Cross-Border Flow Analysis - Case Study for Chemicals Sector

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Cross-Border Flow Analysis Report 7:

Case Study for Company 7 (Chemical Producer)

Prepared forIndustry Canada

Prepared byInterVISTAS Consulting Inc.

8 July 2009

Cross-Border Flow Analysis Report 7: Case Study for Company 7 (Chemical Producer)

8 July 2009

i

Table of Contents

1. Introduction........................................................................................................................ 1 1.1 Overview .............................................................................................................................1 1.2 Methodology........................................................................................................................2

2. Firm Profile......................................................................................................................... 3

3. Value Stream Map...................................................................Error! Bookmark not defined. Processes and Timing .......................................................................................................................9

4. Key Findings.................................................................................................................... 11 4.1 Summary...........................................................................................................................11 4.2 Findings.............................................................................................................................11


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1. Introduction

The purpose of this study is to determine and evaluate the experience of processing a transaction from initiation of an order to clearance at the U.S. border. This report will be followed by recommendations and alternatives to result in enhanced facilitation of trade from Canada to the United States.

The data collected from this report will help to identify the underlying causes of border challenges that may impact the competitiveness of Company 7 from a number of perspectives: regulatory, logistic and security. The study examines, measures and reports upon the various logistics, security and compliance costs for the company at the border, including more detailed examinations of the frequency of secondary inspections and the issues that trigger such incidents (i.e. regulatory compliance vs. border protection imperatives).

The following report is a case study for Company 7 - a chemicals producer. This draft case study report is developed based on interviews and information received from the firm. While the findings reflect the issues faced by the individual organization, it is intended to demonstrate the challenges that other companies within the industry are faced with. The report includes the following: Value stream maps of cross border processes Descriptions of process steps for shipping goods across the border Matrix of key findings Explanations of key findings

1.1 Overview This report provides an overview of the following information: 1: Shipping Steps / Wait Time 2: Regulatory Requirements/Issues 3: Logistics Related Issues 4: Security Issues 5: Existing Programs & Initiatives to Address Issues 6: Compliance Cost Data 7: Observations/Gaps

Information included in this report will support the identification and analysis of top issues leading to significant challenges at the Canada-U.S. border. Further, it will allow for a better understanding of how border issues affect the competitiveness of companies enable assessment of their impacts on North American supply chains. This information will lead to the development/proposal of potential options and solutions to eliminate unnecessary costs and delays at the border.


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2. Methodology

The methodology used to develop this report is as follows:

1) Company Selection - Initial criteria dictates that the company has significant traffic volumes across the Canada-US border, both with respect to overall movements and their value. Its operations provide a fairly representative sample of its industry sectors, who export significant portions of their production from chemical plants. The selection of Company 7 also included input from the Canadian Chemical Producers Association as well as input from Industry Canada staff.

2) Data Collection - In depth data collection was performed to qualitatively and quantitatively characterize the cross-border shipment process and to identify border issues. Data reviewed was based on collection of aggregated data from Company 7 for a period of one year (2008). Due to the nature of issues on the border for Company 7, this was felt to be a better timeframe to capture issues that arose. For Company 7, costs were also estimated in terms of incremental impacts of border measures. Through discussions with appropriate personnel responsible from Company 7, data was gathered to follow the product and information from order to border clearance in addition to itemizing issues that were noted.

3) Develop Value Stream Map - With the detailed processes outlined for the products, timing data and incident rates were associated to each step to develop the “current state” value stream maps.

4) Detail and Categorize Border Issues - The challenges faced by the company in shipping chemicals across the border, as identified by the company and through the value stream mapping process, were documented and categorized into one of the seven columns as outlined in the findings matrix.

This report is one of seven case studies developed. For ease of reference, the seven companies are as follows: Company 1 (Services Sector Involved in the Movement of Goods) Company 2 (Small to Medium-sized Enterprise) Company 3 (FAST Member) Company 4 (Food Processing Industry) Company 5 (Motor Vehicle Sector) Company 6 (Consumer Goods Industry) Company 7 (Chemicals Sector)

Companies provided data in confidence; as a result their names and descriptions are genericized and data collection results are provided in aggregate form only to protect commercial sensitivities.


