 40-foot containers are shipped by railto Grainger’s central distribution center in Kansas City, Kansas.The containers are unloaded and quality is checked in Kansas City.From there, individual items are sent to regional warehouses innine U.S. locations, a Canada site, and Mexico.
Grainger: U.S. Distribution
In the United States approximately 40 percent of the containersenter in Seattle, Washington, and 60 percent at the Los Angeles,California, port. Containers on arrival at the port cities areinspected by federal agents and then loaded onto rail cars formovement to the Kansas City distribution center. Variable costs forprocessing at the port are $4.00 per cubic meter (CBM) in both LosAngeles and Seattle. The rate for shipping the containers to KansasCity is $0.0020 per CBM per mile.
In Kansas City the containers are unloaded and processed througha quality assurance check. This costs $2.00 per CBM processed. Avery small percentage of the material is actually sent back to thesupplier, but errors in quantity and package size are often foundthat require accounting adjustments.
Items are stored in the Kansas City distribution center, whichserves nine warehouses in the United States. Items are also sent towarehouses in Canada and Mexico, but for the purposes of this studywe focus on the United States. The nine warehouses each placeorders at the distribution center that contains all the items to bereplenished. Kansas City picks each item on the order, consolidatesthe items onto pallets, and ships the items on 53-foot trucksdestined to each warehouse. Truck freight costs $0.022 per CBM permile. The demand forecasts for the items purchased fromChina/Taiwan for next year in cubic meters and shipping distancesare given in the following table.
Although a high percentage of demand was from warehouses eithersouth or east of Kansas City, the question has surfaced concerningthe 34,110 CBM (approximately 18 percent of the total volume) thatwill be shipped to Kansas City and then shipped back to the LosAngeles warehouse. This double-transportation could potentially beeliminated if a new distribution center were built in Los Angeles.The idea might be to ship material arriving at the Seattle port byrail to a new Los Angeles distribution center, which would belocated at the current location of the Los Angeles warehouse.
It is estimated that the Los Angeles facility could be upgradedat a one-time cost of $1,500,000 and then operated for $350,000 peryear. In the new Los Angeles distribution center, containers wouldbe unloaded and processed through a quality assurance check, justas is now done in Kansas City. The variable cost for doing thiswould be $4.00 per CBM processed, which includes the cost to movethe containers from the Los Angeles port to the distributioncenter.
After the material is processed in Los Angeles, the amountneeded to replenish the Los Angeles warehouse (34,110 CBM per yearon average) would be kept and the rest sent by rail to Kansas City.It would then be directly stocked in the Kansas City distributioncenter and used to replenish the warehouses. They expect that verylittle would need to be shipped back to the Los Angeles warehouseafter the new system was operating for about six months.
Grainger management feels that it may be possible to make thischange, but they are not sure if it would actually save any moneyand whether it would be a good strategic change.
*The data in this case have been developed for teaching purposesand do not represent the actual situation at Grainger. The data,though, are representative of an actual problem that Grainger andsimilar companies must address to efficiently run the supplychain.
Relative to the U.S. distribution network, calculate the costassociated with running the existing system. Assume that 40 percentof the volume arrives in Seattle and 60 percent in Los Angeles andthe port processing fee for federal processing at both locations is$4.00 per CBM. Assume that everything is transferred to the KansasCity distribution center by rail, where it is unloaded and qualitychecked. Assume that all volume is then transferred by truck to thenine existing warehouses in the United States. (Do notround intermediate calculations and round your answers to thenearest whole number.)
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