Challenges and opportunities: Responding to international supply chains

1
Challenges and opportunities Responding to
international supply chains Christopher B.
Lofgren, Ph.DPresident and Chief Executive
Officer
2
Schneider is a transportation leader with a broad
portfolio of services.

• Schneider National Inc. is a premier provider of
  transportation, logistics,and related services
• 3.5 billion in revenue in 2005
• Operate 14,000 tractors, 15,500 drivers, and
  60,000 trailers/containers with 21,900
  associates in 28 countries
• Commitment to superior information and
  communications technology

3
Schneiders portfolio delivers door-to-door
international supply chain solutions.

• Service offerings feature
• Import/export logisticsand transloading
• Freight forwarding
• Customs brokerage
• Air, ocean and inlandtransit
• North American platform includes
• Full transportation portfolio with Canadian and
  Mexican services
• Cross-border expertise, including expedited
  release systems and security programs

4
Objectives

• Highlight the growing impact of international
  trade particularly with China on the United
  States
• Discuss the implications and challenges of this
  growth on supply chains
• Examine the US logistics infrastructure and the
  ability to respond
• Discuss opportunities, and some cautions for the
  logistics industry

No nation was ever ruined by trade Benjamin
Franklin
5
Global price competition is forcing companies to
employ China as a source strategy option.
Industrial Geography Shift 1950-Present
200 400 Miles
Source MergeGlobal North America Port Congestion
Impact Model
6
Transit-related inventory costs rise up to 100
percent higher.
Ratio Of Logistics Factors
Domestic vs. International
25
20
15
International/Domestic Complexity Factor
10
5
0
Transit Time
Transit Variation
Of Entities
Transport Costs
Administrative Costs
Domestic
Mexico
Asia
Source Schneider Research 2006
7
In addition, cost risks grow larger as retail
revenue and profits become more reliant on short
product lifecycles and promotions.

• SKU proliferation driven by consumer preference,
  private labels
• New international sources
• Product life cycles are down from 20 years in the
  1950s to three years today

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Consumer goods imports have grown 171 over the
last ten years.
Import Container Growth
450
400
350
300
250
Millions
Teu's
200
150
100
50
0
0
2005
TEUs
Consumer Goods Imports
Source Census Bureau
Driving strong growth in container volume.
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This growth in imports, principally from Asia,
have driven large volumes to West Coast ports.
U.S. Containerized Imports and Exports by Port
2005Millions of Cargo Bearing TEUS 1/
Seattle
2.1
Tacoma
2.1
4.8
.2
Oakland
2.3
Baltimore
.6
Virginia Ports
LosAngeles
2.0
7.5
1.3
Charleston
2.0
Long Beach
6.7
1.9
Savannah
Everglades
.2
.8
1.6
New Orleans
Houston
Source MergeGlobal North America Port Congestion
Impact Model
Today, the west coast handles over 50 of the
container volume.
10
This has already changed how and where companies
flow product into the United States.

Source Census Bureau
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This has already changed how and where companies
flow product into the United States.

Source Census Bureau
This is not without implications.
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These strategies have pushed growth to smaller
ports at greater transit times.
U.S. Port Size Growth
China To North America Transit
Times In Day
18
16000000
Miami
16
14000000
14
Elizabethport, NJ
12000000
12
10000000
Norfolk, VA
10
Teu's
8000000
Savannah, GA
8
6000000
6
Houston, TX
4000000
4
Manzanillo, MX
2000000
2
Vancouver, BC
0
0
LosAngeles, CA
Oakland
Houston
Charleston
Miami (FY)
Savannah
Long Beach/LA
Seattle/Tacoma
Hampton Roads
Oakland, CA
New York/New Jersey
Seattle, WA
0
10
20
30
And, stress is being placed on transportation
infrastructure, traditional freight flows, and
ultimately inventory levels.
Source Census Bureau
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But, most of the shipping capacity being added
cannot pass through the Panama Canal.
Current Projected Container
Vessel Fleet
Panamax
15000000
10000000
TEU's
5000000
0
lt2,000
2,000-
4,000-
5,000-
8,000
3,999
4,999
7,999
Source Census Bureau
Therefore, constraining growth to Gulf and
Eastern ports from China, Korea, and Japan.
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The west coast flows require increased intermodal
capacity at the time when the railroads are
reducing their coverage.
Intermodal Network
Rail Network
of Markets with Ramps
Miles of Road Operated
1000's
of Markets
0
1960
1980
1990
2005
1960
1980
1990
2005
Source Census Bureau
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Additionally, growing volumes of international
and domestic containers, along with reduced
average train speeds have created congestion.
Average Intermodal Train Speed
Major Intermodal Market Segments, 2004
Major U.S. Railroads
Domestic
Domestic
Containers
Containers
24
24
ISO
ISO
Containers
Containers
Domestic Trailers
55
55
20
20
MPH
USPS
UPS
UPS
LTL Motor Carriers
LTL Motor Carriers

