Global Supply Chain Management — July, 2007

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Strong Canadian Currency Causes Shift in Cross-Border Trade; Schneider National Poised To Take Advantage of Changes
The record high value of the Canadian currency against the U.S. dollar is causing a marked shift in trade flows between these two major trading partners and driving substantial growth at Schneider National's Canadian operations.
"Over the last three years Canada's currency has appreciated more than 30 percent against the U.S. dollar and has very quickly shot up in the last couple of months another 6 percent to 8 percent, to around 94 cents," says John Ferguson, Schneider's general manager for Canada. "Consequently, the demand for our services Northbound is almost out of control and it has become more challenging to balance flows outbound, particularly from Ontario and Quebec."
To put the level of cross-border trade in perspective, he notes that approximately 14m trucks cross the Canada-U.S. border every year. "That's around 40,000 trucks a day, which means that one truck is clearing Customs every two seconds," he says. The value of that cross-border truck traffic is an estimated $400bn annually, he adds.
The run-up in the Canadian currency is due to several factors, Ferguson says. One is the oil boom taking place in western Canada, which has produced something of a gold-rush environment in parts of Alberta. Second is the continuing overall strength of the Canadian economy and third is a surge in merger and acquisitions among Canadian companies. "All of this has changed the flows of freight," Ferguson says. "In addition to more Northbound flows, we also are seeing more intra-Canada flows, primarily to Western Canada from Ontario and Quebec. And we are seeing a lot more trans-loading activity as more freight from Asia flows through the port of Vancouver."
Schneider National is well positioned to take advantage of these trends, Ferguson says.
"Schneider is one of the few, if not the only, large U.S.-based carrier with a significant presence in Canada," he says. "Consequently, we have the ability to take advantage of those northbound flows to Canada that are so hot right now." Schneider can leverage its U.S. network to get northbound loads to the Canadian border, where they can be relayed to a Schneider Canada truck with a Canadian driver, he says. Because of its presence in the country, Schneider also can handle the cross-Canada movements as well. "We are seeing a lot more demand for our team expedited product," Ferguson says. This traffic is being driven both by the oil boom in Alberta and increasing imports from Asia to Canada's West Coast ports.
Schneider also is seeing well-balanced growth in the Canada to Mexico trade lane, Ferguson says. "Most people think of Canada-U.S. trade, but there is a lot of through traffic between Canada and Mexico. Because Schneider has a unique ability to clear both borders with our own assets, we feel that we are the leader in being able to offer this service."
Schneider's Access Canada service is another "extremely hot product right now," Ferguson says. This is a solution targeted to U.S.-based shippers who want to enter Canada without investing in bricks and mortar. "Instead of retailers having to come in and open distribution centers and put a lot of infrastructure in place, Access Canada allows them to serve Canada from their U.S. DCs," he explains. By consolidating orders into truckload shipments, "we are able to provide them an efficient move, including Customs clearance." Freight is delivered to a Canadian cross-dock, from which Schneider manages the distribution across Canada with its LTL, small package and store delivery network. "We can give companies a really quick and easy entry, on a door-to-door basis, into the Canadian market from their existing facilities in the U.S. That's a very attractive package," he says.

