Operations Management Project

Grainger: Re-engineering the China-US Supply Chain

Prof. Ankur Chauhan
IMT Ghaziabad

Submitted by: APO Group 3

Amarpal Singh Ahlawat
Dhanikonda Venkata Nanda Gopal
GR Dheemanth
Mitasha Bhattacharya
Nupur Chauhan
Teja Srinivas Ravi
Varun Tarun Madan
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Table of Contents
1. Abstract……...…………………………………………………………………….3

2. Introduction……………………………………………………………………….3

3. Objectives of study………………………………………………………………..3

4. Scope of study…………………………………………………………………….4

5. Methodology...…………………………………………………………………….4

6. Existing System………………….…………………………………………….….5

7. Scenario Analysis………………………………………………………………….6

8. Recommendation………………………………………………………………….9

9. References…….…………………………………………………………………10
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Abstract
Grainger is a leading supplier of maintenance, repair, and operating products in the
US mainly characterized by timely service and product availability. Given the huge product
catalog having a seamless and efficient supply chain is of utmost importance. This study
intends to understand and optimize the supply chain by considering the demand at each of the
warehouses and finding out the optimum location of the warehouse by using the Center of
Gravity method of location planning. We found out that 8 warehouses are on the eastern half
of the North American continent. Los Angeles is the only warehouse on the west coast. Upon
further research, we found out that Eastern coast ports of the US are nearer to the Chinese
city of Shanghai than western ports of the USA (via Indian and Atlantic Oceans). We have
thus decided to establish two different distribution centers – one for Los Angeles and the
other one which caters to the demand on the east coast. Using the Centre of Gravity(centroid)
Method, we found that establishing a distribution center at Louisville is the most economical.
Louisville is a nerve center of logistics being a major Inland Riverport and has a Rail facility.
Given that the inland water freight is cheaper than rail or road transport, we recommend that
the shipment to Louisville from Houston will be thru the inland waterway. Louisville is a
nerve center of logistics, has well-developed railway links to all the 8 eastern cities where the
warehouses of Grainger are located. Thus, we recommend shipping goods from the Supply
center to the 8 Warehouses by Rail. Our proposed solution reduces the total logistics cost by
50.4%.

Introduction
Global Sourcing is a procurement strategy used by large companies to find the most
cost-efficient locations for procuring and manufacturing a product. Due to the increased
globalization of businesses, global sourcing has become an integral part of an organization’s
strategic sourcing abilities, which includes having robust supplier or vendor relationships to
procure goods. raw materials and services profitably and efficiently. (Chase & Jacobs, 2014,
p. 400).
W.W. Grainger Inc is a leading supplier of maintenance, repair, and operating
products to businesses in the US. The products range from industrial adhesives used in
manufacturing to hand tools, janitorial supplies, lighting equipment, and power tools. When
one of its 1.8 million customers needs something, it is often needed quickly. So a quick
service and product availability play a key role in Grainger’s success.
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Objective of Study
Grainger works with suppliers in the Asian region who produce products as per
Grainger’s specification and ship to the US using ocean freight. These large containers are
shipped to the US at the Seattle or Los Angeles ports. Both these shipments then reach
Kansas by rail after the necessary port formalities. At Kansas, which is the distribution center,
the shipment undergoes the mandatory quality checks and gets dispatched to the 9
warehouses across the US.
This study intends to understand and optimize the US side of the supply chain
involved with Grainger’s procurement strategy. The company is faced with multiple
solutions. To analyze each solution and weigh each proposal’s pros and cons to arrive at the
best possible solution is the primary objective of the study.

Scope of Study
The scope of the study is to evaluate and analyze the viability of upgrading a
warehouse to a distribution center to reduce multiple trips of shipments between the port and
distribution center for quality checks and optimizing of the process by way of selecting
routes, modes of transport, and location of distribution centers.

