Logistics And Transportation Megatrends

Session Code: BL Logistics and Transportation Megatrends and Strategies for Supply Managers Joseph L. Cavinato, Ph.D., C.P.M. ISM Professor of Supply Management at Thunderbird School of Global Management Director, A.T. Kearney Center for Strategic Supply Leadership at ISM Monday, May 7, 2007 9:00 a.m. – 10:20 a.m.

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Logistics and Supply Megatrends – 2007

Joseph L. Cavinato, Ph.D.

Annual Conference ISM May 7, 2007

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Why Bother?

These become vital linkages as supply chains become longer, more complex, and increasingly external They represent key huge tradeoffs in time, cost, and required oversight as companies pursue low cost country sourcing and market reach ISM Fortune 1000 study reveals 70-80% of these activities now are purchasing/supply direct report responsibilities 3

Four Logistics / Transportation Themes and Watch Points 1. Supply chain lengths and complexity to grow even more 2. Lack of back-ups mean a diligence and market watch as never before 3. Immediate trends bring opportunity and caution 4. Sourcing and using logistics/transportation providers is not a buyer’s price game anymore

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1. Supply Chain Lengths and Complexity to Grow Even More

Access more, since North Americans and Europeans can do less and less Sophistication of supply chains are no longer just North America and Europe

CEO market tourism is on the rise

31 time zones – more collaboration, tiers of suppliers with innovation and going to market 5

2. Lack of Back-ups Mean a Diligence and Market Watch as Never Before

Lack of back-ups in technologies

Container market supply growing, but congestion and consolidation pose issues

Saudi Arabia can no longer ramp up excess supply when times are tight

Electricity and water are this century’s issues

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3. The Immediate Trends Bring Opportunity and Caution

Per unit pricing in logistics/transportation is the next wave Radio Frequency Identification (RFID) to grow Food supply chains: canary in the mine?

Chase for low cost labor to go farther and be more difficult

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4. Sourcing and Using Logistics/Transportation Providers is Not a Buyer’s Price Game Anymore

Sound sourcing is matching movements to provider’s labor, assets, and flow Even better sourcing and price are gotten with longer term arrangements fitting the provider’s business and capabilities Yet even better cost driven pricing is obtained when working with the provider’s economics and investment cycles.

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Where’s It All Going?

78% of logistics/transportation reports to Purchasing/Supply ISM survey of Fortune 1000

Look to how logistics/transportation assets / resources / processes can help your business grow through your supply quests With our observed broadbanding of buying into procurement and now to supply, today’s professional is no longer a price watcher only. They are business builders, and those who see and craft opportunities are the winners

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Logistics and Supply Megatrends - 2007 Strategies and Tactics for Supply Chain Performance

Randy Strang Vice President UPS Supply Chain Solutions

© Copyright 2007 United Parcel Service of America, Inc. All rights reserved.

Evolution of the Supply Chain: Impacts Market Drivers

Globalization Globalization Intense Intense competition competition Short Short product product life life cycles cycles Deregulation Deregulation Environmental Environmental focus focus

Impacts

ƒƒ Elongated Elongated supply supply chains chains ƒƒ Potential Potential for for disruption disruption ƒƒ SCM SCM considered considered aa strategic strategic competitive competitive advantage advantage ƒƒ Need Need for for automated automated processes processes ƒƒ Constantly Constantly shifting shifting sourcing sourcing options options ƒƒ Need Need for for global global visibility visibility ƒƒ Need Need for for global global compliance compliance and and security security ƒƒ Consolidation Consolidation among among global global SCM SCM providers providers ƒƒ Reverse Reverse logistics logistics -- green green logistics logistics ƒƒ Outsourcing Outsourcing of of non-core non-core functions functions

UPS Supply Chain Solutions

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Strategies and Tactics for Supply Chain Performance

1. The supply chain is very much a board room topic 2. Continually longer and more complex 3. Why visibility is so important 4. Security is a big factor – Compliance and Continuity Management

… and some tactical recommendations…

UPS Supply Chain Solutions

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Never Underestimate the Supply Chain’s Power Research of the last 10 years has shown: • The supply chain can directly impact, on average, 75% of a business’ operating results • Corporations identified as having best-in-class SCM practices manifested market cap growth 726% above industry average

Supply chains require lines of business to act in concert vs. the traditional silo structure.