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3. Firm Profile

Company 7 is a large chemicals producer with production facilities in Canada, as well as distribution facilities in the United States. Company 7 is a producer of billions of pounds of ethylene, polyethylene and styrene.

These are bulk volume and are not considered highly time-sensitive. As a result, the primary modes of transportation for Company 7 are rail, followed by bulk trucking. In addition to exports to the United States, production in Canada also is destined for the Mexican market. As a result, Company 7 does ship U.S. in-transit goods to Mexico.

In developing the VSM for Company 7, research was also done into overall concerns from the chemicals sector. Interviews with industry representatives and firms indicated the primary concern revolved around lengthy wait times primarily due to lack of resourcing from CBP as well as issues associated with new programs and measures.

Company 7 has a diversified product base to serve sectors such as automotive, health, consumer goods and food production. It holds a Customs-Trade Partnership Against Terrorism (C-TPAT) Tier III status. Carriers and drivers are mandated to be registered with the Free and Secure Trade (FAST) program when shipping to the U.S.

Company 7 is part of a larger industry philosophy to self-regulate in areas of environment, health and safety. The industry overall is focused to going beyond legislative and regulatory compliance by adopting cooperative and voluntary initiatives with government and other stakeholders. Existing initiatives from the Canadian Chemicals Producers Association (e.g. ResponsibleCare), as a result, lend themselves well as a base for new industry-wide border/security applications.


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4. Value Stream Map

Value Stream Mapping (VSM) is a process analysis tool that is used to represent the interaction between processes, operations and information for bringing a product order (or request for service) through to delivery of it. The concept originated a number of years ago through the Toyota Production System and is a key technique used in Lean Manufacturing. VSM is used to determine the value added and non-value added elements of a system. It provides a high level picture of product and information flows in order to develop improvement suggestions.

A value stream consists of the following elements: Supplier (start of flow) Customer (end of flow) Physical flow of product being mapped Information used by process transformation steps Information flowing between process control, supplier and customer

Value stream maps can help visualize the process steps required to make a product or provide a service and any waste that exists in the processes. It provides a view of the entire system so that any improvements can be made to better the overall flow rather than a limited area within it.

The symbols used in the value stream maps in this report are as follows:

Customer or Supplier

Delay (non-value added)

Process (value added) Flow of Product

Decision Point or Alternative Flow of Information

Transport

Information System

Elapsed time

Touch time Timing Chart

The following section provides a glossary of terms used in the value stream maps.


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4.1 Value Stream Glossary

The following definitions are used in value stream maps and Lean principles.

Term Definition

Elapsed Time The time it takes to complete the tasks to make a product or provide the service including delays and interruptions within the process. Also known as throughput, turnaround, flow or lead time.

Non-Value-Add (NVA) Any operation or activity that consumes time and/or resources but does not add value to the service provided or product sold to the customer. (Some are necessary - i.e., regulatory requirements - while others are unnecessary.)

Queue or Delay Time Non-value added time spent waiting for a process.

Takt Time Average demand for product or service expressed in units of time. Sets the pace for the operation; all processes need to produce at rate of demand. The calculation of takt time is available work time per day / customer demand per day.

Touch Time The total time spent performing tasks to complete the product or provide the service without delays or interruptions within the process.

Transport Physical movement of goods from one place to another. If the company performs the transportation, queue time is not included in the transport time. Otherwise, delay time is included in transportation time.

Value-Add (VA) Any operation or activity the customer values (and would be willing to pay for).

Waste The elements of the process flow (or lack thereof) that add no value to the service provided.

4.2 Current State vs. Future State Maps

Current state value stream maps are typically developed to document current process flows and identify potential points of improvement. Future state maps are developed from the current state maps to design a lean flow that eliminates waste and improves the process flow. There are three basic Lean principles that are applied when designing future state value stream maps: Eliminate Unnecessary Non-Value Added Reduce Necessary Non-Value Added


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Optimize Value-Added

In general, these are targets for improvements that can be achieved six to nine months out. Some of the tactical actions that can be taken include: Eliminate steps / handoffs Merge steps Create parallel paths Implement pull if flow is not possible Reduce / eliminate batches Improve quality Create standard work Create an organized, visual workplace Eliminate unnecessary approvals / authorizations Stop performing nonessential (NVA) tasks from the customer’s point of view Co-locate functions based on flow; create teams of crossfunctional staff Balance work to meet takt time requirements

The following diagrams show the value stream maps for Company 7 for a chemical producer using. Future state value stream maps are outside of the scope of this study and were not developed. The size of the firm operation showed dependency on a number of manual processes: data gathered was based on a review of 1 year of information.

