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A SECOND GOLDEN AGE OF RAILROAD?
Intermodal rail transportation makes headway against line haul trucking

Rail is not just for coal and grain anymore. Various manufacturers are developing a new appreciation of intermodal rail transportation as an integral component of their North American supply chain. Intermodal rail traffic has more than tripled in just over 20 years. Along with the growth of north-south trade in the North American economy, intermodal rail shipments between the U.S. and Canada have been steadily increasing by an average 6 percent per year since the late 1990s.

Intermodal rail typically combines rail transportation for long-haul shipping, with trucking between rail terminals and the local points of origin and destination. “For many shippers, it’s the best of both worlds,” says Doug Payne, President of Clarke Logistics, a transportation management provider specializing in intermodal rail freight, soon to be acquired by PBB. “When moving goods
over long distances, it provides the cost efficiencies of rail with
the flexibility of trucking.”

There is no shortage of reasons behind the recent surge in intermodal rail traffic and it is unlikely the trend will slow down anytime soon.

Railroad infrastructure investments: Railroads have spent tens of billions of dollars on intermodal-related investments, including terminal improvements, new freight cars and locomotives dedicated to intermodal service. Clearances on many bridges have been raised to accommodate double stacking of containers along key routes. Track capacity and advanced signaling systems have also improved service standards significantly, shedding rail’s old image of being slow and unreliable, perceived by some as recently as a decade ago.

It’s tough on the road: Truck carriers are facing significant burdens in the form of higher fuel costs, increased insurance premiums and driver shortages. New Hours of Service road safety regulations that mandate stricter driver work and rest schedules contribute to driver shortages and ultimately reduced productivity. All these factors combine to increase freight costs and are most pronounced when shipping over long distances – further accentuating the cost effectiveness of rail.

Growing highway congestion: As commuters in any of North America’s major centers will attest, our highways are simply getting busier and busier. Transborder shippers are also experiencing significant congestion at key border points. Regrettably, much-needed border infrastructure improvements are riddled by delays and are quickly being outpaced by growing truck volumes. As growing congestion threatens the timely delivery of truck-bound shipments, one of trucking’s main advantages over rail dwindles.

While the dominant position of the truck in North America’s domestic transportation system is more than secure, look to shippers to explore – and perhaps rely upon – supply chain alternatives that involve intermodal rail. For a lot of cargo that is not time sensitive, is not perishable and needs to be shipped over hundreds of miles, it makes sense.

PBB TO ACQUIRE CLARKE LOGISTICS

PBB recently entered into an agreement with Clarke Inc. to purchase its Clarke Logistics division, one of the largest transportation providers in the North American transborder intermodal market. The company manages the movement of its customers’ goods through a combination of rail, truck and intermodal services.

Clarke Logistics handles transportation needs between and within Canada, the United States and Mexico, through its established relationships with all of North America’s major railroads and with over 650 trucking companies.

Clarke Logistics will bring approximately 130 employees operating from 12 locations across North America, including presence in the Western U.S., Texas and major operations in Memphis and Philadelphia, two important U.S. logistics hubs. In addition, it has two offices in Mexico. Among its 2,300 clients are some of North America’s leading multinationals in the food, beverage and consumer goods industry.

In addition to expanding PBB’s continent-wide network of offices, the acquisition will bolster the company’s North American Transportation capabilities, adding cost-effective rail transportation to its existing integrated logistics solutions. With international and domestic freight expertise in air, ocean, highway and now rail, PBB’s customers can benefit from transportation management services that are highly flexible and cost-effective.

CANADA LAUNCHES ADVANCED COMMERCIAL INFORMATION

In April 2004, the Canada Border Services Agency (CBSA) began requiring advance shipment data for ocean cargo 24 hours prior to loading at the foreign port of origin, excluding U.S. ports. With the first of three planned phases of Advance Commercial Information (ACI) now underway, Canadian importers are beginning to deal with many of the same supply chain issues that their American counterparts have been facing since the U.S. 24-hour rule first came into force in 2002.

Similarities between ACI and AECI: Like the U.S. Advance Electronic Cargo Information program, Canada’s ACI will eventually cover all modes of transportation: air and rail in Phase 2 of the program (Spring 2005) and highway in Phase 3 (Spring 2006). Initially, CBSA will even use the same targeting system developed by customs in the U.S. However, there are some subtle differences. Canada’s timeframes for prior notification (see Table 1) are slightly different than the American rules and different required data elements are envisioned. Furthermore, unlike the U.S. regulations, advance notice of exported shipments is not required under Canada’s ACI.

Although the details differ slightly, the same general advice applies to shippers preparing for the new regulatory environment. Manufacturers need to review their operations to ensure that shipment data is available to transmit within the prescribed time frame. Inventory and production processes may even need to be adapted. Furthermore, carriers, customs brokers and other supply chain partners should be consulted to ensure their systems and procedures are compliant.

