Positioning your cross – border Supply Chain to meet the economic challenges

in 2009

Bob Armstrong C.I.T.P, P.LogPresident

SCL Canada

Global Supply Chain Management ConferencePlattsburg, New YorkMay 19, 2009

Discussion Framework

About SCLBackground Industry Statistics Supply Chain VolatilityStrategies to Protect cross – border supply chains during economic downturnQuestions you should be asking

Background

Catalyzing the “integrated” supply chain in Canada

Building more resilient Canadian companiesIntegrating Canadian companies in global supply chains

EDC Canadian SC researchSCM is generally tacticalKey business process gaps existUnderinvestment in technologyNeed for coordinated cross response and engagement

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“Canadian companies’ involvement in global supply chains appears still to be limited”

Conference Board of Canada, March 2007

Linking Supply Chain Performance to Share Price

As the chart below shows, companies announcing supply chain disruptions had stock prices that significantly lagged their peers over a three-year period (one year before the announcement, through years afterward).

Source: Supply Chain Digest: Impact of Supply, 2007

The Perfect and Continuing Storm

U.S. Logistics Industry : Overall logistics costs on the rise!10.1% of GDP spent in 2007 on logistics ($1.39 trillion)

Source: 19th State of the Logistics UnionJune, 2008

The Perfect and Continuing Storm

From 2006 to 2007 Supply Chain ImpactsTotal U.S. logistics costs rose 7% last year despite a slowing economyOf that 7%, total transportation expenses rose 6%9% increase in total inventory carrying costs, which included warehousing costs9.9% increase in total warehousing operations

Source: 19th Annual State of Logistics Report June 2008

The Perfect and Continuing StormAverage Monthly Canadian Fuel Prices

Jan. ‘03 – Dec. ‘08

There is a wide range of costs variability within sectors of the economy

Compared to the US total SCM and logistics costs are:

+12% (Canadian manufacturers)+18 % (Canadian wholesalers) +30% (Canadian retailers)

Possible factors:Inventory management practices (+20% ICC)Service outsourcingSize of firmsHighly qualified personnelRegulations (cabotage…)

Source: SOL Report 2008

The US outsourced 50% more of its logistics activities than Canada

Possible factors:MandatesInnovation Value added services RegulationHQPCulture / business modelSize of firm

Source: SOL Report 2008

Supply chain collaboration is more important than costs in terms of innovation drivers

Users (Canadian manufacturers, wholesalers, and retailers) are prioritising better co-ordination with suppliers and/or customers over lower costs

The users perceive more benefits from these practices both in terms of costs and co-ordination than do logistics service providers

Source: SOL Report 2008

60% increase in investment in new distribution innovation and facilities in Canada from 2001-2007

•Complexity of inventory management with supply chain partners around the globe

•Strategic investments in advanced deconsolidation facilities and innovation

Not all manufacturing sub sectors are embracing the Just-In-Time and mass customisation road

•Many sub-sectors reduced their inbound inventory turns due to an increase of inputs from low cost country sourcing

• Globally, the Canadian manufacturing sector was innovative in finding ways to maintain its inventory turns while increasing its GVC footprint

47% GDP growth for the Canadian logistics service industry since 1998

•Growth particularly marked in:

•Truck transportation

•Increased use of JIT by Canadian firms

•Value added 4-5PL sectors

•More than $10 billion to the Canadian economy

•Return on Equity is directly linked to the value added and complexity of the logistics service provided:

•Trucking (5%)

•3PL (12%)

•4-5PL (20%)

GDP for logistics service providers is expected to increase byan additional 40% between 2007 and 2015

•3PL and couriers are expected to integrate 4-5PL value added activities

•The increase demand for supply chain agility maintain the leading position of trucking

•Logistics and SCM activity requires HQP (20%) and quality operational (80%) workforce to stimulate economic growth

•In 2007 Canada counted 590,000 logisticians and more than 239,000 truck drivers in total in 2007

•Quebec and Ontario count for 60% of the total Canadian logistics workforce

Annual demand for employees in logistics and SCM is estimated at 86,330 employees (12.3%) over the next five years

Supply Chain Strategy Alignment

Survey: CSC

2009 Realities affecting the Canadian Supply Chain

Volatility is rampant!

