PUBLISHED SINCE 1898 | FORMERLY CANADIAN TRANSPORTATION & LOGISTICS
3PL SURVEY The role of outsourcing in cost reduction AUTOMOTIVE LOGISTICS Toward a flexible, adaptable supply chain
Bridge to Growth Canada’s economy leads in exports to the US. Is your supply chain ready?
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6 | Viewpoint If trucking is to be the main beneficiary of the growth in freight volumes in 2014, is the mode ready to respond? Columnist Lou Smyrlis looks at the numbers behind shippers' stated optimism and the more conservative carrier outlook.
COVER STORY CANADA-US TRADE Our comprehensive report looks at the status of trade between Canada and its biggest trading
8 | News Focus The marine industry raises alarms over icebreaker service issues on the St. Lawrence Seaway.
partner, the US.
52 | Inside the Numbers High prices and surcharges are some of the reasons behind a modal shift for Canadian shippers.
What are NAFTA’s prospects for surviving another twenty years? Columnist Laurie Turnbull weighs in on the pact.
© Joshua Haviv/iStock/Thinkstock
54 | The Bigger Picture
Manhattan Bridge and New York City Skyline At Night
TRADE REPORT | 10 Canada, a nation of traders, faces good prospects in 2014 in terms of freight volumes with the US. A look at some of the indicators for trade.
WHAT’S NEXT FOR NAFTA | 18
An update on the direction of the North American Free Trade Agreement as it celebrates 20 years.
Canadian Shipper’s annual outsourcing survey examines opportunities, trends and motivators around outsourcing decisions in supply chain.
How do security, preclearance and infrastructure factor into bilateral trade policy? A look at the priorities and accomplishments.
BORDER CLEARANCE | 22
CANADA-US BUSINESS | 28 Business tips and trends around “negotiating the border”.
continued www.canadianshipper.com March/April 2014 3
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Shipper. com CANADIAN
Shipper news CANADIAN
AUTOMOTIVE LOGISTICSDESIGNING FOR AGILITY | 30
OEMs are turning to service providers who can address capacity and cost constraints with flexible, agile supply chain strategies.
SUPPLY CHAIN VISIBILITY | 34
Telemetry, besides location intelligence, also adds the capability to collect a whole roster of data to increase overall visibility.
FIVE PRINCIPLES TO GUIDE LEAN SUCCESS | 44
As this year’s 3PL survey sponsor, Ryder Supply Chain Solutions Canada outlines key tips on lean.
PANAMA CANAL | 46
WEB TV Transportation Matters
There is promise of a wealth of opportunities and services when the Panama Canal completes its ambitious expansion project.
TMTV’s Better Bids video, sponsored by Shaw Tracking, saw shippers and carriers weigh in on the RFP process and tips on developing better bids.
CASE STUDY | 50
A look at wood pellet exporter Rentech’s robust supply chain solution.
Editorial Director Lou Smyrlis behind Canadian Shipper’s rebrand, and commitment to providing the most comprehensive logistics news coverage across multiple platforms.
Canada Cartage’s Centennial Celebration. CORRECTION
In the January/February issue of Canadian Shipper, our annual carrier capacity guide of the TOP 100 carriers incorrectly listed a telephone number for Bison Transport. Bison’s number is 1-800-GO-BISON, or 1-800-462-4766. In addition, the equipment numbers for Transforce Inc. should be read as follows: straight trucks: 3,615, tractors: 3,860, trailers: 11,060, and containers: 671.
FEATURES What’s the Buzz?
An industry natural gas primer Paylode case study looks at reusable cargo protection A commentary on pipeline construction and how it could boost government revenues
Find us on Twitter at: @CanadianShipper
www.canadianshipper.com March/April 2014 5
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THE VIEW Lou Smyrlis, MCILT March/April 2014 Volume 117 Issue No.2
EDITORIAL DIRECTOR Lou Smyrlis (416) 510-6881 Lou@TransportationMedia.ca
On the same page? Getting ready for increased global freight volumes also means ensuring your carriers are up to the task
o global or go home. It’s a business mantra Canada’s supply chain managers have had to increasingly adapt to over the past 20 years as their companies sought to grow by looking beyond their traditional regional and national markets. They’ve had to master operating much longer, much more complex supply chains utilizing a variety of carriers and modes and negotiating the pitfalls of different currencies and customs regulations. The pace of this change was set back by the Great Recession and the slow recovery but many experts believe the recovery is about to pick up speed. In 2014, exports are expected to lead Canada’s economic growth. They may even surpass the $487 billion record set back in 2008, particularly because of the momentum south of the border. Yet the best laid supply chain plans can fall apart if the carriers contracted to move this international freight aren’t up to the task.The reality is the nation’s carriers, and in fact carriers around the world, have spent the past five years looking inward trying to reduce costs and capacity. Are they ready to look outward towards an expansion of global freight volumes? Are they ready to translate that into investments in new equipment, systems, staff and services? Our own research has traditionally shown that transportation and logistics CEOs are consistently less optimistic about future growth than their customers. A recently published PwC survey sheds light on the question. PwC surveyed 1,344 business leaders in 68 countries around the world, including 101 transportation and logistics company CEOs, in the last quarter of 2013. It’s good news that the overall survey found a leap in CEOs’ confidence in the global economy. Similar to our own research findings, the PwC survey found transportation and logistics company CEOs were less optimistic than their peers. But they are more optimistic than they’ve been in the past. Forty-five percent of transportation and logistics CEOs believe the economy will improve in 2014 while just 8% think it will decline. In 2013 this figure was at 38%. Our own survey of Canada’s motor carrier executives found 40% expect freight volume growth in 2014, a 3% increase from the number who thought likewise the previous year. (For more detailed analysis of our research findings see the Modal Update digital issue being e-mailed to your inbox mid March). But this wouldn’t be transportation if the tailwinds supplied by a global economy growing in strength were not tested by the headwinds created by a series of challenges. PwC also surveyed transportation and logistics company CEOs on their concerns and what they said reveals the obstacles that lie ahead and the role buyers of transportation services must play in dealing with them. Last year, 61% of T&L CEOs were somewhat or extremely concerned about energy costs. This year that figure jumped to 76%. Since 2001 the price for crude oil has risen fourfold. This can only mean increased upward pressure on fuel surcharges. It will be up to buyers of transportation services to ensure it also means greater emphasis on adoption of fuel efficiency best practices. Only 43% of transportation and logistics CEOs are concerned about the speed of technological change - fewer than across the overall sample. That’s probably because fewer see product and service innovation as their main route to growth, according to PwC. Lack of innovation does not bode well for improved supply chain communication and efficiency. Buyers of transportation services must push their carriers on this. Transportation and logistics CEOs overwhelmingly agree they’ll need to change their talent strategies to cope with future trends. But just 19% are already doing so, compared to a third of CEOs across the overall sample, and only 30% believe their HR departments are well prepared. Again, that’s an issue for which buyers of transportation services must demand improvement. All the investments in equipment and systems are for naught if the right people aren’t in place to drive them.
ASSOCIATE EDITOR Julia Kuzeljevich (416) 510-6880 Julia@TransportationMedia.ca PUBLISHER Nick Krukowski (416) 510-5108 email@example.com ART DIRECTOR Ellie Robinson firstname.lastname@example.org CONTRIBUTING EDITORS Carroll McCormick, Leo Ryan, James Menzies, John G. Smith, Ian Putzger, Ken Mark, Carolyn Gruske MARKET PRODUCTION MANAGER Gary White (416) 510-6760 email@example.com VIDEO PRODUCTION MANAGER Brad Ling RESEARCH MANAGER Laura Moffatt CIRCULATION MANAGER Barbara Adelt (416) 442-5600 ext. 3546 firstname.lastname@example.org EXECUTIVE PUBLISHER Tim Dimopoulos VICE-PRESIDENT PUBLISHING Alex Papanou PRESIDENT Bruce Creighton HEAD OFFICE: 80 Valleybrook Drive, Toronto, ON M3B 2S9 Canadian Shipper is written for Canadian transportation and logistics professionals who manage product flow from manufacturer to point-of-sale. Editorial is focused on reporting, analysis and interpretation of Canadian log istics trends and issues. It is published by BIG Magazines LP, a division of Glacier BIG Holdings Company Ltd.
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St. Lawrence marine industry blasts ‘inadequate’ icebreakers The marine industry engaged in St. Lawrence River trades has been up in arms over alleged ‘inadequate’ icebreaking services by the Canadian Coast Guard (CCG) during a winter that has provided the densest ice conditions since 1993, and is urging the federal government to rectify certain priorities. While the powerful ice-reinforced container vessels of global carriers calling at Montreal – a strategic North Atlantic hub - experienced limited delays, this was not the case for domestic coastal operators and some foreign-flag operators. In a bluntly-worded letter on January 30 to Gail Shea, minister of fisheries and oceans, four industry associations blamed an icebreaking fleet “falling into a state of increasing obsolescence” for the stranding of 20 ships imprisoned in ice between Jan.3 and Jan. 9. Affirming that nearly one third of the icebreaker fleet (consisting of 18 units, including six heavy and medium units) is operating at less than full capacity, the industry considers this has resulted “in serious financial losses for Canadian industries and their trading partners overseas.” Under average ice conditions, after receiving a message for assistance, the CCG is supposed to deploy a unit on the scene within five hours on the St. Lawrence River and within 12 hours in the Gulf of St. Lawrence. Two vessels owned by a Quebec shipping firm, Groupe Desgagnés, had to wait for six days off Rimouski in the St. Lawrence River. And a number of ferries were immobilized for several days. Under the government’s cost recovery policy, shipping lines are charged an Icebreaking Services Fee whenever CCG help is executed. In their letter, the Shipping Federation of Canada, the St. Lawrence Shipoperators, the St. Lawrence Economic Development Council (SODES) and the Association of Canadian Port Authorities evoked the “negative implications” for the reputation of the St. Lawrence-Great Lakes corridor “as a major commercial axis and reliable transportation route.” It also warned of “a less than ideal outcome within the context of an increasingly global economy and a recently-negotiated free 8
Canadian Coast Guard icebreaker vessel
Courtesy Canadian Coast Guard.