CSA/FAST vs. ACI: Where Canada differs significantly from the U.S. is its alternative processing stream. Under current policy direction, importers who are enrolled in CBSA’s Customs Self-Assessment (CSA) program would be exempted from ACI rules. There are no such exemptions under the American advance notification regulations. CSA importers are eligible for the Free And Secure Trade (FAST) program, designed to move shipments through customs more quickly, with fewer delays and examinations at the border.

But before shippers formally apply for CSA/FAST just to avoid advance notification, they should consider the costs and responsibilities involved. CSA requires considerable investment in accounting and business systems in order to satisfy CBSA’s post-importation reporting demands. CSA requires thorough internal integration across business functions and, inevitably, boardroom-level buy-in. As of March 2004, only 150 importers have determined it worthwhile to apply for CSA status – and less than a dozen of those have been accepted.

Release at first point of arrival: A second major difference between the U.S. and Canadian programs is the provision for release at first point of arrival, envisioned as part of Phase 3 of ACI.

In the first two phases of ACI, Customs requires advance electronic information only for admissibility purposes, that is to determine whether the goods are allowed to physically enter the country, having been screened for contraband, health and safety or terrorist threats.

Customs release (where the goods have been presented to customs with proper documentation and all duty and taxes have been paid), however, is effected independently through existing programs such as PARS or FIRST.

So in Phase 3, when ACI data will be used for determination of both admissibility and customs release at the first point of arrival, shippers may face major new challenges. Will bonded warehouses be available under the new system? Will congestion at border points increase without the option to move and/or inspect uncleared goods at an inland location?

These are just some of the many questions that are unanswered in the early stages of ACI. Over the next few months, the CBSA will be consulting with industry stakeholders as it further develops its Phase 3 policy.

In the meantime, even though full implementation is still two years away, knowledge of the upcoming rules is always the best asset in helping shippers prepare for the future. By the time ACI is in full effect, the everyday cross-border procedures that thousands of shippers have been accustomed to will be radically different. PARS and FIRST will be phased out, and CBSA will operate exclusively in an electronic environment. The sooner that the trading community is prepared for tomorrow’s customs reality, the fewer obstacles it will encounter.

TRADE COMPLIANCE SEMINARS TO SIMPLIFY CUSTOMS

Doing business across borders is growing in complexity, and importers and exporters alike face increased risks. Heightened security and tougher trade compliance requirements threaten to delay shipments and increase overall supply chain costs. To help shippers make sense of – and prepare for – new and upcoming Canadian customs regulations, PBB will be conducting a series of seminars in the fall.

PBB’s trade and regulatory experts will address a number of topics including:
• Customs Self-Assessment (CSA)
• Free And Secure Trade (FAST)
• Administrative Monetary Penalty System (AMPS)
• Advance Commercial Information (ACI)

All introduced within the past five years, all of these programs have been reformulated since their original conception, primarily to address today’s post-9/11 supply chain security environment. PBB’s seminar series will provide up-to-date information on the latest policies and customs procedures, as well as tips and advice critical to cross-border shippers.

Dates and locations will be announced in the near future. Visit www.pbb.com/seminars/ for further details or call 1-866-820-0340.

FIVE-LINE MANDATORY HS RULE IN PLACE

On May 3, 2004, Canada Border Service Agency (CBSA) began requiring 10-digit HS classification on at least five lines of all multi-line electronic and paper releases. Until now, only one line needed a full 10-digit HS.

CBSA is clearly pushing forward towards full HS reporting, a major component of Advance Commercial Information (ACI). CBSA estimates that the five line HS code requirement will address 93 percent of all release transactions. It applies to all RMD and PARS transactions that are over $1,600 CAD in total value. Approved CSA/FAST importers are exempt from the mandatory HS requirement.

How do you determine which five items need full HS codes? The key is to ensure that the highest value invoice line of the shipment includes a 10-digit code. Beyond that there are no other criteria for the other four codes reported, as long as all five HS codes are unique.

Businesses should be proactive in updating their tariff databases and developing the capacity to transmit customs information electronically. These early steps will be of considerable value in preparing for comprehensive, mandatory HS reporting down the road.

TECHNOLOGY DRIVES LOGISTICS OPTIMIZATION

As supply chain technology becomes increasingly sophisticated, it is leading the charge toward lower costs and better turnaround for the end consumer. Just a few years ago technology brought about major advances on the reporting side of supply chain management: shipment visibility, inventory control and even e-procurement. Today, technology is going further: it is now doing a lot of the actual thinking that goes behind various logistics functions.