Fuel and Commodity Pricing

Carrier Capacity

Consumer Demand

Currency

Supplier Stability

Offshoring…………………Near shoring?

Strategies to Protect Supply Chains from Economic Downturns

Strategy One: Ensure you have truly leveraged the marketplace for logistics savings to meet service requirements

Our research indicates that many companies (in good times and bad) have not gone through the process of collecting the required data, understanding their business requirements and innovatively streamlining their logistics and transportation processes.

“Buyer Beware”The Logistics Services Industry

Internal technical knowledge has been farmed out to service companies (transportation / 3PL)Many companies lacking the internal expertise, systems, information and …… time to properly understand cost savings opportunities

Strategies to Protect Supply Chains from Economic Downturns

Strategy Two: Evaluating your distribution competency:

Difficult times have many C-level executives seeking ways to offset infrastructure and fixed commitments. The “O” word (Outsourcing) question invariably comes up at these times. Each business needs to be very clear where its core competencies lie and where it can leverage those capabilities through a partnership with the right Third Party provider. This process, by the way, may not lead to a “lower cost line” per se, but can offset assets and risk, which is very desirable during a downturn.

Outsourcing vs. Insourcing: Risks Outsourcing

Risks

- Start – up cost - Service for profit attitude - Selection process / cost - Information system interfacing- Non-performance - Cost creepers- Legal expenses- Limited intervention

Insourcing

Risks

- Facility size constraints (may be carrying excess space or insufficient space)

- Capital outlay and cost commitments- People (unionization)- Training (learning curve)- Performance proficiency linked to internal

processes and systems- Management Team focus - Project management (scale & scope)- Develop redundant processes / systems- Loss flexibility (can’t share resources

across facilities or other task)

Outsourcing vs. Insourcing: Benefits

OutsourcingBenefits

- Quick entry and exit to markets- Mitigates risk- Short term commitments- Access to established management &

staffing personnel- Minimal capital investment- ‘Pay as you play’

- space / labor - Provides access to advance distribution

systems- May bring transportation savings as a

result of economies of scale- Able to tie performance to service fees

- should result in heightened performance

InsourcingBenefits

- Human capital is owned- Total flexibility (non constrained

intervention)- Develop / instill company culture & values- Increased equity- Capitalize cost diminishes with each

operating year- Intellectual capital is owned- Cost efficiencies are 100% owned- Learnt processes are deployable across

other facilities at an incremental cost

Strategies to Protect Supply Chains from Economic Downturns

Many companies still struggle with less than ideal or disjointed cross companyplanning processes formally known as Sales and Operations Planning. Given the current economic landscape and the tightening of credit, companies need to seriously look at ways of reducing working capital and improving cash flow through inventory reduction but optimizing the inventory asset mix to ensure meeting the required customer service requirements. An effective planning process supported by good inventory policies and tools will enable these results.

Sales & Operations Planning

A Decision-Making ProcessIntegrates Financial & Operating Plans

Focus on Achieving PlanBalanced Demand & Supply

Top Mgt’s “Handle on the Business”

Strategies to Protect Supply Chains from Economic Downturns

Strategy Four: Optimally configured network:

With the increase in transportation costs and with the push in offshore sourcing, protecting a company’s supply chain includes clearly understanding that the network costs (transportation, facility costs and inventory) is the best it can be for supply chain efficiencies and customer satisfaction. Many businesses do not have the analysis and business case support to suggest a change in a company’s network and understanding the benefits.

Questions you should be asking

1) How certain are you that you are receiving the best value from your logistics service providers2) Do you have an effective integrated planning process (Sales and Operations Planning Process)3) Is Distribution and Logistics a true core competency? 4) Have you ever looked at business casing a distribution outsourcing option5) Could your distribution network deliver better customer service at a lower cost?6) How do you manage your cross – border supply chain?7) Are you and your staff fully aware of both Canadian and U.S. customs programs and procedures and the impact on your company as an exporter and/ or importer?8) Do you outsource the customs clearance process? Do you have an agreement with your custom broker that clearly details each parties responsibilities?

Comments

Bob ArmstrongPresident of SCL7270 Woodbine Ave, Suite 204Markham, OntarioL3R 4B9905-513-7300barmstrong@sclcanada.org