Positioning your cross – border Supply Chain to meet the economic challenges in 2009

1. Positioning your cross – border Supply Chain to meet the economic challenges in 2009 Bob Armstrong C.I.T.P, P.Log President SCL Canada Global Supply Chain Management Conference Plattsburg, New York May 19, 2009

2. Discussion Framework • About SCL • Background Industry Statistics • Supply Chain Volatility • Strategies to Protect cross – border supply chains during economic downturn • Questions you should be asking

3. Background “Canadian companies’ involvement in global supply chains appears still to be limited” Conference Board of Canada, March 2007 • Catalyzing the “integrated” supply chain in Canada • Building more resilient Canadian companies • Integrating Canadian companies in global supply chains • EDC Canadian SC research • SCM is generally tactical • Key business process gaps exist • Underinvestment in technology • Need for coordinated cross response and engagement

4. Linking Supply Chain Performance to Share Price • As the chart below shows, companies announcing supply chain disruptions had stock prices that significantly lagged their peers over a three-year period (one year before the announcement, through years afterward). Source: Supply Chain Digest: Impact of Supply, 2007

5. The Perfect and Continuing Storm U.S. Logistics Industry : Overall logistics costs on the rise! • 10.1% of GDP spent in 2007 on logistics ($1.39 trillion) Source: 19th State of the Logistics Union June, 2008

6. The Perfect and Continuing Storm From 2006 to 2007 Supply Chain Impacts • Total U.S. logistics costs rose 7% last year despite a slowing economy • Of that 7%, total transportation expenses rose 6% • 9% increase in total inventory carrying costs, which included warehousing costs • 9.9% increase in total warehousing operations Source: 19th Annual State of Logistics Report June 2008

7. The Perfect and Continuing Storm Average Monthly Canadian Fuel PricesJan. ‘03 – Dec. ‘08

8. There is a wide range of costs variability within sectors of the economy • Compared to the US total SCM and logistics costs are: • +12% (Canadian manufacturers) • +18 % (Canadian wholesalers) • +30% (Canadian retailers) • Possible factors: • Inventory management practices (+20% ICC) • Service outsourcing • Size of firms • Highly qualified personnel • Regulations (cabotage…) Source: SOL Report 2008

9. The US outsourced 50% more of its logistics activities than Canada • Possible factors: • Mandates • Innovation • Value added services • Regulation • HQP • Culture / business model • Size of firm Source: SOL Report 2008

10. Supply chain collaboration is more important than costs in terms of innovation drivers • Users (Canadian manufacturers, wholesalers, and retailers) are prioritising better co-ordination with suppliers and/or customers over lower costs • The users perceive more benefits from these practices both in terms of costs and co-ordination than do logistics service providers Source: SOL Report 2008

11. 60% increase in investment in new distribution innovation and facilities in Canada from 2001-2007 • Complexity of inventory management with supply chain partners around the globe • Strategic investments in advanced deconsolidation facilities and innovation

12. Not all manufacturing sub sectors are embracing the Just-In-Time and mass customisation road • Many sub-sectors reduced their inbound inventory turns due to an increase of inputs from low cost country sourcing • Globally, the Canadian manufacturing sector was innovative in finding ways to maintain its inventory turns while increasing its GVC footprint

13. 47% GDP growth for the Canadian logistics service industry since 1998 • Growth particularly marked in: • Truck transportation • Increased use of JIT by Canadian firms • Value added 4-5PL sectors • More than $10 billion to the Canadian economy • Return on Equity is directly linked to the value added and complexity of the logistics service provided: • Trucking (5%) • 3PL (12%) • 4-5PL (20%)

14. GDP for logistics service providers is expected to increase by an additional 40% between 2007 and 2015 • 3PL and couriers are expected to integrate 4-5PL value added activities • The increase demand for supply chain agility maintain the leading position of trucking

15. Annual demand for employees in logistics and SCM is estimated at 86,330 employees (12.3%) over the next five years • Logistics and SCM activity requires HQP (20%) and quality operational (80%) workforce to stimulate economic growth • In 2007 Canada counted 590,000 logisticians and more than 239,000 truck drivers in total in 2007 • Quebec and Ontario count for 60% of the total Canadian logistics workforce

16. Supply Chain Strategy Alignment Survey: CSC

17. 2009 Realities affecting the Canadian Supply Chain Volatility is rampant! • Fuel and Commodity Pricing • Carrier Capacity • Consumer Demand • Currency • Supplier Stability • Offshoring…………………Near shoring?