Methodology
W.W. Grainger a manufacturing company gets its supplies through global
procurement channels mainly from China and Taiwan. It has its distribution center in Kansas
City where the quality assurance is done before distributing the products to nine of its
warehouses across the US.
We have divided the costs into three broad categories which are Transport Costs, Port
Processing Costs, and Upgradation costs. We calculated the cost incurred by the company in
the existing system of operations. It is observed that the Quality Check is costlier in LA and
the transport costs of rail are a fraction of the truck freight charges. We then used the
information to design other configurations in terms of the location of the distribution center
and mode of transport. We compared these configurations with each other as explained in
scenario analysis to find the least cost configuration.
Since the ocean freight is a lot cheaper, we plan to use this mode of transport to the
maximum possible extent. We’ve achieved this by changing the destination port of ocean
freight from Seattle to Houston which is on the east coast. It is also planned that the second
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container unloads 18% of LA’s demand in LA and the carrier continues its journey to
Houston to make the final delivery of goods.
Centre of Gravity Method: This method is an approach to compute geographic
coordinates for a potential single new facility that will minimize costs.
 Cx= ∑ dix Vi/ ∑ Vi
 Cy= ∑ diy Vi/ ∑ Vi
Cx is the X (latitude) coordinate for the new facility. Cy is the Y (longitude)
coordinate for the new facility, dix is the X coordinate of the existing location, diy is
the Y coordinate of the existing location, and Vi is the volume of goods moved to or
from the ith location.
This method was used to calculate the most cost-effective location of the new
distribution center. It was found that Louisville is the COG of the 8 warehouses (excluding
LA).
To come up with this solution, we checked the availability and prices of inland
waterway from Houston Port to Louisville which can significantly reduce rail costs.

Existing System
In the existing system, 40% of the total volume of the shipment goes through Seattle
and 60% through Los Angles. Post mandatory port processing the shipment reaches Kansas
from both Seattle and LA. At Kansas, which is the main distribution center, the shipments are
distributed to the 9 warehouses of Grainger Inc across the US viz., Kansas, Cleveland, New
Jersey, Jackson Ville, Chicago, Greenville, Memphis, Dallas, LA. Barring Kansas, trucks
leave for the remaining eight distributor warehouses and the demand for Kansas is internally
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transferred from the DC to the warehouse post quality check. The demand for each
warehouse and their respective distance from Kansas is as per the below table.
Warehouse Average % Of Demand Miles from Miles from Miles from
Demand (CMB) Kansas LA Seattle
Kansas 20900 11.0% - 1620 1870
Cleveland 17100 9% 800 2350 2410
New Jersey 24700 13% 1200 2780 2890
Jacksonville 15200 8% 1150 2420 2990
Chicago 22800 12% 520 2020 2060
Greenville 15200 8% 940 2320 2950
Memphis 17100 9% 510 1790 2330
Dallas 22800 12% 500 1430 2130
Los Angeles 34200 18% 1620 - 1140
Total: 190000 100%

Table 1: The Demand and Distances of Warehouses

USD($)
Transportation Costs (per CBM per mile)
Port Processing Costs 5.00
Rail Shipping Rate 0.00180
Truck Freight 0.0220
Quality Check Costs (per CMB) at
Kansas 3.00
LA 5.00
LA facility upgrade costs:
one time 15,00,000.00

operational cost (per year) 3,50,000.00

Table 2: The following information is known about the cost of transport, port processing, and facility upgradation.

Below is an image and flow chart depicting the container movement and mode of
transport from the suppliers to distributors through the port and distribution center.
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Scenario Analysis
Scenario 2: In a modified scenario, it is assumed that the upgradation of the Los
Angeles warehouse to a distribution centre and the quality check of all the stock is happening
in Los Angeles. Post the port processing and quality assurance, the demand at Los Angeles is
internally moved to the newly upgraded Distribution Centre and the remaining stock is
shipped by rail to Kansas DC. No quality check is performed again in Kansas before
dispatching the items to the 7 warehouses excluding Los Angeles and Kansas warehouses.
Here we observed that the transportation costs are reduced significantly as the to-and-
fro shipping of Los Angeles stock is avoided. But the cost of quality checks at the LA
Distribution Centre is still higher.

Port Cost $ 9,50,000.00

Rail cost $ 6,10,264.80
Shipping Cost $ 23,55,430.0000
Transporation Costs $ 39,15,694.80

Quality Check at LA $ 9,50,000.00

Quality Check at Kansas $ -
Quality Assurance Cost $ 9,50,000.00
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Scenario 3: In a third scenario, in addition to the upgradation of the LA warehouse,

only the goods that are demanded by the LA facility (18% of total) undergoes quality check at
the LA Distribution Centre. The remaining stock from LA is shipped by rail to Kansas DC for
quality check and further distribution by trucks. Here it is taken that the goods from the
Seattle port are shipped to Kansas DC by rail to avoid extra miles. This ensured that the costs
of the transport and quality check is minimized.

Port Cost $ 9,50,000.00

Rail cost $ 4,88,512.80
Shipping Cost $ 23,55,430.0000
Transporation Costs $ 37,93,942.80

Quality Check at Kansas $ 4,67,400.00

Quality Check at LA $ 1,71,000.00
Quality Assurance Cost $ 6,38,400.00

Proposed Scenario:
After analyzing the location of different warehouses, we found out that most of the
warehouses are concentrated in the eastern half of the North American continent. Los
Angeles is the only warehouse on the west coast. Upon further research, we found out that
Eastern coast ports of the US are nearer to the Chinese city of Shanghai than western ports of
the USA (via Indian and Atlantic Oceans). 

