Value and Criticality of Efficient Border Crossings

Cross-Border Flow Analysis Report 11: Value and Criticality of Efficient Border Crossings strategic transportation & tourism solutions

Prepared for Industry Canada Prepared by InterVISTAS Consulting Inc. 26 January 2010

Cross-Border Flow Analysis Report 11: Value and Criticality of Efficient Border Crossings

Disclaimer Please note that the views expressed this report are not those of the Government of Canada. The findings and recommendations found within this document were made by the authors of this report.

Also, any references to corporations or figures have been made generic in order to protect the identity of the organization and to not reveal any proprietary or confidential information.

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Cross-Border Flow Analysis Report 11: Value and Criticality of Efficient Border Crossings

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Table of Contents 1.

Introduction........................................................................................................................ 1

2.

Value of Efficient Border Crossings ................................................................................ 2

3.

Scenario Analysis............................................................................................................ 12

4.

Conclusions ..................................................................................................................... 23

5.

Future Potential Studies ................................................................................................. 26

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2.1 2.2 2.3 2.4 3.1 3.2 3.3 3.4 3.5 3.6

Existing Studies...................................................................................................................2 Other Data Sources ............................................................................................................3 Results from Value Stream Mapping Study ........................................................................5 Key Study Parameters ......................................................................................................11 Scenario Overview ............................................................................................................13 Scenario A: Furniture Manufacturer ..................................................................................14 Scenario B: Textiles Manufacturer ....................................................................................16 Scenario C: Food Manufacturer ........................................................................................18 Scenario D: Automotive Parts Manufacturer .....................................................................20 Less-Than-Truckload Carriers...........................................................................................22

Cross-Border Flow Analysis Report 11: Value and Criticality of Efficient Border Crossings

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Introduction As the world’s largest trading partnership with two way trade at about $500 billion annually or $1.7 billion a day., the U.S. and Canadian economies are dependent on the efficient flow of goods across our shared border. North American supply chains, for both large and small companies, are highly integrated with plants, distribution centres, warehouses and retailers dispersed between the two countries. Efficient border crossings are vital to the global competitiveness of Canadian companies that have supply chains that span between U.S. and Canada.

Regulatory, logistics and security issues of cross-border flows, however, may influence decisions if and where a company’s various supply chain activities should be established. The report considers factors such as the risk of border delays, exchange rates, labour costs, market proximity, and technology development in investment decisions of companies. A quantitative comparison of a number of scenarios of the costs of shipping goods across a Canada/U.S. supply chain was performed to illustrate how border delays factor into overall costs.

This report is the last in a series of reports studying cross-border flow of goods from Canada to the U.S. The main objective of this report is to provide an assessment of the value and criticality of efficient border crossings by: 1) Identifying and summarizing the key impact of delays from a macro point of view; 2) Documenting micro examples that illustrate the importance of efficient borders; and 3) Proposing future work that could deepen the understanding of border-related issues in North America and from global practices.

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Value of Efficient Border Crossings Few studies have quantified the value-criticality of border crossings from a supply chain perspective. A number of studies have developed macro-level conclusions: In 2009, the U.S. and Canadian Chamber of Commerce cited 7 million jobs in the United States and 3 million in Canada depend on an efficiently functioning border1.

In 2005, a Transport Canada study concluded that “resultant annual cost impacts of the U.S. border security measures on the Canadian trucking industry is estimated to range from $179 million to $406 million in 2005 dollars” – or roughly 4% of long-distance trucking expenses2.

These order of magnitude estimates are important; however researchers are increasingly citing the lack of consistency in border conditions. This was also found in the majority of firms interviewed for this study.

2.1 Existing Studies While macro level studies have been useful, limited supply-chain analyses have taken place, particularly since post 9/11 security measures have come into place. The U.S. Federal Highway Administration Summer 2001 study and earlier analyses in 1999 by Clarence Woudsma represent some of the more detailed analyses.

Given the changes since 9/11 and data availability, there have been some important research papers advanced in the area of value efficiency. They include: Halcrow Consulting, Pacific Highway Port-of-Entry Commercial Vehicle Border Operations Survey Final Report, 2007; and Goodchild, Globerman, Albrecht. Service Time Variability at the Blaine, Washington International Border Crossing and the Impact on Regional Supply Chains. Journal of the Transportation Research Board, 2007.

Key conclusions from this research relevant to this report include: Variability of border crossing times was problematic to truckers, with modest actions taken to respond to variability.

Joint U.S. and Canadian Chamber of Commerce/U.S. Chamber of Commerce – Finding the Balance: Shared Border of the Future, 2009 2 Transport Canada, TP 14402E The Cumulative Impact of U.S. Import Compliance Programs at the Canada/U.S. Land Border on the Canadian Trucking Industry, 2005 1

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ƒ Increasing or changing logistics times seems to be one option to deal with uncertainty, as well as absorbing costs to be passed on to the consumer. ƒ Analyses of the value of border wait times also need to account for variability in other parts of the logistics process (e.g. inclement weather). ƒ Significantly regional variability exists between different parts of the U.S.-Canada border due to differences in commodity types and local competition for trucking services.

A key observation is depicted in the Figure below adapted from an 11-month dataset collected between British Columbia and Washington State on commercial vehicle movements.