BROKER

RAIL CARRIER

ABI/ACS

RAILAMS

Entry Data and B/L

Rail AMS transmitted 4 hrs prior to arrival at crossing

ULTIMATE CONSIGNEE

Trip data

COMPANY 7

Chemical Shipment

March 5, 2009

CHEMICAL STORAGEFACILITY

LOAD ASSEMBLE TRAIN

CBP PROCESS(RAIL)

To ConsigneeTo CrossingTo Yard

- 2 – 4 hrs- tanker cars from

facility- quantity varies

- 1 – 2 hrs- assemble train at

terminal- mixed freight

- 10 – 20 min.-process mapped

elsewhere

120 - 240 min.

3 - 6 hrs.

120 – 240 min.

3 – 4 hrs

10 - 20 min. Touch time: 250 - 500 min.

Queue time: 24 -36 hrs.

Transport time: 6 – 10 hrs.

I

24 – 36 hrs

- 1 – 1.5 days- wait for

other shipments

SAP Receive Order

Load plan

Load data(Hazardous Material

information mapped elsewhere)

Reconciliationreport Reconciliation of actual value

Within 15 month of shipment

Shipper

100% VACISAt 5mph

RAIL HEAD EXAM

- Entire train- 4 hrs

BROKER

RAIL CARRIER

RAIL CROSSING(LIMITS VARY BY LOCATION)

ABI/ACS

RAILAMS

Entry Data and B/L

Rail AMS transmitted 4 hrs prior to arrival at crossing

- Rail carrier will not load container arriving by sea without auditing Ocean B/L

ReleaseFinding

YES

NO

10 - 20 min.

ULTIMATE CONSIGNEE

- Cargo selectivity- ATS- Random selection

Trip data

YARD EXAM

CUT OUT AND INSPECT

- Individual car- 8 – 16 hrs. to

release balance of train

- Devan cut out car, 1 – 3 days1 – 4 hrs.

SECONDARY PROCESSING

CBP Process for Rail

March 5, 2009


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Processes and Timing

# Step Observations Timing

Product Flow

1 Load Load products into rail cars – typically tanker cars from production facility. Timing is variable depending on the size of shipment of chemicals.

2-4 hours

2 Transport to yard

Transport time to common rail yard to be consolidated with other rail shipments.

3-6 hours

3 Wait Wait time at the common rail yard for rail shipments from other companies to arrive.

24-36 hours

4 Assemble train

Trains destined to the U.S. are assembled at the terminal and will included mixed freight.

1-2 hours

5 Transport to border

Transport time of the completed train to the border. 3-4 hours

6 CBP rail process

All clearance is done electronically, so the train does not have to come to a stop. At the crossing, the train passes through VACIS scanning, slowing down to 5 mph (8 km/hr) while passing through the scanner. No instances of stopping rail cars were noted.

10-20 minutes

7 Tranport to consignee

The transport time for product from the border to distribution/market depends on the destination in the United States and may take 3-10 days

Not included

Information Flow

1 Shipment order

A firm shipment order is sent to Company 7. The shipment info entered in SAP and then sent to the rail carrier/broker.

< 1 minute

2 File Rail AMS manifest

The railway files the Rail AMS (ANSI 309) manifest 4 hours in advance of crossing with CBP’s Rail AMS system.

< 1 minute

3 File Entry Data

Company 7’s broker files Entry Data < 1 minute


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# Step Observations Timing

4 Reconciliation As a step specific to chemicals, CBP has a process to reconcile entry data with pricing changes to reflect the actual value of product. Values are reconciled within 15 months through work by the broker and Company 7 to gather data from the SAP

Up to 15 months from Entry

Timing Summary

1 Touch-time 250-500 minutes, depending on length of time to load and time for train assembly

2 Queue time 24-36 hours, depending on wait time for other shipments for train consolidation.

3 Transport time 6 to 10 hours to transport product to the common rail yard and to the U.S. border.

4 Delay No major delays noted.


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5. Key Findings

The following are the categorized key findings from interviews and other data collected from Company 7.