trade agreement with the European Union.” Rather than attempting to prolong the life of a fleet with average age of 33 years and “in a state of increasing obsolescence,” the letter urged the federal government to “undertake immediate action to invest in the construction of (new) medium and heavy icebreakers.” Such a move, the object of a number of industry representations in the past few years, should take “precedence over the planned construction of a $1 billion polar icebreaker dedicated to the Arctic,” said the letter signed by the St. Lawrence Shipoperators, the Shipping Federation of Canada, the St. Lawrence Economic Development Council (SODES), and Association of Canadian Port Authorities. As it happens, construction on the West Coast of the polar icebreaker announced several years ago (and conceived as part of a sovereignty campaign in the Arctic) remains mired in delays due to budget and other complicating factors. The alreadynamed CCGS John G. Diefenbaker was initially slated to enter service in 2017 – but now it is not expected to join the fleet before 2022 if the project proceeds. The industry letter also rammed home this point: “The maintenance of winter operations in the St. Lawrence, Saguenay and Gulf cannot be sacrificed for the profit of another region, especially when one considers that trade along the St. Lawrence corridor generates economic benefits of more than $2.3 billion annually for Quebec, and represents more than 40 percent of Canada’s international freight and 50 percent of its domestic freight.” The letter, nevertheless, did not question the resourcefulness or quality of the
BY LEO RYAN
work done by Coast Guard employees under difficult circumstances. In an interview, Michael Broad, president of the Shipping Federation, which represents ocean carriers, said “some of our members have been quite upset. And prolonging the lives of the old CGG vessels (through re-fits and repairs) is not a longterm solution.” According to SODES in a press release, the losses to the maritime industry and to foreign trading partners due to delayed arrival of Coast Guard assistance “averaged more than $100,000 per ship per 24 hours of delay. And extending the lives of the old CCG vessels is not a long-term solution.” Tony Boemi, vice-president growth and development of the Montreal Port Authority, acknowledged that some vessels were stranded unexpectedly between Jan. 3 and Jan. 9 due to ice conditions. But once the information was known,“the Port of Montreal communicated with the appropriate government authorities” and the channel was cleared so the vessels could proceed to Montreal. “The Port Montreal continues to operate on a year round basis as it has for the last 50 years,” Boemi stressed. Response of the Canadian Coast Guard Asked to comment on the issues raised by the marine industry, David Walters, from the media relations office of the Department of Fisheries and Oceans, stated in an email: “To respond quickly on one of the longest rivers in the world, the Canadian Coast Guard strategically deploys its vessels and sets service priorities – search and rescue, flood control, ice jams and ice stops, passenger ferry service, vessels carrying dangerous cargo, commercial vessels and harbor breakout. “From December 23 to 27, 2013 and from January 3 to 9, 2014, the Canadian Coast Guard mobilized three icebreakers in the Lake St. Pierre area, where a single icebreaker is normally required, to stop the formation of ice jams and ensure flood control. Since 2009, more than $6 billion in investments into the renewal and life extension of Canadian Coast Guard vessels which continue to provide quality service, have been announced.” CS
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GOOD PROSPECTS AHEAD FOR NATION OF TRADERS EXPORTS TO LEAD GROWTH FOR CANADA AS US ECONOMY REBOUNDS BY JULIA KUZELJEVICH
10 March/April 2014 www.canadianshipper.com
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n 2014, exports will lead Canada’s growth, with global demand for commodities on the increase, and the US economy picking up. This, along with cheaper currency, should help Canadian manufacturers and exporters and their logistics partners expand and facilitate their US sales. According to Export Development Canada’s Export Performance Monitor for the month of February 2014, Canadian exports rose 0.9% in December to $39.7 billion because of a 0.8% increase in volumes while prices were essentially flat. The top performer was Canada’s metal sector. It rose 19.5% as copper shipments doubled and iron ore rose 7.8%. The industrial machinery sector also had a strong month increasing 3.2% as construction, logging and mining machinery surged by 25% while commercial and service industry machinery gained 5.7%. Rising business investment in the US was the major driver for Canadian machinery, the report noted. On the downside, Canada’s energy exports www.canadianshipper.com March/April 2014 11
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contracted by 4.5%, the fourth consecutive month of decline as crude oil shipments fell 5% and natural gas decreased by 6.8%. Canada’s total exports for 2013 rose 3.2% to $477.4 billion, a big increase over the 1.3% growth in 2012, but we’re still below the $487.3 billion reached back in 2008. Canada’s exports will finally surpass the pre-crisis peak in 2014, particularly because of rising momentum south of the border. In fact, exports to the US grew by 5.3% in 2013, even faster than sales to emerging markets which rose 4.3% and well above shipments to the EU which contracted by 3.6%. Now that the US economy is gaining speed with GDP growth of 4.1% in Q3 and 3.3% in Q4, business investment will pick up while consumption will gain on the improving job market, said the report.
In a February report on the Canadian economy, Peter G. Hall, vice-president and chief economist with Export Development Canada, said that while Canadian trade “is indeed facing considerable headwinds” with weaker commodity prices and a stalling of the Keystone pipeline construction that has slowed US-bound oil flows, there is a decent list of positive factors, first and foremost of which is world growth, led by US economic revival. “Canada is already seeing very positive effects in exports that feed off key US leading indicators, suggesting that other exports will soon join the party. The weaker Canadian dollar, now 7% lower than the 2013 average, suggests a boost of about 1% to GDP, if sustained,” said Hall. André Downs, chief economist at Foreign
AV N A O IL W A B LE
Affairs, Trade and Development Canada (DFATD), said that improvements in different markets will mean a more balanced pattern of growth internationally. “What we see over the next year or two will be much more healthy growth in terms of exports,” said Downs in the Bank of Canada’s October 2013 Monetary report. “We see investment coming back, we see consumption continuing to increase at a more sustainable pace, with all of that leading to a more balanced pattern of growth in Canada as well.” Canadian exporters also have a comparative advantage in growth areas such as agricultural products.
“Canada is already seeing very positive effects in exports that feed off key US leading indicators, suggesting that other exports will soon join the party. ” Peter G. Hall, vice-president and chief economist, Export Development Canada
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“We’ve always been a trading nation, and we’re increasingly a nation of traders. The efforts toward diversification didn’t stop during the financial crisis, and they will continue over the next couple of years,” Downs noted. The Bank of Canada report said that a projected expansion of US business and residential investment in 2014 is expected to fuel a rise in the growth of Canadian exports, with non-energy commodities such as metals and forestry products posting strong gains and crude oil exports contributing to growth. continued
12 March/April 2014 www.canadianshipper.com
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US trade with NAFTA partners exceeds $100B for first time Data on October North American Freight Numbers from the US Department of Transportation saw US trade with North American Free Trade Agreement (NAFTA) partners Canada and Mexico reach $103.1 billion, exceeding $100B for the first time on record. The Department of Transportation’s Bureau of Transportation Statistics (BTS) reported that three of the five transportation modes carried more US-NAFTA trade in October 2013 than in October 2012. Total surface transportation trade, comprised of truck, rail and pipeline, was at an all-time high in October, at $85.4 billion. Truck, at $61.4 billion, and rail, at $15.9 billion, also reached record monthly levels. Percent Change in Value of U.S.-Canada Freight Pipelines showed the most Flows by Mode: October 2012 to October 2013 year-to-year growth at 23.7%. Truck The increase in the value of freight carried by pipelines Rail reflects the rise in prices for oil and other petroleum products, Pipeline the primary commodity Vessal transported by pipelines. Truck, which carries threeAir fifths of US-NAFTA trade and is 0 5 10 15 20 25 30 35 40 the most heavily utilized mode for SOURCE: Bureau of Transportation Statistics, TransBorder Freight Data moving goods to and from both US-NAFTA partners, rose 3.1% year-to-year while rail rose 7.1%. Vessel declined 3.6% and air declined 1.0% Trucks carried 59.5% of the $103.1 billion of US-NAFTA trade in October 2013 accounting for $32.3 billion of exports and $29.0 billion of imports. Truck was followed by rail at 15.4%, vessels at 8.8%, pipeline at 7.8%and air at 3.8%. The surface transportation modes of truck, rail and pipeline carried 82.8% of the total NAFTA freight flows. In terms of trade with Canada, US-Canada trade by vessel, of which 63.3% was imported, had the largest percentage increase of any mode from October 2012 to October 2013, growing 40.2%. Next highest was pipeline trade, which grew 26.7% during the same period. Petroleum Percent Change in Value of U.S.-NAFTA Freight products have the highest Flows by Mode: October 2013 Compared to October 2012 value of any commodity by Truck both vessel and pipeline although pipelines carry four Rail times the amount of petroleum from Canada to the US as do Pipeline vessels. US.-Canada pipeline Vessal trade comprises 96.1% of total US-NAFTA pipeline trade. Air Freight moved by truck between -5 0 5 10 15 20 25 the US and Canada grew the SOURCE: Bureau of Transportation Statistics, TransBorder Freight Data least of any mode, 0.7%.
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continued from p. 14
Canada’s share of exports destined for the US has declined from a high of almost 85% in the years following NAFTA to about 70% today, with the depreciation of the world market and diversification by Canadian exporters. The level should not decline below 70% for the foreseeable future, according to DFATD simulations. “We make things together, so when the US economy picks up, we follow closely,” said Downs. The Conference Board of Canada’s Canadian Outlook report also sees recovery ahead in the US economy, which should expand at a pace better than 3% in 2014, with even stronger growth anticipated in 2015, it said. “It’s a good news story for Canada,” says Pedro Antunes, director of the Conference Board’s National and Provincial Forecast and coauthor of the report. “We’re very much part of their supply chain.” However, the increasing practice of “re-shoring” in the US could reduce the reliance on Canadian imports, especially given the cheaper cost of US labour, Antunes noted. Canada is better able to compete in capital-intensive manufacturing operations, those that involve automation. “Higher inflation in 2014 is expected to prompt the Bank of
Canada to lift rates ahead of its US. counterpart. This should help stabilize and lift the loonie,” Antunes said. Further, the Bank of Canada report finds “encouraging signs that Canadian firms are taking steps to improve their export performance,” for example investing in innovations and marketing. It also notes there have been investments to improve efficiency and lower costs, which are helpful, Downs said. “But remember, we have to increase our competitiveness, and we would like to see them invest for expansion. That’s not quite there yet.” Downs cautions that while the objective is “to increase the value-added in Canada, we may not be good at transforming all resources, other countries may be better at it, so it’s better for us to specialize in areas of transformation where we have a comparative advantage.” CS Associate editor Julia Kuzeljevich has been writing about transportation issues for more than a decade. Her meticulously researched articles have garnered several transportation and Canadian Business Press writing awards.
