trends and challenges for supply chain management and

Copyright © United Parcel Service of America, Inc. All rights reserved.

Trends and Challenges for Supply Chain Management and Logistics in China

Global Supply Chain Management Joint Forum 2007

Hangzhou, November 14, 2007

Sebastian Chan

VP, Supply Chain Operations

UPS China

2Copyright © United Parcel Service of America, Inc. All rights reserved.

UPS

2006 revenue $47.5 billion

Employees 425,300

Daily delivery volume 15.6 million packages and documents

Customers 7.9 million daily

UPS.com Average 15 million daily on-line tracking

Operating facilities 1,788 Express; 936 Supply Chain

Delivery fleet 94,542 package cars, vans, tractors, motorcycles, plus 6,334 tractors and 22,364 trailers with UPS Freight

UPS jet aircraft 273; 9th largest airline in the world

Chartered aircraft 322

Airports served Domestic – 424; International – 389


■ What are the customers telling us

� Findings from UPS Asia Business Monitor 2007

■ Development in China

■ Challenges for Supply Chain Management in China

■ UPS solutions to Value Creation – two illustrations

� Trade Direct SM

� UPS Capital

■ UPS in China

Presentation Outline


UPS Asia Business Monitor 2007- A Source of Insight for Asia’s SMEs

What are the customers telling us


Overview of Methodology

■ Fieldwork period: 15 November, 2006 - 10 January, 2007

■ SME = Companies with fewer than 250 employees (Following EU standards)

■ Approximate annual turnover between US$500,000 and US$10 million

■ The average SME has been in business for approximately 20 years.

■ Industries: Automotive, Electronics & Electricals, Garments & Textiles, Gifts & Housewares, Healthcare & Pharmaceuticals, Timepieces, Jewellery & Optical goods, Toys & Sporting goods.

■ Interviews were conducted by an independent market research organisation using the respondents’ native language.

• Australia: 100• China: 150• Hong Kong: 100• India: 100

• Indonesia: 50• Japan: 100• Korea: 100• Malaysia: 100

• Philippines: 100• Singapore: 100• Taiwan: 100• Thailand: 100

■ Total of 1,200 respondents


Robust Economic Growth in 2007

44%

66% 60% 60%

38%

41%30%42% 35% 41% 50%52% 54%

40% 38% 36%47%

21% 16%16%14%26%28%49%54% 6%

14% 10%2%

13%

69%79%89%

60%67% 66%63%54% 48%

Regional India China Philippines Taiwan Malaysia Singapore Australia Thailand Korea Indonesia HongKong

Japan

Much better BetterSame

Worse Much worse

62%ABM 2006 : 38%44%71%71%66%59%59%59%61%63%69%86%

Do you think your company’s overall prospects in 2 007 will be better, worse or about the same as they are now?


China to Catch up with the U.S.

5% 8%19%9%

11%

17%11%

6%

11%

20%

25%

23%

33%

37%

32%

27%38%

20%13% 8% 7%

11%

9%

0%

20%

40%

60%

80%

100%

All Countries ExceptChina

Korea Japan Taiwan

Never More than 20 years Within 16-20 years

Within 11-15 years Within 6-10 years Within next 5 years

How long do you think it will take China to catch u p with the U.S. as the world’s biggest consumer market?


Obstacles to SME Competitiveness

40%

50%

60%

70%

80%

90%

100%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%% Lacking

% I

mpo

rtant

Free-market economy

Property leasing and management costs

Government SupportLegal framework

Innovation

Availability of a Qualified Workforce

Access to Funding and Working Capital

Transportation infrastructure

IT adoption Entrepreneurial spirit

Access to market intelligence and other business information

Supply-chain efficiency

Labour costs

Access to overseas markets

How important are the following factors in contribu ting to SME competitiveness in your country?Which of the following factors do you consider to b e lacking and are obstacles to SME competitiveness in your country?

Strengths Barriers

Hygienics Future value add


Obstacles to SME Competitiveness - China

How important are the following factors in contribu ting to SME competitiveness in your country?Which of the following factors do you consider to b e lacking and are obstacles to SME competitiveness in your country?

Strengths Barriers

Hygienics Future value add


Top Three Business Issues

50% 48% 47% 4 3 % 4 2 % 2 8 % 18 %

All

Cou

ntrie

s

Quality of products/services Customer loyalty

Retention of a qualified workforce Financial performances

Speed, flexibility and adaptability to change Government

Corporate reputation

What are the top three business issues that keep yo u up at night?


