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Linda M. TaylorIndustry MarketingFedEx

Speeding the Supply Chain From China

How Manufacturers Are WinningWith Full Service Shipments


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WHITE PAPER

July 2006

FedEx White Paper fedex.com

Speeding the SupplyChain From ChinaHow Manufacturers Are Winning With Full-Service Air Shipments

By Linda M. Taylor

American manufacturers are facing ever-increasing pressure to deliver products more efficiently. To compete, many have turned to China toproduce lower-cost components and finished goods. However, theefficiencies that manufacturers take for granted when sourcing in NorthAmerica are dramatically reduced when importing from China.

Notably, the shipment of products has become a complex, slow andunpredictable process. Unable to quickly respond to market fluctuations,manufacturers are often forced to increase inventory levels, extendproduction schedules and write off unforeseen expenses. Thesecircumstances are particularly challenging for electronics and electricalequipment manufacturers.

Fortunately, full-service air shippers are speeding the transport of goods fromChina to days rather than weeks. Able to handle product delivery fromforeign factory to American factory and even direct to consumers full-service air shippers own all critical connection points and dramaticallyimprove the supply chain.

This white paper will examine the challenges of traditional overseas producttransit and introduce the many advantages of shipping with full-service air providers.

Global Manufacturing Market Trends

Manufacturing in China accounts for the majority of the country's grossdomestic product, making China the world's factory. Importing from China isa hot trend. Of American manufacturers with revenues of more than $50million, 9 of 10 are relying on China. 1

However, with the increased demand for goods from China comes globalport capacity limitations and delayed shipments. A survey of 200 Fortune500 logistics professionals revealed, "The transport industry is facing a

1 Aberdeen Group. (March 2005). New strategies for global management.

With the trend toward

imports from China comesignificant transit delaysand the lack of timelyinformation


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capacity crisis. Manufacturers are outsourcing and producing more abroadthan ever before, which has resulted in a situation where trade outstripscarrier capacity. The global shipping infrastructure, particularly on the westcoast of the U.S., is fast approaching critical mass." 2 The survey highlighted

tight carrier capacity and event disruptions as the biggest supply chain issuesfaced by manufacturers importing from abroad. 3

"In China, for all but the most advanced products, navigating the supplychain can be a matter of feeling your way through total darkness," explainedCIO Magazine's executive editor Christopher Kosh. 4 This problem isevidenced by an Aberdeen Group study that found 1 in 10 internationalshipments are late or incomplete for large manufacturers AND 1 in 5 are outof compliance with order or routing instructions (see figure 1). 5

Figure 1 : An unacceptable number of shipments from China are either out of compliance or late.

The lack of timely information is another top challenge, according to adifferent Aberdeen study of global manufacturers. 6 For example, it iscommon for manufacturers NOT to know that an order will be late until after the ship date has passed and no product has arrived. "Most companieshave little or no visibility into transitional activity because it is done by verysmall drayage and cartage operations with no technology. Because of portcongestion and customs delays, these operators often have to rescheduleappointments to pick up freight. Some companies report having toimplement 48-hour lead time buffers for these transitional movements as aresult of this unpredictability." 7 Smart manufacturers have learned tominimize these risks with reputable ocean freight brokers.

2 Canete, R. (June 2005). EyeForTransport Report. Fortune 500 companies' views on the supply chain &logistics landscape 2005/2006.3 Ibid.4 Koch, C. (Oct. 15, 2005). CIO Magazine . Supply chain: Making it in China.5 Aberdeen Group. (March 2005). New strategies for global management.6 Aberdeen Group. (September 2005). Winning with global manufacturing networks.7 Aberdeen Group. (March 2005). New strategies for global management.


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Aberdeen found, "Overwhelmingly, better-performing companies focus onimproving responsiveness, speed and customer satisfaction." 8

The Challenges of Oceangoing TransportationShipping product from China by sea includes significant risks and is a veryslow process compared to North American shipments, creating unforeseenexpenses for American manufacturers.

The Costs and Risks of Cargo Ships

Most manufacturers believe that moving product by cargo ships from Chinais less costly than air. However, the risks and total costs of shipping by seamay outweigh the perceived savings. The largest costs stem from the time ittakes to move product to the United States.

Manufacturers must evaluate the total inventory cost of carrying three or more weeks of inventory to accommodate longer transit times. In industrieswith high product values or obsolescence risks, this can be a very costlyoption. In a competitive market, slow deliveries can cripple Americanmanufacturers.

Once a product has been manufactured inChina and is ready to ship, it is notuncommon for products to languish for 30days or more inside China and then takeanother 20 to 30 days to travel by ocean tothe United States. 9 The often-inefficientshipment of product across China to oceanports is part of the problem.

Once product reaches a port, culturalissues can add further delays. Determiningwho gets the last freight slot on a full cargoship at a Chinese port is not determined byfirst arrival or even who pays the most;rather it is dependent on long-standingrelationships with the shipping company,customs agents and governmentemployees. 10

Depending on the shipper and the port, cargo vessels may leave every dayor only a few days a week. Thus, missing a ship could significantly set back

a delivery.

