Challenges and opportunities: Responding to international supply chains Christopher B. Lofgren, Ph.D President and Chief Executive Officer
Schneider is a transportation leader with a broad portfolio of services. <ul><li>Schneider National Inc. is a premier provider of transportation, logistics,and related services </li></ul><ul><li>$3.5 billion in revenue in 2005 </li></ul><ul><li>Operate 14,000 tractors, 15,500 drivers, and 60,000 trailers/containers with 21,900 associates in 28 countries </li></ul><ul><li>Commitment to superior information and communications technology </li></ul>Truckload • One-Way Van • Dedicated • Expedited • Specialized • Bulk <ul><li>Logistics </li></ul><ul><li>• Supply Chain Management </li></ul><ul><li>• International Logistics </li></ul><ul><li>Transportation Management </li></ul>Intermodal • TruckRail ® • TruckRail ® Express
Schneider’s portfolio delivers door-to-door international supply chain solutions. <ul><li>Service offerings feature: </li></ul><ul><ul><li>Import/export logistics and transloading </li></ul></ul><ul><ul><li>Freight forwarding </li></ul></ul><ul><ul><li>Customs brokerage </li></ul></ul><ul><ul><li>Air, ocean and inland transit </li></ul></ul><ul><li>North American platform includes: </li></ul><ul><ul><li>Full transportation portfolio with Canadian and Mexican services </li></ul></ul><ul><ul><li>Cross-border expertise, including expedited release systems and security programs </li></ul></ul>
Objectives <ul><li>Highlight the growing impact of international trade particularly with China on the United States </li></ul><ul><li>Discuss the implications and challenges of this growth on supply chains </li></ul><ul><li>Examine the US logistics infrastructure and the ability to respond </li></ul><ul><li>Discuss opportunities, and some cautions for the logistics industry </li></ul>“ No nation was ever ruined by trade” Benjamin Franklin
Global price competition is forcing companies to employ China as a source strategy option. 200 – 400 Miles Industrial Geography Shift: 1950-Present Source: MergeGlobal North America Port Congestion Impact Model Late 90’s 5,000 – 8,000 Miles 80’s – 90’s 60’s – 70’s 1950’s North America America China 1,000 – 1,500 Miles Industrial Center of Gravity
Transit-related inventory costs rise – up to 100 percent higher. Ratio Of Logistics Factors Domestic vs. International 0 5 10 15 20 25 Transit Time Transit Variation # Of Entities Transport Costs Administrative Costs International/Domestic Complexity Factor Domestic Mexico Asia Source: Schneider Research 2006
In addition, cost risks grow larger as retail revenue and profits become more reliant on short product lifecycles and promotions. <ul><li>SKU proliferation driven by consumer preference, private labels </li></ul><ul><li>New international sources </li></ul><ul><li>Product life cycles are down from 20 years in the 1950s to three years today </li></ul>
Consumer goods imports have grown 171% over the last ten years. Source: Census Bureau Driving strong growth in container volume. Import & Container Growth 0 2005 Teu's 0 50 100 150 200 250 300 350 400 450 $ Millions TEUs Consumer Goods Imports 15000000 5000000 10000000 20000000 25000000 30000000 35000000 40000000 45000000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
This growth in imports, principally from Asia, have driven large volumes to West Coast ports. Long Beach Tacoma Seattle Houston New Orleans Everglades Savannah Charleston Virginia Ports Baltimore 1.3 2.0 6.7 7.5 2.3 2.1 2.1 2.0 1.9 1.6 .2 .8 .6 4.8 .2 Oakland Los Angeles Source: MergeGlobal North America Port Congestion Impact Model U.S. Containerized Imports and Exports by Port: 2005 Millions of Cargo Bearing TEUS 1/ Today, the west coast handles over 50% of the container volume. New York Philadelphia Miami 1.1
This has already changed how and where companies flow product into the United States. Source: Census Bureau
This has already changed how and where companies flow product into the United States. Source: Census Bureau This is not without implications.
