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Case #2

Re engineering the China/US Supply Chain

A. Maybach, 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 Japan, India, China, and Panama. The company works with more than 4000 suppliers and it offers nearly 5 million products to its customers. The products range from industrial adhesives used in manufacturing, to hand tools, janitorial suppliers, lighting equipment, and power tools.

Your assignment involves studying US distribution in Maybach's supply chain. Maybach works with over 250 suppliers in the China and Taiwan region. These suppliers produce products to Maybach'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 US entry ports in either Seattle, Washington, or Los Angeles, California. After passing through customs, the 20-foot and 40-foot containers are shipped by rail to Maybach'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 in nine US locations, a Canadian site, and Mexico.

Maybach: US 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 $5.00 per cubic meter (CBM) in both Los Angeles and Seattle. The rate for shipping the containers to Kansas City by rail is $0.0018 per CBM per mile.

In Kansas City, the containers are unloaded and processed through a quality assurance check. This costs $3.00 per CBM processed.

Items are stored in the Kansas City distribution center, which serves nine warehouses in the United States. The nine warehouses each place orders at the distribution center that contains all the items to 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 $0.0230 per CBM per mile. The demand forecasts for the items purchased from Taiwan for next year in cubic meters, as well as the shipping distances, are given in the following table:

Demand (CBM)	Distance (miles)
Warehouse	Average	% of Demand	From Kansas City	From Los Angeles	From Seattle
Kansas City	20900	11	0	1620	1870
Cleveland	17100	9	800	2350	2410
New Jersey	24700	13	1200	2780	2890
Jacksonville	22800	12	1150	2420	2990
Chicago	22800	12	520	2020	2060
Greenville	15200	8	940	2320	2950
Memphis	17100	9	510	1790	2330
Dallas	15200	8	500	1430	2130
Los Angeles	34200	18	1620	0	1140
Total	190000

Although a high percentage of demand was from warehouses either south or east of Kansas City, the questions has surfaced concerning the 18 percent that will be shipped to Kansas City and then shipped back to the 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 Lost 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 $5.00 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. Maybach 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.

Maybach 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.

Specific questions to address in your analysis:

1. Relative to the US 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 Lost Angeles and that the port processing fee for federal processing at both locations is $5.00 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.

2. Consider the idea of upgrading the Los Angeles warehouse to include a distribution center capable of processing all the volume coming into the United States. Assume that containers coming into Seattle would be inspected by federal officials (this needs to be done at all port locations) and then immediately shipped by rail in their original containers to Los Angeles. All volume would be unloaded and quality-checked in Los Angeles (the check cost $5.00 per CBM when done in Los Angeles). 18 percent of the volume would then be kept in Los Angeles for distribution through that warehouse and the rest transshipped by rail to the Kansas City warehouse. Assume the cost to transship by rail $0.0018 per CBM per mile. The material sent to Kansas City would not need to go through the "unload and quality check process," and would be stored directly in the Kansas City distribution center. Assume that the remaining volume would be transferred by truck to the eight remaining warehouses in the United States at a cost of $0.0230 per CBM per mile.

3. What should be done base on your analytic analysis of the US distribution system? Should the new Lost Angeles distribution center be added? Is there any obvious change that Maybach might make to have this option be more attractive?

4. Is this strategically something that Maybach should do? What has the company not considered that may be important?