Uncertainty on Cross-Border Supply Chains by Gaston Cedillo


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In the future, increased growth of the NAFTA integration is foreseen, based on logistics flows boosted by the automotive industry and also by the electronic and aerospace industry. A “reverse globalization” is becoming a tendency as firms back off from China to other countries as Mexico for sourcing and manufacturing requirements. The opportunity to organize one of the largest regional manufacturing zones in the world exists (Black and Rodriguez, 2010; Manners-Bell, 2010); However, because of intensification of trade, improving cross-border process will be a critical issue for NAFTA.

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Uncertainty on Cross-Border Supply Chains by Gaston Cedillo

  1. 1. Uncertainty on Crossing Times at U.S. – Mexican Border: Impacts on Safety Stocks of NAFTA Supply Chains. Miguel Gaston CEDILLO-CAMPOS Miguel MATA-PEREZ Charleston, West Virginia, USA 2011 International Transportation Economic Development Conference [email_address] http://gastoncedillo.com
  2. 2. Agenda <ul><li>General context </li></ul><ul><li>Conception and objectives </li></ul><ul><li>Methodology </li></ul><ul><li>Analysis and findings </li></ul><ul><li>Conclusions & future research </li></ul>
  3. 3. General context <ul><li>Under NAFTA, the value of trade between the USA and Mexico crossing the border by truck increased from $74 billion in 1994 , to $235 billion in 2008 (Frittelli, 2010). </li></ul><ul><li>In 2009, Mexico was the third largest U.S. trade partner . It bought more from the U.S. than any other country with the exception of Canada. </li></ul>
  4. 4. <ul><li>For every dollar of trade between the two countries, Mexico imports 42% from the U.S. </li></ul><ul><li>For instance, China only bought about 19% . </li></ul>General context 296, 402 69, 576 128, 998 176, 537 U.S. Imports U.S. Exports MEXICO CHINA U.S. Census Bureau, 2011
  5. 5. Conception & objectives <ul><li>A “ reverse globalization ” is becoming a tendency as firms back off from China to other countries for sourcing and manufacturing requirements. </li></ul>
  6. 6. <ul><li>Despite security concerns, Mexico remains attractive because of its proximity , and potential as emerging market . </li></ul>U.S. Manufacturing-Outsourcing Cost Index General context AlixPartners  Mexico Remains the Top Choice for Manufacturing ‘ Near-Shoring,’ ( 2011 )
  7. 7. General context
  8. 8. <ul><li>If the main reason in the expansion of truck crossings has been the intensification of trade, then, improving cross-border process is a key issue for NAFTA . </li></ul><ul><li>Clearly, “ Mexican cross-border trucking appears to be in the future of (North American) free trade .” (Bakir and Pakdaman, 2006; NACC, 2008) </li></ul>General context
  9. 9. <ul><li>The opportunity to organize one of the largest regional manufacturing zones in the world exists (Black and Rodriguez, 2010; Manners-Bell, 2010). </li></ul><ul><li>One of the key success factors for the region is to increase cross-border throughput , which is: </li></ul><ul><ul><li>“ the speed and volume with which products move through transportation, manufacturing processes, and even customs at the border ” (Lawrence, Leon, 2010). </li></ul></ul>General context
  10. 10. <ul><li>However, the lack of collaborative security processes on the border, as well as differences in transport infrastructures are elements creating uncertainty in crossing times. </li></ul>General context
  11. 11. <ul><li>Given the multiplicity of variables involved in this matter, our research was limited to study border crossing times at the most important land port-of-entry of the NAFTA: Laredo Texas Border Crossing . </li></ul><ul><li>The land port of entry in Laredo, Texas is the most important one for both economies with 31.6% of trade value and has the largest number of truck border crossings (U.S. Department of Transportation, 2009). </li></ul>Conception & objectives
  12. 12. <ul><li>Top 10 Ports by Trade Value (US$) ranked by Total Trade for USA - NAFTA Partner Trade by all Modes: 2009 (RITA, 2010). </li></ul>Conception & objectives 1 Laredo - Texas
