SUPPLY CHAIN PROCESSES

ANALYTICS EXERCISE: GLOBAL SOURCING

DECISIONS – GRAINGER: REENGINEERING THE
CHINA/U.S SUPPLY CHAIN
CHAPTER 16 CASE STUDY

PROC 5820
OPERATIONS MANAGEMENT
2016
 THE CONCEPT OF GLOBAL SOURCING
 Global Sourcing is a procurement strategy in which a business seeks to find the
most cost efficient location for manufacturing a product, even if the location is in
a foreign country. For example, if a toy manufacturer finds that manufacturing and
delivery costs are lower in a foreign country due to lower wages of foreign
employees, the company might close the domestic factory and use a foreign
manufacturer (http://www.businessdictionary.com/definition/global-sourcing.html )

 Due to the increasing globalization of business activities, it has become an

integral part of an organization’s strategic sourcing capabilities; which is the
development and management of supplier relationships to acquire goods and
services in a way that aids in achieving the needs of a business (Chase & Jacobs,
2014, p. 400).
 BACKGROUND

 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 Japan, India, China, and Panama
 The company works with more than 3,000 suppliers and runs an extensive website
(http://www.grainger.com), where it offers nearly 900,000 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 their 1.8 million customers, it is often needed
quickly, so quick service and product availability are key drivers to Grainger’s success.
 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 Seattle, Washington, or Los Angeles, California.
 BACKGROUND (cont.)

 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 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 Canada site,
and Mexico.
 The contracts that Grainger has with Chinese and Taiwanese suppliers currently specify that the supplier
owns the product and is responsible for all costs incurred until the product is delivered to the shipping
port. These are commonly referred to as free on board (FOB) shipping port contracts. Grainger works
with a freight forwarding company that coordinates all shipments from the Asian suppliers.
 suppliers have the option of either shipping product on pallets to consolidation centers at the port
locations or packing the product in 20- and 40-foot containers that are loaded directly on the ships
bound for the United States. In many cases, the volume from a supplier is relatively small and will not
sufficiently fill a container. The consolidation centers are where individual pallets are loaded into the
containers that protect the product while being shipped across the Pacific Ocean and then to Grainger’s
Kansas City distribution center. The freight forwarding company coordinates the efficient shipping of the
20- and 40-foot containers. These are the same containers that are loaded onto rail cars in the United
States.
 CURRENT GRAINGER SUPPLY CHAIN ACTIVITIES

 Currently 190,000 cubic meters of material are shipped annually from China and Taiwan.
 This is expected to grow about 15 percent per year over the next five years.
 About 89 percent of all the volume shipped from China and Taiwan are sent directly from the
suppliers in 20- and 40-foot containers that are packed by the supplier at the supplier site.
Approximately 21 percent are packed in the 20-foot containers and 79 percent in 40-foot
containers. The 20-foot containers can hold 34 cubic meters (CBM) of material and the 40-foot
containers, 67 CBM. The cost to ship a 20-foot container is $480 and a 40-foot container, $600 from
any port location in China or Taiwan and to either Los Angeles or Seattle.
 Grainger estimates that these supplier-filled containers average 85 percent full when they are
shipped.
 Material at the consolidation centers is accumulated on an ongoing basis and as containers are
filled they are sent to the port. Volume is sufficient that at least one 40-foot container is shipped
from each consolidation center each week. Grainger has found that the consolidation centers can
load all material into 40-foot containers and utilize 96 percent of the capacity of the container.
 GRAINGER SUPPLY CHAIN METRICS

 About 11 percent of goods shipped from China and Taiwan go through

consolidation centers that are located at each port. These consolidation
centers are run by the freight forwarding company and cost about
$75,000 per year each to operate.
 The variable cost is $4.90 per CBM.
 This variable cost of running a consolidation center could be reduced to
about $1.40 per CBM using technology if the volume could be increased to
at least 50,000 CBM per year.
 With variability in the volume run at each center, the average is now
about 5,000 CBM per site.
 GRAINGER SUPPLY CHAIN METRICS

 Shipment of Goods:
 Shipped from the north China port of Qingdao: 10%
 Central China port of Shanghai/Ningbo: 42%.
 Kaohsiung in Taiwan: 10%
 Southern Yantian/Hong Kong port: 38%

 Consolidation centers are currently run in each location. Grainger

management feels that it may be possible to make this part of their
supply chain more efficient.
 EVALUATION OF THE CURRENT
CHINA/TAIWAN LOGISTICS COSTS
 Assumptions:
 Current total volume: 190,000 CBM
 Percentage shipped direct from the supplier plants in containers: 89%
 Use the data from the case and assume that the supplier-loaded containers are 85 percent full.
 Assume that consolidation centers are run at each of the four port locations.

 If the consolidation centers only use 40-foot containers and fill them to 96 percent capacity, the
total shipping cost will be $2,192,520.00

 Assume that it costs $480 to ship a 20-foot container and $600 to ship a 40-foot container, the
total cost to get the containers to the United States? (U.S. port costs not inclusive) will be
$2,594,930.00
 Evaluation of a single alternative to the current
China/Taiwan logistics costs

 Assumptions:
 Consolidating all 20-foot volume and using only a single consolidation center in Shanghai/Ningbo.
 Assume that all the existing 20-foot volume and the existing consolidation center volume is sent to
this single consolidation center by suppliers.
 This new consolidation center volume would be packed into 40-foot containers filled to 96 percent
and shipped to the United States.
 The existing 40-foot volume would still be shipped direct from the suppliers at 85 percent capacity
utilization.
The cost of consolidating and shipping all 20-foot volume and using only a single consolidation center
in Shanghai/Ningbo to the U.S. will be $1,932,946.00
 ANALYTICAL OBSERVATIONS

 An increase of the volume of containers will directly increase the packaging and shipping costs

 Dispersed location of the distribution centers is a factor in the increasing cost of shipping to the
U.S.

 Two alternatives are currently being evaluated for shipping the containers to the U.S.

 The first alternative is to utilize four consolidation centers to ship both 20 feet and 40 feet
container sizes.

 The second alternative is to use one consolidation center and 20 foot containers
 RECOMMENDATIONS

 The first alternative is not feasible because it will increase the packaging
and shipping costs

 Based on an analytical analysis, the second alternative is more cost

effective, because a cost savings of $507,184 can be achieved, based on
the assumed shipping figures

 To forestall breakdown in the supply chain, I would suggest that the

company use two consolidation centers for the container shipments. The
ports with the highest usage are more likely to yield cost savings:
Shanghai/Ningbo: 42% and Southern Yantian/Hong Kong port: 38%
QUESTIONS