Figure 1: Border Wait Time Variation (Pacific Highway Crossing)

Source: adapted from Goodchild et al, 2007 based on Whatcom Council of Governments data collected between August 1, 2005 and July 17, 2006 (excluding January 2006)

The key conclusion from Figure 1 is that wait times vary by time of the day in terms of typically recorded values (16 minutes up to 37 minutes on average). However, it is also important to note that for some time periods, the standard deviation does not correlate with wait times. In other words: variability exists.

Research does not currently exist to systematically document each border crossing in the same manner as the Pacific Highway Crossing; however anecdotal reports from interviews for Companies 1-7 in this survey indicate that the pattern can be substantially different from crossingto-crossing.

2.2 Other Data Sources The lack of data is one of the weaknesses of being able to characterize the extent of risk for border wait time delays.

There are two major initiatives that will inform future data sources for border wait time:

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ƒ The U.S.-Canada Border Wait Time Working Group will be advancing a project to test, evaluate and deploy technologies to automate the measurement of real-time border wait times at U.S.Canada land border crossings. While this assessment is technology focused, additional work is needed to assist in future value-criticality assessment by providing commodity-linkages to commercial vehicles. ƒ A second study of note is an update of 2006 data. In 2009, new data will be collected by Whatcom Council of Governments (and partner agencies including Transport Canada) on commercial vehicles. This data was instrumental in the Goodchild et al study on supply chain valuation of wait times. Updated data for processing rates for commercial vehicles with commodity movements will help refine assessments.

2.2.1

Magnitude of Delays

The extent of delays was analyzed both from the U.S. Customs and Border Protection point of view as well as from the results of the value stream mapping portion of the study. Since 2002, U.S. CBP has increased the frequency of examinations at the border. While the sharp increase is attributable to the requirement for 100% screening of all rail cars, trucks have experienced an increased examination rate as seen in Figure 2 below.

Figure 2: U.S. Customs and Border Protection Examination Rates, 2002 to 2008

Source: U.S. Customs and Border Protection

Technological advances such as the Vehicle and Cargo Inspection System (VACIS), gamma ray imaging system, have enabled non-intrusive examinations to take place with a lower impact compared to a complete de-vanning. Part of the increased examinations, however, are due to a larger number of Secondary inspection referrals for such things as paperwork, APHIS fee payments, etc.

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2.3 Results from Value Stream Mapping Study In our review of Companies 1 to 7, delays for Secondary inspections typically take place for approximately 25% of all truck shipments across all industry sectors. This agrees with Figure 2 above, but the value stream mapping analysis also revealed the huge variability in the length of delays required for Secondary inspections. The vast majority (20 of the 25%) involve simple payments or data changes that require about a one hour wait (depending on the crossing and time of day) and approximately 15 minutes to perform. The other 5% that require opening doors for inspection, de-vanning, or holding trucks for compliance may take anywhere from 5 hours up to several days.

Although the border process typically requires about half an hour for 75% of all trucks according to the value stream maps, the worst case scenario that takes place less than 1% of the time must be considered and either built into a company’s supply chain or incurred as a significant cost when it occurs. The illustrative examples later in this report examine the effect of some of these worst case scenarios on shipment costs.

2.3.1

Locational Decisions

The investment attractiveness and companies' decisions to locate activities on either side of the border may be affected by border challenges and supply chain efficiency. Currently, wait times and physical delays at border crossings, that are viewed as temporal and may change over time, are not a major cause of relocation of facilities by Canadian companies to the U.S. If impediments to easily ship product to the United States persist, however, some companies may eventually elect to move some of its operations to the U.S. This is not unusual in major changes in borders; for example the opening up of China post-1997 prompted a number of manufacturers to relocate from Hong Kong to neighbouring cities in China and radically change supply chain routes.

In conducting this study, the consulting team found that there was anecdotal shifts in location decisions that could be tied to border issues, including: Exiting the U.S. market entirely; Partial relocation to the U.S.; and Establishing new corporate structures to be headquartered in both countries.

While these are not exclusively functions of border-related decisions, as compared to other costs (labour, real estate, etc.), there are potential trends that are worth further study. The following maps highlight some of the changes in locational decisions that may form the basis of further review:

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Decision 1: Dehubbing

The first change involved a company where products shipped to its U.S. customers shifted from direct-to-customer to a U.S. warehouse/distribution facility. The cost and inconvenience of making individual shipments across the border for this small-medium enterprise (SME) prompted management to explore the alternative of consolidating standard shipments to a location in the U.S. before re-distributing products to its customers throughout the U.S. What was noteworthy about this dehubbing change was often times the shipping costs in the United States were greater for some markets. However, the company has enjoyed the trade-off of certainty in delivery of product that was previously not possible.

Decision 2: No Change

The second decision was seen with one company that was resource-based. As with a number of firms, globalization and mergers/acquisitions continue to consolidate operations. In spite of this, due to the nature of location of sources of raw materials as well as areas of production and distribution, no change is anticipated.

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Decision 3: Partial Relocation / Two-country Expansion The third location decision was observed in several firms conducting services and products for logistics. An emerging trend is the creation of cross-border specific products as well as corporate structures.

For some Canadian companies, the advantage of this decision was cited as the ability to establish a presence in the United States. Some taxation benefits as well as dealing with channels available only to U.S. based firms were also perceived as reasons for establish a presence in both countries.

The “Buy America� clause limiting expenditure of U.S. stimulus dollars to U.S. companies could further prompt local decisions of this nature.