5.1 Summary

1) Shipping Steps / Wait Time

2) Regulatory Requirements/Issues

3) Logistics Related Issues

4) Security Issues

5) Existing Programs & Initiatives to Address Issues

6) Compliance Cost Data

7) Observations / Gaps

No Major Issues Reported

Pre-requisites for Importers

Harmonized Classification of Regulated Substances Between Canada and U.S.

Trade Compliance Impacts on Border Compliance

None noted 10 plus 2 Requirements Onerous on Marine Transport

C-TPAT Benefits not as High as Desired

FAST Drivers Very Beneficial

New Internal Mechanisms Invested in for Compliance

Information Systems need Greater Integration for Aid in Compliance

Research Centre Role

5.2 Findings

5.2.1 Shipping Steps / Wait Time

No Major Issues Reported The chemicals producer interviewed reported that there were no issues with border wait times. This was noted to be in part due to participation of the firm in Customs-Trade Partnership Against Terrorism (C-TPAT) for four years, with a solid track record. Further research indicated that the companies that share trains for export also are members of this US Customs and Border Protection Program.

Company 7 does utilize third party logistics for truck shipments. Bulk truck shipments are required under C-TPAT to be part of the Free and Secure Trade (FAST) program for carrier and truck drivers. Company 7 does mandate their suppliers to have this relationship and has noted no issues in this regard.


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5.2.2 Regulatory Requirements/Issues

Pre-Requisites for Importers Company 7 reported that there is a misnomer about the requirement to meet the Toxic Substance Control Act (TSCA). A major objective of TSCA is to characterize and evaluate the risks posed by a chemical to humans and the environment before the chemical is introduced into commerce of the United States.

Section 5 of TSCA regulates anyone who plans to manufacture or import a "new" chemical substance for commercial purposes. Under section 5, the US Environment Protection Agency (EPA) requires notice before manufacture or importation of non-exempt substances so that the EPA can evaluate whether the chemical substance poses a threat to human health or the environment. This notice is called a pre-manufacture notice (PMN) and must be submitted at least 90 days prior to the activity.

This means that whether a substance is “toxic” or not, prior to an import cycle starting, EPA needs to be involved in the process of vetting substances. According to a broker specialized in chemical imports, there are also other potential requirements depending on the substance:

Uranium importers must have a National Regulator Number (NRC) and are required to make special arrangements with 24-hour notice to CBP.

Chemical Abstract Service (CAS) numbers are required to classify over 40 million organic and inorganic substances through standardized numbers. Around 50,000 new numbers are added each week to this list and are needed as part of the standardization of trade classification for border compliance purposes.

Bulk truck drivers need to have updated Material Safety Data Sheets (MSDS) to deal with instructions for the safe use and potential hazards associated with a particular material or product.

Harmonized Classification of Regulated Substances Between Canada and U.S. U.S. Customs and Border Protection classified one product from Company 7 differently than industry standards and Canada Border Services Agency laboratories. As a result, there is a different classification for trade compliance for this type of product. With a different methodology used by CBP for testing products than is used in the industry, Company 7 has worked to resolving this potential trade issue cooperatively with the Agency as well as with the backing of key industry groups (e.g. American Chemistry Council).

Trade Compliance Impacts on Border Compliance The relevance of trade compliance issues such as classification is due to its future impacts on cross border movements. Should the classification issue not be resolved, there is the potential for shipments of this substance to be subject to greater scrutiny, as well as a lowered score on the CBP targeting system for determining which shipments to provide greater scrutiny. This invariably


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translates into increased time for border movements as well as cost for monitoring/demonstrating compliance.

Some trade compliance issues for Company 7 may have little to do with Canada-US movements. For example, Automated Export System (AES) requirements for U.S. Customs and Border Protection came into effect in late 2008. Shipments from the United States for export are required to provide ocean carrier partners a numeric response to an AES filing with US Census or written notification of their exemption /exclusion status. Although this requirement does not have anything to do with a Canada-US movement, the quality of the company’s adherence to export rules has a direct bearing on the level of scrutiny of CBP for imports to the US.

5.2.3 Logistics Related Issues

Company 7 did not report major logistics related issues. Its reliance upon a select group of rail carriers as well as third party logistics greatly limits its exposure to variable practices.