U.S. Port Size & Growth 0 2000000 4000000 6000000 8000000 10000000 12000000 14000000 16000000 Long Beach/LA Oakland Seattle/Tacoma Charleston Hampton Roads Miami (FY) New York/New Jersey Savannah Houston Teu's 0 2% 4% 6% 8% 10% 12% 14% 16% 18% These strategies have pushed growth to smaller ports at greater transit times. China To North America Transit Times In Day 0 10 20 30 Seattle, WA Oakland, CA LosAngeles, CA Vancouver, BC Manzanillo, MX Houston, TX Savannah, GA Norfolk, VA Elizabethport, NJ Miami And, stress is being placed on transportation infrastructure, traditional freight flows, and ultimately inventory levels. Source: Census Bureau Size Growth
Current & Projected Container Vessel Fleet 0 5000000 10000000 15000000 <2,000 2,000- 3,999 4,000- 4,999 5,000- 7,999 8,000+ TEU's Panamax But, most of the shipping capacity being added cannot pass through the Panama Canal. Source: Census Bureau Therefore, constraining growth to Gulf and Eastern ports from China, Korea, and Japan. 2005 2010
The west coast flows require increased intermodal capacity at the time when the railroads are reducing their coverage. Rail Network Miles of Road Operated 1960 1980 1990 2005 1000's Source: Census Bureau Intermodal Network # of Markets with Ramps 0 1960 1980 1990 2005 # of Markets 0 50 100 150 200 250 50 100 150 200
Average Intermodal Train Speed Major U.S. Railroads '2003:1 '2003:3 '2004:1 '2004:3 '2005:1 '2005:3 ‘ 2006:YTD MPH Western RR's Eastern Railroads Additionally, growing volumes of international and domestic containers, along with reduced average train speeds have created congestion. Source: Census Bureau Domestic Trailers ISO Containers 55% Domestic Containers 24% LTL Motor Carriers UPS 20% USPS Major Intermodal Market Segments, 2004 ISO Containers 55% Domestic Containers 24% Source: IANA LTL Motor Carriers UPS 20% This has resulted in lower service levels when supply chains are demanding higher. 19 21 23 25
Rail Capital Needed to Reduce Truck Volume 10% in 2015 0 2 4 6 8 10 12 14 16 18 20 Current Spend Spend Required For Full System Maintenance Spend For Growth Spend To Gain Market Share Rail Capital $B Current Full Maintenance Growth Market Share Recent rail capital expenditures are not designed to take share from motor carriers. Source: Schneider National, Inc., AAR Therefore, growth in heavy freight will put more pressure on over-the-road trucking.
This is happening at the same time that supply of capacity has become highly constrained. Morgan Stanley TL Freight Index Source: FTR, ATA, Morgan Stanley The market fundamentals do not point to significant relief in the near future.
Real Change in Line Haul Cost Inputs (Before Productivity) 0.6 0.8 1 1.2 1.4 1.6 1.8 Labor Fuel Equipment Risk Overhead Indexed to 1970 = 1 1970 2000 2010 Source: Schneider National, Inc. Market Research The capacity constraint is a product of inflationary costs, and highly constrained labor availability. <ul><li>Regulatory requirements for engines and growing material prices within equipment are having large impacts on capital costs </li></ul><ul><li>Recovery of volatile fuel price is impacting operational decisions on what freight to haul and when </li></ul><ul><li>Competition at historical wage rates is not yielding the replacement levels for drivers. </li></ul><ul><li>Toll roads are significantly impacting the cost of transportation on major freight lanes </li></ul>This must lead to increased prices to bring supply in balance with demand.
CL 8 Truck Productivity 0.80 0.85 0.90 0.95 1.00 1.05 1992 1994 1996 1998 2000 2002 2004 Tonmiles Per Active Vehicle (M) With increasing demand, productivity is dropping. <ul><li>Regulatory requirements (Hours of Service) have reduced available driver hours </li></ul><ul><li>Congestion in metropolitan areas further reduce available driver productivity </li></ul><ul><li>While truck and trailer technologies have advanced, size and weight limitations remain at early ’90s levels </li></ul>Are we killing the golden goose? Source: Schneider National, Inc. Market Research
Freight Infrastructure Investment - Public & Private % Of GDP - 2005 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% U.S China Euro India The United States has the best transportation infrastructure, but others are investing more. Source: Census Bureau Almost all of U.S. investment is for maintenance of existing infrastructure.
Transport Cost Per $GDP 0 0.05 0.1 0.15 0.2 U.S. Europe China Cost / $ GDP 1980 2004 2015 Transport performance is a major contributor to economic competitiveness. Source: Schneider National Note: Costs are normalized to account for different lengths of haul. Our system sets the global standard, but is now at risk.
Summary <ul><li>Surface transportation is a critical part of a country’s economic power train. </li></ul><ul><li>The complexity of supply chains is increasing and becoming even more reliant on quality providers. </li></ul><ul><li>Growth must still be accomplished without the financial inefficiency of excess working capital. </li></ul><ul><li>The U.S. government must invest, and incent private investment in transportation infrastructure and capacity. </li></ul><ul><li>Productivity of these investments is vital to ensure the capacity to support a growing U.S. economy. </li></ul><ul><li>Coordination and collaboration of supply chain participants is a requirement to ensure effectiveness, particularly over international flows. </li></ul>
Thank you. Christopher B. Lofgren, Ph.D President and Chief Executive Officer