Difficulty in Forecasting Demand

What problems do you see with the supply chain mana gement at your company?

67%17%33%17%33%50%Thailand

0%20%0%20%60%60%Taiwan

33%17%50%33%33%83%Singapore

0%13%25%50%50%38%Philippines

14%29%43%57%43%57%Malaysia

25%0%38%13%13%63%Korea

5%27%27%9%32%59%Japan

33%33%0%33%67%100%Indonesia

33%17%25%33%33%42%India

0%44%22%33%44%56%Hong Kong

14%0%29%43%43%57%China

0%25%13%25%25%13%Australia

16%21%27%28%37%53%All Countries

Use of unreliable

logistics and

shipping service

providers

Supply chain

management is

not seen as a

priority

Lack of visibility

of product

movement and

inventory levels

Supply chain is

fragmented with

too many parties

involved

Lack of

knowledge of

and expertise in

supply chain

management

Difficulty in

forecasting

demand

% rating“Disagree" +

“Stronglydisagree"

Problems encountered

Rated B

Y S

ME

s in…







� Trade Direct SM

� UPS Capital

■ UPS in China



China has evolved from primarily an export-driven economy to a huge consumer market

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2001 2002 2003 2004 2005

GDP increase %

Growth of totalprivate consumption

7.5

9

10.5

0

Total private consumption (RMB Trillion)

6

4.5

3

1.5

0

Source: China yearbook and website: www.stats.gov.cn


Growth at China’s inland cities

Source: China Yearbook and www.stats.gov.cn

GDP Growth

5%

7%

9%

11%

13%

15%

2002 2003 2004 2005Year

Inland Provinces GDP Growth % Total China GDP Growth %

■ China national GDP continued its growth at rates above 9%

■ In recent years, Chinese inland cities experienced growth at higher rates


0.0

0.2

0.4

0.6

0.8

1978 1985 1990 1995 1998 2001 2002 2004 2005

Rat

io

Interior Household income relative to the Coastal Level

Rural Resident income Relative to the Urban Level

Coastal vs Interior income gap

Rural vs urban income gap

The growth of the interior China areas


Generate more consumption and develop the interior and/or rural areas

■ China policies are to generate more consumptions in the next five years and beyond:

� reduce income inequality across regions

� change urban-bias development policy into more rural-bias one

� provision of more public goods to poor regions and families

� more investment and government spending on rural areas, education, health and infrastructure


Infrastructure – highway network■ China will spend RMB 2,000 billion in

next 30 years to expand highway system

� Total of 85,000 km highway system covering 85% of major GDP cities

� “7918” Network� 7 radial lanes connecting Beijing to

Shanghai, Hong Kong, Kunming, Lhasa, Taipei, Urumqi and Harbin

� 9 vertical lanes from North to South

� 18 horizontal lanes from East to West

� Direct access to all provincial capital cities and major cities

� Direct access to 50 regional railway gateway, 67 regional air gateway, 140 road hubs and 50 seaports

� Linking Yangtze river delta, Pearl river delta and Bohao bay







� Trade Direct SM

� UPS Capital

■ UPS in China



Implications for logistics and supply management in China

■ Optimistic about growth

■ World’s biggest consumer market

■ Challenges

� Innovation

� Availability of qualified workforce

� Access to funding & working capital

� Government Support

■ Business Issues

� Quality of product / service

� Customer loyalty

� Retention of qualified workforce

■ Supply Chain Management

� Difficulty in forecasting demand

� Lack of knowledge of and expertise in supply chain management

� Supply Chain fragmented with too many parties involved

What the customers are saying …

The macro environment …■ Development in Interior China

■ More consumer spending

■ Expansion of Infrastructure

■ People

■ Network coverage

■ Domestic Capability

■ Supply Chain financing

■ Integrated Services

■ Information Management

Implications


People

■ Increase in breadth of services and depth in geographical coverage means a strong need for logistics professionals

� Knowledge and experiences in integrated supply chain solution

� Exposure to international business environment

� Knowledge in China operating environment

� Mobility domestically in China and internationally

� Innovative approach to supply chain solutions

■ Challenges

� Qualified middle to senior management to cater for the strong growth in the industry

� Well-trained and experienced junior operators

� Shortage more pronounced in inland cities


Air Express Industry Contributes to the Development of China

� According to a study by the US-China Business Council, an

unrestricted integrated air express industry can bring additional

US$3billion investment to the major export industry, additional 84 billion industrial output and add 800,000 job opportunities. [from 2003-2008]

� The study also indicated one of the benefits the air express industry brings is the balance of development gap between the coastal area and

the inland areas.