Other Locational Decisions No other locational decisions related to border issues were reported by firms interviewed.

However, the ongoing changes due to the current economic downturn will certainly impact the current methods of bi-national product. For example, in the automotive sector, the current model of multiple production units leading into a manufacturing plant on either side of the border is expected to change due to cost and other considerations; border issues are but one of multiple factors to lead to future restructuring of supply chains.

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Other Factors

A number of other factors must be considered in establishing the value of an efficient border including exchange rates, labour costs, technology development and other costs. Other indirect factors include the level of education in specific regions of each country, healthcare availability and costs as well as the proximity of the respective market for each industry sector.

Exchange Rates The Canada/U.S. currency exchange rates have a macro effect on the volume of trade across the border. The lower the value of the Canadian dollar, the more attractive north to south trade will become. This is especially true for commodity items. However, the effects vary sector by sector but emphasize the importance of efficient borders to accommodate the fluctuations in trade volumes affected by changes in exchange rates. As seen in Figure 3 the historical exchange rates have varied significantly in the past decade.

Figure 3: U.S./Canada Dollar Exchange Rate 1 $USD in $CAD

$1.80 $1.60 $1.40 1.6 $1.20 $1.00 1.4 $0.80 1.2 $0.60 1 $0.40 $0.20 0 1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Source: http://www.bankofcanada.ca/en/rates/exchform.html

Labour Costs Btween 2005 to 2007, the unit labour costs for the U.S. remained relatively static as compared to relative increases in Canada of abut 5%. (Figure 4). While OECD indices are comparisons of relative values to each country, it highlights a relative growth in cost in the Canadian manufacturing

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sector. Absolute values are difficult to compare based on sizable differences in other labour costs (e.g. medical, insurance, benefits, etc.)

Figure 4: Unit Labour Cost: Manufacturing Sector

110

Index OECD base year (2005=100), trend cycle Canada

United States

108

106

104

102

100

98

96

Q3

Q4 2005

Q1

Q2

Q3 2006

Q4

Q1

Q2

Q3 2007

Q4

Q1

Q2 Q3 2008

Q4

Q1 2009

Note: 2005=100 applies to the relative base for each country, and not a comparison between countries Source: Organization for Economic Development & Cooperation (http://stats.oecd.org/Index.aspx?DatasetCode=ULC_QUA)

Multi-variate analyses of labour costs, such as KPMG Competitive Alternatives 20083 tend to indicate that labour costs are slightly higher in Canada when accounting for statutory plans on benefits. However, when accounting for other factors (lease, transportation, utilities, taxes), Canada as a whole is slightly more competitive on location-sensitive costs.

Technology development In support of improving border crossing efficiency, various new technology and traffic management processes have been successfully implemented and integrated into the border crossing process.

Some micro examples include the deployment of intelligent transportation systems such as transponders and other devices. Designated of dedicated commercial FAST Lane Primary inspection lanes that have reduced certain process time by 25%; implementation of license plate readers directly eliminate the key stroking of data input thereby reducing the process time by about 10%; implementation of new Information Technology and equipment that is electronically displayed to the Inspection Officer and Vicinity RFID documents that have reduced processing time by 20%

3

http://www.competitivealternatives.com/

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and will continue to increase. The importance of Vicinity RFID Document Technology to cargo is that it increases the throughput rate of vehicle processing by increasing access to commercial lanes in the border plazas to trucks and their cargo.

Transportation Costs Other costs to consider include trucking transportation costs. International long distance hauling operating cost rates were estimated by region for trucks based in Canada and the U.S. in a Transport Canada report. As seen in Figure 5 below, the per kilometre cost for truck transportation varies significantly for Canadian-based operators by region within the country and is quite different from U.S.-based operators.

Figure 5: International Long Haul Trucking Operating Costs

$2.00

Operating Costs ($/km)

$1.50

$1.00

$0.50

$0.00 West

Central Canada-based trucks

East U.S.-based trucks

Source: Transport Canada, Operating Costs of Trucks In Canada 2005 - assume International Long Distance Hauling case - 5 Axle Semi Unit (Van) for 800 km distance

Multiple Border Crossings Another factor to consider in the criticality of efficient border crossings is the compounding effect of products that cross the Canada/U.S. border multiple times. Although the statement that some components of an automobile may cross the shared border up to seven times has been quoted numerous times, the Canadian International Council’s 2008 report, A New Bridge for Old Allies, found that “about one-third of Canada’s exports to the U.S. are composed of goods which have been previously imported from the United States.” The estimated value of an efficient border should be multiplied by the number of times that a given product’s component parts must cross it.

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Trusted Shipper Program Membership The Joint U.S. and Canadian Chamber of Commerce/U.S. Chamber of Commerce 2009 report, Finding the Balance: Shared Border of the Future, indicates that attaining membership in a trusted shipper program (e.g., C-TPAT and PIP) can cost over $100,000 in up-front costs and typically requires up to two years to become certified. After being accepted in such programs, there are significant long-term costs for supporting full-time staff to ensure compliance in these programs as well as any potential future security upgrades required depending on the size of the organization.

The report further stipulates that despite both governments receiving the security benefits, companies do not realize the promised commercial benefits and are regularly sent to secondary inspections at the border and subject to paying additional fees. One company that was cited estimated that it spent about $1 million annually from inspections and delays due to increased security measures and from membership expenses to participate in multiple trusted shipper programs.