  13. 13. Conception & objectives <ul><li>Objectives </li></ul><ul><ul><li>To Identify the crossing time by processes involved. </li></ul></ul><ul><ul><li>To propose a quantitative model to analyze scenarios. </li></ul></ul><ul><ul><li>To analyze the effects of lead-time uncertainty on safety stocks because of delays as well as disruptions caused by cross-border processes at U.S.-Mexico border. </li></ul></ul><ul><ul><li>To provide insights for improving cross-border flows. </li></ul></ul>
  14. 14. <ul><li>Congestion and Delay = Higher Emissions + Security Fears </li></ul><ul><li>Delay time for commercial motor vehicles is a key indicator of transportation and international supply-chain performance . </li></ul>Analysis & findings “ There is no systematic and consistent way of measuring border crossing time at land ports of entry.” (Hitzfelder & Villa, 2011)
  15. 15. Methodology <ul><li>Methodological approach </li></ul><ul><ul><li>Strategic approach . Systems point of view. </li></ul></ul><ul><ul><li>Tactical approach . Abductive or hybrid process linking theory and field research. </li></ul></ul><ul><ul><li>Operational approach . Development of a system of equations to represent scenarios. </li></ul></ul><ul><li>The main reason for implementing this method was to understand the key issues involved. </li></ul>
  16. 16. <ul><li>Research steps </li></ul>Methodology Operations context = Systems point of view Key data = ƒ (Lead time, cost) Field Work + Literature = Abductive approach Modeling = Quantitative approach ¹ Changrui Ren and Jin Dong, “ Linking strategic objectives to operations: Towards a more effective supply chain decision making ”. Winter Simulation Conference (2006), pp1422-1430. Analysis & Conclusions Problem Identification KPI’s Identification Mapping Process Scenarios based on a mathematical model (quantitative approach) 1 2 3
  17. 17. <ul><li>Many different stakeholders from Public and Private Sectors in both sides of the border. </li></ul>Analysis & findings Border Crossing Process Hitzfelder & Villa, 2011 Customs Brokers International Long-Haul Trucking Firms Drayage Firms Shippers (Traditional, Maquila) Local Authorities U.S. and Mexican Border Agencies Freight Forwarders Logistics Providers Trade Associations
  18. 18. Analysis & findings Hitzfelder & Villa, 2011
  19. 19. <ul><li>C-TPAT is a voluntary government-business initiative to build cooperative relationships that strengthen and improve overall international supply chain and U.S. border security. </li></ul><ul><li>FAST - Free and Secure Trade (as part of C-TPAT) allows U.S./Canada and U.S./Mexico partnering importers expedited release for qualifying commercial shipments. </li></ul>Analysis & findings
  20. 20. <ul><ul><li>In Mexico there are only 1,568 C-TPAT ( FAST ) members (CBP, 2010): </li></ul></ul><ul><ul><ul><li>709 land carriers. </li></ul></ul></ul><ul><ul><ul><li>859 manufacturers. </li></ul></ul></ul><ul><ul><li>Because C-TPAT certification involves a long verification process, CBP does not have capacity to quickly manage the entire importers request: </li></ul></ul><ul><ul><ul><li>From Mexico. </li></ul></ul></ul><ul><ul><ul><li>From all over the world. </li></ul></ul></ul>Analysis & findings
  21. 21. Analysis & findings Monterrey Nuevo Laredo Laredo, Texas Detroit Mexican Export U.S. Export Value Added = 0 Value Added = 0 Drayage Hitzfelder & Villa, 2011 NON-FAST
  22. 22. Analysis & findings Monterrey Nuevo Laredo Laredo, Texas Detroit Mexican Export U.S. Export NAFTA plan Hitzfelder & Villa, 2011 Mexico USA Customs Broker Customs Broker
  23. 23. <ul><li>In 2008, the southwestern truck crossings reached 4.8 millions, which represented 21% of the total containers entry into the United States (Frittelli, 2010). </li></ul>Analysis & findings 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 LAREDO, TX Empty Containers because of drayage
  24. 24. Analysis & findings <ul><li>From a security approach… </li></ul><ul><ul><li>U.S. General Accounting Office ( 2000 ) emphasizes that “congestion can be a security risk” , since it has negative impacts on the rate of selected vehicles to inspection, on the time dedicated to the inspection process and on the quality with which it is carried out. </li></ul></ul>