� When a company in Xi’an has the same access as a company in Beijing or

Shanghai to the global express network, the advantages of resources and

cost in the west area will not be offset by any higher costs or longer time in transportation.







� Trade Direct SM

� UPS Capital

■ UPS in China



Freight (All Trade Terms)

UPS Trade Direct SM

Production Facility

Finished Goods Shipping DeliveryOrigin Destination

Orders shipped individually by ocean / air freight

End Customers

B2B/B2C

Distribution Warehouses

B2B

Small Package Express service (door-to-door air)

Express (Ex-works/DDU/DDP)Production

Facility

Production Facility

Production Facility

Consumers

Retail Stores

B2C

B2B

B2BShipment is then deconsolidated after customs clearance

Each order is labeled at origin, consolidated & shipped as one shipment (air, FCL or LCL)

Trade Direct SM (All Trade Terms)


UPS Trade Direct SM Process Flow

A complete, integrated, multi-modal solution

Freight and individual packages are picked up, labeled and consolidated

Consolidated shipment crosses the border in a single customs clearance

Freight moves via LTL

Packages enter UPS package delivery network

Package and LTL shipments are delivered direct to multiple retail stores and/or end customers

PICKUP / CONSOLIDATE

SHIPMENTS

CLEARCUSTOMS

DECONSOLIDATESHIPMENTS

FINALDELIVERY

FULL VISIBILITY: End-to-end tracking provided throu ghout the supply chain.


UPS Trade Direct Portfolio of Services

■UPS Trade Direct SM Cross BorderAn end-to-end solution providing complete dock-to-door movements of packages and freight shipments across borders between NAFTA markets. Origin-to-border movement is by ground trailer.

■UPS Trade Direct SM AirCombines air freight and customs clearance with final UPS package or LTL delivery. Enables you to get your product to customers with the benefit of bulk shipping and the speed of individual direct express shipments by transparently combining the best features of both.

■UPS Trade Direct SM OceanFor economical movement of shipments in major trade lanes worldwide, with delivery direct to retailers and end consumers. Combines ocean freight and customs clearance with final UPS package or LTL delivery.


Benefits of UPS Trade Direct SM

� Increased speed to market can increase order-to-cash cycle, improve response time and overall service

� Repeatable processes create dependable service, decreased risk of error, loss or damage caused by multiple hand-offs

� DC by-pass reduces physical asset requirements due to impact of seasonality and market fluctuations

� Removing unnecessary handling, labor and equipment costs reduces overall logistics costs

� Better inventory management increases inventory turns and reduces carrying costs

� Consolidated invoice for more efficient processing

� Complete on-line tracking for proactive management and greater control

� Single point of contact simplifies management and administrative requirements

Speed

Reliability

Flexibility

Cost Containment

Effectiveness

Efficiency

Control







� Trade Direct SM

� UPS Capital

■ UPS in China



About UPS Capital

■ Founded in 1998 as the financial services subsidiary of UPS

■ Staff of over 700 professionals

■ Offices throughout the U.S. (FCI member) as well as Hong Kong

(FCI member), Taiwan (FCI member), Shanghai, Canada, and the

United Kingdom

■ UPS Capital develops financial solutions and introduces additional

UPS resources that enable companies to operate more effectively.


Supply Chain Convergence

Financial Supply Chain Services

Transportation Export/Import ComplianceDocument Management

Shipment TrackingInventory Management

Global Parts ManagementSecurity ManagementContract Management

WarehousingFulfillment

PO ProcessingLetters of Credit

Open Account ManagementPre & Post Shipment Financing

Invoice PresentmentInsurance ManagementReceivables Financing

Global Asset Based LendingPayables FinancingInventory Financing

Physical Supply Chain Services

Information


Trade Finance Market Trends

■ Buyer strength is dictating terms of relationship

� Buyers are demanding open account terms on trade transactions.

� Buyers are placing large orders to fewer vendors. This has created working capital strains on their vendors, especially as letters of credit usage continues to decline.

� Globalization has stretched the supply chain and has increased strain on working capital.

The result: An opportunity for financial institutions and logistics companies to collaborate in developing lower risk open account solutions, while leveraging logistics data to mitigate risk.


UPS Capital Global Supply Chain Finance

■ We leverage UPS Supply Chain services and information to provide financing and risk mitigation tools at varying points within your supply chain.

■ We offer working capital financing solutions to address a company’s needs around accounts receivable, accounts payable, and inventory.


