Inside Logistics

Guest column: Servicing the US market

Supply chain segmentation and cross-border network optimization


July 11, 2013
by Guy Gessner

Guy Gessner

Canadian companies considering a transition from exporting to the United States to direct investment in US operations offers a unique set of opportunities and challenges for logistics network design and management. This decision requires an assessment of the need (or not) for multiple supply chains—in other words supply chain segmentation.

There are critical differences that need to be recognized as a result of this transition. As an example consider a Canadian electronics automotive aftermarket manufacturer that also imports items and currently sells to US aftermarket retailers and independent repair shops. All shipments are parcel shipments from Canadian warehouses to US customers. This Canadian company is looking for significant growth in the US market and needs to design a supply chain strategy to prepare for this growth.

The first issue to deal with is to decide if the Canada/USA border can be managed well enough to continue to support growth in the US market. Resolving this issue sets the stage for expansion of the current Canadian supply chain network to include the US market, or to consider implementation of multiple supply chains. Some of the important decision factors to evaluate are:

  • Demand patterns and sensitivities by US customers—is demand stable and predictable or erratic? Do resellers inventory significant amounts or run lean systems? Could one or two significant border delays impact business in the USA? In some cases supply chain networks are segmented because of differing patterns of customer demand.
  • Border crossing patterns and sensitivities—can the border be crossed on a predictable schedule or do delays and interruptions occur at random and appear unpredictable? Do US customers view this as a Canadian supplier problem or a process requiring collaborative management?
  • Transportation rates —transporting freight across borders increases complexity and paperwork that at a minimum includes both customs documents and immigration. This triggers higher transportation rates and costs for shippers and consignees that must be passed along or absorbed. Can a Canadian shipper pass these along to US customers and remain competitive?
  • Government Customs programs—are there programs such as trade zones, offered by either or both countries, that make sense to take advantage of that require modifications in the current supply chain or distribution network?

In the current single-network (not segmented) export model a Canadian company’s logistic network of importers, manufacturers, warehouses and distribution centres is all contained within the borders of Canada. US customer orders are fulfilled out of Canadian distribution centres using 3PLs and are considered outside of the network. This Canadian supply chain network has been optimized for the Canadian market. Direct investment in United States operations would require expansion of the current Canadian logistic network to include operations in the US. This single network would need to absorb the costs, variability, and uncertainties associated with crossing the US border.

These factors need to be added as inputs to the network optimization model and a new solution would need to be developed. An additional factor is that a significant number of cross-border shipments are likely to be intra-firm full-truck load shipments to US warehouses or distribution centres whereas before all export shipments were inter-firm parcel shipments to US businesses. While logistics performance always counts, intra-firm shipments typically are for inventory replenishment and can have less variability and be easier to plan then fulfillment of customer orders. Changing from international parcel shipments to full truck load shipments should also help to lower the transportation rates and costs in the supply chain.

An alternative would be to create a separate supply chain network in the US dedicated to support sales in the US. This is a strategy of supply chain segmentation based upon geopolitical boundaries. This may entail establishment of separate manufacturing operations as well as a distribution network in the US or the importation of finished goods or sub-assemblies into the US for completion and distribution there.

Using this strategy, the Canadian company is now operating two independent supply chain and distribution networks supporting sales in two different countries. Both the Canadian and US supply chain and distribution networks should be optimized to minimize costs, using models and input factors representative of different conditions found in the two different countries. Often when Canadian companies make their first investments in the US, they are in border regions so Canadian executives can can easily visit the American operations and keep in close touch.

As the Canadian company increases sales in the US, the supply chain and distribution network will need to evolve to service geographically dispersed customers with differing performance standards. Each of these evolutionary stages will require re-optimization of the network and/or decisions to segment the network further, perhaps this time by demand patterns instead of geopolitical boundaries or by both differing demand patterns and geographic regions.

Among the unique factors in cross-border network models are the opportunities created by trade agreements and Customs programs. In addition to NAFTA, US Customs has two programs that are of particular interest: one for bonded warehouses and one for foreign trade zones. Both of these unique programs provide suppliers with the ability to defer duty on items imported into the USA that are not covered under NAFTA.

Furthermore, US foreign trade zone programs permit imported items to have a degree of value added to them and then exported to other non-NAFTA countries without paying US tariffs or duties associated with products that formally enter into the US markets. This adds both exciting global opportunities and complexity to cross-border logistics networks. Compliance with these programs may be strenuous enough, the penalties for violation significant enough, and the nature of global opportunities provided may be large enough that it may make sense to create a third and separate supply chain and distribution network to capitalize on these programs and conditions.

Minimization of supply chain and distribution costs is not complete without package optimization. Creating full truck loads for intra-firm freight moved from Canadian operations to the new US warehouses and distribution centres and between US warehouses and distribution centres requires new corrugate configurations and pallet patterns to achieve maximum density and minimize logistics costs. Parcel distribution from the new US facilities to US customers can now take advantage of US domestic transportation options and rates. And while that may be a significant plus, it may come with a downside. It is likely the packaging will have to be optimized for the domestic market and any new additions to the product mix.

Finally, direct investments in US operations usually require a long-term lease commitment or investment in a plant and equipment. Both of these investments can be treated like incremental fixed costs to the Canadian corporation. Recovery of these incremental fixed costs comes about from incremental US sales. Canadian companies should consider adding US partners who can rapidly expand their sales in the USA to accelerate recovery of these incremental fixed costs by amortizing their cost over a larger number of orders.

Of course expansion of sales in the United States will most likely increase the number and product mix of orders fulfilled, as well as delivery destinations. Increasing market coverage requires periodic evaluation of supply chain segmentation strategies and the re-optimization of supply chains, as well as package re-optimization as the mix of products and orders changes.

Crossing an international border provides some exciting and unique opportunities and challenges for supply chain and distribution management. Companies should consider international expansion as a repeatable process of adding new customers and products, re-optimizing supply chain and distribution networks to support these new customers and then re-optimizing packaging to continue to drive out costs and inefficiencies and they grow.

Guy Gessner is a member of the consulting team for Supply Chain Optimizers and a faculty member of the Department of Marketing and Information Systems at Canisius College.