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Cross-Border Flow Analysis Report 2:

Case Study for Company 2 (Small-Medium Sized

Enterprise)

Prepared forIndustry Canada

Prepared byInterVISTAS Consulting Inc.

8 July 2009

Cross-Border Flow Analysis Report 2: Case Study for Company 2 (Small-Medium Sized Enterprise)

8 July 2009

i

Table of Contents

1. Introduction........................................................................................................................ 1 1.1 Overview .............................................................................................................................1

2. Methodology ...................................................................................................................... 2

3. Firm Profile......................................................................................................................... 3

4. Value Stream Map.............................................................................................................. 4 4.1 Value Stream Glossary .......................................................................................................5 4.2 Current State vs. Future State Maps...................................................................................5 4.3 Processes and Timing.........................................................................................................9

5. Key Findings.................................................................................................................... 11 5.1 Summary...........................................................................................................................11 5.2 Findings.............................................................................................................................11 5.3 Quantitative Results ..........................................................................................................13

6. Border Crossing Costs ................................................................................................... 14


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1. Introduction

The purpose of this study is to determine and evaluate the experience of processing a transaction from initiation of an order to clearance at the U.S. border. This report will be followed by recommendations and alternatives to result in enhanced facilitation of trade from Canada to the United States.

The data collected from this report will help to identify the underlying causes of border challenges that may impact the competitiveness of Company 2 from a number of perspectives: regulatory, logistic and security. The study examines, measures and reports upon the various logistics, security and compliance costs for the company at the border, including more detailed examinations of the frequency of secondary inspections and the issues that trigger such incidents (i.e. regulatory compliance vs. border protection imperatives).

The following report is a case study for Company 2 - a small-medium sized enterprise. This draft case study report is developed based on interviews and information received from the firm. While the findings reflect the issues faced by the individual organization, it is intended to demonstrate the challenges that other companies within the industry are faced with. The report includes the following: Value stream maps of cross border processes Descriptions of process steps for shipping goods across the border Matrix of key findings Explanations of key findings

1.1 Overview This report provides an overview of the following information: 1: Shipping Steps / Wait Time 2: Regulatory Requirements/Issues 3: Logistics Related Issues 4: Security Issues 5: Existing Programs & Initiatives to Address Issues 6: Compliance Cost Data 7: Observations/Gaps

Information included in this report will support the identification and analysis of top issues leading to significant challenges at the Canada-U.S. border. Further, it will allow for a better understanding of how border issues affect the competitiveness of companies, enabling an assessment of their impacts on North American supply chains. This information will lead to the development/proposal of potential options and solutions to eliminate unnecessary costs and delays at the border.


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2. Methodology

The methodology used to develop this report is as follows:

1) Company Selection - The primary criterion for selecting this company was that is a small-medium sized enterprise with a significant volume of its products shipped across the Canada-U.S. border. In terms of overall movements and value, 55% of annual sales are to U.S. customers. Company 2 was also selected as an example of textiles shipments and is representative of other small textile companies in the industry sector with significant exports to the U.S.

2) Data Collection – In-depth data collection was performed to characterize the cross-border shipment process and to identify border issues. Data collection consisted of reviewing data with personnel responsible for export and customs requirements. To refine and ensure fidelity of data and supply chain processes, a facilities site tour was also undertaken to document and validate the process steps. This included a review of hard copies of actual shipment documentation and shipping reports for the month of January 2009. Three year’s worth of shipment history summary was also reviewed in addition to interviews with Company 2’s customs broker. Additionally, the carrier and service provider was also contacted to verify the processes, times and incident rates at the border.

3) Develop Value Stream Map - With the detailed processes outlined for the products, timing data and incident rates were associated to each step to develop the “current state” value stream maps.

4) Detail and Categorize Border Issues - The challenges faced by the company in shipping goods across the border as identified by the company and through the value stream mapping process were documented and categorized into one of the seven columns as outlined in the findings matrix.

This report is one of seven case studies developed. For ease of reference, the seven companies are as follows: Company 1 (Services Sector Involved in the Movement of Goods) Company 2 (Small to Medium-sized Enterprise) Company 3 (FAST Truck Drivers) Company 4 (Food Processing Industry) Company 5 (Motor Vehicle Sector) Company 6 (Consumer Goods Industry) Company 7 (Chemicals Sector)

Companies provided data in confidence; as a result their names and descriptions are genericized and data collection results are provided in aggregate form only to protect commercial sensitivities.