5.2.4 Security Issues

10 Plus 2 Requirements Onerous on Marine Transport With the passage of the SAFE Port Act of 2006 Congress has mandated that CBP gather additional data elements about every import before the shipment is made. The import community is to provide ten data elements while the ocean carriers are to provide two. This reporting would supplement what CBP already receives from ocean carriers twenty four hours in advance of shipment from foreign ports.

Company 7 reported this will impact the volume of information they need to provide to CBP, particularly due to the fact that additional information was already submitted as part of C-TPAT membership.

5.2.5 Existing Programs & Initiatives to Address Issues

C-TPAT Benefits Not as High as Desired C-TPAT represents an important program for Company 7 to meet its objectives for pro-active leadership goals in border management. Company 7 is a full “Tier III” participant, meaning that it has among the highest standards for supply chain security.

Benefits however are not felt by Company 7 in that compliance rates prior to C-TPAT were already extremely high.

However, the main motivation for C-TPAT membership appears not to be with day-to-day flows of chemicals to the U.S. as much as the ability to weather future requirements. Company 7 was amenable to the suggestion that C-TPAT Tier III membership should exempt it from more onerous security requirements such as the “10 plus 2” rule. Moreover, additional benefits for business resumption after a major attack are desired by Company 7.


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Company 7 is in the midst of re-applying for CBSA’s Partners in Protection. It is hopeful the existing validation for C-TPAT will streamline (or be used in place of) a separate Partners in Protection process.

FAST Drivers Very Beneficial As part of the C-TPAT program, Company 7 has third party carriers. The carriers used are registered FAST members with FAST drivers and results in essentially all bulk trucks being cleared at Primary.

5.3 Quantitative Results

Company 7 has hundreds of rail shipments a year to the United States but did not record delay time due to major changes in rail border crossings as well as sizable investments by Company 7 to ensure compliance, training and audit. This accounts for 87% of movements by Company 7

However Company 7 did note that it is not wholly dependent upon rail. The use of rail truck and bulk trucks accounted for about 13%. During the time of the study there were no incidents of delay, albeit Company 7 noted that on occasion there were issues with third party truckers.

InterVISTAS concluded that the lack of delay was due to internal compliance, training and audit efforts and improved training for third party suppliers to Company 7.


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6. Border Crossing Costs

Company 7 costs were reviewed for compliance as well as the mechanisms needed to ensure trade rule adherence. Overall, Company 7 maintains a high degree of compliance (near 100%) for border movements. Since 2001, it has invested heavily to reinvent its systems to accommodate new compliance requirements in both trade and borders. This includes two internal bodies to deal with customs and trade compliance, as well as mandatory training and audit processes.

It is, as a result, difficult to estimate cost of compliance due to the number of different individuals in Company 7 that are involved. Incrementally, however, the Company estimates 2 FTE’s were added purely to maintain the level of border fluidity for Company 7 products.

The continuing additions to or adjustments of U.S. regulations affecting the border related to the trusted shipper programs may require extensive additive costs.

Category Cost Drivers FTEs Cost*

Compliance Company 7 has two full-time equivalents designated to address compliance issues that were incrementally added due to U.S. rules.

2 $140,000

Annual Total 2 $140,000

* The assumed cost of an FTE for Company 7 is $70,000.

Additional Cost Issues There are three additional cost issues specific to Company 7:

Cost savings needed to simplify information systems: The level of reporting to CBP and other US agencies was deemed to be working well for Company 7. However in tracking the progress of US Participating Government Agencies in International Trade Data System (ITDS), Company 7 felt that a model of using a central reporting data centre and feed out to various authorities as needed would be useful. Its order-of-magnitude estimate for cost savings is in the hundreds of thousands of dollars by creating less of a burden to deal with various compliance authorities.

Costs structure for research need to be considered: Company 7 is actively engaged in ongoing product research and development. This necessitates the movement of samples from one country to the other. As a result, there are some issues from the research centre importing exotic chemicals. There are some import issues to manage; from time to time this will occur for exports to the United States. Delays are not frequent in this type of shipment, but the speed of moving research materials is vital to Company 7 for meeting time targets for developing new products.

Fees: While fees were not specifically covered in the scope of work, new fees assessed by US Customs that started July 1, 2009 are expected to impact chemical producers.

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

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Cross-Border Flow Analysis - Case Study for Chemicals Sector

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