2.4 Key Study Parameters Due to the lack of global data, and consistent data available, this study embarked upon a set of micro studies based on data collected from different sources. The objective is to: Illustrate the risk potential of border delays as a function of supply chains; Outline the possible valuation of border delays for different commodity types; and Capturing the regional differences that will occur between different commodities.

Note that the analyses do not include a statistical valuation of choices that a shipper may make.

For example, studies have shown that if a border checkpoint has a historically high track record of a delay (e.g. peak of 37 minutes in Figure 1), that the truckers will tend to avoid this 6-7am period at the Pacific Highway crossing. As well, there are dynamic elements of variability that have been simplified related to the different price elasticity’s that exist in different industries.

The next chapter provides a scenario analysis outlining the cost of border wait times and some of the worst case scenarios based on the unpredictability of delays at the border. It is also important to factor into the analyses that other delays can and will occur due to weather, illness or other factors that will be part of a probabilistic view of flexibility needed in supply chain management.

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Scenario Analysis Based upon data collected earlier from this study (Case Studies 1 to 7), and integrating data from recent Transport Canada and Industry Canada studies, four scenarios (A,B,C and D) were generated. The total cross-border trip costs were subdivided into four different portions (1,2,3 and 4) of a truck journey to estimate the total cost of a shipment: 1 Inventory + Other Transactional Costs

2

3

4

Costs of a Half Transportation + Trucking + Cost to Border Hour Border + from Border = Queue

Total Trip Cost

1 Inventory and Other Transactional Costs % Inventory Carrying Cost x Shipment Cost These are costs that are incurred to carry inventory (storage, interest on value of goods held, etc.) that are typically incurred at the Canadian plant or warehouse. The percentage cost for the specific subsector was obtained from the Industry Canada/SCL Canada in the State of Logistics: The Canadian Report 2008. The product of the percentage and the total value of the shipment gives the total inventory carrying cost for the shipment for the scenario.

Distance x Per Kilometre Trucking Cost 2 Trucking Costs to Border These are considered to be the costs for transporting goods to the border. The distances from the warehouse or plant location to the border were estimated. The trucking costs were calculated by multiplying the distance and the cost per kilometre as provided in Transport Canada’s Operating Cost of Trucks 2005 report (assuming location, trip distance, truck type and truck home base).

Queuing Time x Opportunity Cost of Truck Time 3 Cost of a Half Hour Border Queue This is the opportunity cost of a truck and driver’s time from waiting in the queue to be cleared at the border. Assuming the same per kilometre trucking cost as Cost 2 above multiplied by the queue time (0.5 hours) and an assumed 100km/h average driving speed, the cost of queuing at the border were calculated.

Distance x Per Kilometre Trucking Cost 4 Trucking Costs from Border The trucking rate that is used to calculate transportation costs within Canada, to the border is similarly applied to transportation from the border to the U.S. destination. The distance from the border to the U.S. warehouse or plant was estimated to help establish a cost for truck transportation from the border.

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3.1 Scenario Overview Four scenarios were used to illustrate the value and criticality of efficient border crossings. Each fictional company varies in terms of industry, size, volume of sales into the U.S., geographic location, potential border issues and supply chain structure. A micro-level calculation of each hypothetical organization was performed with a number of assumptions that are intended to illustrate cross-border issues and costs that are common to Canadian exporters.

Description

Value of Sales to U.S.

Shipments per Year

Average Shipment Value

$500,000

26

$19,230.77

Scenario A

Small custom furniture manufacturer in Manitoba

Scenario B

Suit manufacturer in Quebec

$1,000,000

12

$83,333.33

Scenario C

Food manufacturer in Alberta

$3,000,000

104

$28,846.15

Scenario D

Automotive parts supplier in Ontario

$20,000,000

365

$54,794.52

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3.2 Scenario A: Furniture Manufacturer 3.2.1

Overview

The first of the illustrative cases is a small custom furniture manufacturing operation located near Winnipeg, Manitoba. The organization is considered a small to medium enterprise, but still ships over $500 thousand worth of goods to the U.S. Because of the custom nature and premium pricing of its product, there are limited shipments to the U.S. per year (1 shipment every 2 weeks = 26 shipments annually). The average shipment value, therefore, is approximately $19,230.77.

As a smaller organization, the company uses third party logistics providers that have their own brokers or preferred brokers for border crossing purposes. The furniture manufacturer ships directly to its customers all over the U.S typically with less-than-truckload requirements. The manufacturer is also responsible for fulfilling Lacey Act requirements by labelling all of its products with genus and species.

3.2.2

Primary Processing Delay Costs

As can be seen in the table below, the cost of the border delay represents over 7% of the $904 in trip logistics costs. This is derived from the opportunity cost of a half-hour delay the driver and truck are idle waiting to be processed by CBP Primary.

1

2

Inventory + Other Trucking Costs to Transactional Border Costs

3

4

Cost of a half hour border queue

Trucking Costs from Border

Based on half-hour queue time delay

Pembina, ND Æ Grand Forks, ND based on $1.38 per km

Inventory Carrying costs (1.76% of sales) and brokerage fees based on shipment value

Winnipeg, MBÆ Emerson, MB based on $1.38 per km

$510

$153

$69

$172

56.3%

16.9%

7.6%

19.0%

Total Trip Costs

$904

In this scenario, the border queue time has a more substantial impact on the logistics costs in comparison to the scenarios listed below due to the relatively short distance between the Canadian warehouse and its destination in the U.S. (236km). The total trip logistics costs associated with this shipment is the lowest of the four scenarios outlined within this report.

