Analytics Exercise: Distribution Center Location

Grainger: Reengineering the China$/$U$.$S$.$ Supply Chain

W$.$ W$.$ Grainger, Inc., is a leading supplier of maintenance, repair, and operating $($MRO$)$

products to businesses and institutions in the United States, Canada, and Mexico, with an

expanding presence in Europe, Japan, India, China, and Panama. The company works

with more than $4,500$ suppliers and runs an extensive website $($www$.$grainger.com$)$

where Grainger offers nearly $26$ million products. The products range from industrial

adhesives used in manufacturing to hand tools, janitorial supplies, lighting equipment, and

power tools. When something is needed by one of its customers, it is often needed

quickly, so quick service and product availability are key drivers to Grainger$$s success.

Your assignment involves studying U$.$S$.$ distribution in Grainger$$s supply chain.

Grainger works with over $250$ suppliers in the China and Taiwan region. These suppliers

produce products to Grainger$$s specifications and ship to the United States using ocean

freight carriers from four major ports in China and Taiwan. From these ports, product is

shipped to U$.$S$.$ entry ports in either Seattle, Washington, or Los Angeles, California. After

passing through customs, the $20-$ and $40-$foot containers are shipped by rail

to Grainger$$s central distribution center in Kansas City, Kansas. The

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containers are unloaded and quality is checked in Kansas City. From there, individual

items are sent to regional warehouses in nine U$.$S$.$ locations, a Canadian site, and

Mexico.

Grainger: U$.$S$.$ Distribution

In the United States, approximately $40$ percent of the containers enter in Seattle,

Washington, and $60$ percent at the Los Angeles, California, port. Containers on arrival at

the port cities are inspected by federal agents and then loaded onto rail cars for

movement to the Kansas City distribution center. Variable costs for processing at the port

are $$5\mathrm{.}00$ per cubic meter $($CBM$)$ in both Los Angeles and Seattle. The rate for shipping

the containers to Kansas City is $$0\mathrm{.}0018$ per CBM per mile.

In Kansas City, the containers are unloaded and processed through a quality

assurance check. This costs $$3\mathrm{.}00$ per CMB processed. A very small percentage of the

material is actually sent back to the supplier, but errors in quantity and package size are

often found that require accounting adjustments.

Items are stored in the Kansas City distribution center, which serves nine warehouses

in the United States. Items are also sent to warehouses in Canada and Mexico, but for the

purposes of this study, we focus on the United States. Each of the nine warehouses

places orders at the distribution center that contains all the items to be replenished.

Kansas City picks each item on the order, consolidates the items onto pallets, and ships

the items on $53-$foot trucks destined to each warehouse. Truck freight costs $$0\mathrm{.}0220$ per

CBM per mile. The demand forecasts for the items purchased from China$/$Taiwan for next

year in cubic meters, as well as the shipping distances, are given in the following table:

Although a high percentage of demand was from warehouses either south or east of

Kansas City, the question has surfaced concerning the $18$ percent that will be shipped to

Kansas City and then shipped back to the Los Angeles warehouse. This double

transportation could potentially be eliminated if a new distribution center were built in Los

Angeles. The idea might be to ship material arriving at the Seattle port by rail to a new Los

Angeles distribution center, which would be located at the current location of the Los

Angeles warehouse.

It is estimated that the Los Angeles facility could be upgraded at a one$-$time cost of

$$1,500,000$ and then operated for $$350,000$ per year. In the new Los Angeles distribution

center, containers would be unloaded and processed through a quality assurance check,

just as is now done in Kansas City. The variable cost for doing this would be $$5\mathrm{.}00$ per

CBM processed, which includes the cost to move the containers from the Los Angeles

port to the distribution center.

After the material is processed in Los Angeles, the amount needed to replenish the

Los Angeles warehouse $($approximately $18$ percent$)$ would be kept and the rest sent by

rail to Kansas City. It would then be directly stocked in the Kansas City distribution center

and used to replenish the warehouses. Grainger expects that very little would need to be

shipped back to the Los Angeles warehouse after the new system has been operating for

six months.

Grainger management feels that it may be possible to make this change, but it is not

sure if it would actually save any money and whether it would be a good strategic change.