Winter Issue
January 2005
Click here to view the PDF version.

THE OUTLOOK FOR 2005
Third Party Logistics in the year ahead

The third-party logistics (3PL) industry has enjoyed a year of strong growth that is expected to continue through 2005. The reality today is that almost every company doing business is dealing globally. In order to focus on their core competencies and to remain competitive, these businesses will continue to outsource their logistics functions, and to increase their spending in this area.

Another major shift has been in the level of service and integration that companies are now demanding from their logistics providers. Global competitiveness is the buzzword of the day, and as a result, management of the supply chain has become a key strategic issue for businesses. Companies are looking for partners who can not only supply a full range of logistics services, but who can also analyze and identify areas for process improvements. Supply chain strategy has become a high level function for businesses, and service providers are becoming increasingly involved in their customers’ logistics decisions. Competition is tough for today’s global trader, and they are relying on their logistics partners to offer solutions that streamline processes and have a direct impact on the bottom line.

Technology is also a critical element in supply chain management, and many believe that 2005 will be the year of RFID. In particular, companies dealing with Wal-Mart and the U.S. Department of Defense are moving forward into the RFID arena. Many have pilots underway, some in conjunction with their logistics providers. There is still some concern over issues such as standardization and the high cost of the technology, but there is overall agreement that RFID is a logistics technology that is here to stay.

Security continues to be a major concern for all parties involved in trade – shippers, logistics service providers and foreign and domestic governments. A critical area for discussion in 2005 and beyond will be the best methods to ensure security for both goods and people while still maintaining the ability to flow products quickly and efficiently around the world. Many customers are looking to their third party logistics providers for help in meeting regulatory demands and ensuring compliance with government security initiatives. This trend is likely to continue as security regulations across the globe become increasingly complex.

Capacity, integration of services, technology and security are all major themes in logistics today, but one must not discount the importance of people, who are essential in bringing all these factors together. As North American employers continue to face challenges finding qualified labor, the ability to recruit, train and retain skilled logistics professionals and general labor is critical to shippers, carriers and 3PLs alike.

Competition today is such that companies intending to succeed globally are focusing on their core businesses and looking to experts to help with their supply chain operations. Strategic partnerships, technology and collaborative supply chain planning are the trends that will provide savvy companies with a competitive advantage and lead them into the new year.

SUPPLY CHAIN SECURITY
2005 brings new challenges, especially with truckbound freight, but there is light at the end of the tunnel

For shippers trying to adjust to the reality of supply chain security, 2005 may just be the last year of sweeping change. By the end of the year, the major American and Canadian security initiatives will be in place. With the groundwork having been set over the past three years, future policy changes are likely to be evolutionary, not revolutionary.

The year ahead, cargo reporting: The major hurdle that shippers will need to overcome this year is advance notification. Canada’s Advance Commercial Information (ACI) for air cargo comes into effect on May 9, extending to rail and truck shipments later in the fall.

Truck cargo reporting promises to be the most significant development facing shippers this year. U.S. Advance Electronic Cargo Information (AECI) rules came into force at the end of 2004 and Customs and Border Protection (CBP) will ramp up enforcement throughout the year.

CBP requires cargo information to be received electronically through the Automated Broker Interface (ABI) at least one hour prior to arrival, or at least 30 minutes prior to arrival for Free And Secure Trade (FAST) shipments. The submission is typically done by the customs broker, most often using release data from the Pre-Arrival Processing System (PAPS).

CBP is making certain temporary exceptions for importers who are already using other specific clearance systems, notably Customs Automated Forms Entry System (CAFES) for in-bond processing and Border Release Advanced Screening and Selectivity (BRASS). Due to the “enhanced security features” inherent in these programs, Customs is accepting shipment details at the time of arrival. However, shippers using these systems would be well advised to review all the criteria needed to qualify before assuming they can be temporarily exempted from AECI.

Impact of truck AECI: As with advance notification for other modes of transport, all parties in the trucking supply chain need to be diligent in complying with AECI. Carriers, brokers and importers alike are subject to stiff monetary penalties of $5,000, climbing to $10,000 for subsequent infractions involving the same driver. CBP can also deny entry for non-compliant trucks and shipments.

Customs will phase in its penalty structure after a transition period aimed at building awareness of the rules. The compliance schedule is based on when a particular port of entry came on-line under AECI and on the clearance method used by the shipper.

One of the most important steps that shippers can take to ensure compliance is to verify their product database with their broker or service provider. This should include H.S. classification, origin information, packaging data and other data elements, to ensure timeliness, consistency and accuracy in all entries. To minimize supply chain delays, shippers may need to adjust their operations to ensure that shipment data is available (preferably through EDI or another electronic format) well before the stipulated time frame – or even earlier if required by their supply chain partners.