16 March/April 2014 www.canadianshipper.com
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NORTH AMERICAN TRADE
he North American Free Trade Agreement, NAFTA, celebrated 20 years this January, It came into effect in 1994 creating one of the world’s largest free trade zones comprising Canada, the US and Mexico. In the 20 years since, trade between these three nations has tripled and overall job growth has been strong in all three partner countries with total employment increasing by almost 40 million jobs. As Canadian Shipper was going to press, the current leaders of Canada, the US and Mexico, Stephen Harper, Barack Obama and Enrique Peña Nieto, respectively, were having their annual meeting in Mexico, the “Three Amigos Summit”, to discuss the direction of the pact. Many stakeholders are questioning whether NAFTA is at a crossroads. In 1994, a pact encouraging North American economic integration was an obvious and logical solution. In 2014, factors like emerging global economies and their participation in other free trade agreements are changing relationships, leading the NAFTA players to try and figure out where to place their bets. In their presentation to the Center for North American Studies (CNAS) at Washington University, Frank Graves, Robert Pastor and Miguel Basáñez, authors of a survey called “The NAFTA Promise and the North American Reality” found that with regard to attitudes about borders and security, security is still important in the United States, but “it has declined over the last decade.” “Mexico is now much more concerned about freedom of movement. This has vaulted to top border concern. Canada no longer focuses on security, while the US supports common border policies to both Canada and Mexico. And all three countries now support a common security perimeter, particularly Mexico,” the survey found. Discussing the US perspective on the direction NAFTA could take, Leslie Blakey, executive director at the Coalition for America’s Gateways and Trade Corridors, applauded President Obama’s January State of the Union address as supportive of trade and infrastructure. “Obama is the first president since probably Eisenhower to talk about transportation, noting that first class jobs go where there is first class infrastructure,” said Blakey at the Cargo Logistics Conference in Vancouver this January. Obama’s address also seemed to mark a positive development for the president, who has not always been seen as supportive of the NAFTA deal throughout his presidency. “We need to do a better job of focusing on gateways,” said Blakey, who is organizing a summit on transportation and energy policies in Chicago this April called NAFTA NEXT. The summit will focus on freight mobility, energy and the environment. “Looking at supply chain network capacity, how has it expand-
By Julia Kuzeljevich
ed? 25% of US imports from Canada and Mexico have US content. The US gets more balance of trade between Canada and Mexico than it does of any of its other trade partners. For every dollar of trade, Mexico imports 42% from the US,” said Blakey. The top trade lanes have important corridor implications. “Our mutual interest in terms of working together is to create more advanced products, which make up 47% of trade. Energy is the North American game-changer. We cannot let things like truck size and weight get in the way of freight mobility,” she added. “Mexico is the first or second export destination for 21 US states. Canada is Mexico’s fifth largest source of foreign direct investment mining and there are 3,000 Canadian companies operating in Mexico,” said Luis Brasdefer, commercial counselor with ProMexico, a trade organization based in Canada that coordinates actions to attract foreign direct investment, as well as export opportunities. For Mexico, NAFTA has gleaned significant benefits. Some 66% of Mexican trade is with North America, and the country now boasts solid macroeconomics, specialized and high skilled manufacturing, added Brasdefer. Its automotive industry and supply chain has become highly integrated with that of the US. Jim Phillips, president and CEO of the Canadian American Border Trade Alliance, called Mexico “NAFTA’s clear winner.” He noted that North American auto production numbers for the NAFTA nations has revealed a flipped switch of sorts: in 2013, 24% of vehicles were produced in Mexico, vs. 11% in Canada, and 65% in the US. US numbers has stayed the same while Canada and Mexico have reversed roles. Mexico’s labour force, which graduates 115,000 engineers each year,is a result of demand driven education, noted Brasdefer. “NAFTA is at a crossroads for a variety of reasons. But anything we do in the future, if you don’t have three winners, you’re in serious trouble.You can’t have one country being the consumer. And if you don’t have a population that can afford to buy things, or that is working, you’re not as big a consumer in future,” said Phillips. “The logic of closer integration of these three countries is impeccable. As Mexico modernizes we increasingly have convergence of rule of law and domestic institutions, etc. But obstacles at the border cost us,” Phillips noted. A US pilot program for Mexican truckers, which was introduced 17 years after the NAFTA signing as a three year pilot up for renewal this year, did not get the anticipated sign-up response from Mexican trucking companies. “Not as many applied as they thought would happen. One of the reasons is drayage is a costly issue on the Mexican border. As a result the rail business of moving product from Mexico to the US is going through the roof,” said Phillips. “The hue and cry (over Mexican truckers entering the US) was
WHAT’S NEXT FOR NAFTA? As the North American Free Trade Agreement celebrates 20 years, what are the directions and priorities for the three-country pact? T
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typically coming from independent owner operators. A limited pilot has evolved and a lot of the drama has been laid to rest. It didn’t materialize as a huge usurpation of trucking jobs. Part of that is related to the driver shortage all over,” said Blakey. Key issues from the Canadian perspective include a stymied approval of the Keystone pipeline between Canada and the US, and rules of origin. “In 2012, 950,000 autos arrived at the Port Of Baltimore, 100% manufactured offshore, and in one day 1900 cars are on their way to dealers at less than $30 the cost of inspection. So why are we charging ourselves $600 per car to cross the border between the US and Canada? Foreign suppliers do not face this tax,” said Phillips. Meanwhile, the Trans-Pacific Partnership, the TPP, is being negotiated as world’s largest free trade zone.The US, Canada and Mexico are negotiating separately to join the partnership. TPP would give Canada preferential trade and investment access to dynamic new markets, a coveted “door” of opportunity that may accelerate the currently sluggish economic recovery. Assuming Canada, the US and Mexico join the TPP,“any provisions will apply not only to us but to them. This does not play to a robust North America.Trade facilitation measures are critical to the long-term success of the TPP. While the cross-border flow of goods, investments, people and technology has transformed the world, there has been little reform to the supply chain trade since the 1990’s”, said Phillips. “Post 9/11, public security at the US/Canada border has taken over
and become a priority over the facilitation of low-risk trade, threatening our economic security and in fact creating more harm than good. Other bottlenecks like border delays, inadequate infrastructure and burdensome regulations are barriers that weigh as heavily on trade as tariffs and are inhibiting our industry’s potential business future. Ministers must work to ensure these issues are the framework for immediate action once the agreement is signed. We support efforts to move a Competitiveness and Business Facilitation chapter into the agreement,” said Phillips. “The TPP is dealing with a specific and effective area of the globe. As TPP becomes reality, NAFTA NEXT better become reality, and better get some real traction. To make the three of us begin to compete globally, we have to do something about connectivity and infrastructure development,” he said. “The collective drive to make the best kind of outcomes is missing and we need to revive it,” said Blakey of NAFTA. Added Brasdefer: “NAFTA’s legal document doesn’t need to change in itself, but we need to promote it. The three countries, the private sector and government must realize the benefits of NAFTA, which seem to have been forgotten,” he said. “Ultimately, we are three countries, we are one continent, and we must be in this together. If done right, ten years from now the North American economic power of Canada, US and Mexico can be the leading global economic force. We have to take it forward, retool it and move it,” said Phillips. CS
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Trucks clear Canada Customs and Border Services at Coutts, Alberta. Photo courtesy CBSA.
A CRITICAL ‘NEED TO WIN’: Canada and the US move forward on mutual border security and preclearance
he Canada-US ‘Beyond the Border perimeter strategy’, issued by President Obama and Prime Minister Harper in February 2011, wrapped up 2013 with some significant developments along the Canada-US border, thanks to a specific action plan formulated in December 2011. But the plan still has a long way to go, and according to Jim Phillips, CEO of the Canadian/American Border Trade Alliance (Can/ Am BTA), this strategy absolutely has to deliver. “Beyond the border is about teamwork, cooperation and the critical need to win,” Phillips said at the Vancouver Cargo Logistics Conference this January. “In 2002-security did trump trade but today the US has come to the conclusion that security does not trump trade. Our quality of life, and our economy, are tied in to how we handle our border,” Phillips said. While Phillips does not necessarily advocate a micromanaging of the border by government, he says that the government working groups tasked with the border “have been functioning without interruption, and they are making tremendous progress.You don’t read a big headline about (data harmonization) but I don’t think they’ve taken their eye off it. But our biggest concern is we’ve got to get preclearance done. If we don’t win it, the costs, fees, and congestion are going to go up. But I think we are close - within 12 months the Beyond the Border achievement will be in hand,” said Phillips.
By Julia Kuzeljevich
Can/Am BTA has recommended several pain points be addressed at the border, specifically paradigms around small or rural port inspection that can be done by either Canadian or American border agencies, and around duplicate inspection at shared land borders, with cross-designation capabilities for the Department of Agriculture and the Food and Drug Administration with those of the Customs and Border Protection, so that in the absence of the DA and FDA the CBP could cover the same duties. The CBP and CBSA have established a Small Ports Working Group to develop a long-term strategy to more effectively and efficiently manage small ports of entry along the Northern border. Both US and Canadian border agencies have continued to develop and implement several additional initiatives consistent with the Beyond the Border declaration that “recognize that more than 90% of all non-trusted cargo and more than 98% of trusted cargo is cleared at the point of primary inspection.” One of those initiatives is the Secure Transit Corridor (STC) technology demonstration being conducted at the Ambassador Bridge by the Department of Homeland Security’s Science and Technplogy Directorate (S&T) in collaboration with CBP, Canadian Border Services Agency (CBSA), and industry partners. The objective of the project is to increase security while facilitating the flow of commerce. Industry partners attach devices at the shipment origin which monitor and report the security status of the shipment through continued
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its arrival at the destination. CBP uses the data to inform their characterization of the shipment as “high” or “low” risk so resources are focused on high risk shipments while low risk shipments can be expedited; this facilitates the efficient flow of commerce from trusted agents.
The Can/Am BTA would also like to see direct streamed access to primary customs inspection for the trusted trader tiers, including: ISA/PIC/CSA, FAST, CTPAT/PIP TIER 2, and C-TPAT/PIP. There is a lot of work to be done in the area of controlled access to the plazas so that
trucks can be cleared efficiently, noted Phillips. “Seven percent of trucks are FAST.This is not enough critical mass. We have to stream, and better control how trucks arrive into the plaza. What are the factors determining the processing capacity of primary inspection at a land port in terms of number of booths, hours each is operation-
“We have to stream, and better control how trucks arrive into the plaza. What are the factors determining the processing capacity of primary inspection at a land port in terms of number of booths, hours each is operational, and the processing dwell time for each? This is a major element where nothing has been done” Jim Phillips, CEO of the Canadian/American Border Trade Alliance (Can/Am BTA) al, and the processing dwell time for each? This is a major element where nothing has been done,” he said. The CBP, in partnership with Canada Border Services Agency (CBSA) and Public Safety Canada, has already concluded a five month pilot test of cargo pre-inspection, and deemed the concept feasible. The truck cargo pre-inspection pilot began on June 18, 2013 at the Pacific Highway crossing adjacent to Surrey, British Columbia, and included participation from Transport Canada, the Royal Canadian Mounted Police, and the BC Ministry of Transport. The pilot saw CBP officers pre-inspect approximately 3,500 US-bound commercial trucks. The Border Policy Research Institute 24 March/April 2014 www.canadianshipper.com
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at Western Washington University was involved in gathering data on the phase 1 pre-inspection pilot at the Blaine border crossing. Launched in June 2013, this phase was designed as a “proof of concept” to test technologies and operating procedures, the institute noted. It sought to answer two questions: If a Customs and Border Protection inspection booth were placed on Canadian soil, ‘would the length of an inspection be greater given the need to access networked databases using technologies other than those present in a typical booth?’ And ‘once inspected in Canada, could a truck move nonstop through a downstream CBP facility?’ The Border Policy Research Institute’s field data from the pre-inspection pilot test at Blaine showed that prior to the test, in baseline operations, trucks approached the plaza in a truck lane parallel to and slightly west of BC’s Highway 15. Non-FAST
posed as an exit booth to determine whether trucks successfully inspected in Canada could be allowed to proceed nonstop through the downstream facility. The number of booths available to standard trucks during the pilot was reduced to two. The University then stationed students at three locations within the plaza, to time the progress of every truck traversing the port via the FAST lane. Baseline data was collected in June 2013, just prior to the pilot launch. Inspection durations were found to be comparable to what had been seen the prior year: 63 seconds per truck, said the institute. One week after the pilot’s launch, on July 2 and 3, the average duration of primary inspections was increased to 89 seconds. It was also found that 29% of trucks processed at the pre-inspection booth encountered significant delays at booth 3 (the conceptual exit booth). An additional 29 % engaged in stop and go behaviour: halting just long enough to be told to proceed. After the July 2 and 3 outing, CBP
trucks used the east lane leading to a signal which dispersed the trucks within 11 individually signalized staging lanes. FAST trucks, meanwhile, used the west lane, bypassed the dispersal signal, and were staged in lane 12. Trucks were released from the staging plaza by a first-in, first-out scheme, with highest priority given to the FAST trucks. Once released from the plaza, all trucks turned west and made use of any one of three Customs and Border Protection booths. This same traffic flow was used during the pilot. A new CBP booth was installed within a footprint that occupied two lanes of the staging plaza.This reduced the number of lanes available for standard trucks to nine. The pre-inspection booth was used for primary inspection on Canadian soil of only those trucks using the FAST lane. A radiation portal monitor and portable orange jersey barriers established a “sterile” path to booth 3 from the new booth. Booth 3 was conceptually repur-
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“FAST lanes have been successful at some border crossings, and the current Peace Bridge pilot could save some $300 million dollars in terms of early deliverables” Jim Phillips, CEO of the Canadian/American Border Trade Alliance (Can/Am BTA)
noted that many trucks using lane 12 were non-FAST, “possibly seeking to traverse the port more rapidly by avoiding the staging area.” For such trucks, CBP was issuing a compliance briefing at the pre-inspection booth and performing the actual inspection at exit booth 3. On the next outing (July 23/24) a student was placed within the pre-inspection booth to segregate the data pertaining to “valid” trucks from that of the non-FAST trucks. The average inspection duration for the mingled stream has dropped to 62 seconds, while the average for valid trucks was just 50 seconds. Only 9% of trucks encountered significant delay at the designated exit booth. At this point the pilot operations were on par with the baseline conditions. According to the study conclusions, while CBP can proceed to phase 2 with confidence that the concept of pre-inspection is viable, “stakeholders at Blaine are left
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with a challenge: how to exclude non-FAST trucks from the FAST lane once the preinspection booth is removed, leaving no agent in that lane to ensure compliance?” Phillips noted that on average, a FAST truck inspection takes 50 seconds, which is ten seconds faster than a non-FAST inspection. He stressed that cash collection should be removed from the border inspection process as well. “It’s a fact that this takes an extra 45 seconds,” he noted. FAST lanes have been successful at some border crossings, Phillips noted, and the current Peace Bridge pilot could save some $300 million dollars in terms of early deliverables, he added. Canada’s Minister of Public Safety, Steven Blaney and US Deputy Secretary of Homeland Security, Alejandro Mayorkas, signaled the launch of a one year pre-inspection pilot at the Peace Bridge just as Canadian Shipper went to press in late February. During the pilot, Customs and Border Protection (CBP) officers will pre-inspect trucks entering the United States on the Canadian side in the hopes of avoiding backups on the bridge due to the size constraints of the customs plaza on the Buffalo side. The project, which creates two new booths on the Canadian side to house CBP officials, is being funded by the Peace Bridge Authority. After being processed on the Canadian side, trucks that take part in the pilot will proceed across the bridge where it is anticipated they will come to a rolling stop at a CBP “exit” booth. If the process goes
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booths manned. As we come out of the recovery, all of a sudden the volume of activity is going to go up, and I don’t have to paint you a big picture of the lines and the backup. There is $ 20-25 billion dollars of cost/productivity loss caused by waiting at the border,” he said. CS
Associate editor Julia Kuzeljevich has been writing about transportation issues for more than a decade. Her meticulously researched articles have garnered several transportation and Canadian Business Press writing awards.