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3. Firm Profile

Company 2 is a small to medium sized enterprise (SME) company with headquarters, production facilities and distribution center in western Canada. It designs, sources and produces specialized textile products that are either standard off-the-shelf product or customized for the end user.

Typical of a number of SME firms, Company 2 exhibited computer systems that were not as fully automated as compared to larger producers of auto parts or food/chemical products. Some reliance on fax technologies supplemented by database linkages provided a good example of the extent of data and practices suitable for this study.

Most standard products for Company 2 are sourced from suppliers from around the world as finished goods to the western Canadian facilities. Otherwise, the remaining standard products and customized items are manufactured on-site from raw materials imported from a number of countries (primarily from East Asia). All standard products destined for the U.S. market are shipped to Company 2’s eastern U.S. warehouse/distribution center and subsequently to U.S. retailers. Customized goods are sent directly to U.S. customers.

The products are relatively small in size and are lightweight, so shipments are less-than-truck load (LTL). In terms of logistics, Company 2 uses a service provider who performs both common carrier trucking and brokerage into the U.S. As a Canadian textiles manufacturer, the products are subject to textiles reporting requirements, tariff preference level (TPL) quotas and the North American Free Trade Agreement (NAFTA). In the U.S., the service provider cross-docks the goods to a courier for domestic delivery to their final U.S. destination (i.e., warehouse or end customer).

There are two product shipment types that are relevant to Company 2: Time-definite delivery: Customized products are generally made for highly time-sensitive

deadlines. More specifically, the products are intended for a specific customer event, so a missed delivery date has significant repercussions to Company 2.

Inventory replenishment: For the balance of products, shipments are used to replenish stock at the U.S. warehouse so timing does not play as large of a role.

Company 2 does not currently participate in any existing facilitation programs despite the majority of its sales volume being shipped to the U.S. This may be a function of size of the company as a SME as well as knowledge capacity in potential benefits of participation.


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4. Value Stream Map

Value Stream Mapping (VSM) is a process analysis tool that is used to represent the interaction between processes, operations and information for bringing a product order (or request for service) through to delivery of it. The concept originated a number of years ago through the Toyota Production System and is a key technique used in Lean Manufacturing. VSM is used to determine the value added and non-value added elements of a system. It provides a high level picture of product and information flows in order to develop improvement suggestions.

A value stream consists of the following elements: Supplier (start of flow) Customer (end of flow) Physical flow of product being mapped Information used by process transformation steps Information flowing between process control, supplier and customer

Value stream maps can help visualize the process steps required to make a product or provide a service and any waste that exists in the processes. It provides a view of the entire system so that any improvements can be made to better the overall flow rather than a limited area within it.

The symbols used in the value stream maps in this report are as follows:

Customer or Supplier

Delay (non-value added)

Process (value added) Flow of Product

Decision Point or Alternative Flow of Information

Transport

Information System

Elapsed time

Touch time Timing Chart

The following section provides a glossary of terms used in the value stream maps.


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4.1 Value Stream Glossary

The following definitions are used in value stream maps and Lean principles.

Term Definition

Elapsed Time The time it takes to complete the tasks to make a product or provide the service including delays and interruptions within the process. Also known as throughput, turnaround, flow or lead time.

Non-Value-Add (NVA) Any operation or activity that consumes time and/or resources but does not add value to the service provided or product sold to the customer. (Some are necessary - i.e., regulatory requirements - while others are unnecessary.)

Queue or Delay Time Non-value added time spent waiting for a process.

Takt Time Average demand for product or service expressed in units of time. Sets the pace for the operation; all processes need to produce at rate of demand. The calculation of takt time is available work time per day / customer demand per day.

Touch Time The total time spent performing tasks to complete the product or provide the service without delays or interruptions within the process.

Transport Physical movement of goods from one place to another. If the company performs the transportation, queue time is not included in the transport time. Otherwise, delay time is included in transportation time.

Value-Add (VA) Any operation or activity the customer values (and would be willing to pay for).

Waste The elements of the process flow (or lack thereof) that add no value to the service provided.