■Supplier Benefits

■Supplier obtains financing earlier in the supply chain.

■Leverages buyer’s credit strength to obtain favorable cost of funds.

■Reduces days sales outstanding.

■Supplier has visibility of products throughout the supply chain.

■Buyer Benefits

■Ability to extend payment terms to supplier.

■Decreases cost of goods sold by providing earlier financing solutions to suppliers.

■Buyer has visibility of products throughout the supply chain.

UPS Capital Global Supply Chain Finance Payables Discounting




■Leverages buyer’s credit strength to obtain favorable cost of funds.

■Supplier has visibility of products throughout the supply chain.

■Buyer Benefits

■Buyer has visibility of products throughout the supply chain.

■Balance sheet optimization.

■Creates better cash flow availability.

■Results in improved profitability.

UPS Capital Global Supply Chain Finance Inventory Financing




■Supplier may obtain higher advance rates against approved invoices.

■Eliminates buyer credit risk.

■Reduces collection costs.

■Buyer Benefits

■Increases working capital by eliminating letters of credit.

■Can negotiate better payment terms.

■Enhances financial stability.

UPS Capital Global Supply Chain Finance Receivables Financing







� Trade Direct SM

� UPS Capital

■ UPS in China



UPS in China

UPS Express Facilities

UPS Supply Chain Solutions Offices (Exclude Hongkong and Taiwan)

DalianDalianBeijingBeijing

TianjinTianjin

QingdaoQingdao

NanjingNanjing

ShanghaiShanghaiSuzhouSuzhou

FuzhouFuzhou

WuxiWuxi

Shenzhen + Shenzhen + YantianYantian

ShenyangShenyang

NingboNingbo

KunshanKunshan

ChengduChengdu

XianXian

HangzhouHangzhou

ChongqingChongqing

ShijiazhuangShijiazhuang

GuangzhouGuangzhou

KunmingKunmingXiamenXiamen

ChChangzhouangzhouWenWenzhouzhou

FuoshanFuoshanDongguanDongguan

ZhongshanZhongshanHongkongHongkong

■ Established in China since 1988

■ 45 locations covering more than 330 cities

■ Employees: 4,518 in China

�Express 2,600 Supply Chain 1,918

■ Delivery Fleet: 553

�Package vans, trucks, trailers

■ Operating Facilities: 87

�Distribution centers, Package centers, Hubs, Gateways, Offices, Freight Warehouses

■ Products� UPS Worldwide Express PlusSM, UPS Worldwide

ExpressSM, UPS Express Saver, UPS Worldwide ExpeditedSM, UPS World EaseSM, UPS Air Cargo and UPS Trade DirectSM. Heavyweight Air, Ocean, Ground freight transportation, International trade services, Supplier Management, Logistics and Distribution Services, Post Sales support. Financial services through UPS Capital Corporation.


UPS International Air Hub in Shanghai - 2008

Overall Land Size: 96,000 sqm, including office & w arehouse: 35,000 sqm

Plan to operate in the 3rd quarter of 2008 at Pudon g Airport West Freight Handling Area.


Bombay

EuropeOsaka

747-100

Qingdao

Dalian

UPS Connects China and Asia to the World

Seoul

Tokyo

Taipei

Shanghai

Hong Kong

Beijing

Xiamen

Guangzhou

Shenzhen

Bangkok

Penang

Kuala Lumpur

Clark

Cebu

Singapore

Jakarta

Fiji

Sydney

Anchorage

RockfordNewark

Louisville

Ontario

Honolulu


UPS China

• Official BOCOG Designations include:

– Official Sponsor of the Games of the XXIX Olympiad

– Beijing 2008 Sponsor

– Beijing 2008 Logistics and Express Delivery Sponsor

– Official Sponsor of the Beijing 2008 Olympic Games

– Official Logistics and Express Delivery Sponsor of the Beijing 2008 Olympic Games

– Official Logistics and Express Delivery Sponsor of the Beijing Organizing Committee for the Games of the XXIX Olympiad

– Official Logistics and Express Delivery Sponsor of the Beijing Organizing Committee for the 2008 Olympic Games

– BOCOG Logistics and Express Delivery Sponsor

• UPS has been appointed as the Beijing 2008 Logistics and Express Delivery Sponsor.

• All of our affiliated companies in China are covered by our sponsorship.

• We are also sponsors of COT, COC and Paralympics

Official Logistics and Express Delivery Sponsor of the Beijing 2008 Olympic Games

trends and challenges for supply chain management and

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