2006YTD
'20033
'20031
'20041
'20043
'20051
'20053
Source IANA
Eastern Railroads
Western RR's
Source Census Bureau
This has resulted in lower service levels when
supply chains are demanding higher.
16
Recent rail capital expenditures are not designed
to take share from motor carriers.
Rail Capital Needed to Reduce
Truck Volume 10 in 2015
20
18
16
14
12
10
Rail Capital B
8
6
4
2
0
Current Spend
Spend Required For
Spend For Growth
Spend To Gain
Full System
Market Share
Maintenance
Full Maintenance
Growth
Market Share
Current
Source Schneider National, Inc., AAR
Therefore, growth in heavy freight will put more
pressure on over-the-road trucking.
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This is happening at the same time that supply of
capacity has become highly constrained.
Morgan Stanley TL Freight Index
Source FTR, ATA, Morgan Stanley
The market fundamentals do not point to
significant relief in the near future.
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The capacity constraint is a product of
inflationary costs, and highly constrained labor
availability.

• Regulatory requirements for engines and growing
  material prices within equipment are having large
  impacts on capital costs
• Recovery of volatile fuel price is impacting
  operational decisions on what freight to haul and
  when
• Competition at historical wage rates is not
  yielding the replacement levels for drivers.
• Toll roads are significantly impacting the cost
  of transportation on major freight lanes

Real Change in Line Haul Cost Inputs
(Before Productivity)
1.8
1.6
1.4
1.2
Indexed to 1970 1
1
0.8
0.6
Fuel
Labor
Risk
Overhead
Equipment
1970
2000
2010
Source Schneider National, Inc. Market Research
This must lead to increased prices to bring
supply in balance with demand.
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With increasing demand, productivity is dropping.

• Regulatory requirements (Hours of Service) have
  reduced available driver hours
• Congestion in metropolitan areas further reduce
  available driver productivity
• While truck and trailer technologies have
  advanced, size and weight limitations remain at
  early 90s levels

CL 8 Truck Productivity
1.05
1.00
0.95
Tonmiles Per Active Vehicle (M)
0.90
0.85
0.80
1992
1994
1996
1998
2000
2002
2004
Source Schneider National, Inc. Market Research
Are we killing the golden goose?
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The United States has the best transportation
infrastructure, but others are investing more.
Freight Infrastructure Investment -
Public Private Of GDP - 2005
2.50
2.00
1.50
1.00
0.50
0.00
U.S
China
Euro
India
Source Census Bureau
Almost all of U.S. investment is for maintenance
of existing infrastructure.
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Transport performance is a major contributor to
economic competitiveness.
Transport Cost Per GDP
0.2
0.15
Cost / GDP
0.1
0.05
0
U.S.
Europe
China
1980
2004
2015
Note Costs are normalized to account for
different lengths of haul.
Source Schneider National
Our system sets the global standard, but is now
at risk.
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Summary

• Surface transportation is a critical part of a
  countrys economic power train.
• The complexity of supply chains is increasing and
  becoming even more reliant on quality providers.
• Growth must still be accomplished without the
  financial inefficiency of excess working capital.
• The U.S. government must invest, and incent
  private investment in transportation
  infrastructure and capacity.
• Productivity of these investments is vital to
  ensure the capacity to support a growing U.S.
  economy.
• Coordination and collaboration of supply chain
  participants is a requirement to ensure
  effectiveness, particularly over international
  flows.

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Thank you.Christopher B. Lofgren,
Ph.DPresident and Chief Executive Officer