Freight Leadership Summit Houston, Texas April 4, 2014 David Aguilar GSIS 1401 H ST., NW, SUITE 875 WASHINGTON, DC 20005 202.888.2360 WWW.GSIS360.COM
Texas: at the Crossroads of U.S. Mexico Trade Five-fold increase in U.S. Mexico trade to $500b/year since passage of NAFTA. $1.2B in trade crosses the border every day. 67% of all cross-border truck traffic & 87% of rail crossings occur Texas. 3 of the 4 busiest land ports of entry (El Paso, Laredo, and Pharr) are in Texas. Texas exports 17% of total U.S. exports. Annual Texas-Mexico trade is $200B. Trade supports 2 million jobs in Texas. More than 20,000 Texas companies are involved in trade. Export-related jobs pay 15-20% more than those focused on domestic production.
Border Communities Benefit from Trade Per capita income is rising in border communities faster than the national average; 2/3ds of this growth is due to trade. $230B in trade passes through Laredo each year. Laredo s labor force has increased 50% since 1994 while taxable value of its properties has increased at 5 times the rate of population growth. International toll bridges generate 25% of Laredo s general fund revenue. Cross-border trade generates $1.45B in retail shopping and supports 100,000 jobs in El Paso. A single project can be a game changer (new UP rail yard in Santa Teresa will generate 600 jobs). $26B in trade passes over the Pharr-Reynosa bridge every year. 100,000 truckloads of produce enter the U.S. at Pharr every year, supporting 4,000 jobs. Volume of produce entering Texas is projected to double by 2020 and generate 7,200 additional jobs in Texas as Mazatlan-Matamoros super highway comes on board. Border communities that can leverage the opportunities associated with increasing trade will do very well for themselves and their workforces.
Texas Trade and Security Challenges Drugs via Mexico:over $30 billion/year. Cargo, Transport, and POVs targeted CBP: Border Protecton. Supply Chain Integrity = Efficiency and Facilitation Mexican Government: expanding the rule of law. Criminal threats to trade in Mexico will diminish. Supply Chain Risk Management Segmentation Risk Management Distribution
The U.S. Mexico Border is Increasingly Safer We have better control over the border than at any time in the past. Apprehensions: declined by 78 percent since 2000 (from 1.65M in 2000 to 357K in 2012) The two safest big cities in the USA are El Paso and San Diego. Violent crimes in border communities and states have declined significantly. DHS & Border Patrol have addressed migration routes away from urban areas DHS investments in surveillance, barriers, and personnel (e.g. increase of USBP to 21,000), more effective border control and interior enforcement operations, combined with greater economic opportunities in Mexico and an economic downturn in the USA have collectively contributed to the large decline in illegal border crossings.
Texas Land Ports of Entry 3.4 million trucks enter Texas every year over 61 commercial lanes. 20 trucks and $1M in trade every hour a lane is open. Infrastructure: Aged, constrained, congested Time is money. Unpredictable wait times increase the cost of doing business. An idle truck costs $200/hour. More inspections mean fewer daily border crossings per truck. Federal investment in LPOEs lacking:$6b and 6,000 CBPO s is required to meet current requirements P3s and reimbursable fee agreements with CBP are alternative ways to fund expansion of inspection capacity at LPOEs. Increased supply chain security: facilitates and expedites trade Trusted Partner Programs: C-TPAT and other programs that increase cargo security.
2040 and Beyond
Megaregions Applying the Concept to Trade Megaregions develop when there is a critical mass of activity (e.g. electronics in Silicon Valley, film in Los Angeles, finance in NYC). Texas has the essential elements to become a freight & trade Megaregion. Strategic investment in transportation infrastructure and corridors can make this a reality.
Recommendations for Consideration Invest strategically in roads and rails to allow cargo to move quickly an efficiently through Texas; trade follows the path of least resistance. Influence National and Bi-national investments in border and transportation infrastructure in both the U.S. and Mexico. Push out the borders. Increase security of the entire international supply chain. Coordinate infrastructure projects with Mexico. Educate/Inform/Communicate Border Reality to all stake holders many states benefit from trade that goes through Texas. They can be your advocates. Determine how market forces can be brought to bear at the border. Bring all potential resources to the table are all available funding mechanisms being capitalized? Strategic outlook versus Tactical approach. POEs PLUS; address the entirety of the trade system (e.g. secure supply chains, good transportation network). Harness the future value of trade and trade-related economic activities.
