Case 11-1 Krafts Distribution Challenges in China

Case 11-1 Krafts 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.
FIGURE 11-5

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China has been investing massively to improve the road infrastructure. In Beijing, where much investment took place in preparation for the 2008 Olympics, eight-to-ten-lane highways often have traffic jams. In this sprawling city it is not unusual for a drive across town to take as long as 3 hours.
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.
FIGURE 11-6

Local officials often request additional fees from truck drivers, delaying them and making it hard for them to reach their destination on time. At toll stops, trucks tend to take much longer than other vehicles.
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 container.
Yet 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.