State of logistics: the Canadian report 2008

This page has been archived on the Web

Information identified as archived is provided for reference, research or recordkeeping purposes. It is not subject to the Government of Canada Web Standards and has not been altered or updated since it was archived. Please contact us to request a format other than those available.

Background

As competition becomes more globally intensive, innovation is moving from a firm level to a supply-chain perspective. Competitive advantages are now being realized when all supply chain players are synchronized and working together.

Canadian manufacturers, retailers, wholesalers, and logistics service providers can benefit from quality and timely information on logistics, SCM trends, and performance indicators. This strategic information can be used to identify best practices, develop benchmarks, justify investments and innovation decisions, monitor industry performance, and become more competitive in global value-chains.

In this context, Supply Chain & Logistics Association Canada (SCL) and Canadian Manufacturers and Exporters (CME) partnered with Industry Canada to undertake the first Canadian State of Logistics Report.

Section I of this report examines the cost trends of Canadian logistics and supply chain management (SCM) and reviews Canadian inventory management practices, the logistics industry, as well as port activities that support these specific functions.

Section II provides an overview and analysis of the drivers that affect the Canadian logistics and SCM world. Key drivers include the impact of global commerce, security within supply chains, increasing energy costs, sustainable development practices, and technology.

Finally, Annexes I-III contain Canada and U.S. supply chain management costs, Canadian sub-sectors' logistics costs, and Canadian supply chain agility performance indicators.

Approach and methodology

This report is based on a collaborative undertaking between SCL's research committee, CME, and Industry Canada's Service Industries and Consumer Products Branch. Together, they identified industry needs and trends in supply chain management. Using industry generated intelligence, and applying unique economic models developed in-house, Industry Canada provided the overall analysis bringing together all components to produce a first state of logistics report for Canada.

Industry Canada economic models used for the analysis draw upon Statistics Canada data from the Census, Labour Force Survey (LFS), GDP and Input-Output tables. For the U.S., Input-Output tables, Census and Bureau of Economic Analysis data were used.

1 — The Canadian Logistics Business System

1.1 — Logistics and Supply Chain Management Costs

Supply chain management (SCM) encompasses the planning and management of all activities involved in sourcing, procurement, and logistics management. It also includes coordination and collaboration activities with channel partners, which can be suppliers, intermediaries, third-party service providers, or customers. In essence, SCM integrates supply and demand management within and across companies.

Logistics management is the part of SCM that plans, implements, and controls the product and information flow between the point of origin and the point of consumption in order to meet customer requirements.

From 2005 to 2007, total logistics and SCM costs for the Canadian economy increased by 3 percent. Of the three main distribution sub-sectors, logistics costs increased by close to 22 percent in retail, while manufacturers and wholesalers kept their cost within a ±1 percent range (Figure 1).1 Most of the logistics cost increase in retail was attributed to inventory carrying costs (a rise of more than 35 percent in inventory levels). The increased use of low-cost country sourcing and the unpredictability/ variability of that specific supply chain for Canadian retailers resulted in a sharp increase in their inventory levels and transportation costs.2 Compared to the U.S., total SCM and logistics costs were 12 percent higher for Canadian manufacturers, 18 percent higher for Canadian wholesalers and 30 percent higher for Canadian retailers in 2007.1

Figure 1 — 2005-07 Logistics and Supply Chain Management Cost Growth1

Figure 1 - 2005-07 Logistics and Supply Chain Management Cost Growth (the link to the long description is located below the image)

 

Logistics and SCM Costs

Logistics and SCM costs can be separated into three main categories: those occurring internally within firms, those through outsourcing to logistics service providers, and those through inventory carrying costs. Internal SCM and logistics costs encompass all logistics activities that occur within a firm, excluding all outsourced logistics activities and all production processes. Outsourcing costs encompass activities assigned to a logistics service provider.