18. Strategies to Protect Supply Chains from Economic Downturns Strategy One: Ensure you have truly leveraged the marketplace for logistics savings to meet service requirements Our research indicates that many companies (in good times and bad) have not gone through the process of collecting the required data, understanding their business requirements and innovatively streamlining their logistics and transportation processes.

19. “Buyer Beware”The Logistics Services Industry • Internal technical knowledge has been farmed out to service companies (transportation / 3PL) • Many companies lacking the internal expertise, systems, information and …… time to properly understand cost savings opportunities

20. Strategies to Protect Supply Chains from Economic Downturns Strategy Two: Evaluating your distribution competency: Difficult times have many C-level executives seeking ways to offset infrastructure and fixed commitments. The “O” word (Outsourcing) question invariably comes up at these times. Each business needs to be very clear where its core competencies lie and where it can leverage those capabilities through a partnership with the right Third Party provider. This process, by the way, may not lead to a “lower cost line” per se, but can offset assets and risk, which is very desirable during a downturn.

21. Outsourcing Risks Start – up cost Service for profit attitude Selection process / cost Information system interfacing Non-performance Cost creepers Legal expenses Limited intervention Insourcing Risks Facility size constraints (may be carrying excess space or insufficient space) Capital outlay and cost commitments People (unionization) Training (learning curve) Performance proficiency linked to internal processes and systems Management Team focus Project management (scale & scope) Develop redundant processes / systems Loss flexibility (can’t share resources across facilities or other task) Outsourcing vs. Insourcing: Risks

22. Outsourcing Benefits Quick entry and exit to markets Mitigates risk Short term commitments Access to established management & staffing personnel Minimal capital investment ‘Pay as you play’ space / labor Provides access to advance distribution systems May bring transportation savings as a result of economies of scale Able to tie performance to service fees should result in heightened performance Insourcing Benefits Human capital is owned Total flexibility (non constrained intervention) Develop / instill company culture & values Increased equity Capitalize cost diminishes with each operating year Intellectual capital is owned Cost efficiencies are 100% owned Learnt processes are deployable across other facilities at an incremental cost Outsourcing vs. Insourcing: Benefits

23. Strategies to Protect Supply Chains from Economic Downturns Many companies still struggle with less than ideal or disjointed cross company planning processes formally known as Sales and Operations Planning. Given the current economic landscape and the tightening of credit, companies need to seriously look at ways of reducing working capital and improving cash flow through inventory reduction but optimizing the inventory asset mix to ensure meeting the required customer service requirements. An effective planning process supported by good inventory policies and tools will enable these results.

24. Sales & Operations Planning A Decision-Making Process Integrates Financial & Operating Plans Focus on Achieving Plan Balanced Demand & Supply Top Mgt’s “Handle on the Business”

25. Strategies to Protect Supply Chains from Economic Downturns Strategy Four: Optimally configured network: With the increase in transportation costs and with the push in offshore sourcing, protecting a company’s supply chain includes clearly understanding that the network costs (transportation, facility costs and inventory) is the best it can be for supply chain efficiencies and customer satisfaction. Many businesses do not have the analysis and business case support to suggest a change in a company’s network and understanding the benefits.

26. Questions you should be asking 1) How certain are you that you are receiving the best value from your logistics service providers 2) Do you have an effective integrated planning process (Sales and Operations Planning Process) 3) Is Distribution and Logistics a true core competency? 4) Have you ever looked at business casing a distribution outsourcing option 5) Could your distribution network deliver better customer service at a lower cost? 6) How do you manage your cross – border supply chain? 7) Are you and your staff fully aware of both Canadian and U.S. customs programs and procedures and the impact on your company as an exporter and/ or importer? 8) Do you outsource the customs clearance process? Do you have an agreement with your custom broker that clearly details each parties responsibilities?

27. Comments • Bob Armstrong President of SCL 7270 Woodbine Ave, Suite 204 Markham, Ontario L3R 4B9 905-513-7300 barmstrong@sclcanada.org