Global Supply Chain Management

World Trade Services are Changing

Value of Global Trade has grown from U.S. $2 trillion to more than U.S. $7 trillion since 1985

Growing participation of new and developing markets (e.g. China and India)

Asian entities now involved in approximately 66% of international trade

Intra-regional trade growing in Europe

The Global Supply Chain

The Global Supply Chain

Trends (2004 – 2006)

• Annual growth in direct sourcing 22%• 55% of companies have increased direct sourcing• Technology has not been embraced to support

– 56% use fax, email or courier to deliver PO’s• 80% of all direct sourced imports are FOB

• What does the future hold?– Can you think of one of the biggest challenges facing freight forwarders and

the global supply chain?– How can we offset this challenge?

• I.E.: What direction is the industry moving?

The Global Supply Chain

What is the “Global Supply Chain”?

• Both Domestic and International• Begins with the Purchase Order• Ends with liquidation of the purchase• Integrates / Impacts Trading Partners Supply Chains• Many sub – parts all of which add cost, risk and opportunity• Different by Industry

Three Distinct Parts

Three Distinct Parts

Physical Services

Logistics & Carriage

The Global Supply Chain

All three, and the costs associated with each, must be managed in concert with one another in order to maximize

your business goals

Financial ServicesTreasury Management

& Financing

Information Services Technology

The Global Supply Chain

Packaging Consolidation Pre-assembly Sequencing

Material management

Inventory JIT delivery Hub operations

Assembly Packaging Material handling

Outsourcing Inventory management

Labour management

Transport Consolidation

Customs Express

Shipping

Logistics

Physica

l

Service

s

Factoring Purchase Order and L/C financing

Inventory

Freight payments

Trade financing

Equipment leasing

Project financing

Equipment financing

Private fleet financing

Equipment financing

Project financing

Letter of Credit financing

Credit servicing

Financia

l

Services

EDI services

Material Resource Planning

Integrated supply chain tools

Production planning

Workflow Management

Transport Routing

Tracking POD verification

Informatio

n Services

The Global Supply Chain

Domestic Supply Chain versus Global Supply Chain

• Three primary components are the same • Complexity and imbedded costs are the difference• Global has three distinct movement components domestic only one

1. Origin to departure port (domestic seller)

2. Port-to-Port shipping (ocean or air)

3. Port of arrival to destination (domestic buyer)

The Global Supply Chain

What are the Keys?

Understanding the differences and their impacts on your company and your trading partners

Effectively aligning pricing and payment terms with physical, financial and informational costs to drive greatest benefits

Effective Risk Management Effective & Integrated Information Management Effective Financial Management

Physical Movement of Goods

• What moves from point-to-point• How it moves• COST to move it• Who is responsible for what during transit?• Regulatory impacts

– Customs – outward & inward– Tax and tariff issues– Cost of terrorism (US PATRIOT Act)

• Added burden, transit time• Impact on delivery & scheduling• CTPAT

The Global Supply Chain

Clarification on the“COST” to move it…

•Oil is expensive, and it’s only going to get more expensive.

•Oil is a common thread that binds all markets, and it’s running out.

You’ve seen the headlines….

• “Wal-Mart expects to convert fleet to hybrid 18 wheelers”

• “USPS sees promise in battery powered mail delivery vehicles”

• Oil only found in a few places• Most have been explored long ago • Peak of oil discovery was in the 60’s• Today we consume 6 times as much oil

as we discover but still increase production from existing wells.

1956 Hubbert predicts USA oil production to peak in 1970

It Did (source EIA Energy Information Administration)

World Proven Oil Reserves per CIA

Source CIA World Factbook

Suspicious Reserves in the Middle East

When Saudi Arabia Peaks -The World Peaks

• “The West is deluded to rely on Saudi oil” Ali-Husseini former Saudi Director Exploration Aramco

• 5 fields generate 90% of Saudi oil. • 35 yrs of exploration finds little new oil• Matt Simmons book details these

concerns.

There is an Arab proverb

• My father rode a camel

• I drive a car

• My son flies a jet airplane

• His son will ride a camel………

US still 3rd Largest Producer

Source: BP Statistical Review of World Energy 2006

Many different projections about peak World oil

Source: Khebab of The Oil Drum

Oil demand projected to grow

Source: Department of Energy

Oil Prices go for a wild ride

Crude Oil Prices last 10 years(not adjusted for inflation)

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

$80.00

$90.00

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Year

US

$/b

arr

el

Source: Department of Energy

But over 140 years ….

Source: Energy Information Administration

Where does our oil money go?

• After Peak Oil, exploration and operating costs will increase dramatically.

• On the Gulf of Mexico, there is an identified oil well called “Jack #2” it’s in 7000 ft of water; it’ll take another 20,000 ft further to reach oil.

• It costs big money to dig for oil and it will cost bigger money tomorrow.

Oil is not in friendly places

• “You steal our wealth and oil” – Osama bin Ladin, Nov 2002

• “Yesterday the devil was here, I can still smell the sulfur” Venezuelan president Hugo Chavez referring to President Bush at the United Nations, 09/20/06

What about other energy sources?

• Coal production in the United States won’t peak for another 50-100 years.

• Uranium for nuclear energy won’t peak for at least 50 years.

• Natural Gas peak related to oil peak but global peak less relevant due to shipping difficulties.

Nuclear Transportation??

USS Nimitz, a nuclear powered aircraft carrier .