Trucks clear inspection booths at Canada Border Services Agency.
smoothly, they will be given a green light signalling they are free to proceed through the customs plaza en route to their destination. A red light instead signals the truck must be brought to a complete stop for further processing. “The trucking industry has a keen interest in facilitating the shipment of goods across the Canada-US border while maintaining security,” Canadian Trucking Alliance president David Bradley said at the announcement. CTA says the pilot’s measured success will essentially depend on whether the two stops (albeit one being a rolling stop), compared to the current one-stop, will actually speed the flow of trucks across the border and maintain advantages for carriers and drivers operating under the trusted trader program, Free and Secure Trade (FAST). “Everyone wants the pilot to be a success,” said Bradley. “But if things don’t go as planned, or there are some unintended consequences, it is important that the protocols are in place to take the necessary corrective action on a timely basis and in communication with industry.” “What isn’t in hand in 12 months isn’t likely to get in hand. We know now what the new parameters are for how we’re going to operate, and common sense must prevail,” noted Phillips. “In 2015-I’m assuming beyond the border is known, and by 2017, we achieve it. I don’t think it’ll be derailed. But we’re victims of reality. The CBSA has had to take substantial cuts in its budget. We’re getting down to the muscle-if we don’t get small port reallocation, we’ll have less
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Canada offers host of e-commerce opportunities, but is not “extension” of US market
n a white paper on Canadian e-commerce opportunities, published in October, Purolator International, Peerless Research Group (PRG) and Logistics Management noted that a rise in B2C, as well as B2B e-commerce, has brought challenges to businesses exporting products to Canada. Among these are transit times that can be difficult to measure in days or hours, lengthy delays at the border due to incomplete or incorrect customs paperwork, and multiple handoffs among carriers that are not uncommon, said the paper. The belief that the Canadian logistics market is an extension of the US market is another common misconception as well as the “root cause” of most mistakes made in crossborder shipping. E-commerce shipping to Canada is growing. Canadian consumers represent a $292 billion export market to United States retailers, Purolator revealed. But logistics and transportation managers say they continue to experience higher costs and some level of dissatisfaction in crossborder logistics. They cite the lack of a coordinated Canadian freight network, additional paperwork and related transactional costs, and damaged goods as persistent problems, said the paper. John Donahue, a director in Price Waterhouse Coopers’ (PwC’s) transportation and logistics practice, said that many of his clientele deal with a significant import-export imbalance on the northsouth lanes. “Dealing with costing models and strategies for asset utilization around these issues is key.We’re very active in these conversations. It’s an ever-changing model-what worked one year may not work the next year. It’s about understanding the bottom line cost and what you can do with vendors to make that sit correctly. Most of it is around cost and vendor modeling and developing good relationships so that they have the background to pull in the right people at the right time,” he said. “Asset management and route management are probably the two largest issues we’re approached with. The regulatory issues north-south are more informational, with regard to the transition of information to a system, although it’s not as big of a challenge today as it was four years ago. Putting that information into a consolidated environment is probably the best thing that’s happened in the last four years,” he added. Canada’s total population of nearly 35 million is spread across a large geographic area, so logistics costs can also be higher because of the difficulties in building freight “density” into operations. Of some 218 US operators surveyed who conduct business in Canada, of these, about 40% currently take orders over the inter-
By Julia Kuzeljevich
net from Canadian customers, and, of those, nearly one-fourth (22%) maintain a website specifically geared to the Canadian market. The majority of these operators claim their Canadian sales volumes have either grown in the past two years (51%) or stayed level (37%). And, the Canadian market should continue to be fertile territory for US businesses. Two-thirds of respondents (65%) expect Canadian sales volumes to increase in the next two years, the Purolator study said. Those doing business in Canada ship across the US-Canadian border with relatively high frequency. Nearly two out of three (62%) ship at least weekly with more than one in four companies (27%) dispatching goods on a daily basis. Slightly fewer than 20% of those interviewed ship at least a few times per month. These Canada-bound shipments tend to be handled by a variety of carriers. Small package carriers, either express, courier, or postage are widely used. In addition, LTL (57%) are also a provider choice when shipping to Canada. Postal services (35%), freight forwarders (31%), 3PLs (26%), full truckload providers (25%), or air freight services (23%) are also common solutions for those shipping to Canada. Four in 10 respondents say they have experienced problems at some point shipping from the US to Canada, including shipment delays resulting from improper paperwork, noncompliant packaging, or just a failure to satisfy border procedures. Border interruptions were most common at (63%), transit time delays (47%), or incomplete or incorrect customs paperwork (47%). Non-compliance with customs regulations (28%), unexpected expenses (22%), and tracking multiple parcel handoffs (19%) were also common impediments, said the study. Two-thirds of these shippers (65%) say carriers submit a full “land-
“Misconception” is the root cause of crossborder shipping mistakes: white paper
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Advance planning helps in “negotiating the border” Jim Pettinger is president of International Market Access, Inc., which offers US Business Services for Canadian Importers/Exporters. A presenter at the recent Cargo Logistics conference in Vancouver this January, Pettinger spoke about prospects for exporters, strategies for approaching the vast US marketplace, and customs release processes.
ed” cost-that is, total cost to include complete shipping fees, taxes, and tariffs. Some contend this information varies by carrier while others assert they were hit with additional, unexpected costs in trans-border shipments. Business-to-business and businessto-consumer US manufacturers shipping both domestically as well as to Canada believe their level of service to US customers is superior to what they are able to provide their Canadian customers. Nearly all (93%) rate their service to US clients as excellent or very good. In comparison, roughly three out of four (73%) consider the quality of their service to their Canadian clientele to be as strong. Canadian customers’ most common complaint is the high cost of shipping (40%) followed by problems with returned (26%) or damaged (14%) merchandise, unforeseen or unexpected shipping costs (22%), and lack of inventory or too many back orders (6%). In terms of solutions and strategies for navigating border issues, the survey found that about 7 in 10 organizations relied on a third-party such as a customs broker (39%) or logistics provider (30%) to help solve the problems. Another one fourth work to resolve these hassles in-house. In a related survey looking at product returns, John Costanzo, President of Purolator International, noted that e-commerce merchants and retailers “can add value and a level of comfort to Canadian customer purchases through a free and easy return policy across the border.” Total returns from Canada to the United States were valued at $8.6 billion in 2011. CS
Why market to the US? Pettinger: The advantages of marketing in the US are around its proximity, common language, and volume of potential sales. The average American buyer has 2 to 3 times as much money to spend and makes buying decisions 2 to 3 times faster. We’ve had cases where a prospective client has gone down on a research type marketing trip and could have made sales based on Americans wanting sample orders. These things rarely happen in Canada because consumers here research things. What makes for a successful approach in terms of strategy and delivery in this marketplace? Pettinger: Your US market consists only of the prospects you can afford to reach. It’s fundamental to have a unique product or proposition. You also have to generate marketing leads, and when you do, you have to be prepared to make profitable sales. You then have to deliver. Logistics is really part of marketing. Crossing the border from Canada to the USA is not just about crossing the border to the USA. Your distribution and logistics boils down to communications, distribution, and other services. If you’re going to go into the US you should create a business identity. Do your marketing and logistics more on a domestic basis. It’s really important to look at distribution before you do anything. To be effective at marketing and sales, you have to be effective at logistics. In my case I’m dealing more with clients who’ve succeeded in getting across the border. Advance planning helps in negotiating the border. From time to time we have clients whose goods are delayed by the FDA. It is realistic to expect the US government to have certain standards-a certain level of enforcement is acceptable and desirable. How are the changing manufacturing trends affecting the crossborder transactions of clientele? Pettinger: We talk about exports from Canada but in reality many of the exports from Canada are actually the products of outsourced manufacturing to Asia. In terms of near sourcing trends, we see this more so in my Canadian clients who are purchasing in the US. The cost of purchasing in Asia is getting expensive so we see more manufacturing returning to the US from Asia. We have quite a few accounts of Canadian companies purchasing in the US. NAFTA celebrated 20 years this January. Has it been beneficial to Canada, in terms of crossborder business? Pettinger: I certainly think going back even further to the Free Trade Agreement (FTA) between Canada and the US, (signed in 1988, the deal phased out a wide range of trade restrictions in stages over a ten-year period, and resulted in a great increase in crossborder trade) that Canada-US trade has been helped by this. When this agreement kicked in we saw a much wider variety of products coming into the US. There was a tremendous amount of publicity and I believe that helped. With the NAFTA signing in 1994 we had a whole new round of publicity. While NAFTA facilitated travel for professionals back and forth across the border, I’ve often thought Canada should have stayed with a simple Canada-US trade agreement. In some ways the Beyond the Border Action Plan echoes this, and is going to help Canada deal one on one with the US in terms of deals and practices. Under NAFTA, Canada was burdened with certain issues that really related more to the southern border (of the US and Mexico). Canada has to keep pushing the agenda and currently they seem to be doing just that. It’s most important for Canadians to understand the issues at the border that will affect them.
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DESIGNING FOR AGILITY Capacity, cost constraints and evolving players require a flexible and optimized automotive supply chain By Julia Kuzeljevich
orth America’s demand for automobiles is rising, having recovered post Great-Recession, but OEMs are still keeping a relatively tight rein on capacity. Sales of light vehicles in Canada jumped to 1.74 million units in 2013, an increase of 4% since the previous year and a 10% increase since 2011, said a BMO Capital Markets report. But according to the Centre for Automotive Research, compared to the 17 plants built in the United States since 1990, there has been only one built in Canada. Canada’s share of global automotive production has halved since it peaked at 5.4 per cent in the 1990s, placing it 11th in terms of global market share.