Inventory carrying costs consist of opportunity costs (costs of holding inventory), shrinkage (costs associated with breakage, pilferage and deterioration of inventories), total obsolescence of inbound goods and finished goods inventory, and channel obsolescence (all material that goes obsolete while in a distribution channel).3

When observing different sectors within Canada, it is notable that inventory carrying costs constituted the highest total SCM and logistics cost for retailers; whereas for manufacturers, internal costs were the highest (Figure 2). The differences in the total SCM and logistics cost breakdowns are explained by the different business models. For example, manufacturers often sell their goods in the form of Delivered Duty Paid (DDP), where the cost of transportation to the final customer is already included in the price of the good.2 Canadian manufacturing was the sector with the highest logistics and SCM costs, at 6.5 percent of sales in 2007. Close behind were wholesalers and retailers, each at close to 3.5 percent of sales.1

Figure 2 — 2007 Key Sector Total Supply Chain Management and Logistics Costs Breakdown

Figure 2 -  2007 Key Sector Total Supply Chain Management and Logistics Costs Breakdown (the link to the long description is located below the image)

There is a wide range of cost variability within sub-sectors in manufacturing. The highest percentage of total SCM and logistics costs in 2007 was in the pharmaceutical and medicine sector, followed by the motor vehicle body and trailer sector. The petroleum and coal products sector had the lowest percentage of total SCM and logistics costs of all the key sub-sectors. Most logistics and SCM activity in the petroleum and coal supply chains occurred with supply chain partners, such as basic chemical manufacturers, which had 213 percent more logistics and SCM costs.1

In sub-sectors where there are low inventory turns, such as pharmaceutical and medicine manufacturing, SCM and logistics costs were mainly attributable to inventory carrying costs. For most of the key sub-sectors, internal costs made up the largest portion of the firm's total SCM and logistics costs, with the highest percentage in the electrical equipment and food manufacturing sub-sectors.2

1.2 — Inventory Management

Investment in new distribution facilities in Canada increased by more than 60 percent from 2001-2007 (Figure 3).4 This coincides with the rising complexity of inventory management with supply chain partners from around the globe. Over the 2001–2007 period, Canadian organizations outsourced and off-shored some of their production and services to low–cost countries. At the same time, global customers drove product demand and service levels by simultaneously requesting complex customized products and lower prices, thereby creating price/ margin pressures.

Figure 3 — Investment in Distribution Facilities in Canada4

Figure 3 - Investment in Distribution Facilities in Canada (the link to the long description is located below the image)

In order to respond to these challenges, firms are making strategic investments in advanced deconsolidation facilities. In these facilities, large shipments (e.g. railcar lots) are broken down into smaller lots for ease of delivery, as well as into consolidation arrangements, where a variety of smaller shipments are combined into one larger shipment for economy of transport. Firms are also adopting complex cross-docking practices to load materials from incoming semi-trailer trucks or rail cars to outbound trailers or rail cars, with little or no storage in between. This may be done to change the type of conveyance, sort materials intended for different destinations, or combine material from different points of origin.2

In terms of inventory management performance, inventory turns (IT) is the main KPI used by the industry. Operationally, total IT is measured as total output divided by the average level of inventory for a given period. In other words, IT show how many times a year that the average inventory for a firm changes or is sold.5

Manufacturers, retailers, and wholesalers have adopted different inventory management strategies. Manufacturers are moving towards mass customization, focusing on supply chain agility and just-in-time delivery, while wholesalers and retailers are focusing more on sourcing from low-cost countries.