• Companies identified as having poor supply chain operations experienced market cap growth 2-25 percent below their peers

UPS Supply Chain Solutions

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The Supply Chain Drives Economic Value Effective management of the supply chain has direct linkages to financial performance

SC Improvements

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Value Levers

Value Drivers

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Supply Chain Value Trade-offs Supply chain value is driven by four levers, which must be balanced: Service/Revenue • • • • • •

High

Delivery Performance to Customers Improve in-stock levels at stores Service new channels Add stores – Grow Business Enhance competitive positioning Improve visibility & control

A

Cost

Cost efficiency focus

Costs • • • •

B

Reduce transport costs Improve productivity – reduce “touches” Improve shrink Reduce in-store labor

Fixed Capital Low

Service

High

• Reduce inventory levels • Reduce lead time and/or cycle time • Reduce payables

Working Capital • • • • UPS Supply Chain Solutions

Outsource facilities Outsource transportation/delivery Focus capital on core business Improve supply chain throughput 6

The Performance Gap is Striking – The “best” outperform the “average” two to one

Total supply chain cost

Percent of revenue

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9.8%

8 6 4.2%

The ability to execute in the global supply chain better than competitors will lead to improved relative performance

4 2 0 Average

UPS Supply Chain Solutions

Top quartile

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Strategies and Tactics for Supply Chain Performance

1. The supply chain is very much a board room topic 2. Continually longer and more complex 3. Why visibility is so important 4. Security is a big factor – Compliance and Continuity Management

… and some tactical recommendations…

UPS Supply Chain Solutions

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Changing Landscape of International Trade Automation • Automation of import and export submissions to government agencies (ABI) • Harmonized Tariff Schedule adopted by WTO (120 countries) • Expedited Customs procedures to facilitate express consignment operators and brokers

1980 UPS Supply Chain Solutions

Standards • Customs Modernization Act of 1993 and the Informed Compliance and Reasonable Care standards • Preferential duty programs (NAFTA) • Automated Export System (AES) • Movement by WTO and WCO to develop uniform data standards

1990

Security • CBP develops new strategies to assess risk and combat terrorist threats (C-TPAT) • WTO and WCO endorse global security initiatives • CBP builds new Account-Based System (ACE)

Integrated Data Global Trade • Export data being used as import data • Importers and exporters move to periodic data reporting • Adoption of concept of UCR and Transport Reference

• Internet applications prominent in globalized trade

• McKinsey estimates 80% of world’s GDP will be sold across int’l borders • CBP estimates that China may surpass Canada as the United States’ largest trading partner by import value as early as 2010

• 30% of world’s GDP is sold across int’l borders

2000

2010

2020 9

The Holistic Inbound Supply Chain The retail supply chain is a seamless global pipeline of merchandise moving from source to store shelf. Speed, consistency and visibility are critical to success Shelf

Source Distribution Services • Consumer Direct (B2C)

Domestic Transportation • Commercial Ground

• Retail fulfillment (B2B)

• Residential Ground

International Transportation • Intl. Air Freight

Destination Services • Transload

• Ocean Freight

• Deconsolidation

• Vendor Management

• Cross Border Trucking

• Import Flow

• Origin Optimization

• Brokerage

• NDA 2DA Small package

• Consolidation

• Trade Direct

• International

Origin Services • Purchase order management

• LTL • Full Truck Load

Producing Countries

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Consuming Countries

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Strategies and Tactics for Supply Chain Performance

1. The supply chain is very much a board room topic 2. Continually longer and more complex 3. Why visibility is so important 4. Security is a big factor – Compliance and Continuity Management

… and some tactical recommendations…

UPS Supply Chain Solutions

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The Rewards of Comprehensive Visibility ƒ Significant gains made in the past two decades ƒ 34% reduction in ratio of inventory to sales ƒ Yielding an estimated reduction of over $4.6 trillion in total business inventories ƒ Order to cash cycle time improved 10% in last 5 years ƒ Gains came from: – Information technology investments – Improved information visibility – Visibility-enabled just-in-time processes

UPS Supply Chain Solutions

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Supply Chain Costs as Percent of GDP The past two decades have shown a marked decrease in logistics and transportation costs as a percentage of Gross Domestic Product. 110 100 Index: 1982 = 100

Transportation

90 80

Total

70 60

Inventory

50 40

02 20

00 20

98 19

96 19

94 19

92 19

90 19

88 19

86 19

84 19

19

82

30

Source: Council of Logistics Management UPS Supply Chain Solutions

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Strategies and Tactics for Supply Chain Performance