The sensitivity of this scenario was also examined to see what could be determined for the relative cost impacts:

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Longer distances (e.g. to California, Miami) would mean border wait time costs would decline to about 1% of trip costs.

A reduction in inventory costs by half would mean a 1.75% increase in the cost of primary processing delays (over 9.3% of total trip logistics).

A one hour delay would account for 14.17% of the logistics based costs. It should be noted for all scenarios presented in this report that the growth in queue delay and subsequent proportion of overall logistics cost is a non-linear relationship.

3.2.3

Other Potential Costs

For delays or Secondary inspection at the border, there is little to no cost to the company even though they may occur frequently (75% of time through Secondary due to less-than-truckload shipments - 70% for routine processing and 5% for cases involving physical inspection). The service provider typically builds this routine Secondary processing into its delivery schedule and process timing. As a non-perishable good, furniture does not lose value from an unexpected border delay, but it may cause a missed delivery date. A one-day delay may result from just a few hours delay at the border since it may cause a truck driver to exceed his/her maximum continuous driving time allowance or a missed transfer with another vehicle (i.e., train, aircraft or another truck). In such cases either a small discount or a loss of goodwill to the manufacturer may be incurred of approximately 2% of the value of the shipment depending on the shipper/carrier agreement (i.e., 2% x $19,231 = $385). While the probability of trucks being sent to Secondary is quite high, the likelihood of unexpected delays that incur costs is low.

While the small enterprise may not participate in trusted shipper programs, it must still comply with border requirements such as the manifest submission and the Lacey Act. The time or portion of one employee’s time may be dedicated to information submission and tracing its wood supply origin to indicate genus and species.

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3.3 Scenario B: Textiles Manufacturer 3.3.1

Overview

This scenario is for a hypothetical suit manufacturer located in the Montréal area that is quite large, but with a portion of its sales ($1 million) going to the U.S. to a privately labelled clothing retailer chain. Goods are only shipped once per quarter, for each of the spring, summer, fall and winter fashion seasons directly to the retailer’s warehouses. With three warehouse/distribution centres (New Jersey, California and Illinois), only 12 shipments are made annually making the average shipment value quite high at $83,333.

Each season’s release of suits are held at the Canadian manufacturing facility until the appropriate orders are completed and ready to send to each U.S. distribution centre in large shipments.

Samples and prototypes are sent periodically, but in terms of significant amounts of goods, 4 large shipment cycles with high volumes of goods dominate its U.S. logistics. The company, as a result, ships by full truckload and hires a broker to process shipments to the U.S. for its limited number of shipments. The manufacturer has a number of border issues to address and reporting requirements as a textiles manufacturer.

3.3.2

Primary Processing Delay Costs

In this scenario, there is a large shipment that occurs over a longer distance. As a result, the total trip costs amount to $5,351. Delays to primary processing of a half hour would mean about 1% of trip costs. This is derived from the opportunity cost of a half-hour delay the driver and truck are idle waiting to be processed by CBP Primary.

1

2

Inventory + Other Trucking Costs to Transactional Border Costs

3

4

Cost of a half hour border queue

Trucking Costs from Border

Inventory Carrying Montréal, QC Æ Based on half-hour costs (3.72% of Sarnia, ON based on queue time delay sales) and brokerage $1.19 per km fees based on shipment value

Total Trip Costs

Port Huron, MI Æ Chicago, IL based on $1.19 per km

$3,675

$973

$59

$644

68.7%

18.2%

1.1%

12.0%

$5,351

In comparison to Scenario A outlined above, the half hour border queue accounts for a small proportion of the trip costs compared to other categories of trip costs (inventory at 3.72% of sales and the value of the shipment itself). Furthermore, the long distance for which the shipment travels also accounts for a greater proportion of the trip costs.

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The sensitivity of this scenario was also examined to see what could be determined for the relative cost impacts: Shorter distances (e.g. to Vermont, New York) would mean primary processing delays could increase to around 6% of trip costs.

When examining the cycle time for shipment, a reduction in inventory costs by half would only increase the opportunity cost of the border delay to 1.56% of the logistics costs.

A one hour delay would account for 2.2% of the total trip logistics.

3.3.3

Other Potential Costs

While the suit manufacturer may expect to have its shipments sent to Secondary 25% of the time (20% for minor paperwork changes and 5% for physical inspections), a portion of these occurrences may result in unexpected delays. This may be caused by textile quota clarification questions or product labelling. Physical re-labelling of all of its product on a truck may need to be done at the border or offsite. Regardless of where it takes place, proof that the issue has been addressed must be presented to Customs and Border Protection before the product can be released from the border or allowed to be distributed for retail sale and may easily take 7 days.

The inability to sell the product while it is undergoing this process will result in lost retail sales due to the lack of stock. In the example of a one week delay, 7 days’ worth of sales assuming a 60% mark-up rate for one of the three distribution centres is $15,982 (= $1,000,000 x 7 days ÷ 365 days per year ÷ 3 distribution centres ÷ 40% cost). The number of occurrences per year is low but the risk of its occurrence is a consideration in the confidence in the supply chain route.