Only 4 Civilian Nuclear Ships

Nuclear Savannah 1/7th the size of petroleum powered Emma Maersk

Diesels for today’s container ships

Worlds largest sailing ship Sedov

Only 1/50th size of Emma & 4 times as many crew

Strategies for Supply Chains

• Global Supply Chains may be heavily exposed.

• How energy intensive is your supply chain?

• Design supply chains for peak oil.

• Re-evaluate global vs. local sourcing often.

Timing will be everything

• Days of cheap energy behind us. • Market will help the transition, but expect

turbulence ahead.• Fast, flexible, low petroleum dependency

supply chains will win.

And now, back to our show…

Information flows are key to managing risk

Information Management

BuyerBuyer SellerPayment Purchase Order

Negotiate Terms Payment

Financing

Purchase Materials

Manufacture & Packaging

Shipping

Document Presentment

Collections(A/R)

Dispute Resolution

Receiving& Customs

Payables(A/P)

Letter of Credit

Purchase Order

The Global Supply Chain

But is Supply Chain a Business Process? Demand & Supply Information Gaps

The Global Supply Chain

What? Why?

Lack of integrated information Disparate IT systems internally.

Limited global trade registry Lack of global standards.

Information is not synchronized Information required by several

departments in different formats or different databases. Functional silos.

Information not available on demand Lack of integration, synchronization

and discrete silos within an organization are major obstacles.

The Global Supply ChainTrade Market Evolution

Value Risk

Letters of Credit Open Account

Less bank involvement, greater corporate risk

Tipping Point?

The Paradigm Has Shifted

Is becoming a “corporate-centric” financial supply chain world– Companies working directly with their suppliers using a familiar

system, online or otherwise.– Banks are engaging corporations by offering purchase order

management and alternative open account payment methods. – Greater automation and pursuit of simplification.

The Global Supply Chain

The Global Supply Chain

Web-based Trade PO Processing – Open Account

• Submit open account purchase orders • View images of trade documents and make pay/no pay

decision• Benefits

– Streamline document handling– Reduction in costs– Integration of PO data provides end to end messaging and a

payment platform– Availability of invoice discounting upon acceptance by the buyer

The Global Supply ChainTrade Payables Finance

• Financial Supply Chain Web Portal • Communicates invoice status• Establishes date & dollar certain obligation of payment• Certainty allows for accurate risk based pricing and ‘trading’ of obligation

The Global Supply Chain

Opposed objectivesVendor and buyer focused on reducing capital costsChain-conflict in managing terms, cost of working capital, timing of payments etc.

Aligned interestsParties work to move costs ‘out of chain’ vs. shifting ‘within the chain’Chain-collaboration in managing terms, cost of working capital, timing of payments etc.

Paradigm Shift

New Paradigm

Old Paradigm

Vendor Invested Inventory

Days = 65

Buyer ‘Net Inventory

Days’ = 45

Efforts to ‘move’ investment within the chain either through moving physical inventory or ‘investment’ via AP/AR Days.

Chain Conflict

Vendor Invested

Inventory Days = 25

National City

Inventory Days = 65

Buyer ‘Net Inventory

Days’ = 20

Web-based Trade Payables Finance

Chain CollaborationRisk and capital-need moved out of chainCapital efficiencies maximized

Suppliers

• Vendor fulfills PO and invoices Buyer for $1MM

• Vendor provides terms of 90 days but has no visibility to payment date or amount

• Vendor hedges to offset this uncertainty

• Vendor underwrites Buyer risk

• Vendor finances $1MM for 90 days at a cost of 9.5%

• Capital cost of holding ‘Buyer risk’ = $23,424 or 2.3% of the invoice amount

• Buyer (investment grade company) receives goods and invoice

• 90 days hence, remits payment for $1MM

Financial Supply Chain Today

The Global Supply Chain

Suppliers

• Vendor fulfills PO and invoices Buyer for $1MM

• Vendor provides terms of 90 days

• Vendor views web portal for future payment detail

• Vendor elects to sell payment obligation to National City

• Vendor receives immediate cash at a discount based on Buyer’s risk profile

• Buyer (investment grade company) receives goods and invoice

• Buyer remits invoice approval and payment instructions to Web Portal

• 90 days hence, remits payment for $1MM through Web Portal (payment cleared to National City who bought obligation)

Global Supply Chain of the Future Using Information/Technology

• National City views payment obligation on Web Portal

• National City evaluates and values risk of Buyer

• National City, via Web Portal, offers to buy payment obligation at a discount rate of 6.5%

• National City electronically pays Vendor $1MM less a $16K discount fee or 1.6% of invoice

The Global Supply Chain

The Global Supply Chain

Concerns Specific to Global Sellers

• Countries and Markets: – New Markets? – Changing conditions in historic markets? – Your customers changing conditions? – How do stay informed and manage?

• New Foreign Competition:– Both here and there. – Who are these guys and where did they come from?– How do they compete? How do you respond?

• Customer Loyalty:– Whose responsibility?– In your industry, what dictates? (partnering, price, quality)– Do your selling practices help or hurt?

The Global Supply Chain

Concerns Specific to Global Sellers

• Terms of sale, term sheets, catalogues:– How often reviewed and updated? – Reflect current competitive landscape?– Reflect current financial conditions?

• Synchronize your receivables supply chain – Selling to and Buying from is the primary relationship– Work with your buyers to

• Leverage the creditworthiness of major foreign buyers • Leverage lower interest rates in one parties country• Utilize government sponsored programs to:

– Expand sales– Reduce Days Sales (Receivables) Outstanding

After all - It is all about when you get paid.