After the Great Recession, OEMs that had excess capacity in the US and Canada have “right sized” the capacity through consolidation and plant shutdowns. “They’ve moved their overall production around to plants that made more economical sense. That has created some interesting challenges in the overall supply chain. We’re not seeing new OEM plants going up in Canada and the US, but there is growth and new plants in Mexico,” said Guy Toksoy, Vice President/General Manager Ryder Supply Chain Solutions Canada. Jim Barnett, vice president, automotive business development for the Americas, with CEVA Logistics, said the automotive industry is rebounding going into 2014,
with 16 million units in 2013 expected to grow to 16.5/16.6 this year. “Increasing that capacity is a predominant trend among the Big Three and the transplants. They don’t want to use bricks and mortars. Their last option is new fixed costs. They’re coming back to us with a revival of outsourcing-of tire and wheel, suspension, and assemblies. Automakers, with some of the merger and acquisition activity that is taking place, are going after higher volumes with the platforms they developed,” he said. But as demand is rising, the effect of prior consolidation is manifesting in capacity constraints. In order to expand capacity some
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Automotive supply chains employ modal shifting, air chartering as strategies
Loading automotive parts onto an Air Charter Service’s B737
OEMs convert inventory holding space to manufacturing, moving that function out of the plant and creating more opportunity in the 3PL space, Toksoy noted. For automotive OEMs, he said, the decision “comes down to an economic choice about where to locate their plants in terms of geographic proximity to demand, labour costs, environment, and the overall economic picture. From a logistics perspective there is constant pressure on 3PLs to optimize their supply chain and analytics,” he said. Total landed costs and outbound costs take on paramount importance. “There are two schools of thought at work: companies are going to continue to
As a result of the cold weather this winter on the North American continent, many automotive companies have also utilized aircraft charters to transport urgently needed production line parts that had become stuck or delayed. Gary Hopkins, Managing Director of Air Charter Service (ACS) Canada, said that while chartering aircraft is the most expensive way of doing it, this method is the cheaper solution when OEMs are facing penalties if production shuts down or if weather delays will risk ‘just-in-time’ production. “In terms of the automotive sector everything is unpredictable. The only pattern we see is inconsistency. We have a big reach with a number of freight forwarders who handle automotive accounts. There’s been an increase in automotive charters in our company as the sector has grown. Even during tough times the need to charter car parts has continued out of necessity,” said Hopkins of ACS’s ‘Go Now’ aircraft charter services. While many companies have tried to improve their planning, things will inevitably go wrong, he added. And while for some automotive stakeholders the aircraft charters are used just once in awhile, others call on the service more frequently. “We’re fully 24/7 and we can offer charters everywhere in the world,” said Hopkins. The company currently operates 17 offices worldwide. He noted that a lot of charter traffic is heading Canada to Mexico and sometimes northbound out of Mexico into Canada. “Sometimes we do intra-US chartering, or US-Mexico for Canadian clients. In Ontario there is lots of activity in the London, Windsor corridor. A number of events can trigger a charter, such as a just-in-time manufacturing problem, and bad weather is another big factor. The weather has stood out this year vs. other years,” said Hopkins. Due to severe winter storms across the North American continent at various intervals this winter, some automotive supplies that are supposed to move by truck were delayed in transit. “In terms of the people paying the bill they are really chartering when there is no other option. They might spend $30,000 on a charter but the consequences of not doing so are pricier. Sometimes the OEMs have fines imposed by the car companies so they have to charter to avoid these. The freight forwarders want to be chartering because it’s good business for them,” said Hopkins. “Our job is to deliver the right solution so we’ll identify transit time, how quickly the shipment can get into the airport, for example. We try and give the client three options, sometimes a quicker option that may be more expensive. It’s up to the client to decide what they want,” he said. The automotive sector has also been making more use of LCL services. Panalpina’s global LCL (less-than-containerload) network is expected to reach 500 services by the end of 2014, with roughly 15% of its current 450 LCL services operating two or three sailings a week, said Frank Hercksen, Panalpina’s global head of ocean freight. The majority of Panalpina’s LCL services are used by the automotive and manufacturing industries, which accounted for almost 30% of its LCL volumes in 2013. “The 30% are not year-on-year growth but the share of LCL volumes of automotive and manufacturing in 2013,” said Sandro Hofer, Panalpina’s Corporate Media Relations Manager.
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chase lower labour costs and chase the locations that have the lower costs and come up with what makes the most sense for them. When you put up a plant in a new location these are minimum 20 year decisions. It’s not a cheap task to pack up and go to a new place,” said Toksoy. New opportunities are emerging via the use of mulitple logistics centres, which can manage some of that complexity. “With global sourcing supply chains have significantly elongated the challenge of mixing inbound components from multiple different geographies. All of this creates the need for well-run logistics centres,” he said. “Interestingly enough, what we’ve seen more and more is product specialization. Multiple plants that produce the same type of product be consolidated into one. We’re running into these sorts of projects and 3PLs see more growth in that area,” added Toksoy. DB Schenker is planning to open more than 30 Shared Logistics Centers (SLC)
worldwide in the next five years, representing additional investment in approximately 500,000 square meters of warehouse space, the company said. The facilities will be located in strategic locations close to transportation hubs and in geographic markets where customer demand is foreseen in the medium to long term. The SLC program will provide additional capacity in these selected markets as a basis for ongoing growth and development of the target industries, including automotive, the company noted. “We do see a trend toward shared transport networks, and we’ve been very successful with a product in the US that looks at dedicated delivery service.We will take a client’s overall delivery profile and come up with an outbound distribution plan on a timed basis, with cutoff and delivery times. In Canada dealer dispersion is huge so getting out there is really difficult,” noted Barnett. Automotive players are also partnering on the delivery of outbound parts via a shared
network that offers them the ability to share costs on the outbound delivery, he said. “Up until a few years ago the OEMs did not get behind that because they did not want to share delivery. But by using an LTL model they found their parts were still travelling with a variety of other cargo, so why not plan that out. The OEMs are going to something where they try to standardize the packaging, the methodologies and dealer delivery times,” he added. Specific to the Canadian market will be goals around efficiency improvements, and overall cost reductions. Almost everyone wants more visibility, GPS tracking, and online reviews, to see where goods are at all times, Barnett noted. “I’ve seen automakers come to us with ‘what if ’ scenarios. If we move our production from Mexico and we start producing it in X, what would the logistics costs be? We just had one of those what if scenarios for a major Tier 1 that has production facilities in Dallas and Toronto.You’ll see that in past
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years decisions were made on more of an instinctual basis, while nowadays they look at density and logistics costs. A lot of the OEMs want to take money out of the overall supply chain,” he said. According to Barbara Jordan, Site Manager, Contract Logistics, with Schenker of Canada Limited, the automotive industry has also become heavily reliant on customer ratings at the end user level, and this has tremendous impact on what is expected from supply chain partners. “With technology and global visibility, now with real time access of everything that happens in the automotive DC world it’s crucial that that info happens in nanoseconds.Accuracy is high on the radar,” she said. The 3PL now plays that pivotal role in terms of making sure customer service levels and ratings are met, and this ties in to the longevity of that 3PL’s success in retaining business or winning new business. A lot of promotional automotive items and value adds to upsell vehicles are now considered “rush” from a supply chain perspective, noted Jordan. “It’s all about customer rating, branding, and global access of information within the 3PL world. When people are talking about customer service they are not even talking about the warehouse. What we’re seeing is that there are more and more incentives that are being offered at the end user level putting pressure on the warehousing side. We have to take away from the fact that it’s boxes we’re receiving, storing, picking. There’s a whole mindset in terms of changing the morale of the workforce and making them more customer-focused,” she said. Within the integrated North American supply chain, crossborder paperwork is not a big issue from a regulatory standpoint, but a bigger issue remains the predictability of wait times at the border. “There’s not a lot being done to improve that. More lanes would obviously help but there is enough infrastructure- it’s just the turnover and speed that could use some work,” said Barnett. “Hours of service changes have impacted the designs of many networks we had going cross border in the automotive space. The US and Canada are so integrated in terms of supply chains, and there are pressures on us to continuously re-engineer and reroute, plus costs in terms of fuel, bridges and tolls. That could one day change current patterns because the costs
become a tipping point for some companies,” said Toksoy. “We need to ensure we have the most efficient supply chains we can have-keeping control on total costs to improve overall production-that’s what we can control and that’s what we should focus on,” he said. CS
Associate editor Julia Kuzeljevich has been writing about transportation issues for more than a decade. Her meticulously researched articles have garnered several transportation and Canadian Business Press writing awards.
1.800.465.2513 www.canadianshipper.com March/April 2014 33
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SUPPLY CHAIN VISIBILITY
YOU CAN RUN BUT YOU CAN’T HIDE
Telemetry can eliminate the “black holes” and provide increased visibility BY KEN MARK
he black hole into which goods, vehicles and drivers used to sink after leaving the loading dock is starting to shrink. Many believe location intelligence tools will soon make it disappear completely. Old-fashioned GPS (global positioning systems) are quickly morphing into telemetry that combines telecommunications and metrics to deliver cloud-based data storage and management. Besides simply locating vehicles, telemetry also adds the capability to collect data about engine, tire, brake wear and tear, fuel consumption, driver behaviour as well as status monitoring of doors, seals and freezers on trucks etc. It is a direct link into the “Internet of things” or machine-to-machine computing that thanks to the 50 billion or so sensors out there gathers and then transmits real-time information to monitors and screens everywhere. Ultimately, speedier, real-time analysis of reliable in-transit data will enable managers to make better business decisions. Says Tony Lourakis, the Markham ONbased CEO of Fleet Complete Inc., “GPS has been around for 20 years. But users have mainly been large long-haul truckers. Even now about seven out of ten commercial vehicles in North America and Canada still do not have it installed. Within four years, the numbers will be reversed.”
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SUPPLY CHAIN VISIBILITY
Lower costs are driving up adoption rates. According to Lourakis, five years ago, installing an individual GPS system could cost carriers $700 to $1500 to buy the unit plus $50 to $60 per month in service fees. Now carriers are paying $20 to $40 all-in, monthly subscription fees, which include the hardware and eliminate upfront capital costs. As a result, players of all sizes can now install systems that only major carriers could afford before. More important, such installations enjoy high and fast ROI (return on investment) rates. The three-figure installation cost per vehicle pays for itself within 18 months, said Fleet Complete tool user Brian Tremblay, the Surrey, B.C.-based vice-president of TMG Logistics Inc., a mid-sized carrier of fresh produce, fish and meat. “In fact, winning a single, bogus insurance claim for a spoiled shipment pays for the technology right away. The ‘breadcrumb’ trail of stored data helps us prove that the temperature in our reefer unit was within the proper range throughout the trip,” says Tremblay. Mark Gillingham, St. John’s, NL-based executive vice-president, Blue Oceans Satellite Systems Inc., creators of the SkyHawk Mobile Monitoring System (MMS) suggests two other adoption drivers. “One is the move toward mandatory electronic driver logs to replace paper-based solutions. Another is the need to provide an automated electronic cab presence that alerts drivers that they are coming close to their daily hours-of-service limits. “Also, the system can boost in-cab performance by delivering the latest weather and traffic reports as well as offering drivers re-routing options,” he says. The new systems go far beyond simply providing the vehicle’s location. In the last five years, evolving technology links tie location to other data collected from sensors monitoring rpm and engine performance, tire wear, braking systems and driver performance including seat belt usage. As well, they can match vehicle and component performance against driver behavior to compare vehicle speed against speed limits on the relevant stretch of highway not to mention braking and gear-shifting responses against actual road conditions. In addition, they also boost security through geo-fencing - setting up “no-go” zones and sending alerts, if necessary, to operators who have entered them. In addition, GPS can also monitor how long doors are open and match that against the time of day and location. As well, when coupled with updated RFID (radio frequency identification) tags they can also detect if seals have been compromised. The new systems are simple to use, requiring little if any specialized training. Equally important, they are accessible on almost all mobile screens such as smart phones, tablet and laptop computers.