  25. 25. Green Light  =22.5 min.  =5.74 Mexican Side Mx Facility Paperwork Process  =40 min.  =10.2 Point of Transfer MX Customs  =0.75 min.  =0.19 0.02 Red Light Green Light 0.98 Primary Cargo Inspection Secondary Cargo Inspection  =97.5 min.  =24.87  =97.5 min.  =24.87 0.90 0.10 Red Light U.S. – MEXICO BORDER U.S. – MEXICO BORDER Primary Cargo Inspection Secondary Cargo Inspection US Customs D.O.T. Point of Transfer American Side  =166.5 min.  =42.47  =1.5 min.  =0.38  =1,830 min.  =466.84 Security Inspection Safety Inspection No Yes  =0.75 min.  =0.19  =15.5 min.  =2.93  =22.5 min.  =5.74 1 2 3 4 5 6 7 8 9 10 11 NON FAST = 0.60 – 0.9 FAST = 0.10 – 0.4 ATS Acceptable Risk? U.S. Facility Starts Drayage Ends Drayage
  26. 26. <ul><li>6 scenarios </li></ul>Analysis & findings 0.02 0.98 0.1 0.9 0.4 or 0.1 0.6 or 0.9 0.4 or 0.1 0.6 or 0.9 0.4 or 0.1 0.6 or 0.9 ATS ATS ATS P ( S1 ) = 0.0080 0.0002 P ( S2 ) = 0.0012 0.0018 P ( S3 ) = 0.0072 0.0018 P ( S4 ) = 0.0108 0.0162 P ( S5 ) = 0.3920 0.0980 P ( S6 ) = 0.5880 0.882  = 1  = 1 NON- FAST FAST
  27. 27. Analysis & findings <ul><li>Analysis of scenarios </li></ul>FAST: Free and Secure Trade Program C-TPAT: Customs-Trade Partnership Against Terrorism Non-FAST Worst Case FAST Best Case
  28. 28. Analysis & findings <ul><li>Analysis of scenarios </li></ul>72%
  29. 29. Analysis & findings <ul><li>According to the study realized by the Colegio de la Frontera Norte and Peschard-Sverdrup & Associates (2007) , a team of experts from both countries computed that every hour that a truck spends in a bottleneck on the U.S.-Mexico Border costs US$ 112.50 . </li></ul>
  30. 30. Analysis & findings <ul><li>Key issues: </li></ul><ul><ul><li>There are important differences in transport infrastructure and in operational procedures. </li></ul></ul><ul><ul><li>There is not any system to measure border crossing time at land ports of entry. </li></ul></ul><ul><ul><li>Use of “ drayage ” reduces cross-border performance. </li></ul></ul><ul><ul><li>In the future should the investments be in: </li></ul></ul><ul><ul><ul><li>More detailed inspections OR </li></ul></ul></ul><ul><ul><ul><li>More information (intelligence) & coordination from a NAFTA system perspective (based on C-TPAT). </li></ul></ul></ul>
  31. 31. <ul><li>Case-Study . An automotive Tier 1 delivering components from Mexico (Monterrey) to Detroit. </li></ul>Analysis & findings
  32. 32. <ul><li>The statistical reorder point was computed as follows (Narsimhan et al., 1995): </li></ul>Analysis & findings Where: = average daily demand. Ct = crossing time. σdCt = standard deviation of demand during crossing time.
  33. 33. <ul><li>Thus, </li></ul>Analysis & findings Where: = standard deviation of average daily demand. σCt = standard deviation of crossing time.
  34. 34. <ul><li>Therefore, from Chopra and Meindl (2008), safety stock can be computed as follows: </li></ul>Analysis & findings Where: = normal-inverse Gaussian distribution. SL = desired service level.
  35. 35. <ul><li>Safety stocks considered in order to prevent supply chain disruptions because of uncertainty of crossing-times. </li></ul>Analysis & findings Where: σ L = standard deviation of lead time σ DL = standard deviation of demand during lead time ss = safety stock + 112.5 US$/hour Bottleneck
  36. 36. Conclusions <ul><li>Gordon and Rutt (2010) have already identified an enlarged interest in relocating manufacture plants from China to Mexico . </li></ul><ul><li>Consequently, it can be foreseen an important raise in cross border flows and the necessity to improve the Border Throughput . </li></ul>
  37. 37. Conclusions <ul><li>From a NAFTA perspective: </li></ul><ul><ul><li>A collaborative inspection process and a NAFTA information system (based on intelligence & C-TPAT program) are needed. </li></ul></ul><ul><ul><li>They could reduce variability and its disruptive influence on supply chains. </li></ul></ul>
  38. 38. Future research <ul><li>Future research will involve simulating the key cross-border processes, from a system dynamics approach using data from a RFID project in process by TTI and TDT with financial support of FHA. </li></ul>
  39. 39. Thank you! Miguel Gaston CEDILLO-CAMPOS Miguel MATA-PEREZ Charleston, West Virginia, USA 2011 International Transportation Economic Development Conference [email_address] http://gastoncedillo.com
  40. 40. Miguel Gastón Cedillo Campos Cuauhtémoc Sánchez Ramírez Editorial Trillas ISBN 968–24–8196–3 http://gastoncedillo.com