Read Case Study 11-1: Kraft’s Distribution Challenges in China and answer the following questions in an essay format.
1. What types of products in Kraft’s product mix can the company transport by truck? What are the advantages and disadvantages of truck transportation for Kraft’s China operations?
2. What types of products in Kraft’s product mix can the company transport by rail? What are the advantages and disadvantages of rail transportation for Kraft’s China operations?
Your answers must include content and cite reference materials where appropriate. To assist in this requirement, a good rule of thumb is that each answer should be approximately 200 to 250 words in length.
Case 11-1 Kraft’s Distribution Challenges
Tom Shu, Kraft Foods’ warehouse and distribution
manager in China, is on top of things when it
comes to local logistics companies. He lines up,
along with hundreds of other workers, to work as
a day laborer for local logistics companies and to
find out how the companies are running the business.
He feels that it is important to find out as
much as possible about potential logistics providers
because he needs to rely on them to handle the
movement of Kraft products between production
plants, distribution centers, and wholesalers.
Logistics companies are essential for large multinationals
and small and medium-sized enterprises
alike: They ensure that products arrive on time
and in good shape. They also make sure that the
manufacturer and the wholesaler do not have to
store the product for prolonged periods because
this creates additional costs and the potential for
merchandise loss. In China, in particular, this is
important, as the country’s fast economic growth
has contributed to serious transport bottlenecks.
Although the government attempts to make sure
the infrastructure is adequate, building highway
networks to adequately serve the needs of the population,
it still happens that shipments are stuck in
traffic (see Figure 11-5) or even disappear, as highway
robbery of shipments is not unusual.
Kraft partnered with Chinese firms to enter
China in the mid-1990s: One of its companies,
Kraft Tianmei Foods, in Tianjin, makes Tang
instant drink mix and Sugus chews, and the other,
Kraft Guangtong Food, in Guangdong, produces
Maxwell House coffee. In 2000, as part of the
Nabisco acquisition, Kraft gained two more plants
in Beijing and Suzhou that produce Oreo, Chips
Ahoy! and Ritz brands cookies and crackers. Kraft
has not yet brought its full product line to China,
but its presence in this market is expanding rapidly.
Kraft has trimmed down its number of regional
distribution centers in China from 13 to 5 to reduce
costs. Each center has networks radiating into several
neighboring provinces that aremanaged by
third-party logistics, providing warehousing service
and delivering goods to Kraft’s designated wholesalers
around China. One strategy that has helped
the company is to hire mid-size logistics companies,
rather than to go with the top companies—going
with the largest companies used to be Kraft’s mantra
in the past. In its relationship with the logistics
firms, Kraft wants to be their number one client,
to ensure that the company’s needs are met first.
In China, if a company is the third or fourth largest
client, its orders are often delayed when there is a
shortage of vehicles.
Kraft, however, has rigorous standards for storage
and delivery: All the products are sealed in
dry-food containers for transport. Once Kraft’s
sales manager approves an order, the logistics firm
has only 1 to 3 days to deliver, which is not a problem
in the United States, but it is in China where
roads are often narrow and where local officials
often demand additional fees from truck drivers
(see Figure 11-6). The reason for the short delivery
time is that Kraft insists on keeping its inventory
down at its five warehouses: The highest cost
incurred by distribution centers is attributed to
inventory, not to management fees.
Another logistics challenge that Kraft faces in
China is the pilfering of goods transported by rail.
Often dozens of boxes are missing at destination.
With rail, the company does not have many choices
other than to keep its fingers crossed—or to hide
the more expensive goods at the bottom of the
ChinaYet another challenge is that China is clamping
down on overloaded trucks, which will take a big
bite out of Kraft’s bottom line. Trucks drive around
China with huge loads, a practice adopted by logistics
companies to keep costs down, but which poses
a threat to road safety. Now, these companies are
forced to distribute the same loads over two or
three trucks, increasing their costs.
1. What types of products in Kraft’s product mix
can the company transport by truck? What are
the advantages and disadvantages of truck
transportation for Kraft’s China operations?
2. What types of products in Kraft’s product mix
can the company transport by rail? What are
the advantages and disadvantages of rail transportation
for Kraft’s China operations?
Sources: Cui Rong, ‘‘Privileged Position,’’ Far Eastern Economic
Review, Vol. 167, No. 31, August 5, 2004, pp. 46–48; ‘‘Getting a
Foothold in China: Kraft Foods Works on Improving Its Recipe