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WHITE PAPER

July 2006

FedEx White Paper fedex.com

Speeding the Supply

Chain From China

How Manufacturers Are Winning With Full-Service Air Transportation

By Linda M. Taylor

American manufacturers are facing ever-increasing pressure to deliver products more efficiently. To compete, many have turned to China to produce lower-cost components and finished goods. However, the efficiencies that manufacturers take for granted when sourcing in North America are dramatically reduced when importing from China. Notably, the transportation of products has become a complex, slow and unpredictable process. Unable to quickly respond to market fluctuations, manufacturers are often forced to increase inventory levels, extend production schedules and write off unforeseen expenses. These circumstances are particularly challenging for electronics and electrical equipment manufacturers. Fortunately, full-service air transportation providers are speeding the transport of goods from China to days rather than weeks. Able to handle product delivery from foreign factory to American factory — and even direct to consumers — full-service air transportation providers own all critical connection points and dramatically improve the supply chain. This white paper will examine the challenges of traditional overseas product transit and introduce the many advantages of working with full-service air transportation providers. Global Manufacturing Market Trends Manufacturing in China accounts for the majority of the country's gross domestic product, making China the world's factory. Importing from China is a hot trend. Of American manufacturers with revenues of more than $50 million, 9 of 10 are relying on China.1 However, with the increased demand for goods from China comes global port capacity limitations and delayed shipments. A survey of 200 Fortune 500 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 come significant transit delays and the lack of timely information


capacity crisis. Manufacturers are outsourcing and producing more abroad than ever before, which has resulted in a situation where trade outstrips carrier capacity. The global transportation infrastructure, particularly on the west coast of the United States, is fast approaching critical mass."2 The survey highlighted tight carrier capacity and event disruptions as the biggest supply chain issues faced by manufacturers importing from abroad.3 "In China, for all but the most advanced products, navigating the supply chain can be a matter of feeling your way through total darkness," explained CIO Magazine's executive editor Christopher Kosh.4 This problem is evidenced by an Aberdeen Group study that found 1 in 10 international shipments are late or incomplete for large manufacturers AND 1 in 5 are out of 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 a different Aberdeen study of global manufacturers.6 For example, it is common for manufacturers NOT to know that an order will be late until after the ship date has passed and no product has arrived. "Most companies have little or no visibility into transitional activity because it is done by very small drayage and cartage operations with no technology. Because of port congestion and customs delays, these operators often have to reschedule appointments to pick up freight. Some companies report having to implement 48-hour lead time buffers for these transitional movements as a result of this unpredictability."7 Smart manufacturers have learned to minimize 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. (October 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.


Aberdeen found, "Overwhelmingly, better performing companies focus on improving responsiveness, speed and customer satisfaction." 8 The Challenges of Oceangoing Transportation Shipping product from China by sea includes significant risks and is a very slow process compared to North American transportation, creating unforeseen expenses for American manufacturers. The Costs and Risks of Cargo Ships Most manufacturers believe that moving product by cargo ships from China is less costly than air. However, the risks and total costs of transport by sea may outweigh the perceived savings. The largest costs stem from the time it takes 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 industries with high product values or obsolescence risks, this can be a very costly option. In a competitive market, slow deliveries can cripple American manufacturers. Once a product has been manufactured in China and is ready to ship, it is not uncommon for products to languish for 30 days or more inside China and then take another 20 to 30 days to travel by ocean to the United States.9 The often-inefficient transport of product across China to ocean ports is part of the problem. Once product reaches a port, cultural issues can add further delays. Determining who gets the last freight slot on a full cargo ship at a Chinese port is not determined by first arrival or even who pays the most; rather it is dependent on long-standing relationships with the shipping company, customs agents and government employees.10 Depending on the shipper and the port, cargo vessels may leave every day or 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 vessel is fully loaded with thousands of containers, it is ready to leave port. Most

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

The very slow movement of cargo, combined with many at-sea risks, are making manufacturers reassess moving product via cargo ships


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-ocean arrival times are unpredictable. Ocean transportation is by no means risk-free. Thousands of containers fall from the top of cargo ships into the ocean each year. For example, in March of 2006, the M/V Hyundai Fortune caught fire with more than 5000 cargo containers on board (see figure 2).11 Once ships arrive at their American ports, cargo must be unloaded and possibly inspected. If a manufacturer's product is one of many in a cargo container, the container must be located, moved to a warehouse, broken down and then shipped to its destination. With all the different parties included in the movement of cargo overseas, the process is very slow and fraught with errors. Add the cost of skid and wood packaging, moisture barriers, vacuum packs, shrink-wrapping, humidity protection and other precautions that must be taken to ensure nothing is damaged in ocean transit, and you have a rather costly process. In addition, products are tightly packed and must be protected from the excess shifting common with ocean transit. For electronic and metal part transit, these costs and risks alone may justify exploring alternative forms of product transit. Costs that are unanticipated can include unplanned expediting, miscalculated duties, 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) claim that lead times are inhibiting their ability to respond to local demand.12 With up to 6-week lead times for orders from China, many manufacturers are forced to stock extra product to meet unexpected market spikes. Greater inventory requirements tie up capital, countering most lean manufacturing models. Alternatively, if demand shrinks, manufacturers will continue to increase inventory levels as shipments that are at sea continue to arrive 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 more product means higher insurance, obsolescence, taxes and shrinkage. The extra space needed also requires more racking systems and increases the likelihood of higher transportation costs between facilities. These costs can dramatically reduce product profit margins. Port congestion is another problem. Forthcoming mega-ships that can hold 40,000 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 on more risk by increasing inventory levels