Product is usually shipped in 40-foot-long steel containers. If a manufacturer is shipping small quantities of product, it must be grouped with other shipments before its container can be transferred to a ship. When the vesselis fully loaded with thousands of containers, it is ready to leave port. Most

8 Ibid.9 Koch, C. (Oct. 15, 2005). CIO Magazine . Supply chain: Making it in China.10 Ibid.

The very slow movement of cargo, combined withmany at-sea risks, aremaking manufacturersreassess moving product via cargo ships


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cargo ships cannot travel more than 20 knots (or about 23 miles per hour)and can be slowed by weather and rough seas. As a result, cross-oceanarrival times are unpredictable.

Ocean shipments are by no means risk-free. Thousands of containers fallfrom the top of cargo ships into the ocean each year. For example, in Marchof 2006, the M/V Hyundai Fortune caught fire with more than 5000 cargocontainers on board (see figure 2). 11

Once ships arrive at their American ports, cargo must be unloaded andpossibly inspected. If a manufacturer's product is one of many in a cargocontainer, the container must be located, moved to a warehouse, brokendown and then shipped to its destination. With all the different partiesincluded in the movement of cargo overseas, the process is very slow andfraught with errors.

Add the cost of skid and wood packaging, moisture barriers, vacuum packs,shrinkwrapping, humidity protection and other precautions that must be takento ensure nothing is damaged in ocean transit, and you have a rather costlyprocess. In addition, products are tightly packed and must be protected fromthe excess shifting common with ocean transit. For electronic and metal parttransit, these costs and risks alone may justify exploring alternative forms of product transit.

Costs that are unanticipated can include unplanned expediting, miscalculatedduties, custom fines and demurrage charges, which lead to slower cash flow,cost overruns, lower profits and unsatisfied customers.

The Impact of Slow Product Movement

The majority of manufacturers importing from overseas (62 percent) claimthat lead times are inhibiting their ability to respond to local demand. 12 Withup to six-week lead times for orders from China, many manufacturers areforced to stock extra product to meet unexpected market spikes.

Greater inventory requirements tie up capital, countering most leanmanufacturing models. Alternatively, if demand shrinks, manufacturers willcontinue to increase inventory levels as shipments that are at sea continue toarrive for many more weeks. To build better reliability into the supply chain,manufacturers need the right product at the right time.

Increased inventories lead to a host of additional costs. Storing moreproduct means higher insurance, obsolescence, taxes and shrinkage. Theextra space needed also requires more racking systems and increases the

likelihood of higher transportation costs between facilities. These costs candramatically reduce product profit margins.

Port congestion is another problem. Forthcoming mega-ships that can hold40,000 40-foot containers are supposed to help meet demand. However,there are very few ports that can accommodate these massive ships, further

11 See http://www.cargolaw.com/2006nightmare_hyundai_fort.html.12 Aberdeen Group. (January 2006). Best practices for international logistics.

Slow shipments force

manufacturers to take onmore risk by increasinginventory levels


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constricting shipments, as a few ports become overly congested moving highquantities of containers.

Tracking shipments at sea is very difficult. It is common for manufacturers to

have no idea where their product is located. "Companies that still rely onphone calls, emails or manual web lookups to track down shipments are at acompetitive disadvantage. Real-time knowledge of the location of goodsthroughout the supply chain makes for faster-moving inventory speeds, cashflow and receivables, all while reducing inventory carrying costs," explainedan Aberdeen report. 13

Ocean shipments are improving, but lacks the technology and speed of air.While ocean transit will always have a place in global shipments,manufacturers should challenge the idea that air transit is too costly withoutweighing its benefits. Shipping strategies should support business andinventory strategies, not the other way around. The electronics industry hasrecognized that air shipments are critical to their short supply chain successand that ocean shipments are too costly to support their business model.

The Solution: Full-Service Air Shipments

Designed to rapidly accelerate the supply chain from overseas sources suchas China, shipping with full-service air providers speeds the movement of global products while providing predictable and traceable service. Designedas an end-to-end delivery service, full-service air shipments dramaticallyreduce the risks of oceangoing transit and ensure components and finishedgoods are delivered in mere days to their destinations.

Gone are the need for middlemen, the limitations of port schedules andcongestion, extraordinary packaging requirements, unpredictable expensesand untrackable shipments. Because full-service air shipping providers ownevery aspect of product movement, from freight trucks to cargo planes,product transit is greatly streamlined and manufacturers can work with asingle source.

Full-service air shipping providers offer unparalleled speed. For example,product can be delivered as quickly as one day from China to the U.S.Delivery destinations can include an American airport, factory or customer,and a single company handles the product. Service options includepaperwork completion, pickup, brokerage services and customer dropshipments.

13 Aberdeen Group. (January 2006). Best practices for international logistics.

Full-service air transportation provides asingle source to move

products from foreign factory to American factory, or direct tocustomers


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Figure 2 : Full-service shipping provides seamless service.