Mass Customization

Mass customization is a system that combines the low unit costs of mass production processes with the flexibility of individual customization. Firms applying this method of manufacturing may also utilize a different system for dealing with their inbound goods. Depending on various factors and supply chain capabilities, it may result in significant performance variations.2

For these reasons, Canadian manufacturers' finished goods IT remained unchanged from 2005 to 2007. Concurrently, wholesalers' and retailers' finished goods IT decreased by 15 percent and 27 percent respectively over the same time frame (Figure 4). It is also noteworthy that manufacturers' IT were 2.6 times higher than wholesalers and 5.2 times higher than retailers in 2007.1

When compared with the U.S., Canada had supply chain agility gaps in manufacturing inbound goods IT (24 percent), wholesale IT (10 percent), and retail IT (29 percent) in 2007. Canada showed only a slight advantage in the finished goods IT at 3 percent.1

Figure 4 - 2007 Canada Finished Goods Inventory Analysis1

Figure 4 - 2007 Canada Finished Goods Inventory Analysis (the link to the long description is located below the image)

While having high IT ratios can appear to be a good thing at first glance, it is important to understand that it could also lead to a retailer displaying empty store shelves. Without appropriate planning and the help of processes and technologies such as supply chain synchronization systems, a retailer focusing solely on increasing IT will often face challenges with its in-stock position.

In manufacturing, it is also important to distinguish between inbound goods ratios (the inventory of products coming from suppliers), finished goods ratios (the inventory of products ready to be shipped), and unfilled orders ratios (the inventory of products that meet the criteria of the order, but have not been executed by the receiver).

Inbound goods can be sourced domestically or from foreign countries. Sourcing from foreign countries is more complex and often includes low-cost countries.

While the motor vehicle manufacturing sub-sector had the highest IT ratio of inbound goods in 2007, the computer and electronic product manufacturing sub-sector saw the highest growth rate since 2005 (Figure 5). The small growth in motor vehicle manufacturing may be due to the fact that this sector embraced JIT processes before most sectors.5

Figure 5 - 2007 Canadian Inventory Turns (inbound) Analysis1

Figure 5 - 2007 Canadian Inventory Turns (inbound) Analysis (the link to the long description is located below the image)

Other sectors such as petroleum and coal products saw a decline of more than 20 percent in their inbound IT.1 The increased complexity of sourcing inbound goods, combined with a scarcity in human resources in those sectors, may explain some of that decline.2

1.3 — The Logistics Service Industry

1.3.1 — Outsourcing Trends

The percentage of outsourcing costs in a firm's total SCM and logistics costs structure varies across different sectors depending on the business model that each operates under. The differences in Canadian and U.S. business models are reflected in the SCM and logistics costs breakdowns. Compared to Canada, outsourced activities were 52 percent higher for U.S. manufacturers, 53 percent higher for U.S. wholesalers, and 54 percent higher for U.S. retailers, in 2007 (Figure 6).1

Figure 6 - 2007 Canadian and U.S. Supply Chain Management and Logistics Costs Business Model

Figure 6 - 2007 Canadian and U.S. Supply Chain Management and Logistics Costs Business Model (the link to the long description is located below the image)

1.3.2 — Canadian Logistics Service Providers

Logistics and SCM outsourcing is provided by the Canadian logistics service industry, which had an overall GDP growth rate of 47 percent since 19984. The Canadian logistics service sector can be divided into three sub-sectors:

  • Asset-Based Transportation Services
  • Asset-Based Non-Transportation Services
  • Non-Asset-Based Logistics Services

The asset-based transportation services sub-sector is made up of transportation service providers focusing on the transport of goods only. This includes trucking, rail, and marine transportation. Trucking was the principal sub-sector, accounting for over $14 billion of GDP in 2007, with over 72 000 service providers in Canada.4

The asset-based non-transportation services sub-sector consists of third party logistics (3PL) service providers (storage and warehousing) that carry out physical logistics operations and manage systems to track shipments on behalf of the customer. This sector grew by more than 4 percent between 2005 and 2007 (Figure 7).4 Value-added 3PL companies provide additional services including managing complex operational handling (co-manufacturing and co-packing/labelling), managing administrative operations (billing and ordering), managing information management systems (tracking and tracing), custom broker services, international freight forwarding, and providing logistics and SCM consulting services.