Compliance with labelling and reporting requirements for the border incur operational costs for at least one employee’s time, but the actual border process is accounted for through the brokerage fee.

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3.4 Scenario C: Food Manufacturer 3.4.1

Overview

The third example is of a food manufacturer producing fresh meat products in southern Alberta to be shipped on a defined shipping schedule to a distribution facility in Omaha, Nebraska. With approximately $3 million in sales to the U.S., the company ships twice per week to refrigerated facilities in the U.S. and is shipped by train onwards. The average value of a truck shipment, therefore, is $28,846.

As a meat product, its product must undergo US Department of Agriculture (USDA) inspection as well as fulfill Food and Drug Administration (FDA) reporting and country of origin labeling (COOL) for meat requirements. As a fresh meat product, the goods are perishable and have a time definite shipment date. Should delays occur, the value of the product declines significantly.

3.4.2

Primary Processing Delay Costs

Fresh meat products are a highly time-sensitive set of goods. With refrigerated trucks as well as specialized handling processes, the overall speed of moving products to market are of paramount importance to shippers. As a result, there are relatively low inventory carrying costs, but a higher relative trucking cost. Handling meat requires by default USDA inspections. For simplicity this scenario also incorporates a half-hour queuing delay that represents about 1.7% of overall trip logistics costs.

1

2

3

4

Inventory + Other Transactional Costs

Trucking Costs to Border

Cost of a half hour border queue

Trucking Costs from Border

Based on halfhour queue time delay

Sweetgrass, MT Æ Omaha, NB based on $1.47 per km

Inventory Carrying Red Deer, AB Æ Coutts, costs (0.93% of AB based on $1.47 per sales) and brokerage km fees based on shipment value

$500

$566

$73

$3,197

11.5%

13.1%

1.7%

73.7%

Total Trip Costs

$4,337

In this scenario, the border queue time is again a minimal factor within the total logistics costs due to the cost of the truck transporting the goods from the Canada/U.S. border to Omaha, NB. In relation to the inventory and other transactional costs, the food manufacturer and the custom furniture manufacturer (Scenario A) face similar opportunity costs of border delays.

The sensitivity of this scenario was also examined to see what could be determined for the relative cost impacts: January 2010

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Shorter distances (e.g. to Spokane, Washington) would result in a half hour border wait time to increase to almost 4% of trip costs.

A increase in the inventory costs two-fold to 1.8% (a 5.7% increase in logistics costs) would result in only a 0.1% decline in the proportion of the primary processing delay opportunity cost.

A one hour delay would increase the opportunity cost of the border delay to account for 3.33% of the total costs involved in the shipment.

3.4.3

Other Potential Costs

All shipments of fresh meat products must be appropriately labeled for country of origin and inspected by the Canadian Food Inspection Agency with sign off by the U.S. Department of Agriculture at an iHouse. Delays rarely occur at Secondary (3%) but may have an unexpected cascading effect. A minor delay at Secondary on a Friday afternoon or simple border congestion of an hour could have severe consequences for USDA inspection. iHouses will have limited operating hours (e.g., Monday to Friday 8:30am to 4:30pm) for which a delay may cause the truck to not reach it before close of business. In such cases, the trailer may have to wait at the iHouse over the entire weekend before it can be signed-off on a Monday. This three day delay has significant implications for a highly perishable good with a very specific “best before” date. It is estimated that for this commodity, after a week, there could be a loss of 80% of the value of the shipment for both product and goodwill (i.e., 80% x $28,846 = $23,077).

Along with the aforementioned unexpected cost, a number of other costs are incurred by the organization to establish a system to appropriately label product and obtain CFIA approval (along with veterinary sign-off) before the product is even transported to the border.

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3.5 Scenario D: Automotive Parts Manufacturer 3.5.1

Overview

The last scenario is of a manufacturer with the highest dollar volume of sales to the U.S. among the examples. The hypothetical company is an automotive parts supplier based in southern Ontario that provides just-in-time manufacturing with daily deliveries to automotive assemblers in Detroit, Michigan. With about $20 million worth of parts sent to the U.S., the average shipment value is $54,795 with a highly coordinated cross-border operation.

With such high frequency and volumes of goods sent to the U.S., the company employs its own brokers to process shipments at the border. In addition to this, the company takes advantage of the Free and Secure Trade (FAST) and Customs-Trade Partnership Against Terrorism (C-TPAT) programs as well as Customs Self Assessment (CSA) in order to ensure efficient border crossings.

There is a significant cost to participate and comply with the requirements of the programs in terms of dedicated resources to maintain certification in the program as well as the initial sunk cost of attaining certification. Although rare, delays in delivery to automobile assembly plants in the U.S. can shut down the entire production line and incur significant costs.

3.5.2

Primary Processing Delay Costs

Auto parts manufacturing is one example of a just-in-time mode of production. As a result, there is a model of minimizing inventory carrying costs. As can be seen in the table below, the cost of the border delay represents almost 5% of the $1,421 in trip logistics costs.

A

B

C

D

Inventory + Other Trucking Costs to Transactional Border Costs

Cost of a half Trucking Costs hour border from Border queue

Inventory Carrying Aurora, ON Æ Windsor, costs (0.74% of ON based on $1.33 per sales) and brokerage km fees based on shipment value

Based on halfhour queue time delay

Detroit, MIÆ Detroit, MI based on $1.33 per km

$801

$534

$66

$20

56.4%

37.6%

4.6%

1.4%

Total Trip Logistics Costs

$1421

In this scenario, the border queue time is of medium impact (compared to the other three scenarios outlined above) due to the short distances the shipment is travelling. However, the 0.74% inventory carrying costs realized by the auto parts manufacturing industry is substantially lower than that experienced by the other industries due in large part to the daily shipment frequency.

