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Global Supply Chain Management The Global Supply Chain 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 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 The Global Supply Chain Three Distinct Parts Physical Services Logistics & Carriage Financial Services Treasury Management & Financing Information Services Technology All three, and the costs associated with each, must be managed in concert with one another in order to maximize your business goals Information Services Financial Services Physical Services The Global Supply Chain Packaging Consolidation Pre-assembly Sequencing Material management Inventory JIT delivery Hub operations Assembly Packaging Material handling Factoring Purchase Order and L/C financing Inventory Freight Project financing payments Equipment Trade financing financing Equipment Private fleet leasing financing EDI services Material Resource Planning Integrated supply chain tools Production planning Outsourcing Inventory management Labour management Transport Consolidation Customs Express Shipping Logistics Equipment financing Project financing Letter of Credit financing Credit servicing Workflow Management Transport Routing Tracking POD verification 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 The Global Supply Chain 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 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) $90.00 $80.00 $70.00 US$/barrel $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $0.00 1998 1999 2000 2001 2002 2003 2004 2005 Year Source: Department of Energy 2006 2007 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… The Global Supply Chain Information flows are key to managing risk Buyer Purchase Order Payment Seller Financing Payables (A/P) Purchase Materials Dispute Resolution Receiving & Customs Manufacture & Packaging Information Management Shipping Document Presentment Letter of Credit Purchase Order Collections (A/R) Negotiate Terms Payment The Global Supply Chain But is Supply Chain a Business Process? Demand & Supply Information Gaps 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 Chain Trade Market Evolution Letters of Credit Open Account Value Risk Tipping Point? Less bank involvement, greater corporate risk The Global Supply Chain 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 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 Chain Trade 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 Web-based Trade Payables Finance Opposed objectives Vendor and buyer focused on reducing capital costs Chain-conflict in managing terms, cost of working capital, timing of payments etc. Paradigm Shift Aligned interests Parties 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. Old Paradigm Buyer ‘Net Inventory Vendor Invested Inventory Days = 65 Chain Conflict Days’ = 45 New Paradigm Vendor Invested National City Buyer ‘Net Inventory Inventory Days = 25 Inventory Days = 65 Days’ = 20 Efforts to ‘move’ investment within the chain either through moving physical inventory or ‘investment’ via AP/AR Days. Chain Collaboration Risk and capital-need moved out of chain Capital efficiencies maximized The Global Supply Chain Financial Supply Chain Today Suppliers • Vendor fulfills PO and invoices Buyer for $1MM • Buyer (investment grade company) receives goods and invoice • Vendor provides terms of 90 days but has no visibility to payment date or amount • 90 days hence, remits payment for $1MM • 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 The Global Supply Chain Global Supply Chain of the Future Using Information/Technology Suppliers • Vendor fulfills PO and invoices Buyer for $1MM • Vendor provides terms of 90 days • National City views payment obligation on Web Portal • Vendor views web portal for future payment detail • National City evaluates and values risk of Buyer • Vendor elects to sell payment obligation to National City • National City, via Web Portal, offers to buy payment obligation at a discount rate of 6.5% • Vendor receives immediate cash at a discount based on Buyer’s risk profile • National City electronically pays Vendor $1MM less a $16K discount fee or 1.6% of invoice • 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) 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.