Carriers will need to allow a minimum of two to three hours for paperwork and/or border delays, in addition to the time frames prescribed by Customs. The trucking industry, already contending with last year’s Hours of Service rules, faces another challenge that effectively shortens delivery coverage even further, as AECI-influenced delays cut into a driver’s allowable hours of service. An increase in the cost structure associated with trucking may be inevitable.

Refining other initiatives: 2005’s implementation of AECI and ACI will cap a lengthy list of supply chain security programs introduced in North America over the past few years. Although there are no more major policy initiatives on the horizon, shippers can expect stronger enforcement, ongoing refinements and possibly new processes to existing programs over the course of 2005 and beyond.

CBP, for example, is looking at making certain security standards mandatory under its Customs-Trade Partnership Against Terrorism (C-TPAT) program. Until now, its model has been based on voluntary compliance with security guidelines.

In Canada, Customs is reportedly reviewing changes to the FAST program that will make it feasible for a much larger segment of the industry, by removing the requirement that importers be approved under Customs Self Assessment (CSA). Participation in CSA, a streamlined accounting and customs release system, has been limited to a handful of multinationals who have dedicated the necessary resources to adjust their information and financial systems to CSA standards.

With AECI and ACI becoming fully operational in 2005, shippers may not breathe a sigh of relief just yet. But at least they can see the light at the end of the tunnel.

DATES TO WATCH

First Quarter, 2005

PierPass “Traffic Mitigation Fees” to be implemented at Southern California ports. These fees will be collected on containers moved during peak hours, in order to address delays caused by the increasing volume of transpacific traffic.

January
1st	Textile quotas abolished under WTO rules. Retail giant Wal-Mart begins requiring RFID on shipments from its top 100 vendors. Council of Logistics Management adopts new name: Council of Supply Chain Management Professionals.
14th	Truck AECI, already introduced at 40 ports in November 2004 (phase 1) and 43 ports in December 2004 (phase 2), comes into effect on a transitional basis in the third and final group of 16 ports in Montana, Idaho and Alaska.
31st	AECI transition period ends at the first group of 40 ports and U.S. advance notification for truck cargo becomes fully enforced (i.e. through montary penalties and denial of entry).
February
28th	Transitional period ends and U.S. AECI for truck cargo becomes fully enforced at the second group of 43 ports.
March
30th	Transitional period ends and AECI for truck cargo becomes fully enforced at the third and final group of 16 ports.
April
	Pilot of the Automated Commercial Environment (ACE) truck manifest system expected to be in place in seven ports of entry. ACE is CBP’s next generation import system, which when fully in place, is expected to modernize and streamline American border processes significantly. Partnering with the U.S. Container Security Initiative, Canada commits to deploying customs officials at a foreign marine port.
1st	CBP to issue interim report on “smart” container sensor and tracing, reflecting a push by Customs to use new technologies to strengthen supply chain security.
May
9th	Canada’s ACI begins for air cargo.
June
	FDA/CBP to announce final rule following its review of current prior notice processes. World Customs Organization to receive high-level strategic report on trade facilitation and security. This is part of the WCO’s efforts to promote efficiency and standardization of international customs systems and processes.
October
	Canada’s ACI begins for rail and truck cargo.
December
13th	Sixth Ministerial Conference, the topmost decision-making body of the World Trade Organization, begins in Hong Kong.

RFID:THE NEW FRONTIER OF LOGISTICS
This is the year many manufacturers throw their hat in the RFID ring

Radio frequency identification (RFID) takes a great leap forward this year, propelled by Wal-Mart’s mandate to its top 100 suppliers to begin using the technology by January 1. The U.S. Department of Defense is a second high profile organization that will venture heavily into RFID this year. These developments, according to observers, will give RFID the critical mass it needs to make it a mainstream technology in just a few short years.

RFID basics: A RFID system consists essentially of two parts: a tag that is affixed to a product and a controller. Each tag transmits a radio signal consisting of a unique product identification code, which is read by the controller. The controller collects the signals from all tags within range – anywhere from a few inches to a couple hundred feet depending on the radio frequency used – and feeds the data into the inventory or shipping system.

Whereas bar code systems need a line of sight for reading and can only scan one bar code at a time, RFID can read all tags in range simultaneously. In theory, a shopping cart full of groceries could be checked out without the customer or the cashier having to touch a single product.