4.2 Current State vs. Future State Maps

Current state value stream maps are typically developed to document current process flows and identify potential points of improvement. Future state maps are developed from the current state maps to design a lean flow that eliminates waste and improves the process flow. There are three basic Lean principles that are applied when designing future state value stream maps: Eliminate Unnecessary Non-Value Added Reduce Necessary Non-Value Added


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Optimize Value-Added

In general, these are targets for improvements that can be achieved six to nine months out. Some of the tactical actions that can be taken include: Eliminate steps / handoffs Merge steps Create parallel paths Implement pull if flow is not possible Reduce / eliminate batches Improve quality Create standard work Create an organized, visual workplace Eliminate unnecessary approvals / authorizations Stop performing nonessential (NVA) tasks from the customer’s point of view Co-locate functions based on flow; create teams of crossfunctional staff Balance work to meet takt time requirements

The following diagrams show the value stream maps for Company 2 for a SME custom textile products manufacturer using consolidated freight to ship to individuals and small groups. Future state value stream maps are outside of the scope of this study and were not developed. The size of the firm operation showed dependency on a number of manual processes: data gathered was based on a review of 30 days of actual shipping information in addition to a review of the past three years.

Warehousereleases orders

Customer Service

PICK & PACK I LOAD CBP PROCESS UNLOAD

Consignee

Assemble and transmit customs

data

Broker&

Logistics

- 120 min.- custom orders- warehouse

transfer orders- completed by 12

pm

21 hrs.

ACE

ABI/ACS- 30 min- information submitted to

Broker website by 2 pm; check for errors and omissions ½ hr later

- It is possible to submit corrections up to 8 am of the day of shipping

- Rush shipment information can also be called in before 8 am, but will incur additional charges

- 20 min.- pickup by LTL

freight forwarder is between 8:30 am and 9:30 am

- guaranteed delivery truckload freight can be up to 12 pm

- 2 hrs for other pickups

- 1 hr lineup at border

- other orders picked up, and consolidated by LTL freight forwarder

- LTL freight for courier next day air must be delivered by 3 pm

- LTL freight for courier ground must be delivered by 1 pm

30 min.- ½ to 1 ½ hrs for

Secondary Processing

- Frequent diversion to Secondary Processing due to textile shipment

- Diversion if more than 5 different SCNs

Company 2

Textile Shipment

March 5, 2009

120 min.

21 hrs 1 hr2 hrs +

20 min. 30 – 90 min.

0.5 hr

20 min.

Courier

Place order

Air

ERP/MRP Enter order in ERP/MRP system

Shipment details

eManifest

Entry Data; TPL application

Pick list issued by 10am

LTL To Crossdock

Touch time: 190 – 250 min.

Queue time: 21 hrs.

Transport time: 3.5 hrs.

Carrier

Importer of Record

Ultimate ConsigneeACE

Broker

Impending shipment

I Primary Processing

(incl. cab check for non-FAST)

25% of shipments are releasedafter primary processing

Depart

30 min

3 min.

I Change DataMake Payment

1 hr 15 min.

I Open Doors(5%)

1 hr3 – 4 hrs

I VACIS

30 min90 sec

IVACIS

A. RandomB. BlitzC. Directed

1 hr90 sec

Finding

NOI

Hold for Compliance

(at CBP compound)

30 min6 – 24 hrs

IDetain

(Must be exported if no decision has been made after

30 days)Detain up to a max. of 30

days 0 min

I Refuse and Return

1 – 2 hrs0 min

I Seize Shipment

1 hr.0 min

YES

CBP disposesOn-site or off-site

- destroy- donate- auction

I Hold for Compliance

(At CFS – space constraint at CBP)30 min

1 – 2 days

I De-van(at CES)

24 hrs8 – 12 hrs.

I

Conditional Release

(may lead to Request for Redelivery)

30 min.0 min

IDemand for Redelivery to CBP

1 – 2 days0 min

Finding

NO

Return to Canada

July 8, 2009

YES

eManifest- 1 hr prior to

arrival- ½ hr for FAST

OR

Entry DataCF3461

Submit prior to arrival

ReleaseResult

To Secondary Processing

When directed to VACIS

To Secondary Processing

Initial Determination

I

1 hr15 min.

On-site MitigationReturn Property

- pay fine

70%

YESFinding

PORT LIMITS – within 25 miles of border crossing

Arrive at border

ABI/ACS

NO

Return to Canada

Redeliver

COMPANY 2Customs and Border

Protection Truck Process


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4.3 Processes and Timing

4.3.1 Textile Products Shipment by Consolidated Freight

The following processes trace a textile product shipment from order to immediately after the goods cross the U.S. border.

# Step Observations Timing

Product Flow

1 Pick and pack Orders are packed each morning, as required. Generally, shipments are ready by noon.

120 min.