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Truck drivers are typically independent-minded people who resist close supervision. When the new systems are installed, do they complain about “Big Brother” looking over their shoulder while they are they are on the open road? “They may at first. But after the first incident when the system saves their butt, they get onside,” says Bruce Tremblay. Although driver safety is a top priority for all carriers, Blue Ocean’s Gillingham points out that the impact of road accidents can ripple through the entire operation resulting in late deliveries, damaged vehicles and goods, repair costs, higher insurance premiums, potential lawsuits and loss of reputation etc. Since telemetry is in continuous contact with drivers, they now enjoy the same level of comfort as airline pilots who have air traffic control constantly watching over them. Before, in order to get help, drivers had to be physically able to call dispatch on a cell phone to tell them their personal status and offer a vague idea of their location. Now, dispatch is aware of the problem as it is happening and can pinpoint the truck’s exact location right away. Tony Lourakis refers to this new driver safety blanket as “Big Angel, not Big Brother”. The key piece of hardware is the transceiver or modem attached to the asset such as a trailer or tractor that connects it through a cellular or satellite link to the cloud – a central server that stores the data and the software. Most transceivers are just very sophisticated antennae. However, some such as NightHawk that are linked to cellular towers have limited data storage capacity that kicks in when the vehicle passes through a cellular dead zone. Once the link is restored, the data is uploaded into the cloud. Another player in this market space is JouBeh Technologies Inc., a Value-Added Reseller (VAR) for the Iridium system of 66 operational orbiting satellites – (and 10 spares). JouBeh delivers global data modem technology solutions and telematic data services to users. Says Nasser Sayah, JouBeh’s Dartmouth NS-based, Director of Sales and Marketing, “Our transceivers enable users to track assets wherever they are. We also build back-office solutions to collect and analyze data as well as to program devices to send commands to the assets and operators.” Depending on their complexity, the transceivers can range in size from the SkyHawk MMS - deck of cards- to the JouBeh Technologies 9603 SBD Iridium Transceiver, the world’s smallest commercially available two-way satellite data modem, that is only slightly larger than a Scrabble piece. On the metrics side, telemetry introduces informatics - systems and tools that use mathematical algorithms and other statistical tools - to transform incoming data into business intelligence.That enables corporate decision makers and planners to examine performance of individual drivers, divisions and regions against the whole firm, not to mention benchmarking the company against its competitors. Thanks to falling chip costs and a change in business strategy, RFID technology is rebounding to play a major role in the widening world of telemetry. Tom O’Boyle, Addison IL-based director of
RFID, Barcoding Inc., notes that the cost of individual passive tags has now dropped below 10 cents. In addition, RFID chip suppliers are riding a 2% to 5% boost in annual sales because retailers now insist that product suppliers attach tags to products – cookware, jeans etc. -during production, not afterwards. As a result, retailers can now track inventory levels of items in real time. Knowing the quantity and location of items enables them to prevent stock outs and to keep customers happy. Individual items are boxed, placed in containers and loaded onto trucks, rail cars and ships. While on the move, RFID does not track the items directly but by association. In other words, vehicles etc. have their own GPS and security tracking system. So as long as the containers’ seals, which RFID can monitor, have not been broken, the goods are considered secure and the quantities accurate. In the emerging omnichannel retail universe, such real-time inventory accuracy will help large, bricks-and-mortar merchants keep pace with online competitors on price, service and convenience. Consumers now have various choices as to where and how they buy goods as well as more options of when and where to get their purchases. To fulfill online sales more effectively, traditional chains are increasingly using their existing stores as distribution centres. That includes shipping out items or having them available for on-site customer pick up. Before, unreliable inventory was the major barrier to making this strategy viable since conventional systems could not provide timely or accurate counts. Since today’s RFID chips now have 99.9% successful read rates vs. those in the low 80s 10 years ago, conventional retailers are now better positioned to leverage their extensive real estate assets to satisfy online buyers. As LTL carriers build their consolidated loads, enhanced RFID chips enable them to use tags to identify and sort each shipper’s pallets and boxes more quickly and accurately.They also streamline and automate cross docking. The cost of RFID readers is also dropping at least 10% in the last 10 months based on O’Boyle’s figures. As well, such equipment is also becoming simpler and cheaper. “You still need separate appliances to conduct a full-scale inventory count. At a US Navy facility two people each with a hand-held device inventoried 8,000 cartons in three hours,” he says. “For smaller jobs, mobile phones or tablet computers with suitable apps can do simpler jobs.” In today’s world of telemetry, to borrow a phrase from boxing, trucks and other cargo carriers can run, but they can’t hide. CS
SUPPLY CHAIN VISIBILITY
Ken Mark is a veteran technology expert, who has covered supply chain management since it was called distribution and has documented its legitimization as a critical business function. He holds an MBA from York University.
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INSIDE OUTSOURCING Does outsourcing drive results? See what our Survey of Canadian Third Party Logistics reveals. By Lou Smyrlis
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reight volume growth forecasts of recent years have proved either too optimistic or too conservative; transport rate increase projections too aggressive or not in touch with reality – forecasting about anything during this slow and uneven economic recovery has been a gamble. But there is one thing you can safely bet on: shippers’ unwavering focus on the need to reduce costs. That requirement has topped our charts in several of our research efforts over the past few years, including our newest one, our Survey of Canadian Third Party Logistics. Slightly more than half (51%) of survey respondents cited the need to reduce costs as their major supply chain challenge. The need to enhance customer service received the second highest number of nods from our survey respondents but it was a distant second, chosen by only 13% of our sample.
ABOUT THE SPONSOR
RYDER SYSTEM, INC. is a FORTUNE 500© commercial transportation, logistics and supply chain solutions company. Ryder offers Supply Chain Solutions which include a broad range of innovative solutions designed to optimize day-to-day logistics operations and synchronize the supply of parts and finished goods with customer demand. Solutions are strategically engineered to address customer requirements, and include lead logistics management, dedicated services, warehousing, transportation management, packaging, and other value-added services. Ryder also provides Fleet Management Solutions including one-stop outsourcing of a range of solutions for commercial truck fleet operators, including vehicle maintenance, leasing and rental, used vehicle sales, as well as services such as roadside assistance, fueling, safety and financing options.
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continued from p39
Is outsourcing playing a positive role in addressing cost reduction and other shipper challenges? To find out, Canadian Shipper launched its Survey of Canadian Third-Party Logistics. The nation-wide survey, completed in January and February of this year, involves the participation of buyers of 3PL services across Canada representing companies ranging from small firms earning less than $15 million in annual revenue to corporate giants with annual sales topping $2 billion; companies which spend 10% or less of their supply chain expenditures on outsourcing to companies which dedicate 80% or more of their supply chain budgets to outsourcing. This ground-breaking project is sponsored by Ryder Canada. Insights from this leading 3PL provider are included at the end of the survey. So what role is outsourcing playing in helping Canadian supply chain managers meet their challenges? A substantial one, our survey results reveal. Two thirds of survey respondents reported currently outsourcing some or all logistics functions and plan on continuing to do so. Another 8% had outsourced in the past and are considering doing so again while 7% had no prior outsourcing experience but are considering making the move. The survey results indicate a scenario where 80% of Canadian companies outsourcing at least some of their supply chain functions is quite feasible. The majority (45%) described their outsourcing strategy being driven by a review of costs between ownership and outsourcing before making decisions. About a third (34%) indicated they prefer to own or control supply chain functions in-house but will sometimes outsource. Only about a fifth (22%) were so totally committed to outsourcing that their strategy was focused on outsourcing non-core business activities wherever possible. While 21% of respondents were light users of 3PL services with just continued
Major supply chain challenges
Enhance customer service
Improve supply chain execution
Improve supply chain information
Keep up with logistics technology
Outsourcing philosophy Prefer to outsource non-core business
activities where possible
between ownership and
outsourcing before decision
Prefer to own/ control functions in
house, sometimes outsource
7% Have outsourced in past but no plans to outsource in future
7% Not currently outsourcing but considering doing so
Have outsourced in past and considering doing so again
13% 66% of respondents Outsource some or all logistics functions and will continue to do so
Have never outsourced and no immediate plans to do so
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Simplify Every Process.
Empower People. Create Consistent Flow.
Reject Complacency. Set The Pace. Raise The Bar.
Prevent Errors. Do It Again.
Execution Is Everything. SUPPLY CHAIN • DISTRIBUTION • TRANSPORTATION • CONTROL TOWER
©2013 Ryder System, Inc. All rights reserved.
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continued from p40
10% of their current logistics expenditures directed to outsourcing, 45% reported that more than half of their total logistics expenditures were tied up with outsourcing. More than a fifth (22%) of respondents were heavy users of outsourcing, reporting that between 80% and 100% of their total logistics expenditures are currently directed towards outsourcing. A small part of our sample (13%) had never outsourced supply chain functions and had no immediate plans to do so. Another 7% had outsourced in the past but had no plans to outsource in the future. For those not using outsourcing services, concerns over the loss of control of their supply chain functions was the main reason given (42%), followed by a belief that costs would not be reduced through outsourcing (31%) and that service levels would be jeopardized (26%). Among the activities outsourced most frequently, transportation stands at the top of the list with 75% of respondents outsourcing outbound transportation and 66% outsourcing inbound transportation. Customs brokerage (65%), Customs clearance (58%) and warehousing (37%) round out the top five. Less than 10% are making use of 3PL services such as product returns and repair; product marking and labeling; customer service; inventory management; and product assembly. The vast majority of survey respondents (81%) are using multiple 3PL providers when outsourcing supply chain activities. The main reason given for using multiple 3PL providers is the ability to serve different geographic areas (41%); followed by the ability to utilize a greater range of expertise (21%) and the ability to gain greater leverage on pricing (19%). Clearly use of outsourcing is a key supply chain strategy for Canadian shippers. But is it providing results? Thirty percent report their logistics costs have declined as a result. The majority (31%) report logistics costs de-
Percent of logistics expenditures directed to outsourcing 81-100% Less than
Main services currently outsourced
Outbound transportation Inbound transportation
Customs brokerage Customs clearance
Shipment consolidation/distribution Cross docking
Warehousing Freight forwarding
Freight bill auditing Information technology
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Rating of top providers (scale of 1 to 5)
Managing and servicing account
Meeting promises on execution
Being price competitive
Understanding intricacies of client business
to changes or problems
Main reason for using multiple 3PL providers Less reliance on any one provider
14% Serve different geographic areas
Compare service levels of expertise
19% Greater leverage on pricing
21% Greater range of expertise
Main way outsourcing has improved logistics operations 30%
Logistics costs declined
Service has improved
Logistics assets have declined
Average order cycle length shortened
Overall inventories declined
clines of 10% or less but 36% report cost improvements in the 11-50% range. In addition, 34% report their service levels have improved while 7% report improvement in their logistics asset costs. Still, there is work to be done on the outsourcing relationship. The survey asked respondents to rate the performance of their top outsourcing provider on a number of key metrics, using a scale of 1 to 5. Although there were many solid B grades, there were no A grades given. Managing and servicing the account (3.77) and being price competitive (3.76) received the best grades, followed by meeting promises on execution and performance (3.69); reacting quickly to changes or problems (3.58) and understanding the intricacies of the customer’s business (3.57). Of considerable importance, considering the value placed on cost reduction, is that being proactive in seeking ways to reduce costs was given the lowest grade: 2.97. Just as important to note is that a follow-up question on top concerns with their outsourcing contracts revealed that “cost creep and price increases once the outsourcing relationship had commenced” was top of mind, mentioned by 29% of the sample. This is indicative of a dual reality in terms of the state of outsourcing of supply chain activities in the Canadian market. On the one hand, there is wide-ranging reliance on outsourcing to help companies meet their supply chain challenges, cost containment being a chief priority. On the other hand, as companies come to increasingly rely on 3PL services, their expectations can only rise and 3PL providers will have to work hard to ensure they close any gaps between promises made and results delivered. Over the coming years we aim to measure the growth and development of the client-3PL relationship, set benchmarks for performance, and identify new trends and issues. CS www.canadianshipper.com March/April 2014 43
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Five Principles to Guide Lean Success By Guy Toksoy, Vice President, General Manager, Ryder Supply Chain Solutions Canada
ne of the benefits of outsourcing, whether you are looking for cost reductions, shorter order cycles, increasing control, improving your processes, customer service or overall visibility of your supply chain, is leveraging the experience, the talent, the processes and the technology that a 3PL can provide. In all cases it all falls back on lean principles and the execution of these. A 3PL can help you achieve the goals and continued improvements you are looking for in your supply chain by implementing a lean culture. Whether you are executing a supply chain with a 3PL or inhouse, implementing a lean culture is crucial for any company striving to deliver long-term value and outstanding business performance. Lean practices improve quality and productivity by taking cost and waste out of all facets of an operation, from the procurement of raw materials to the shipment of finished goods.It’s based on a fundamental approach that every step in every process must add value for the customer. At Ryder, five lean guiding principles govern every activity the company conducts in its own and its customers’ warehouses. These principles are: 1. People Involvement 2. Built-in Quality 3. Standardization 4. Short Lead Time 5. Continuous Improvement. People are Key Involving people in a lean culture means creating an atmosphere that fosters mutual trust and respect. In a lean organization, employees receive formal training to learn how to recognize and eliminate workplace waste and to solve problems. Employees are also crosstrained, so they understand how different jobs work together and they can better identify opportunities for improvement. Another critical element of People Involvement is recognition. Celebrating successes by thanking employees for great suggestions can keep everyone motivated to do their best. Get it Right the First Time Getting a job done correctly the first time sounds obvious and simple. But many would be surprised how often this element is overlooked. A company should first mistake-proof its processes by engineering supply chain tasks so any worker can perform them correctly. Processes should be tested and assigned metrics for success. A company should also document standards for performing work, using text and photos or illustrations. Instant feedback is also important here. Supervisors should not only address issues immediately
with an employee who is struggling to meet production goals or schedules, but should also provide instant positive feedback when they observe employees performing well. The Best Way is the Only Way In a lean facility, everyone is trained and expected to follow the documented best practice, using exactly the same steps. Standardization can take many forms. Keeping the workplace organized for efficiency, and using signs, symbols, colour codes and other visual tools to inform people about how to do their work, are simple yet effective strategies. Documenting the only acceptable way to perform a task and conducting regular audits also helps to ensure work meets the metrics for quality, cost, speed and safety. Keep it Moving Lead time is the period that elapses from the moment a customer places an order until that customer receives the goods. There are a number of ways that a company can reduce lead time in a lean operation. First warehouses can be designed to allow work for flow as efficiently as possible from point A to point B. Breaking big jobs into smaller ones is another strategy that helps employees work more efficiently and get orders out the door faster. Planning the pace of work and clearly communicating expectations can help employees stick to their schedules and meet goals. Matching inventory to customer demand, without keeping buffer stock (whenever possible), also ensures that a distribution center can deliver just what customers need, on time. Continuous Improvement Continuous Improvement is based on the idea that it is more effective to make many small gains over time than to try to accomplish massive gains all at once. This doesn’t happen by chance, however. Continuous improvement requires a structured practice for identifying a problem, analyzing its root causes and implementing solutions to keep it from occurring again. Employees can be trained to do this. A lean supply chain culture offers tremendous rewards, but also requires a significant commitment. Luckily, becoming lean doesn’t mean a company has to re-engineer its operations. By working with a supply chain partner that has woven lean principles into its very fabric, a business can gain the benefits of lean culture without incurring the associated up-front costs. A 3PL with lean experience already has made the investments, hired the necessary talent and climbed the learning curve. As a result, one can reap the returns of greater efficiency, exceptional quality and the capacity to deliver outstanding value to customers. CS
44 March/April 2014 www.canadianshipper.com
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Join us at the 2014 SCMA National Conference Canada’s largest conference for professionals in supply chain management
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Learn something new and enhance your skills at 20 educational sessions! • Inventory management • Sustainability • Supplier diversity
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Or hit the ground running at the conference by getting a head start on learning with a pre-conference seminar: • How to Avoid Service Contract Disasters • Lean Supply Chain
Feel the energy of over 500 of Canada’s supply chain leaders! Build and enhance your professional network.