Figure 7 - Gross Domestic Product of Canadian Logistics Service Sectors6

Figure 7 - Gross Domestic Product of Canadian Logistics Service Sectors (the link to the long description is located below the image)

The non-asset based logistics services companies (support activities) are characterized by the near absence of their own physical logistics facilities. Companies integrate the services of different subcontracting companies (transport, storage, operations, etc) and then proceed to coordinate and control them through the management of the associated information flows.

Players in this sub-sector include firms offering services in 4PL (virtual 3PL), management consulting in supply chain and logistics, fleet management, supply chain and logistics information systems, shipment consolidation, carrier selection and logistics procurement services, rate negotiation, inventory management applications, distribution control, freight forwarding and customs clearance, and brokerage.

The 5PL is an emerging sub-sector which include logistics service providers who plan, organize, and implement logistics solutions on behalf of a contracting party (mainly information systems) by exploiting the appropriate technologies (conceptual level).2 The 4-5PL sub-sectors contributed more than $10 billion to the Canadian economy and grew by more than 4 percent between 2005 and 2007.4

Logistics service providers GDP is expected to increase by an additional 40 percent between 2007 and 2015, reaching 56 billion CAD. The highest growth is forecasted to be in trucking, followed by the 3PL warehousing and storage sub-sector. The pipeline industry is expected to have the lowest growth during this period (Figure 8).6

Figure 8 - Canadian Logistics Industry 2007 - 2015 Annual Average Growth Rate (AAGR)6

Figure 8 - Canadian Logistics Industry 2007 - 2015 Annual Average Growth Rate (AAGR) (the link to the long description is located below the image)

Consolidations, mergers, and acquisitions have been extremely common in the Canadian logistics and SCM sector in the last few years. Although small firms (defined as those with less than $25M in revenue) accounted for most of the service providers in the various sub-sectors, large firms (those with at least $250M in revenue) have generally seen the highest percentage growth since 1998. The number of large firms in the trucking sub-sector grew by more than five times that of small firms, while the number of mid-sized firms (those with $25M to 250M in revenue) decreased by 60 percent from 1998 to 2007 (Figure 9). Other asset-based transportation services, with the exception of rail, also experienced the greatest growth in large firms and a major decrease in mid-sized firms.7

Figure 9 - Growth of Number of Canadian Logistics Service Providers 1998-20077

Figure 9 - Growth of  Number of Canadian Logistics Service Providers 1998-2007 (the link to the long description is located below the image)

Since 1998, the 4PL support activities sub-sector grew substantially (33 percent for small firms, 67 percent for mid-sized firms and 103 percent for large firms). This can be partly attributed to the emerging market for value-added consulting services that is being addressed through the provision of global solutions to new customers. Mid-sized firms in the 3PL market also expanded by 50 percent, while a 35 percent expansion was observed in the same period for large firms.7

1.3.3 — Canadian Ports Activity

In 2007, the most important port for inbound and outbound container volume was in Vancouver, with a growth rate of 5.2 percent for inbound and 3 percent for outbound in 2006-2007 (Figure 10).8

Figure 10 - Inbound/Outbound - Cumulative Containerized Traffic Per Port8

Figure 10 - Inbound/Outbound - Cumulative Containerized Traffic Per Port (the link to the long description is located below the image)

The Port of Montreal was the second largest in volume with a growth rate of 4.6 percent for inbound and 7.7 percent for outbound in 2006-2007. The Port of Halifax was the smallest in terms of container volume and the only one that had a negative growth rate of 10.4 percent for inbound and 6.3 percent for outbound, in 2006-2007.8

The arrival of the first container ship on October 31, 2007 at the recently-completed Prince Rupert Container Terminal, the first dedicated intermodal container facility in North America, marked the opening of a new Asia-North America express trade corridor. The weekly service moved 16,703 Twenty-Foot Equivalent Units (TFEU) through the facility for the two months of operation in 2007. Capacity was initially 500,000 TFEU and is expected to reach 4 million TFEU by 2015 .8