Research Documents Connection Between Working Capital and Supply Chain
The connection between supply chain management and working capital is the subject of two recent research reports. The 10th Annual Working Capital Survey conducted jointly by REL and CFO Magazine shows that after nearly a decade of annual reductions in working capital, the 1000 largest U.S. companies (excluding automakers and financial institutions) overall showed no improvement in 2006, due in large part to increased inventory. Inventory build-ups were a result of both slowing sales and increased use of overseas manufacturing facilities, according to REL senior director Daniel Windaus. REL, an Answerthink company, is a consulting firm dedicated to delivering sustainable cash flow improvement across business operations.
"We see two primary factors in this year's poor working capital performance by U.S. companies," says Windaus. "First, while sales continued to grow in 2006, the growth rate was down by nearly 25 percent over last year. As a result, companies housed more inventory due to the lag in supply matching the slow down in demand.
"Secondly, we believe this year's poor U.S. performance is tied to a hidden downside of offshore manufacturing. As companies source materials or manufacture goods in low cost countries the increase in lead times associated with shipping parts of finished products to the U.S. contributes to rising inventory levels. This also hinders the speed with which companies can respond to demand changes, causing levels of obsolete inventory to rise. To address this problem, companies will have to find the right balance of taking advantage of cheaper product while creating flexibility in their supply chains to respond better to demand changes, both up and down," he says.
The U.S. survey found that the top 1000 largest publicly-traded U.S. companies (by sales) are carrying as much as $764 billion in excess working capital because of inefficiencies in the way in they manage inventory, collect bills from customers and pay suppliers. Typical companies in the survey would need to reduce their overall working capital by 48 percent to achieve the levels seen by top performers. Those leaders actually reduced working capital by an average of 11 percent, but the vast majority of CFOs saw their company's performance either stall or degrade.
A parallel survey of total working capital performance at Europe's 1000 largest publicly-traded companies (excluding automakers and financial institutions) found a 6.6 percent improvement over last year, liberating 46bn ($62n USD). But overall total working capital performance by the European companies was still 18 percent worse than that of their U.S. peers.
"It's difficult to understand why companies are not taking advantage of the opportunity to drive improvements in working capital, as this results in increased levels of cash flow which should be of significant strategic importance. This is the cheapest source of cash which can be used to enhance shareholder returns or be dedicated to funding strategic initiatives such as paying down debt, building new or additional capacity in low cost regions or repurchasing shares," says REL President Stephen Payne.
Findings from the REL/CFO survey are featured in the July issue of CFO Magazine and the July/August issue of CFO Europe. A more detailed REL analysis of the findings is also available online.
Given these results, it is not surprising that another recent survey from Aberdeen Group shows that working capital is an issue high on the agenda of supply chain and finance professionals. Sixty-five percent of 400 such professionals surveyed for an Aberdeen benchmarking report indicated that working capital optimization was a high priority for their company. Best in class performers in this survey, which represented 20 percent of the total, showed significant differentiation in their use of innovative supply chain, inventory and finance strategies as well as new-generation technologies. Best in class companies were almost twice as likely as laggards to be using an inventory optimization tool, 2.4 times as likely to be using inventory collaboration technology, 1.6 times as likely to be using supply chain/inventory visibility technology, more than twice as likely to be using working capital/cash management tools and twice as likely to have access to receivables/payables/inventory financing at various stages in their supply chains.
The study, "Working Capital Optimization," is available from Aberdeen.

Logistics Costs Jump 11% in 2006
Another unhappy statistic for supply chain execs comes from the 18th Annual State of Logistics Report, published by the Council of Supply Chain Management Professionals. Costs rose dramatically in 2006 to $1.305tr, a $130bn increase over 2005. The rise was fueled primarily by rising energy costs, interest rates and inventory carrying costs. U.S. business logistics now accounts for 9.9 percent of the Gross Domestic Product. Logistics' shared of the GDP has gone up for three consecutive years.
Transportation costs, spurred by rising fuel costs, rose 9.4 percent in 2006 and represent the largest component of logistics cots. Inventory carrying costs increased even faster: 13.5 percent.
The complete report is available online exclusively to CSCMP members.

