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

in China

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.

Analysis Suggestions

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

for Distributing

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