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The sensitivity of this scenario was also examined to see what could be determined for the relative cost impacts: ƒ If the inventory costs in the industry would double to 1.5% (a 29% increase in total costs), the primary processing delay would decline in proportion to 3.6% of total costs. ƒ A one hour delay at the border would increase its proportion of the costs to 8.9%.

3.5.3

Other Potential Costs

As a trusted shipper enrolled in C-TPAT and with FAST drivers, the automotive parts supplier enjoys the fastest border crossing possible. As a supplier to an automotive assembler that uses a just-in-time inventory system, however, the company is still potentially exposed to huge costs if there are delivery delays. Congestion at the border that prevents a truck from even accessing the FAST lane may cause a half hour delay. Automotive assemblers have estimated that it costs them $13,000 per minute that a line is stopped. Although a number of safeguards exist to prevent this from occurring and the probability of such occurrences is very low, a 30-minute delay could result in a worst-case scenario of $300,000 cost to the assembler or penalty to the supplier.

To avoid foreseeable border delays, the automotive parts supplier is a member of C-TPAT (Tier III). As described earlier in this report, there are a number of costs associated with obtaining certification, ongoing maintenance of requirements and reporting compliance. With at least one employee required for trusted shipper enrollment and one dedicated broker to act on its behalf at the border, the cost per shipment is $438 (i.e., $80,000 salary x 2 full time equivalents á 365 shipments per year = $438).

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3.6 Less-Than-Truckload Carriers The variability of less-than-truckload (LTL) operators does present a challenge when assessing the value-criticality of efficient border movements. LTL carriers provide a flexible option for smaller shipments; it is an option for clients who do not have a large enough shipment for a full truck. In the examples mentioned earlier, one scenario called for a furniture manufacturer with the use of LTL on a regular basis for shipments.

Delays at the primary processing typically means: Reduced productivity for drivers and truck; or Delay costs for all shipments inside a van, which could represent on average 10 different shippers.

For LTL carriers, however, the value criticality of efficient borders is further complicated when dealing with referrals to Secondary while at the border. Assuming one or two shipments in the LTL truck caused the referral, additional delay time is incurred for the other 8 shipments. As a result, the reliability of this form of logistics faces challenges. The cost of mitigating these challenges has included: Assignment of on-site brokers to expedite clearance; and Breaking up a LTL shipment to allow those shipments (e.g. the 8 that did not trigger a secondary referral) to proceed, which results in storage costs and additional transportation costs once the goods are finally cleared.

Recovery from these unexpected occurrences has led to a fattening of the supply chain system for LTL carriers that could include: Contingencies to deal with potential issues; and Costs incurred with shippers for full refund of fees due to missed guarantee delivery times.

Beyond this, each individual shipper may incur costs as a result of a delay caused by concerns over an unrelated shipment on the truck. This may range from minimal impact if the carrier arranges for alternative transportation to minimize delay time to potentially significant impact if a sale is lost due to the delay.

As outlined in Report 10, there are also inefficiencies, at present, dealing with FAST-approved shippers and non-FAST shipments and the inability to mix them with the use of FAST lanes.

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Conclusions The complexity of commercial inspections for southbound movements is sizable, given the multitude of commodities and risk management methodologies employed by U.S. Federal Inspection Service agencies.

In reviewing literature and data gathered for this study as well as modelling scenarios that can illustrate value-criticality of border movements, the following conclusions are offered: Figure 6: Three Major Areas of Value Criticality

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Conclusion 1: Preparing for Variability of Queue Time at Primary Booths Wait time is one of the most visible issues at the U.S.-Canada border; the specter of long line-ups is one of the easiest to understand problems. Even in times of reduced economic and international trade, together with recent increases in CBP staff dedicated to the U.S.-Canada border, queue times can be generated based on the match of resources to demand for processing. Based on a half-hour border queue time, the model developed for this study indicates that the opportunity cost of idling trucks represent 1% to 8% of the costs of Canada-U.S. shipment costs. Increasingly as important as wait time is the uncertainty of service levels and variability from port-to-port. For example, if it is generally known that between 6-7 am there is a longer border wait time of 40 minutes, companies have tended to shift their logistics processes away from the peak if possible or to build the time into their delivery estimates - sometimes at no cost to the overall cost of shipments. However if 4-5 am is 20 minutes on average, but variable to 50 minutes on occasion, this tends to limit the confidence in the logistics supply chain since the crossing can still take longer despite the lower average.

Conclusion 2: Reducing Potential Delay at Secondary Areas The border processing model is currently divided between a Primary Processing area that is geographically separate from Secondary Processing. This separation, in theory, is a more efficient method of border management because it allows those trucks that require more time to satisfy risk management methodologies of CBP and other FIS agencies to be processed away from primary processing. This invariably allows for increased throughput processing capabilities at Primary.

However, as the system has evolved, the practicality of this approach has generated several constraints: ƒ

Administrative issues: Clerical errors in transmitting information to CBP and fee collection are some activities at Secondary Processing today that could be dealt with in alternate ways.