2 Wait Orders wait overnight, and are picked up by 9am the next morning. This is necessary in order to allow sufficient time for other pickups and the border crossing process, and still allow the truck to get to the U.S. domestic courier cross-dock in time for loading to the courier trucks.

21 hrs.

3 Load When the consolidated freight truck arrives, pallets are loaded.

20 min.

4 Transport The truck will make several more pickups over the next two hours, before heading to the border. LTL shipments cannot use the FAST lane, so the wait at the border is often 1 hour.

180 min.

5 CBP process With more than 5 Shipment Control Numbers, and very frequently with textile shipments, the truck is diverted to Secondary Processing. Depending on the lineup at the counter, the paperwork review and clearance process can take from 30 to 90 minutes.

30 – 90 min.

6 Transport The truck proceeds to a U.S. domestic courier cross-dock facility close to the border.

30 min.

7 Unload Shipments are unloaded at the cross-dock. If a shipment intended for ground shipment fails to arrive on time to be loaded on a ground delivery truck, it will be sent by air if it cannot make the scheduled delivery time otherwise. This happens frequently, due to unavoidable delays at the border. The textile company absorbs the difference in shipping cost.

20 min.


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# Step Observations Timing

Information Flow

1 Receive and process order

Customers send in orders to customer service. For individuals and small groups, it is necessary to provide a social security number to complete customs information (since these customers do not have an employer identification number [EIN]). This information can be difficult to obtain in various circumstances, such as trade shows, small recreational groups, and individuals reluctant to provide private data.

In scheduling of production, an additional day will be added to the lead time, due to the delay experienced with the customs process just before shipping.

30 min.

2 Issue pick list The pick list is issued in the morning of the day prior to the scheduled shipping date.

<5 min.

3 Send customs information to broker/freight forwarder

When the order has been picked, the shipment data is collected, and sent to the broker via the broker’s online system. This allows time for the broker to file for, and receive, permission to ship textiles subject to an import quota. All broker work takes place during normal business hours.

30 min.

4 File customs information

The broker/freight forwarder files the eManifest, the entry data, and the tariff preference level (TPL) documents for textile shipments. If a quota is involved, this is also applied for.

5 min.

Timing Summary

1 Touch time 190 to 250 minutes. This includes 30 to 90 minutes for the border crossing process.

2 Queue time 21 hours. This results from the working hours of the producer and broker, and the pickup times at the U.S. domestic courier.

3 Transport time 3.5 hours. This includes time to pick up other freight, and a 1 hour wait in the lineup at the border.

4 Delay Delays due to the border crossing process are mainly due to the way the producer and broker work, and their working hours. At the border, Secondary Processing results in a 30 to 90 minute delay.


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5. Key Findings

The following are the categorized key findings from interviews and other data collected from Company 2.

5.1 Summary

1) Shipping Steps / Wait Time

2) Regulatory Requirements/Issues

3) Logistics Related Issues

4) Security Issues

5) Existing Programs & Initiatives to Address Issues

6) Compliance Cost Data

7) Observations / Gaps

Having to Submit Customs Information to Broker One Day Ahead of Pickup

None Noted

Time-Definite Deadlines

LTL Shipments

Air Freight Incurred if a Shipment is Delayed

None Noted

None Noted

IRS Personal Tax Identification Number

Single U.S. Warehouse Located in East (vs. Canadian Warehouse in West)

None Noted

5.2 Findings

The following are the key findings and issues identified by the project team.

5.2.1 Shipping Steps / Wait Time

Having to Submit Customs Information to Broker One Day Ahead of Pickup Because of potential issues that may arise on the shipment data that may need to be rectified, Company 2 must submit its customs information on custom orders to its broker at least one day ahead of product pickup. (i.e., custom order shipments occur on Monday, Wednesday, and Friday for which submission of the data takes place Tuesday, Thursday, and Friday).

5.2.2 Regulatory Requirements/Issues

None noted. Although country of origin marking is required, it has not been a delay issue with Company 2.


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5.2.3 Logistics Related Issues

Time-Definite Deadlines Customized products not delivered at the specified time results in a loss of sales revenue as a refund is required (i.e., event-specific uniforms or goods). If the time deadline is missed, the full value is extinguished (i.e., perishable goods). This is particular difficult for a small-medium enterprise (SME) with limited resources.

