The case company (referred to as ABC) 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 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 (this rate applies to all shippings by rail). In Kansas City, the containers are unloaded and processed through 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 (this rate applies to all shippings by truck) per mile. The demand forecasts for the items purchased from China/Taiwan for next year and shipping distances are given in the table in the next page.
Demand (CBM) Distances (Miles) Warehouse Average % of total Demand From Kansas City From Los Angeles From Seattle Kansas City 20,900 11% 0 1,620 1,870 Cleveland 17,100 9% 800 2,350 2,410 New Jersey 24,700 13% 1200 2,780 2,890 Jacksonville 15,200 8% 1150 2,420 2,990 Chicago 22,800 12% 520 2,020 2,060 Greenville 15,200 8% 940 2,320 2,950 Memphis 17,100 9% 510 1,790 2,330 Dallas 22,800 12% 500 1,430 2,130 Los Angeles 34,200 18% 1620 0 1,140
Total 190,000 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 ABC builds a new distribution centre in Los Angeles.
The idea is 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 cost for doing this would be $5 per CBM processed. The cost associated with transporting the containers from the Los Angeles port to 9 the Los Angeles distribution centre is negligible. 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 by rail to Kansas City.
It would then be stocked in the Kansas City distribution centre and used to replenish the other warehouses. ABC 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:
1. Map and draw the existing supply network, as well as calculate the annual cost associated with running the existing system? (5 marks) 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. Map and draw the new supply network as a result of the changes made in the case and calculate 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 "quality check" and would be directly stored to supply the eight remaining warehouses in the US.
3. In an essay format analyse the US supply network and explain what other SSCM strategies can be applied to optimise network costs? Using Linear/Integer or other Programming mathematical problem solving techniques research other distribution cost and network design methods and determine answers to some of the following questions Eg. What would the optimum location for the warehouses and distribution centres be?
Should the new Los Angeles distribution centre be added as a new node in the network? Is this strategically something that ABC should do? What factors have ABC not considered that might be important in moving strategically to the new SC configuration, base your arguments on academic evidences of concepts or practices that can be applied in coming up with an optimal network design and then mapping out new solutions?