Maritime distance between

Shanghai &
Los Angeles (Nautical miles) 19270 [1]
Houston (Nautical miles) 15904 [2]
Distance saved (Nautical miles) 3366
Distance saved (Miles) 2926.956522
Additional savings $ 228406.452
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We have thus decided to establish two different distribution centres – one for Los
Angeles and the other one which caters to the demand on the east coast. Using the Centre of
Gravity(centroid) Method, we found that establishing a distribution center at (37.3 N, 85.5
W) is the most economical.

Warehouse Average Demand Latitude (N) Longitude (W)

(CMB)
Kansas 20900 39.0119 98.48420
Cleveland 17100 41.4993 81.69440
New Jersey 24700 40.0583 74.40570
Jacksonville 15200 30.3322 81.65570
Chicago 22800 41.8781 87.62980
Greenville 15200 34.8526 82.39400
Memphis 17100 35.1495 90.04900
Dallas 22800 32.7767 96.79700
Centre of Gravity 37.28126829 86.5106184

The nearest city centre to the centroid is Louisville, Kentucky. Louisville is a nerve
centre of logistics being a major Inland Riverport, rail, and road facility [4],[5]. It is on the
bank of the huge Ohio River, which joins into the Mississippi River and then into the Atlantic
Ocean
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We further found Maritime shipping cost is just 27% of the cost of shipping by rail
[3]. Thus, we arrive at our solution: Ship directly from China to Houston, and from Houston
to Louisville via Mississippi and Ohio Rivers – a well-developed and widely used major
inland waterway. We found the cost of transferring goods container from Global ship to
Inland River ship at Houston port is small.
Distance between Houston & Louisville (Miles) 951.6
Cost of shipping from Houston to Louisville (USD) 74258.56111

Louisville is a nerve centre of logistics, has well-developed railway links to all the 8
eastern cities where the warehouses of Grainger are located. Thus, we decided to ship goods
from the Supply centre to the 8 Warehouses by Rail.
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Railway
Distance from Shipping
Warehouse Louisville cost
$
Kansas 509 19,148.58
$
Cleveland 349 10,742.22
$
New Jersey 735 32,678.10
$
Jacksonville 765 20,930.40
$
Chicago 299 12,270.96
$
Greenville 412 11,272.32
$
Memphis 384 11,819.52
$
Dallas 836 34,309.44

Total Railway Shipping cost $1,53,171.54

Port Cost $ 9,50,000.00

Rail cost $ 1,53,000.00
Shipping Cost $ 74,258.0000
Additional savings $ (228406)
Transportation Costs $ 11,77,258.00
Quality Check at Louisville 623200
Quality Check at LA $ 1,71,000.00
Quality Assurance Cost $ 7,94,200.00
Upgradation Costs $ 8,50,000.00
Total $ 28,21,458.00

Total Cost
Scenario 1 $ 56,82,558

Proposed Scenario $ 28,21,458

Savings $ 28,61,100
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Recommendation
After analyzing the location of different warehouses, we found out that most of the
warehouses are concentrated in the eastern half of the North American continent. Los Angeles
is the only warehouse on the west coast. Upon further research, we found out that Eastern
coast ports of the US are nearer to the Chinese city of Shanghai than western parts of the
USA. We have thus decided to Establish two different Supply centers – one for Los Angeles,
another supply that caters to the east coast. Using the Centre of Gravity(centroid) Method, we
found Establishing a warehouse at Louisville is the most economical.

Louisville is a nerve center of logistics being a major Inland Riverport and has a Rail
facility. Given that the inland water freight is cheaper than rail or road transport, we
recommend that the shipment to Louisville from Houston will be thru the inland waterway.
Louisville is a nerve center of logistics, has well-developed railway links to all the 8 eastern
cities where the warehouses of Grainger are located. Thus, we recommend shipping goods
from the Supply center to the 8 Warehouses by Rail. This ensures the cost of transport is
minimized as this is the centroid of the 8 warehouses and is connected to all the warehouses
by rail.
References
[1] http://ports.com/sea-route/port-of-shanghai,china/port-of-los-angeles,united-states/

[2] http://ports.com/sea-route/port-of-shanghai,china/port-of-houston,united-states/

[3] https://www.irpt.net/maritime-versus-railway-transportation-costs/

[4] https://www.a1autotransport.com/port-of-louisville/

[5] https://www.portoflouisville.com/