ƒ

Less-than-truckload clearance: Greater than 5 shipments results in an automatic referral to secondary at a number of CBP ports.

For the supply chain and CBP alike, there are inefficiencies with the current setup that could be improved upon to reduce the burden at Secondary Processing. This will allow FIS agencies to better deal with secondary border, trade and other clearance issues that have a higher risk potential for the mission of border security.

Conclusion 3: Minimizing Downstream Impacts of Delay Supply chains have become increasingly flexible to deal with contingencies for a wide array of issues: inclement weather, illness for drivers, among others. Border delay time in totality (queue time for Primary plus unexpected issues requiring secondary review) have downstream economic consequences for shippers and logistics systems. This is potentially damaging for just-in-time production methods, or time-sensitive products such as perishable goods. The conclusions on reviewing risk impacts on the supply chain further indicate that: ƒ

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An increasing amount of cost is incurred for dealing with downstream costs such as changing transportation modes for guaranteed service delivery; and

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Some evidence of growing inventory of warehousing in the United States can accrue based on responding to the probability of delay.

The scenarios computed suggest that the risk potential for firms to respond to significant border delays have major consequential impacts for goods shipped: Scenario

Risk Criticality for Downstream Impacts

Potential Contingencies

A - Custom Furniture Manufacturer

Up to 2% value of product for late delivery

Few, given the customized nature of the product

B - Textiles/Clothing Manufacturer

Loss of sales while the product is stocked out with significant impacts given a 60% markup on products

While not just-in-time, there are limited contingencies due to the limited shelf-life of fashion products

C - Food Producer

Up to 80% loss of value of fresh meat product based on a 3-day delay

Few, given the high value placed on freshness of the product

D - Auto Parts Supplier

$13,000 per minute for stoppage of just-in-time manufacturing plant

A number of supply chain solutions, including air transport

The worst-case scenario from only several day’s worth of delay for raw meats constituted a loss of value of product by 80% -- with few options to mitigate the potential cost impacts. The risk for some sectors, such as manufacturing automobiles, of delays of $13,000 per minute have resulted in contingency plans being implemented to minimize the costs of delay on the manufacturing process. This is evident in just-in-time processes and the introduction of air shipments to mitigate potential losses due to truck delays. Other scenarios modeled in this study indicated less sensitivity to downstream impacts, but increased costs to implement contingencies to deal with potential border issues.

Last, there are some logistics methods that are more susceptible for cascading levels of delay.

Less-than-truckload shipments, for example, have a multiplication of potential issues given an average of 10 different shipments per truckload. This further amplifies the risk criticality of efficient borders for this sector of cross-border movements.

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Future Potential Studies The following are potential future studies that can be done to deepen our understanding of borderrelated issues and thus, most importantly, result in actual improvements in the border crossing process to increase efficiency, facilitation of known low-risk goods and people to protect Canadian and U.S. future economic vitality / quality of life.

1)

Current funds from the Research Fund on North American Borders, Security and Prosperity have provided for seven case studies focused on southbound traffic entering the U.S. to identify issues and to provide proposed solutions. The study has been a meaningful initiative that has generated critical insights. Performing this assignment has resulted in our awareness that related but separate issues, situations and conditions are present for Canadian importers and others at ports of entry into Canada. A companion northbound study should be undertaken.

2)

Investigate and develop a process that would allow basic data on vehicles and people entering Canada at the Canada/U.S. Land Border to be shared with the U.S. CBP as an exit reporting mechanism for the U.S. and, reciprocally, the like data shared with Canada on U.S. entrants would become the exit reporting for Canada. The implementation of this suggested system would preclude the need in the future to construct exit booths in either country that would also create gridlock and save millions of dollars in construction and addition of personnel.

3)

Develop the process for the operation of a Primary Inspection “Test Bed� pilot that would be co-managed by knowledgeable border and trade personnel with CBSA in Canada and with CBP in the U.S. Essentially it would involve a single commercial lane in each direction being designated at the same Port. The purpose would be to introduce and test ideas, processes, technology etc. intended to result in geometric improvements in facilitation and throughput of cargo without negatively impacting security protection. A preliminary step would be the use of a true test site similar to the CBP site in Glencoe, Georgia.

The essence is to meld the development jointly of knowledge and best ideas of the user and border agencies to become realities. It is a process of why we can instead of preconceived reasons why we cannot make major improvements.

4)

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Proposed studies 1-3 coupled with the findings of this current completed study would form the basis for developing the feasibility and benefits of Canada/U.S. cross- designation at our shared border and/or joint management of elements of the shared border.

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5)

Another study could be developed that is similar to the U.S. Commercial Aviation Partnership model. The comprehensive public-private econometric model can be used to evaluate the effects of policy, regulation or legislation changes to the border. If such a model were developed in a robust and credible manner, it may be used to advise policy makers and legislators as to the results of potential decisions.

6)

Complete end-to-end supply chain analyses (instead of focusing purely on the border) should be performed. While the original studies focused on four border crossings between British Columbia and Washington State, other border crossing points with high crossborder trade should be considered to replicate consistency of data collection and analyses.

January 2010

Prepared by InterVISTAS Consulting Inc. Airport Square – Suite 550 1200 West 73rd Avenue Vancouver, BC Canada V6P 6G5 Telephone: 604-717-1800 Facsimile: 604-717-1818 www.intervistas.com