Supply Chain Assignment (Case Study)

A Supply chain reconfiguration case study

The case company (referred to
as ABC) is a leading supplier of maintenance, repair and operating (MRO)
products to business and institutions in the United States, Canada and Mexico
with an expanding presence in the Japan, India, China and Panama. The company
works with more than 3,000 suppliers and offers nearly 900,000 products ranging
from industrial adhesive used in manufacturing, to hand tools, janitorial
supplies, lighting equipment, and power tools. When something is needed by one
of their 1.8 million customers, it is often needed quickly. So, quick service
and product availability are key drivers to ABC’s success.

Your assignment involves
studying the US distribution network in ABC’s supply chain. ABC works with over
250 suppliers in China and Taiwan region. The suppliers produce products to
ABC’s specifications and ship to the US using ocean freight carriers from four
major ports in China and Taiwan. From these ports, products are shipped to US
entry ports in either Seattle or Los Angeles. ABC currently has free on board
(FOB) shipping contracts with Chinese and Taiwanese suppliers by which the
supplier is responsible for all costs incurred until the product is delivered
to the US entry ports. Approximately 40% of the containers enter in Seattle and
60% at the Los Angeles port. Containers on arrival at the port cities are
inspected by federal agents. After passing through customs, products are loaded
onto the 20-foot and 40-foot containers and are shipped by rail to ABC’s
central distribution centre in Kansas City. Variable processing costs at both
Los Angeles and Seattle ports are $5 per cubic meter (CBM). 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 though a quality
assurance check. This costs $3 per CBM processed. A negligible percentage of
the material may need to be sent back to the supplier. Errors in quantity and
package size are often found requiring accounting adjustments. Items are stored
in Kansas City distribution centre, which serves nine warehouses in the US. The
nine warehouses each place orders at the distribution centre that contains all
the items to be replenished. Kansas City consolidates the items on order onto
pallets and ships them on 53-foot trucks to warehouses. Truck freight cost
$0.0220 per CBM per mile. The demand forecasts for the items purchased from
China/Taiwan for next year and shipping distances are given in the following
table:

Although a high percentage of
demand was from warehouses in south and east of Kansas City, the question has
surfaced concerning the 18% that will be shipped to Kansas City and then
shipped back to Los Angeles warehouse. This double-transportation could potentially
be eliminated if a new distribution centre 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 centre, 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 centre,
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 per CBM processed, which includes the cost to move the containers from the
Los Angeles port to the distribution centre. After the material is processed in
Los Angeles, the amount needed to replenish the Los Angeles warehouse
(approximately 18%) would be kept and the rest sent my rail to Kansas City. It
would then be stocked in the Kansas City distribution centre and used to
replenish the warehouses.

ABS
management feels that it may be possible to make the change, but they are
unsure if it would actually save any money and whether it would be a good strategic
change.

Questions to be addressed
in your analysis:

1. What would be the annual
cost associated with running the existing system?

Note:In the existing system 40% of the volume arrives in
Seattle and 60% in Los Angeles. All material is transferred to the Kansas City
distribution centre by rail, where it is unloaded and quality checked. All
volume is then transferred by truck to the nine existing warehouses in the US.

2. What would be the annual
cost associated with running the upgraded system?

Note:In the new system, the Los Angeles warehouse is
upgraded to include a distribution centre capable of processing all the volume
coming into the US. Containers coming into Seattle would be inspected by
federal officials (it 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. 18% of the volume
would then be kept in Los Angeles for distribution through that warehouse and
the rest transhipped by rail to the Kansas City warehouse. The material sent to
Kansas City would not need to go through another “unload and quality check
process” and would be directly stored to supply the eight remaining warehouses
in the US.

3.
What should be done based on your analysis of the US distribution system?
Should the new Los Angeles distribution centre be added? Is this strategically
something that ABC should do? What have they not considered that may be
important?

Attachments:

Supply-Chain-….docx