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THE PROMISE OF
PANAMA A potential “economic lifeblood”, the Panama Canal will have much to offer, once construction is complete BY KEN MARK
A container Ship in the Panama Canal’s Gatun Locks
anama’s recent flurry of transportation infrastructure projects will leverage the advantages of a widened canal and transform the entire country into a logistics dynamo. “The canal is the economic lifeblood of our country,” Roberto Roy, chairman of the board of directors, Panama Canal Authority and Minister for Canal Affairs, recently told a Toronto audience. He cited its direct contribution to Panama’s annual GDP at about 10%. The indirect contribution is closer to 25%. “Our business plan is to capture the full value of the canal,” he said. Consequently, the entire country has become one gigantic construction site. Projects include updating the port facilities in Colon at the Atlantic Ocean canal entrance and in Balboa on the Pacific Ocean side, expanding existing free trade zones, and opening up new ones as well as updating its transportation and logistics network. Besides ocean traffic, Panama also offers intermodal services involving air, road, rail, and pipeline links. It will also introduce new value-added services such as container-on-barge and top-off (using smaller ships to move containers to and from larger carriers). Thanks to its strategic location, Panama is already the crossroads of world shipping. The canal links 144 maritime routes involving 110 countries. The scheduled launch date for the canal is 2016 after completion in December 2015. However, as Canadian Shipper went to press, canal construction was only just set to resume following two weeks of delays due to a contract dispute. According to the Panama Canal Authority (ACP), the new locks contractor Grupo Unidos por el Canal, S.A. (GUPC) had accepted ACP’s repeated request and agreed to restart on the construction of the Third Set of Locks project as of Thursday, February 20. The GUPC consortium is comprised of companies Sacyr Vallehermoso, S.A (Spain), Impregilo, S.p.A. (Italy), Jan de Nul Group (Belgium) and Constructora Urbana, S.A. (CUSA) (Panama). As soon as works are resumed, ACP will pay GUPC $36.8 million for December invoices to ensure that GUPC cancels continued
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continued from p. 46
PANAMA pending payments and obligations to suppliers, said ACP. Additionally, the parties agreed to discuss other points such as the dates for the delivery of the gates, an implementation schedule for the remainder of the works, a timetable of repayment moratorium and other key aspects for the project’s development. At press time there were still some issues on which an agreement had not been reached, and the dispute could threaten to delay the project by at least three years beyond the proposed completion date of December 2015, said ACP.
To keep canal operations politics-free, the government amended the constitution to reorganize the canal authority as an independent body. The Panama Canal’s investments aim to expand and strengthen logistics and business services involving freight forwarding, insurance and data management transmitted through the canal’s first-world digital network. To capitalize further on its strategic location, Panama will build new facilities to receive, store and distribute LNG (liquid natural gas). By accommodating modern LNG tankers, the new canal will cut the distance to ship US LNG to Asia to about 9,000 miles from the current 16,000 miles. Thanks to the free trade agreement that came into force on April 1, 2013, it should be simpler for Canadian firms to do business in Panama.The FTA and parallel treaties will facilitate market access for goods, crossborder trade in services, investment, financial services, telecommunications and government procurement. “It eliminates tariffs on 95% of non-agricultural products immediately and the rest over the next five to 10 years,” says Jean-Sebastien Charron, Ottawabased EDC regional manager, Mexico, Central American and the Caribbean. “We are just waking up to the opportunities (Panama) offers as a regional manufacturing hub.” Panama has ambitious plans to make those dreams a reality.These include addressing ecological concerns related to widening the canal. For example, currently it requires 208 million litres (55 million US gallons) of fresh lake water for each ship passing through the lock system. Before, after ships passed through, the water simply drained into the ocean. In future, three drainage basins adjacent to the locks will capture the water for re-use. This will save 60% of the water while using 7% less volume. As well, the basins are designed to enable water to flow in and out of the locks naturally without requiring pumps thus eliminating energy costs and further reducing greenhouse gas emissions. Moreover, since assuming control of the canal in 2000 from the US, the new management has switched the business model to operating it as a revenue source rather than as a military installation. Consequently, the canal’s EBITDA (earnings before interest, taxes, depreciation and amortization) has jumped to US$1.3 billion from US$184 million when it was under US control. Segregated pricing has led to higher revenues. The Americans simply charged one price for all commodities including deadhead-
ing empty ships. Now administrators charge more for container ships than for iron ore carriers and less for empty ships. To keep canal operations politics-free, the government amended the constitution to reorganize the canal authority as an independent body. Its board of directors is now filled with entrepreneurs and business veterans while engineers and other professionals form the executive group. However, the government receives 100% of all profits. In 2012, the government also established a national logistics cabinet to develop policies together with private enterprise, to prepare a master plan for promoting Panama as an international logistics centre. The Minister of Trade and Industry chairs the group consisting of the minister of finance, minister of public works and the heads of the Panama Canal Authority and The Civil Aviation Authority. Tocumen International Airport, Latin America’s largest, is emerging as the region’s go-to air hub. Copa Airlines, Panama’s flag carrier, currently serves 66 cities in 29 New World countries, including four flights per week to Toronto. Since 1999, it has enjoyed a strategic partnership with US Continental Airlines. Currently, Copa’s modern fleet of 90 aircraft includes 46 Boeing 737-800s with an average capacity of 3,000 kilos of belly-hold cargo per plane. Daily, they transport some 75,000 kilos of cargo, mail and courier items. Beefed up free trade zones (FTZs) will play a larger role in Panama’s future prosperity. In logistics, the name of the game is moving goods in and out of distribution centres as quickly as possible. FTZs, however, must also attract overseas producers as well as research and development players to create more local high-skilled jobs. Foreign firms enjoy a wide variety of choices.The original one is the Colon Free Zone (CFZ), the largest free trade zone in the Americas, established in 1948. It now occupies close to 405 hectares (1,000 acres) of space. Each year, the value of imports and exports registered there exceeds US$5 billion dollars. It houses close to 2,000 enterprises attracted there by a number of generous tax incentives. The adjacent Manzanillo International Terminal provides a direct, secure link from the CFZ to all the local transportation nodes. Direct bond-to-bond transfers streamline deliveries from the port to the CFZ, reducing truck turn-times and overall costs to shippers, consignees and carriers. The terminal’s 52-hectare yard can store 37,000 TEUs of goods. Panama Pacifico is a mixed-use real estate development on the site of a former US Air Force base that serves multinational giants such as 3M, Dell and BASF. New distribution centres, office buildings as well as residential and commercial sites are under construction. Still, decision makers realize that the new canal will face competition including a proposed alternative canal through Nicaragua, the US “land bridge”- rail and trucking routes linking both coasts- and emerging Northwest Passage shipping lanes through the Arctic Ocean. But for now, the eyes of the logistics world are all fixed on Panama and a resolution around the canal’s completion and launch. CS Ken Mark is a veteran technology expert, who has covered supply chain management since it was called distribution and has documented its legitimization as a critical business function. He holds an MBA from York University.
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EXPORT-WORTHY A robust supply chain was critical for attracting a major European wood pellet client rax has a monstrous appetite for biomass. The operator of a 4,000-megawatt power station in North Yorkshire, England, it supplies about 7% of the country’s electricity. Drax needs large, reliable suppliers with cost-effective, reliable supply chains and able to guarantee long-term commitments. Los Angeles-based Rentech Inc. has assembled just this combination to land a 10-year supply contract with Drax, making it Eastern Canada’s de facto leader in wood pellet exports. Just before Rentech announced the Drax deal, Canada-based professional services firm CPCS published a report, “Supply, Logistics and Export Strategies for Wood Pellets Produced in Eastern Canada”, that it prepared for the Quebec Wood Export Bureau (QWEB) and the Wood Pellet Association of Canada (WPAC). In it, CPCS details the requirements for a successful export strategy. Rentech has met each of the big-ticket requirements CPCS outlined for becoming a major wood pellet exporter. Of all the wood pellet producers in Ontario, Quebec and the Atlantic Provinces, only Rentech has the required combination of high production volumes, direct rail access, dedicated pellet handling facilities at a year-round deep-water port and high-volume shipping to attract an European customer the size of Drax. The CPCS report also discusses the possibility that a strong leader in the region could organize other producers to consolidate their pellets and use its supply chain to collectively create a strong exporter bloc. In its report, CPCS notes, “[There is] no export-focused producer in Ontario/Quebec to be a leader.”With the emergence of the Rentech production, export and contract structure, however, the landscape has changed. CPCS principal and study author Jean-François Arsenault agrees that, should Rentech wish to, it would qualify as a suitable export-focused producer to be a leader for the other producers. “Definitely,” Arsenault says. In fact, at the Eastern Canadian Pellet Logistics Workshop that QWEB and WPAC organized last summer, Rentech announced, “… we are able to consolidate volume and provide a conduit for other producers to the export marketplace.” On the production end of the supply chain, in 2013 Rentech purchased two decommissioned fibre mills in Ontario: a former strand processing mill in Wawa from Weyerhauser, and a former particle board processing mill in Atikokan from Atikokan Renewable Fuels. Rentech is converting the Wawa mill for the production of approximately 450,000 tonnes of pellets annually, and converting the Atikokan mill for the production of approximately 100,000 tonnes of pellets annually. To feed the facilities, Rentech will purchase between 900,000 and 1,000,000 tonnes a year of Canadian Crown fibre. “The Ontario government has provided use rights to the fibre supply for as long as we continue to use it,” says Julie Cafarella, vice president communications, Rentech. Rentech is selling the pellets from the facilities under two longterm contracts: Under a ten-year contract, OPG, Ontario’s provincial power utility will purchase 45,000 tonnes annually from Atikokan, with an option to purchase an additional 45,000 tonnes annually from Atikokan. OPG will receive its first shipment in the first half of 2014. Also under a ten-year contract, Drax is purchasing 400,000 tonnes of pellets from the Wawa facility, with the first delivery
Rentech will lease hopper cars to move the wood pellets.