Efficiencies begin in the warehouse: This grocery example is where major retailers would eventually like to go with RFID. But there are some major stumbling blocks that must be overcome first. The cost of an RFID tag will have to drop tenfold, to only a few cents each, to be financially viable. Second, retailers will have to address the privacy concerns of the vast majority of consumers, an issue that is attracting the interest of legislators around the world. The idea of wearing identifiable clothes or having a household full of identifiable items does not sit well with the general public.

So the initial advances through RFID will probably not be seen in the grocery aisle, but rather on the warehouse floor. Tags are already cost-effective when used to label a case or pallet, and privacy issues are non-existent because the tags never reach the store shelf. Wal-Mart’s recent foray into RFID only involves tags on cases or pallets.

When it becomes feasible, however, to tag individual items, the opportunities for efficiencies are huge in the warehouse. A reader located at the receiving dock can scan an entire truckload of product as it is unloaded, eliminating the need for counting and scanning individual bar codes – a labor intensive process that can involve breaking pallets down and placing each item on a conveyor for scanning.

Data on all received items can be fed directly into the Warehouse Management System (WMS), and any shortages can be reported immediately to the supplier.

RFID readers located in warehouse slot locations and on a forklift can also ensure that the product is placed in the right spot, feeding the WMS with real-time data needed to optimize space usage. All without the driver having to scan a single SKU, leading to considerable time and labor savings.

Similarly, fulfillment can be improved when the RFID reader and WMS work in tandem, alerting of any errors in picking or shipping. Furthermore, given the importance of supply chain security today, readers at employee entrances and parking lots can help a company deter inventory leakage.

Full implementation of RFID will require considerable investment in technology so that data is tracked, processed and acted upon as an integrated part of the overall supply chain. Very few manufacturers and their 3PLs are currently at that stage, but with Wal-Mart’s mandate, it is an opportune time for many to get the RFID ball rolling.

NEWS BRIEFS

Appointments Enhance PBB’s Logistics Strategy

Mike Scott, President & CEO of PBB Global Logistics, has announced the appointment of four chief officers along with three divisional president positions. The move – in direct response to PBB’s recent growth and its strategic expansion plans – strengthens the company’s executive management team and establishes three primary interrelated operational business units: International Logistics, North American Transportation and Customs & Trade Services.

“We are very excited to solidify and strengthen our senior management group to complement the recent growth of our international third-party supply chain services,” said Mr. Scott.

Five of the seven appointments involve PBB veterans recently serving as vice-presidents: Ken Chalmers (Chief Operating Officer), John Ferguson (Chief Marketing Officer), Guy D’Addario (Chief Information Officer), Gary Vince (President, International Logistics) and Mark Lidkea (President, Customs & Trade Services).

Newly appointed to PBB’s executive team are former PBB board trustee Ian Bradley (Chief Financial Officer) and Doug Payne (President, North American Transportation), who served as President of Clarke Logistics prior to its acquisition last year by PBB.

“Collectively, the group possesses considerable expertise, knowledge and experience in the logistics industry,” said Scott. “Their commitment and proven success will strengthen PBB’s ability to meet future opportunities and challenges head on.”

PBB Opens State-of-the-Art Toronto DC

In response to the growing demand for its integrated logistics services in the Greater Toronto Area, PBB Global Logistics has opened a 200,000 sq. ft., 17-dock state-of-the-art distribution center (DC) in Mississauga, Ontario.

The new DC will provide inventory management, fulfillment and final distribution, along with specialized services such as picking and packing, crossdocking and returns management.

It is powered by a leading-edge Warehouse Management System (WMS) and radio frequency technology. These systems combine to ensure inventory accuracy, shipment visibility and customer service.

In addition to Warehousing & Distribution, PBB will deliver other supply chain services from the facility, including North American Transportation, Customs Brokerage and International Freight Forwarding. It consolidates PBB’s Orlando Drive and Bath Road locations, as well as Clarke Logistics’ Etobicoke center.

The new address for the distribution center is: 150 Courtneypark Drive West, Unit C, Mississauga, ON, L5W 1Y6. PBB’s existing Orlando Drive and Bath Road telephone and fax numbers remain operational, while the telephone number to contact Clarke Logistics has been changed to (905) 564-4550.

MISSION COMPLETE!
Q&A with CME’s Perrin Beatty

The Honourable Perrin Beatty, President & CEO of Canadian Manufacturers & Exporters (CME), led the 2004 China CME/PBB Trade and Technology Mission last fall. We recently asked Mr. Beatty to share his insight from this 15-day experience.

Q: You visited China in an official capacity as a senior Cabinet Minister in 1993. In what ways has China changed since that time?

A: Today’s China is truly unrecognizable from just a decade ago. When we flew into Beijing last fall, we counted at least 50 cranes around the airport, evidence of the tremendous expansion and infrastructure investments taking place.

