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 $4.00 per cubic meter (CBM) in both Los Angeles and Seattle. The rate for shipping the containers to Kansas City is $0.0018 per CBM per mile.

In Kansas City the containers are unloaded and processed through a quality assurance check. This costs $2.00 per CBM 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. The nine warehouses each place 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 $0.0218 per CBM per mile. The demand forecasts for the items purchased from China/Taiwan for next year in cubic meters and 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 34,140 CBM (approximately 18 percent of the total volume) 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 $4.00 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 (34,140 CBM per year on average) 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. They expect that very little would need to be shipped back to the Los Angeles warehouse after the new system was operating for about six months.

Grainger management feels that it may be possible to make this change, but they are not sure if it would actually save any money and whether it would be a good strategic change.

*The data in this case have been developed for teaching purposes and do not represent the actual situation at Grainger. The data, though, are representative of an actual problem that Grainger and similar companies must address to efficiently run the supply chain.

Relative to the U.S. distribution network, calculate the cost associated with running the existing system. Assume that 40 percent of the volume arrives in Seattle and 60 percent in Los Angeles and the port processing fee for federal processing at both locations is $4.00 per CBM. Assume that everything is transferred to the Kansas City distribution center by rail, where it is unloaded and quality checked. Assume that all volume is then transferred by truck to the nine existing warehouses in the United States. (Do not round intermediate calculations and round your answers to the nearest whole number.)

WAREHOUSE Kansas City Cleveland Newark Jacksonville Chicago Greenville Memphis Dallas Los Angeles Total DEMAND (CBM) AVERAGE 20,820 16,990 24,680 15,190 22,740 15,190 16,990 22,740 34,140 189,480 MILES FROM KANSAS CITY 0 860 1,260 1,200 550 910 540 530 1,520 DISTANCES MILES FROM LOS ANGELES MILES FROM SEATTLE 1,520 1,880 2,240 2,500 2,650 2,810 2,450 2,910 2,100 1,940 2,280 2,950 1,860 2,250 1,440 2,190 1,060 K.C Distribution Center Only Port to DC Costs Volume Port Processing Distance to K.C. Rail Costs K.C. Unload and Q.C Total Costs Pct CBM Basic data 189,480 $ 4.00 $ 0.0018 $ 2.00 Seattle port % LA port % K.C Distribution Center Only DC to Warehouse Costs Truck Warehouse Freight Costs Kansas City Cleveland Newark Jacksonville Chicago Greenville Memphis Dallas Los Angeles Total Total cost of current system WAREHOUSE Kansas City Cleveland Newark Jacksonville Chicago Greenville Memphis Dallas Los Angeles Total DEMAND (CBM) AVERAGE 20,820 16,990 24,680 15,190 22,740 15,190 16,990 22,740 34,140 189,480 MILES FROM KANSAS CITY 0 860 1,260 1,200 550 910 540 530 1,520 DISTANCES MILES FROM LOS ANGELES MILES FROM SEATTLE 1,520 1,880 2,240 2,500 2,650 2,810 2,450 2,910 2,100 1,940 2,280 2,950 1,860 2,250 1,440 2,190 1,060 K.C Distribution Center Only Port to DC Costs Volume Port Processing Distance to K.C. Rail Costs K.C. Unload and Q.C Total Costs Pct CBM Basic data 189,480 $ 4.00 $ 0.0018 $ 2.00 Seattle port % LA port % K.C Distribution Center Only DC to Warehouse Costs Truck Warehouse Freight Costs Kansas City Cleveland Newark Jacksonville Chicago Greenville Memphis Dallas Los Angeles Total Total cost of current system