constricting shipments, as a few ports become overly congested moving high quantities 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 on phone calls, emails or manual web lookups to track down shipments are at a competitive disadvantage. Real-time knowledge of the location of goods throughout the supply chain makes for faster-moving inventory speeds, cash flow and receivables, all while reducing inventory carrying costs," explained an Aberdeen report.13 Ocean transport is 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 without weighing its benefits. Transportation strategies should support business and inventory strategies, not the other way around. The electronics industry has recognized that air transport is critical to their short supply chain success and that ocean transport is too costly to support their business model. The Solution: Full-Service Air Transportation Designed to rapidly accelerate the supply chain from overseas sources such as China, full-service air transportation providers speed the movement of global products while providing predictable and traceable service. Designed as an end-to-end delivery service, full-service air transportation dramatically reduces the risks of oceangoing transit and ensures components and finished goods are delivered in mere days to their destinations. Gone are the need for middlemen, the limitations of port schedules and congestion, extraordinary packaging requirements, unpredictable expenses and untrackable shipments. Because full-service air transportation providers own every aspect of product movement, from freight trucks to cargo planes, product transit is greatly streamlined and manufacturers can work with a single source. Full-service air transportation providers offer unparalleled speed. For example, product can be delivered as quickly as one day from China to the United States. Delivery destinations can include an American airport, factory or customer, and a single company handles the product. Service options include paperwork completion, pickup, brokerage services and customer drop shipments.

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

Full-service air transportation provides a single source to move products from foreign factory to American factory, or direct to customers


Figure 2: Full-service transportation provides a seamless shipping service. Full-service air transportation offers the following unique benefits for American manufacturers: • Improves budget processes: There is never uncertainty about how

much it will cost to ship a product because rates and services are prenegotiated. Quotes can be instantly generated.

• Reduces inventory requirements: With the dramatically improved supply chain offered by air transit, manufacturers can operate with lean inventory levels by transporting smaller quantities more frequently.

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

• Speeds time to market: New products can be brought to market in a matter of days rather than weeks, eliminating a month or more from the product 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 be transported 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 be received precisely when expected, empowering them to take on greater


risk.

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

• Reduces the total cost of shipments: Full-service air transportation eliminates unforeseen expenses, extraordinary packaging, product damage, lost inventory and the time necessary to manage international shipments.

What to Look for in a Full-Service Air Transportation Provider When seeking a company to provide full-service air transportation, be sure to examine the following critical requirements: Flexible pickup and delivery options: Seek a provider that offers a variety of 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 custody to ensure packages are always accounted for. The company should own its trucks and planes. A single chain of custody ensures government documentation requirements are in compliance and that your product does not pass into the wrong hands. Product transit visibility: Make sure your product can be tracked the moment it is transferred to the carrier and every time it moves. Communication options should include automated emails, web-based lookups or ERP system integration. This eliminates the need to translate foreign 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 unrestricted around the world. Value-added services: The ideal company will offer a variety of services to meet your varying needs. Look for first flight out options, brokerage services and flexibility with cargo weights and sizes. Multi-destination imports: Advanced providers are able to clear a single bulk shipment and then break down multiple final destination shipments to multiple manufacturing facilities, different distribution centers or many customers. All products should be individually packaged and prelabeled to expedite the delivery process. Duty and tax assistance: Work with a company that provides tools to aid in the assessment of duties and taxes by helping you clearly identify and describe commodities. Local service locations: The ideal provider should have local representatives in your area that have a vested interest in the successful transport of your products, eliminating long-distance or international calls.

Seek a company that maintains a single chain of custody as product moves from its international source to its final destination


Reliable track record: Look for a company that has a proven history importing products and has backup plans in the case of an unforeseen delivery event. The best companies have extra planes on standby ready to ensure on-time delivery. Worldwide security threat monitoring: The best companies track regional instability, natural disasters, terrorist activity and even international holidays and 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 and finished goods from China. A full-service air transportation provider, FedEx currently has more all-cargo flights to and from China than any other air transportation provider. With a history in China that dates back more than 20 years, FedEx is China's oldest non-Chinese air cargo transportation provider. In 2008, FedEx will expand its China operations with a new Asia-Pacific hub at the Guangzhou Baiyun international airport in southern China. The largest in the Asia-Pacific region, the hub will employ 1200 workers and process 24,000 packages per hour. As number 4 on Fortune's "World's Most Admired Companies (2006)," FedEx is a widely respected and trusted company. FedEx is helping businesses achieve unprecedented supply chain efficiencies through a combination of FedEx companies, including FedEx Express®, FedEx Ground®, FedEx® Freight and FedEx Trade Networks®. Together, FedEx companies handle more than 6 million shipments each day to 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 advisory services, including faster customs processing, assistance with product classification 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 and implementation of corporate-wide initiatives for the manufacturing industry within FedEx. Linda has over 16 years experience in the manufacturing sector and during much of her career has employed lean manufacturing and transportation strategies. Linda has an MBA from West Virginia University.

FedEx is the leading air transportation provider between China and the United States and will be opening a very large hub in southern China in 2008

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