What also stood out for me was the great diversity of Chinese business. We visited five cities and each had considerable breadth in their industrial base. What this means for North American manufacturers is that regardless of what sector you are in, it is critical to have a “China strategy.” No manufacturer is immune from the emergence of China on the global trade scene.

Perrin Beatty (right) and PBB's Josephine Boyle (center) tour a Chinese computer manufacturing facility.

Q: CME has been emphasizing the importance of this “China strategy.” What advice do you typically give your members to help them adapt to China’s role in today’s global economy?

A: We cannot emphasize enough the importance of a China strategy. China’s impact on global trade cannot be ignored. After all, we are talking about an economy that will have the world’s largest GDP in our lifetime.

There is no single one-size-fits-all solution. North American manufacturers can look to China as a supplier, a customer, a joint venture partner or a competitor. What’s important is that they begin thinking about and acting upon their strategy very soon, because the pace of change and economic development in China will continue to impact us significantly.

In developing a strategy, it is important to draw upon the expertise and knowledge of people with first-hand experience in China, whether it’s through government resources, industry associations such as ours or private-sector services such as PBB’s Access China program.

Q: How does the CME/PBB mission compare with those led by the government or one of its agencies?

A: CME and PBB’s privately-led approach is very focused on doing business. I would say that ceremony is less prominent than in government missions and we place an emphasis on achieving the specific business goals of our delegates. Some ceremony is necessary because of its importance in Chinese business culture, but with a much less significant political component involved, the mission can really focus on assisting delegates by bringing the right people to their table.

We were able to facilitate one-on-one meetings with potential business partners, visit manufacturing plants and attend two major trade fairs. The Canton Fair in Guangzhou stands out for its sheer scale. It was held in the second largest exhibition complex in the world, and I understand that about 20 percent of China’s exports can be linked back to this annual event.

Q: We hear there are at least two potential joint ventures in the works stemming from the recent mission, and business deals in the range of $8 to $10 million. But how did the delegates view the mission during the event itself?

A: Well before any contracts were being negotiated, they seemed uniformly impressed by the mission and felt that it was time well spent developing their businesses. A lot of credit has to go to Josephine Boyle, who co-led the mission and served as PBB’s official representative. It was quite evident that Chinese officials held PBB in high regard, giving them considerable influence in coordinating the mission events and business meetings.

The hands-on approach was particularly valuable, because it reinforced some of the basic tenets of Chinese business culture. Chinese companies are anxious to do business with North American firms, but it takes a warming up period before any deals are signed.

The mission helps make the introductions, but follow-up is critical to nurturing the business relationships that translate into deals. All three previous missions that CME and PBB have been involved in have led to lasting relationships between mission participants and Chinese businesses, and I also anticipate some very positive results from our latest endeavor.

LOGISTICS IN ASIA PACIFIC

China is today’s hot topic in international supply chain management, but businesses should not underestimate the impact of the Asia Pacific area as a whole. Of the world’s 20 busiest ocean ports, 15 are in Asia, of which eight are outside China. To keep up with China and meet global demand, Taiwan, South Korea, Singapore, and the “tiger” economies of Southeast Asia are investing significant resources to upgrade their logistics infrastructure.

The countries of Asia Pacific are at different stages of development in logistics. Japan is highly evolved, although costs are fairly high because of labor pressures and union penetration. Singapore, Taiwan and South Korea have also been important manufacturing centers for many years and are served by well-developed logistics networks, although their road systems are increasingly experiencing congestion.

The younger tigers, Thailand, Malaysia and Vietnam, share many characteristics with China: modern port facilities and ambitious infrastructure plans, yet relatively undeveloped inland transportation. One serious shortcoming is that containers tend to be used only during the ocean segment of the supply chain, rather than at the point of production. This requires goods to be unloaded and reloaded at port facilities, an inefficient process that is prone to damage and pilferage.

In China, sometimes two-thirds of the cost of transpacific transportation can be incurred inland, before the goods even set sail. As a result, the proportional logistics costs that are associated with manufacturing can be twice as high as in North America.

Improving land access to port facilities clearly represents the greatest logistics challenge to the emerging economies of Asia Pacific. Another key area for improvement is on the regulatory side. Despite the advances made by many countries in recent years, logistics and customs processes remain highly regulated. There are often many levels of bureaucracy, complex documentation requirements and outdated clearance systems to overcome.

The region’s emergence as the world’s manufacturing center has been impressive. As Asia Pacific improves its logistics capabilities and procedures – by no means a simple task – it will reinforce its competitive advantages and set the course for global trade over the next half century.