Full-service air shipments offer the following unique benefits for Americanmanufacturers:

Improves budget processes : There is never uncertainty about howmuch it will cost to ship a product because rates and services areprenegotiated. Quotes can be instantly generated.

Reduces inventory requirements : With the dramatically improvedsupply chain offered by air transit, manufacturers can operate with leaninventory levels by shipping smaller quantities more frequently.

Enhances planning : With accurate and up-to-date shipment tracking,businesses can deliver better customer service and coordinatemanufacturing efforts.

Speeds time to market : New products can be brought to market in amatter of days rather than weeks, eliminating a month or more from theproduct planning process.

Improves inventory-carrying costs : By reducing inventory levels,manufacturers can free cash for other revenue-generating opportunities.

Enables customer drop ships : Fully assembled products can betransported to customer doorsteps with a single carrier.

Improves marketplace agility : As demand spikes or drops,manufacturers can increase or decrease product shipments in a matter of days, rather than a month or more.

Increases reliability : Manufacturers can guarantee deliverables will bereceived precisely when expected, empowering them to take on greater risk.


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Simplifies transit management : By working with a single full-serviceprovider, manufacturers can greatly simplify the entire shipment process.

Reduces the total cost of shipments : Full-service air shipments

eliminate unforeseen expenses, extraordinary packaging, productdamage, lost inventory and the time necessary to manage internationalshipments.

What to Look for in a Full-Service Air Shipment Provider

When seeking a company to provide full-service air shipments, be sure toexamine the following critical requirements:

Flexible pickup and delivery options: Seek a provider that offers a varietyof pickup and delivery options depending on your needs, such as door-to-door, airport-to-airport or door-to-airport.

Chain of custody : Look for a company that offers a single chain of custodyto ensure packages are always accounted for. The company should own itstrucks and planes. A single chain of custody ensures governmentdocumentation requirements are in compliance and that your product doesnot pass into the wrong hands.

Product transit visibility : Make sure your product can be tracked themoment it is transferred to the shipper and every time it moves.Communication options should include automated emails, web-basedlookups or ERP system integration. This eliminates the need to translateforeign languages or make multiple phone calls.

Worldwide network : Work with a provider who can meet all of your international transportation requirements and is able to fly unrestrictedaround the world.

Value-added services : The ideal company will offer a variety of services tomeet your varying needs. Look for first flight out options, brokerage servicesand flexibility with cargo weights and sizes.

Multi-destination imports : Advanced providers are able to clear a singlebulk shipment and then break down multiple final destination shipments tomultiple manufacturing facilities, different distribution centers or manycustomers. All products should be individually packaged and prelabeled toexpedite the delivery process.

Duty and tax assistance : Work with a company that provides tools to aid inthe assessment of duties and taxes by helping you clearly identify anddescribe commodities.

Local service locations : The ideal provider should have localrepresentatives in your area that have a vested interest in the successfultransport of your products, eliminating long-distance or international calls.

Reliable track record : Look for a company that has a proven historyimporting products and has backup plans in the case of an unforeseen

Seek a company that maintains a single chainof custody as product moves from itsinternational source to its

final destination


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delivery event. The best companies have extra planes on standby ready toensure on-time delivery.

Worldwide security threat monitoring : The best companies track regional

instability, natural disasters, terrorist activity and even international holidaysand notify customers if these factors might impact delivery.

The FedEx Advantage FedEx is uniquely positioned to serve the international shipping needs of American manufacturers especially those importing components andfinished goods from China. A full-service air shipping provider, FedExcurrently has more all-cargo flights to and from China than any other air shipment provider. With a history in China that dates back more than 20years, FedEx is China's oldest non-Chinese air cargo shipment provider.

In 2008, FedEx will expandits China operations with anew Asia-Pacific hub at theGuangzhou Baiyuninternational airport insouthern China. The largestin the Asia-Pacific region, thehub will employ 1200workers and process 24,000packages per hour.

As number 4 on Fortune's "World's Most AdmiredCompanies (2006)," FedEx is a widely respected and trusted company.FedEx is helping businesses achieve unprecedented supply chainefficiencies through a combination of FedEx companies, including FedExExpress , FedEx Ground , FedEx Freight and FedEx Trade Networks .Together, FedEx companies handle more than 6 million shipments each dayto more than 220 countries and territories.

FedEx offers manufacturers a comprehensive list of full-service options. For example, FedEx Trade Networks offers expert trade and customs advisoryservices, including faster customs processing, assistance with productclassification and import advisory services.

To find out how FedEx can help streamline your imports from China,contact Linda M. Taylor at [email protected] or go to fedex.com.

About the Author : Linda M. Taylor leads the development andimplementation of corporate-wide initiatives for the manufacturing industrywithin FedEx. Linda has over 16 years experience in the manufacturingsector and during much of her career has employed lean manufacturing andtransportation strategies. Linda has an MBA from West Virginia University.

FedEx is the leading provider for air shipmentsbetween China and theUnited States and will beopening a very large hub insouthern China in 2008

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