Entertainment Supply Chain Transformed by Digital Delivery
The emergence of digital media as a viable platform for movies, television shows, and video games in transforming not only the sales environment for these products, but also the supply chain, according to results of a pulse survey of nearly 100 participants attending last month's Entertainment Supply Chain Conference Academy (ESCA) meeting in Los Angeles. Conducted by ESCA and Capgemini, the survey shows that the primary channels for growth and innovation in the industry are next generation physical DVDs (42 percent) multi-platform bundling (30 percent), and on-demand manufacturing (16 percent).
"Distributors and retailers are beginning to use technology as an enabler to provide access to content across any channel to any device," says Mark Landry, vice president in Capgemini North America's Telecom, Media & Entertainment practice. "This digital convergence will make the entertainment industry think about supply chains in entirely different ways."
Even though digital media has generated the most buzz in the industry and dominates discussion of future growth, the supply chain for the brick-and-mortar retailer continues to be the area of biggest concern for studios and distributors. Participants described returns management (33 percent) as the number one area for improvement in the home entertainment supply chain followed by retail execution (31 percent) and warehouse to delivery (18 percent). An overwhelming number of respondents conclude that the best option for supply chain improvement between the studios and retailers is generic, category-wide point-of-sale data sharing (39 percent); while others suggest returns and deduction protocol (24 percent) and scorecards (20 percent).
Other key findings from the Capgemini pulse survey at ESCA:
Participants almost equally suggest SKU proliferation/shelf space allocation (29 percent), competition between physical and digital (29 percent) and downward pressure on price points (27 percent) will have the most impact on the home entertainment supply chain.
Nearly 36 percent believe RFID at the item level is the technology that will have the greatest impact on home entertainment supply chains during the next two years, while another 25 percent say manufacturing on demand and 18 percent project digital delivery.
52 percent still believe in-store promotional corrugate is an effective use of resources.
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C-TPAT Soon to Be Compatible With EU's AEO System
U.S. import-export managers need to get used to yet another acronym: AEO, for Authorized Economic Operator. The AEO system is, in turn, the key element of CSP, the European Union (EU) Customs Security Program, which is the equivalent of the CBP Customs-Trade Partnership Against Terrorism (C-TPAT) program aimed at promoting global supply-chain security. The United States and EU have been working to achieve mutual recognition between CSP and C-TPAT.
Under the AEO system, "reliable traders," established in the EU, may voluntarily apply for AEO status--just as C-TPAT is a voluntary program. And the payoff, as with C-TPAT in the U.S., is that AEO companies receive trade facilitation, or "green lane" benefits, for their imports into the EU. Therefore, for U.S. trade pros, shipping to EU partners that have achieved AEO status will become an important competitive advantage. The U.K.'s customs agency (HM Revenue and Customs) began accepting applications for AEO status in July 2007 with a target date for the system to be operational as of Jan. 1, 2008. Other EU members are not far behind.
As of now, an importer must be established in the EU to apply for AEO status--and such status will only be applicable to imports into or exports from the EU.
All World Customs Organization (WCO) member nations have committed themselves to adopting some version of an AEO system at some point in the future. The ultimate goal is a WCO-facilitated network of nations that mutually recognize each others' trade facilitation and supply-chain security programs. The United States and New Zealand are close to achieving a mutual recognition agreement for C-TPAT and New Zealand's Secure Export System.
Managing Imports and Exports,

Three Major U.S. Firms Hit With Record Fines For Trading Violations
A recent round of hefty fines for violation of U.S. trade laws is getting the attention of import-export pros. Nearly $200m in fines will have to be paid by ITT Corp., Chiquita Brands International and Baker Hughes Services International for various violations.
ITT was hit with the biggest penalty in a $100m settlement of a case involving export of controlled night-vision equipment to China, Singapore, and the U.K. without either the proper export license or written authorization from the Department of State. To make matters worse, ITT left critical information out of arms exports required reports and then failed to take corrective action in a timely way once aware of the problem. The fine would have been even higher if ITT had not finally self-reported to State.
Chiquita Brands International recently will pay $25 million to settle Justice Department charges that the company knowingly paid protection money to Colombian paramilitaries designated by the U.S. in 2001 as a foreign terrorist organization (FTO). Chiquita management did not react to the FTO designation until 2003, when it made a voluntary self-disclosure to the Justice Department regarding some 100 payments beginning in 1997 that totaled $1.7m. Chiquita executives, however, instructed their Colombian subsidiary to keep up the payments through mid-2004. The Columbian government could potentially prosecute Chiquita executives.
Baker Hughes Services International Inc. was fined $44m for violating the Foreign Corrupt Practices Act (FCPA)--the largest penalty ever levied under the act. The FCPA forbids companies and individuals from paying bribes to foreign government officials. The company pled guilty to violations of the anti-bribery provisions of the FCPA, conspiracy to violate the FCPA, and aiding and abetting the falsification of the books and records of its parent company, Baker Hughes Inc. The bribes totaled $4.1m and were made between May 2001 and November 2003, via an intermediary. The company understood that the bribes were destined for an official of Kazakhoil, the state-owned oil company of Kazakhstan.
Managing Imports and Exports,

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