1. The supply chain is very much a board room topic 2. Continually longer and more complex 3. Why visibility is so important 4. Security is a big factor – Compliance and Continuity Management

… and some tactical recommendations…

UPS Supply Chain Solutions

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Heightened Security Regulations Myriad security initiatives exist in the post 9/11 freight environment. • Air Security Cargo Requirements (12/06)

• Operation Safe Commerce (OSC)

• Business Anti-Smuggling Coalition (BASC)

• Smart Border

• Customs-Trade Partnership Against Terrorism (C-TPAT)

• Container Security Initiative (CSI)

• Importer Self-Assessment (ISA) • Known Shipper Policy (FAA Initiative)

UPS Supply Chain Solutions

• Trade and Bioterrorism Acts of 2002 • Free and Secure Trade (FAST)

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Advantages of Active Compliance Management • Companies that have done C-TPAT self-assessment have found ways to become more efficient • Preliminary research indicates that supply chains are benefiting from security measures • Fewer Custom examinations • More predictable deliveries • Reduced inventory needs • Less risk of theft • Lower transportation costs • Secure our borders

UPS Supply Chain Solutions

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The Impact of Disruption is Massive Headlines regarding West Coast Port Strike 2002• West Coast Port Shutdown Likely to Reduce U.S. Earning by $4.7 Billion – Consumer, worker losses total $100 million; exporters and industry shoulder four-billion-dollar burden -Anderson Economic Group LLC • Some of the loss estimates are staggering: – A 10-day shutdown at West Coast ports could strip $19.4 million from the U.S. economy. After 20 days, the price jumps to $48.6 billion, according to the study. –Seattle Post

UPS Supply Chain Solutions

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Strategies and Tactics for Supply Chain Performance

1. The supply chain is very much a board room topic 2. Continually longer and more complex – so what’s the impact? 3. Why visibility is so important 4. Security is a big factor – Compliance and Continuity Management

… and some tactical recommendations

UPS Supply Chain Solutions

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Inbound Freight Best Practices Industry leaders leverage consistent strategies to optimize inbound freight.

Prepare Product Strategically

Share Forecasts And Objectives

UPS Supply Chain Solutions

Manage For Global Network Efficiencies

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Prepare Product Strategically ƒ Packaging – How much are you paying to ship wasted space? The consumer electronics industry has seen its products shrink, while its packaging has remained unchanged. Software packages, conversely, have decreased by over 40%. Consider alternate packaging strategies. ƒ Palletization – Shippers benefit from a well built pallet. A typical target weight for a pallet is approximately 2,000 kilos. After the first 2,000 kilos favorable economies of scale can be achieved. ƒ SKU Velocity – Many shippers use a ‘one size fits all approach for air freight’, using a single service level for all shipments. Routings can be optimized for the specific needs of different classes of product to great effect.

UPS Supply Chain Solutions

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Share Forecasts and Objectives Primary research of active air freight shippers shows poor alignment of business information and strategies to freight decisions.

ƒ CFO’s surveyed confirm that their top freight objectives are cost control and customer service. ƒ They advise that operational plans are not well integrated with their corporate strategies, however. ƒ There is a gap between the recognized importance of the air freight element and its operational performance. ƒ Operational control is frequently fragmented. ƒ Companies have difficulty effecting improvements when their service providers have insufficient information with which to plan.

UPS Supply Chain Solutions

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Manage for Global Network Efficiencies Primary research of leading air carriers shows the advantage of economies of scale and back-haul efficiencies in managing air freight expenditures. Consistency of volume – “Trade lane specific volume and, more importantly, the stability of the volume provided were big factors in determining who was considered a ‘quality’ customer.” Concentration of volume – “Using too many service providers will lessen buying power. The fewer providers you have the easier it is to manage your relationships.” Block purchasing – “Typically making any kind of space commitment will generate 10% or more relative to a normal contracted rate – depending on the lane.” – “The forwarders control the entire logistics process, from the pick up to the delivery to the carriage by the carrier and they get a quicker recovery if they have block space. It is a way that allows them to be very competitive.” Strength of the relationship with a carrier – “I can’t emphasize enough how important relationships are in this business.” Network effect – “If a customer gives us space on a low utilization flight then we will guarantee them space on a high utilization lane, and sometimes will give discounts.”

UPS Supply Chain Solutions

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The Quantifiable Rewards of Integration An integrated holistic approach to supply chain management produces quantifiable business advantages

UPS Supply Chain Solutions

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Thank you

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