“Optimization” software works with complex statistical algorithms to find the ideal solution for any given task. From high-level decisions about the best place to locate manufacturing plants and distribution centers, to daily operational tasks such as the most efficient way to route a truck to and from numerous points, there are optimization solutions available for many different logistics challenges.

Transportation planning: At the operational level, one successful strategy uses technology to optimize in-house and outsourced transportation assets dedicated to any given shipping requirement.

The optimization system used at many of PBB’s distribution centers illustrates how the process can work. An order comes in, typically electronically (EDI or the web), and is fed into the warehouse management system (WMS). While the order is being picked and packed, the shipment and delivery information is processed by an optimization module integrated with the WMS.

The system looks at all available options for shipping the order, comparing its delivery requirements to the schedules of multiple courier companies and common carriers. It also compares rates and other key variables including shipper preferences, in order to determine the best choice of transportation.

The result is the lowest cost solution for the required turnaround time. By computing the ideal carrier for each individual order, overall transportation savings of 5 to 15 percent can be achieved, while maintaining and even improving service standards.

Route planning: Many courier service providers and large common carriers have invested in optimization systems that focus on route planning. The concept is simple, but the solution can be very complex. If a truck has 20 deliveries to complete, what is its optimal route? And to complicate the matter further, what is the ideal solution factoring in constraints on truck capacity, traffic expectations and time demands?

Human intuition has generally worked well in the past, but technology makes route planning a true science, by analyzing all the possible combinations and outputting the best solution. Today’s computer processing power makes this possible. The scenario above involves around 2.4 quintillion possible outcomes (that’s 18 zeros) – although pre-programmed algorithms in most optimization systems would narrow this down considerably before analyzing each theoretical route.

Logistics optimization and today’s shipper: Logistics optimization systems are on the leading-edge of supply chain management technology today. Unfortunately, it is essentially out of reach for many companies other than large multinationals with considerable in-house supply chain resources.

Nevertheless, small and mid-size shippers can benefit from optimization by partnering with Third Party Logistics (3PL) providers that have invested in optimization technology. Improved customer service and cost efficient transportation are among the direct and indirect advantages that can be realized. So when sourcing potential new 3PL partners, make sure to investigate their capabilities with optimization technology – ultimately it could improve the performance of your supply chain.

TECHNOLOGY PROMINENT IN TRADE MISSION TO CHINA

PBB and Canadian Manufacturers & Exporters (CME) have finalized the schedule for their upcoming 2004 China Trade & Technology Mission. The mission will take place between October 24 and November 9, with key stops in Hong Kong, Guangzhou, Chengdu, Nanning, Shanghai and Beijing.

Throughout the mission, participants will meet key industry contacts and high-level government officials in key centers, building the personal and professional relationships that are critical to succeeding in China.

Compared to the three earlier trade missions organized by PBB, the 2004 delegation has a very strong technology component. CME’s popular “behind the scenes” Innovation Insights program figures prominently in the schedule, providing the opportunity to witness the advanced processes of leading Chinese manufacturers, innovative techniques and the application of best practices in an international setting.

The itinerary is also designed to incorporate two preeminent business events, the Canton Fair in Guangzhou (China’s largest trade fair) and the 10+1 China-Asean Expo in Nanning (Asia’s most important trade and investment show).

Additional details on the CME/PBB 2004 China Trade & Technology Mission can be found at www.pbb.com/china/mission2004/ or by calling 1-800-268-9684 ext. 249.

NEWS BRIEFS

Thanks to all our readers!
In the last issue of Solutions, we asked readers for their suggestions and advice to help us revamp the publication. As you can see, we have gone to a colorful, easy-to-read tabloid format, covering a wide range of topics from trade regulations to supply chain technology. We look forward to your feedback on our new look!

George Lutz of Global Source Solutions was the winner of a random draw for a RIM Blackberry® wireless handheld, courtesy of Vega Wireless (Blackberry Sales and Service: 1-877-708-9600 or josh.finlay@vegawireless.ca).

Best Buy names PBB as “Outstanding Vendor”
PBB Global Logistics was recently named "2003 Display Management Outstanding Vendor of the Year," by Best Buy Canada Ltd.

PBB was commended for its 98% shipment accuracy and exceeding delivery expectations by 1.5 days in its handling of 8,000 shipments for Best Buy each year. PBB’s management reporting, measuring key performance indicators, was a critical factor in managing a surge of 19 store openings in 2003.

PBB currently supports over 100 existing Best Buy/Future Shop stores and provides complete end-to-end logistics services and supply chain management for Best Buy Canada’s Display Management and Field Services division.