By Carroll McCormick
scheduled for the fourth quarter of 2014. Both facilities have on-site access to mainline rail service. Wawa, for example, has a rail siding with room to store rail cars. Arsenault notes that virtually none of the other Eastern Canadian pellet producers have direct access to a railhead.This poses a serious challenge. “Trucking to railhead is unlikely to be viable for the large majority of producers, but of course, this depends on the price,” Arsenault says. Under long-term contracts with Rentech, CN will transport the pellets from the Wawa facility 1,100 kilometres to the Port of Quebec City. The journey is direct, with no switches to other carriers. “The specific tenure of the long-term contract with CN has not been disclosed,” Cafarella notes. “OPG will purchase the pellets from the Atikokan facility FOB at the plant gate.” The large volume of pellets that Rentech is committing for transport, with long-term guarantees, allowed Rentech to negotiate the most cost-effective rail and car lease rates. (Rentech will be leasing around 200 covered hopper rail cars from a third party to move the pellets.) “Rail was the most cost-effective on a long-term contractual basis,” notes Rentech in a combined Rentech/Drax presentation titled “A Case Study in Logistics and Export Strategies in Eastern Canada.” The Port of Quebec is not the only port on or leading to the Atlantic Ocean that handles pellets. Thunder Bay, Trois-Rivières, Belledune and Halifax, for example, handle pellets. But Rentech has made an exclusive arrangement with Quebec Stevedoring Limited (QSL) that has QSL investing up to $20 million to build dedicated pellet unloading, storage and vessel loading facilities at the Port of Quebec. The facility should be completed prior to Rentech’s first shipment of pellets to Drax. The facility will have 75,000 tonnes of storage, with space reserved to expand that by another 37,500 tonnes, if needed. The current plan is for rail car unloading with plenty of existing siding capacity. Truck unloading can be added later, if required. Should other pellet producers get onboard with Rentech, Arsenault notes that, “For some, trucking directly to the facility in Quebec City is likely more viable than trucking to a railhead.” This also speaks to the possibility and advantage of of virtual consolidation, where producers’ pellets are consolidated on paper before transport, and only physically consolidated in ships’ holds. Due to the limited UK port infrastructure, Drax needs to use the
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CASE STUDY CS
fewest and largest ships possible. Drax has targeted Panamax/modified chip carriers to transport the pellets to the UK. To this end, says Cafarella, “We plan to use Panamax ships that can carry approximately 50,000 tonnes of pellets.” The higher-volume ships stand to add to the viability of Rentech’s pellet export venture. Knud Jensen, executive vice-president, Canfornav, illustrates what higher shipping volumes can mean. “The freight difference between a 40,000-tonne load and a 30,000-tonne load will be 15-25%. We will look at freight rates much differently on a long-term strategy than on the spot-market.” Although Rentech has not revealed details of all of its supply chain contracts, what it has made public suggests it has largely achieved another key requirement for the success of a supply chain agreement: synchronized agreements. In short, Arsenault explains,“It means that contract periods are similar, to minimize risks. If not, you have to include cost escalation indicators in your contracts to transfer risk to the buyer. Otherwise, if costs outside your control (as a producer) increase, you [are vulnerable.]” Eastern Canadian pellet producers currently have a production capacity evaluated at 1.18 million tonnes and production of about 600,000 tonnes of pellets a year, according to the CPCS report. Yet, notes CPCS, plans for new and expanded capacity could push this to 1.88 million tonnes in the short to medium term. Implicit in this observation is that producers’ supply chain and export shortcomings will only worsen. Drax states that foreign demand is there. In fact, Drax believes that Eastern Canada could become as large an export market as Western Canada; western producers shipped 1.6 million tonnes of pellets out of Port Metro Vancouver in 2012. Yet, warns the CPCS report, “Logistical constraints and unfavourable market conditions, however, are preventing this export potential from materializing.” With Rentech’s wood pellet export operation soon to be in play, the largest, industry-sized supply chain constraint has vanished. Drax notes in the presentation, “The Rentech controlled export infrastructure will now provide existing suppliers a route to consolidate small incremental volumes onto larger ships.” Rentech has similar thoughts. “The storage and handling infrastructure being built at the Port of Quebec would allow for ad-
ditional pellets to be stored and handled through the Port beyond our existing contract with Drax,” Cafarella says. “As such, there could be opportunities to work with other pellet producers to leverage our Port access and storage.” CS
Carroll McCormick is an award-winning writer who has been covering transportation industry issues and technologies for more than a decade. He is based in Quebec.
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INSIDE THE NUMBERS
WHY CANADIAN SHIPPERS MODE SHIFT Higher rates and/or surcharges have affected modal selection
Is there a ceiling to how high surface transportation rates can rise? Our annual Transportation Buying Trends research, conducted in partnership with FMAC and CITT, shows that there is. More than a third of Canadian shippers responding to our survey noted higher prices and/or surcharges have caused a change in their modal selection for at least some of their shipments. Increasing truck prices are the main reason shippers will switch from truck to rail, with almost 40% noting that as their reason for a modal switch. Conversely, when Canadian shippers shift from rail to truck it’s primarily due to service issues with the majority (35%) blaming poor rail service or coverage, followed by almost a quarter who do so in response to customer requests. CS
Decreasing truck prices
58% of shippers
GETTING REAL ON RATES
Main reasons Canadian shippers divert freight from truck to rail
Responding to customer requests
Increasing rail prices
Faster inventory times
Poor rail service or coverage
Percentage of current trucking shipments for which Canadian shippers consider rail a viable alternative 31% or more
To service new markets Responding to customer requests
49% of shippers
Increasing truck prices Decreasing rail prices
To service new markets
31% or more
Main reasons Canadian shippers divert freight from rail to truck
Percentage of current rail shipments for which Canadian shippers consider trucking a viable alternative?
Faster inventory times Poor truck service or coverage
52 March/April 2014 www.canadianshipper.com
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THE BIGGER PICTURE
NAFTA: WILL IT SURVIVE ANOTHER TWENTY YEARS? Much will no doubt be made this year of the fact that the North American Free Trade Agreement (NAFTA) has survived twenty years. I was well into my logistics career when Canada and the United States signed the Free Trade Agreement in 1989, followed by NAFTA some five years later, and I’ll admit I was somewhat skeptical of the alleged benefits of free trade agreements. I’ll also admit that I was swayed to the NAFTA camp on each successive anniversary, especially in view of the benefits being heralded by all three governments, including claims of ‘economic growth’, ‘increasing trilateral trade’ and ‘tariff elimination’. Milestones were recognized at five years, ten years, and fifteen years; books were written, commissions formed and web sites established, all trumpeting the success of NAFTA. So this was my frame of reference as I cast a spectator’s eye this year towards the success, and relevance, of NAFTA some twenty years on. And where better to look for information than the Government of Canada, signatory and partner in NAFTA? On its website, Foreign Affairs, Trade and Development Canada (DFATD), still refers to the creation of NAFTA in terms of the ‘largest free trade region in the world’. But, has this economic juggernaut generated the benefits and results one would expect from a trilateral partnership that included the US, the world’s leading economic powerhouse? DFATD also reports on Canada’s overall trade status with other nations around the world and it was there, in the 2011 trade statistics most recently reported, that I looked
for confirmation of NAFTA’s legacy and, perhaps inferred, superiority. What I found, or, perhaps more importantly, what I didn’t find, was more revealing. In addition to trilateral trade agreements such as NAFTA, DFATD also reports on bilateral trade agreements,
are Canadian consumers realizing as a signatory to the largest trilateral trade agreement? According to DFATD, Mexico is number five on the list of Canada’s ‘top ten’ export destinations, albeit accounting for only 1% of Canadian exports, with canola seeds being the single largest
So what has been NAFTA’s real contribution to Canada? What products are being shipped between our two nations? What benefits are Canadian consumers realizing as a signatory to the largest trilateral trade agreement? including a ‘top ten’ list. In 2002 for example, the largest bilateral trade relationship listed by DFATD was that between Canada and the US. The US/Mexico trade relationship was ranked second, and the trade relationship between the US and China was ranked number four, behind the US/Japan relationship. Trade between Canada and Mexico did not make the ‘top ten’ list, approximately eight years into NAFTA. Ten years later, DFATD still listed the Canada/US bilateral trade relationship as number one in the world. But by 2011, the US/China relationship had surged ahead to number two, vaulting over both Mexico and Japan, which had fallen to third and fourth place respectively. Once again, the Canada/Mexico trade relationship did not make the ‘top ten’, approximately seventeen years into NAFTA. So what has been NAFTA’s real contribution to Canada? What products are being shipped between our two nations? What benefits
commodity exported to Mexico. Imports were of somewhat more significance in 2011 at 5.5%, mostly on the strength of vehicles, mineral fuels and oil imports. Is this the success story that consumers envisioned for NAFTA? Or has NAFTA simply become a niche agreement for a small, select group of industries? And while those benefits can certainly be applauded, why did they not extend to consumer finished goods in a way that met consumer perceptions, if not expectations? The answer can be found in the statistics quoted above – China! The fact that the purchasing community would look to suppliers in Shanghai, 9,000 km from Vancouver, rather than Monterrey, 4,000 km from Vancouver, speaks vol-
umes regarding the shortfalls of NAFTA. Organizations that claim ‘sustainability’ as part of their mission statement have undoubtedly developed some creative reasoning in terms of overcoming the geographic disadvantages of China. Nonetheless, the fact that companies can source goods cheaper from Asia than Mexico underscores the need for serious discussions regarding Mexico’s ability to play a more significant role in NAFTA, including a pragmatic review of such topics as government commitment, training and education, infrastructure investments, and, yes, finished goods pricing. That shouldn’t surprise anyone, at least as much as the fact that no one has done it successfully for twenty years. In the early days of NAFTA, the mere idea of a free trade agreement gave rise to all sorts of heady speculation, including a common currency for NAFTA signatories and an efficient land-bridge supporting a North-South America trade axis. Many of those ideas seem naïve and far-fetched twenty years later. And yet, Mexico remains a country with great trading potential, with many distinct advantages over other parts of the world for North American businesses, including proximity, access to labour, climate, and perhaps most importantly in terms of supply chain advantage, surface transportation access. It may be twenty years later, but it’s never too late. CS
L W C L
Laurie Turnbull, CITT, P.MM is a supply chain consultant with Cole International, a leading Canadian logistics company providing Customs brokerage, warehousing and worldwide transportation services. He can be contacted at email@example.com.
54 March/April 2014 www.canadianshipper.com
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Published on Mar 18, 2014
Published on Mar 18, 2014
Canadian Shipper magazine provides innovative solutions to transportation, logistics and purchasing professionals who manage product flow th...