Less-than-Truckload (LTL) Shipments The custom made nature of the products of Company 2 often result in small order patterns that require shipment by less than truck load (i.e., mixed with shipments to other customers and other companies’ shipments). Because this typically leads to multiple commodities and shipment control numbers for one truck and is considered higher risk, these trucks are often sent to Secondary processing at the U.S. border.

Air Freight Incurred if a Shipment is Delayed In order to avoid having to issue a refund by missing time-specific deadlines, Company 2 must occasionally employ air freight to ensure meeting promised delivery date. This is at a much higher cost utilizing FedEx services.

5.2.4 Security Issues

No security issues were noted by Company 2 at the Canada/US border.

5.2.5 Existing Programs & Initiatives to Address Issues

Company 2 does not participate in any existing programs or initiatives to address the noted issues.

5.2.6 Compliance Cost Data

IRS Personal Tax Identification Number The CBP requirement for an U.S. Internal Revenue Service (IRS) tax identification number to be provided on commercial invoices functions appropriately with the Employer Identification Number (EIN) assigned to a business. However, when the ultimate consignees are not businesses (a large portion of their custom apparel business), a personal social security number is demanded. This is a situation that results in the majority of individuals refusing to supply this information (understandably so, with identity theft as a major concern). This results in missed deliveries causing a full refund, Company 2 incurring the cost of production, shipping fees, and loss of goodwill.


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Single U.S. Warehouse Located in East vs. Canadian Warehouse in West Brokerage fees are applied on a per shipment basis to the U.S. from Canada by the service provider (i.e., each U.S. destination is a separate shipment). Because of this, Company 2 ships all of its U.S.-bound product (except for its custom apparel) to its warehouse located in northeastern U.S. from its western Canadian facility. To minimize on brokerage fees, U.S. customers located in western U.S. are served from the U.S. warehouse, which adds several delays extra on shipment times and additional freight costs.

5.2.7 Observations

No other observations or gaps were noted with regards to the Canada/U.S. border.

5.3 Quantitative Results

As outlined in earlier in the document, the quantitative data aggregated from Company 2 was based on a review of 30 days of actual shipping information in addition to a review of the past three years. The following is an annualized set of data:

Description Frequency per Year

Shipments to the U.S. 25,000

Custom Orders (direct to customer) 10,000

To U.S. Warehouse/Distribution Center 15,000

To CBP Secondary (but no delays to Company 2)

24,500

Shipments with delays (i.e., missing information)

12


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6. Border Crossing Costs

Border-related costs, which are quantified on an annual basis for Company 2, can be categorized into one of two groups: compliance costs and other costs (i.e., due to delays, etc.).

Compliance costs consist of the number of full-time equivalents (FTEs) employed by Company 2 to complete all the necessary paperwork and documents to export textile products to the U.S. This excludes the cost of the service provider for when the goods physically arrive at the border that are charged on a per shipment transaction basis. Company 2 has two shipment types to the U.S.: custom orders shipped directly to individual customers and U.S. warehouse replenishment from which U.S. customers are served. In the past, all shipments were sent directly to customers from Canada but service provider fees to handle all orders to the U.S. were great enough to justify the creation of a warehouse/distribution centre.

A substantial cost to establish a U.S. based warehouse/distribution centre was found to be indirectly attributable to the cost of compliance at the border. As a result, it was not counted as a cost item for border compliance for this study. It is however of interest to broader policy objectives given that warehousing/supply chain jobs were diverted to the United States from Canada.

Other costs are incurred when goods are delayed at the border. While virtually all shipments proceed to CBP Secondary because they are less-than-truckload and are textile products, no delay costs are incurred since the service provider/carrier accounts for this and it does not directly affect Company 2. Unexpected delays that cause missed connections to Company 2’s carrier in the U.S. for its custom products, such as the requirement for a tax identification number for items over USD 2,000, incur direct and indirect costs to Company 2.

Category Cost Drivers FTEs Cost*

Compliance Company 2 has one employee who completes any forms to fulfill border crossing compliance requirements.

1 $60,000

Other - Tax Identification Number Requirement

This unexpected delay for items over USD 2,000 in value causes shipment deadlines to be missed and results in lost revenue, cost of production and loss of goodwill approximately once per year.

$2,500

Annual Total 1 $62,500

* The assumed cost of an FTE for Company 2 is $60,000.

Prepared by InterVISTAS Consulting Inc.

Airport Square – Suite 550 1200 West 73rd Avenue

Vancouver, BC Canada V6P 6G5

Telephone: 604-717-1800 Facsimile: 604-717-1818

www.intervistas.com

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