Q&A WITH CME’S JAYSON MYERS
Managing the exchange rate seesaw

The volume of bilateral trade between Canada and the United States is the largest of any two countries in the world. Yet unlike economies in Europe (which often trade between each other in a single currency, the Euro) and in China (which pegs its currency to the U.S. dollar to match its largest trading partner), Canadian and American exporters who sell across the 49th parallel must consistently factor currency fluctuations into their business operations.

The last 18 months have seen the Canadian dollar go from a near all-time low of 63 cents, up towards the 80 cent range, then back down to more modest midrange value in the low 70s. We asked Jayson Myers, Senior Vice President & Chief Economist of Canadian Manufacturers & Exporters (CME), to answer some questions about the impact of such volatility on businesses that trade between Canada and the U.S.

Q: At the height of the Canadian dollar’s recent wave, what was the impact of currency appreciation on Canadian and U.S. businesses?

A: During that period, overall manufacturing shipments remained reasonably stable, although below their peak in 2000. That suggests that Canadian manufacturers were reluctant to compromise U.S. market share by raising prices quoted to American customers in USD. So Canadian export profit margins generally bore the brunt of the currency appreciation. To put this in perspective, they’ve effectively been subjected to a 23 percent price cut at the height of the dollar’s climb.

Obviously U.S. exporters were in a more enviable situation, well positioned to capture Canadian market share from domestic competitors.

Q: Are Canadian manufacturers off the hook now that the CAD is in more familiar territory?

A: Yes and no. Had the loonie remained in the 80 cent range for an extended period, it would have become increasingly difficult for Canadian manufacturers to absorb the effective price cut any longer. Now that it’s closer to 70 cents, companies might postpone restructuring efforts aimed at achieving higher levels of productivity, which is the only way to deal with a long-term rise in the currency.

But they are still on the hook because even in the low 70s, the Canadian dollar is 10 cents higher than its low a couple years ago. Furthermore, competition from China, India, Mexico and other low-cost production economies is putting downward pressure on prices, aggravating the impact of any potential currency appreciation in the future.

Q: What tips can you share with North American manufacturers to help them cope with future exchange rate fluctuations?

A: Both American and Canadian traders can smooth the impact of short-term fluctuations through currency hedging and other financial derivatives, which are sophisticated services offered by banks and various finance companies. These can be complex and time consuming, but are suitable as long as they are done right and don’t take away from long-term solutions aimed at boosting productivity. Operational efficiencies and product/service innovation can be critical in cushioning against short-term swings in North America’s currencies, but more importantly they will help against the long-term threat of global competition.

THE IMPACT OF EXCHANGE ON SUPPLY CHAINS

The effect of fluctuating exchange rates on a company’s supply chain can have a significant impact on overall production costs. Consequently, logistics is yet another thing to consider when doing cross-border business.

Transportation costs: Shippers should keep in mind that different transborder carriers can have cost structures with different proportions of U.S. and Canadian-denominated expenses. Costs incurred for driver wages, insurance, maintenance and fuel may tend to be weighted towards one currency, whereas rates may be charged in the other currency.

During the recent surge of the Canadian dollar, transborder carriers billing in USD saw their margins squeezed when forced to pay expenses in CAD. Already facing pressures with soaring fuel costs, insurance premiums, driver shortages and new U.S. Hours of Service regulations, carriers have responded in a number of different ways. These include trying to switch rates to CAD instead of USD, implementing exchange rate surcharges or even turning to domestic business at the expense of transborder freight. None of these are particularly welcome developments for the average cross-border shipper.

Inventory and warehousing: When the Canadian dollar was near its low early in 2002, there was a strong argument for relocating major regional distribution centers to Canada: Vancouver rather than Seattle, or Toronto rather than Buffalo/Detroit. As the Canadian dollar began driving upwards, close to the 80 cent level (and with some experts foreseeing a further rise to 90 cents), American-based distribution centers looked more and more appealing for servicing markets in the Northern U.S. and Canada.

That was then and this is now. With the Canadian dollar back down in more familiar territory, relocating a major warehousing facility does not make sense based solely on exchange rate criteria. In the end, it would take long-term exchange rate stability to justify a decision of this magnitude.

Sourcing in new markets: For many North American companies, the lower U.S. dollar makes sourcing overseas more attractive, particularly from China. China is unique in that it is the only major economy with a fixed currency, pegged at just over 8.25 Yuan to each U.S. dollar.

As a result, Canadian businesses can get more bang for their loonie when sourcing or investing in China. At the same time, transpacific logistics costs are more affordable, since they are typically incurred in USD. For American companies who import, China also looms large, since they can effectively source in relatively-lower USD, rather than from countries whose cost structures were affected by the appreciation of their local currency.

There are many reasons why North American companies should investigate sourcing from China (visit www.pbb.com/china/ to learn more). The recent depreciation of the U.S. dollar only strengthens the case.