Approach Tactical Strategic Increased government funding Public Private Partnerships Port-specific infrastructure Supply Chain Infrastructure support POE- centric operations Systems-wide risk diffusion POE tactical technology System Wide Data/Intel/Information CBPOs: Intensified Inspections Risk Management/Segmentation/Targeting Border Communities as State Championing Efforts w/partner States Allies Border Champions Port Capabilities Supply Chain System
Texas Freight Leadership Summit Michelle Livingstone Vice President - Transportation April 3, 2014 Proprietary & Confidential to The Home Depot
Company Overview Founded in 1978 Bernie Marcus and Arthur Blank Atlanta, GA Total square footage: 235 million Stores: 2,263 United States 1,977 Canada - 180 Mexico 106 FY2013 Sales: $78.8 billion USD 300,000+ associates 2 Proprietary and Confidential Property of the Home Depot
The Power of a Values-Based Business Taking Care of Our Associates and Customers Proprietary and Confidential Property of the Home Depot
The Power of The Home Depot Interconnected Retail Passionate About Customer Service Disciplined Capital Allocation Driving Productivity and Efficiency #1 Product Authority for Home Improvement 4 Delivering a Best in Class, Interconnected Multichannel Retail Experience Proprietary and Confidential Property of the Home Depot
2014 Financial Targets Sales growth ~5% New store openings 8 (1 U.S., 1 Canada, 6 Mexico) Operating margin expansion ~70 bps to >12% EPS Growth ~17% (after share repurchases) 1) ROIC ~24% 5 Proprietary and Confidential Property of the Home Depot
2007 Distribution Center Network Import Vendors Distribution Channels Import DCs Carton DCs Lumber DCs Transit Facilities ~ 20% COGS ~ 20% COGS Domestic Vendors Direct to Store ~ 60% COGS 80% of Store SKUs Ordered by the Store 6 Proprietary and Confidential Property of the Home Depot
RDC Concept of Operations Store demand is forecasted for all stores serviced by an RDC The Vendor pulls full pallets. Full truckloads arrive at the RDC Product is allocated based on real time demand and aggregated to a single Purchase Order. Day 1 and ships in bulk to the RDC. Days 2-3 where current store needs are assessed. Days 4-7 Product is Not Held in Inventory at RDCs and delivered daily to each store. Days 8-9 7 Proprietary and Confidential Property of the Home Depot
Current Supply Chain Network Lumber/Bulk DCs Vendors Stocking DCs ~ 75% COGS RDCs Vendors Direct to Store ~ 25% COGS Central Replenishment Systems & Processes 8 Proprietary and Confidential Property of the Home Depot
Optimal Flow Distribution Network Direct To Store Best Used When Full Truckload Manufacturing Close to Stores High Volume Stores Why? Eliminates Additional Distribution Expense Associated with Handling at a DC Rapid Deployment Center Flow Less than a Full Truckload/Store Demand & Supply is Predictable Value of Product is Low to Medium Aggregates Store Demand to Create Full Truckloads Low Handling Costs Stocking DC Stock & Pick Less than Full Truckload/Store Demand & Supply is Unpredictable Value of Product is Medium to High Aggregates Store Demand to Create Full Truckloads Holds Buffer Inventory at the Stocking DC to Allow for Rapid Replenishment Lumber/Bulk DC 9 Handling Bulky, Oversize Materials Flatbed Truck Transportation is Optimal Proprietary and Confidential Property of the Home Depot
Supply Chain Core Distribution Network 10 Average Sq Ft Bulk Distribution Centers ~175K Stocking Distribution Centers ~825K Rapid Deployment Centers ~560K Transload / FTZ Proprietary and Confidential Property of the Home Depot
RDC Service Area Map 11 Proprietary and Confidential Property of the Home Depot
Home Depot Loves Texas Every Year Across the State: We drive 30,000,000 Miles Haul 80,000 truck loads Make 280,000 appliance deliveries We have 178 Stores in TX, 10% of the US total 7 Distribution Centers in TX, 10% of the US total Dallas RDC Dallas SDC Dallas BDC Houston RDC Baytown SDC Houston BDC San Antonio BDC 12 Proprietary and Confidential Property of the Home Depot
Direct Fulfillment
Why we are investing in interconnected retail Papal Inauguration 2005 vs. 2013 The Mobile Mind Shift 14 Proprietary and Confidential Property of the Home Depot
Direct Fulfillment Building New Direct Fulfillment DCs Larger More Capable Operations Closer to our Customers: Improved Speed Stock High Demand SKUs Complemented by Vendor Drop Ship Direct Fulfillment is Building New Capabilities to Support Interconnected Retail 15 Proprietary and Confidential Property of the Home Depot
Locust Grove, GA Direct Fulfillment DC OBJECTIVES: Supports expansion of SKU assortment and sales growth of hd.com Improved customer service through faster delivery Lower total Supply Chain costs FACILITY HIGHLIGHTS: Locust Grove, GA ~35 miles South of Atlanta ~1.1 MM SqFt Facility Estimated Go-Live: Q1 2014 ~175 Dock Doors Automated, state of the art facility Upgraded WMS System Locust Grove, GA Facility Enables DF to Meet Long Term Strategic Goals 16
17 Locust Grove, GA Direct Fulfillment DC
Transportation Overview
Use All Modes of Transportation THD shipped 6.4 million loads across the modes in 2013 19
International Logistics Footprint Origin Factory Origin Operations Origin Port On The Water Destination Port Destination Customs THD Facility 40+ Countries ~1,000+Factories (US/CAN] 6,000+ import SKUs 3 Origin Cargo Managers (OCM) 12 CFS Facilities 4 Overseas Sourcing Offices 85+ Origin Ports 250 Terminals 8 Global Ocean Carriers 6 Jones Act Carriers 1 Air Freight Broker 24 Ports Of Entry (US/CAN/MEX] ~125 Terminals 9 US Container Management Companies 2 Expedited Freight Service Providers 6 Railroads 4 Transloads 3 Customs Brokers 4 FTZ (3 live, 1 pending approval) 22 SDCs 5 Transload facilities 18 RDCs 2,200+ Stores Country Risk Management C-TPAT International Security Legislation International Logistics manages the operations, trade compliance, and trade risk for the 3rd largest container import program into North America (123K FEU) 20
Service Counts! Inbound on-time service: 97.3% Outbound on-time service: 98.5% Low on-time service scores impact ability to capture new business Provide weekly scorecards to all carriers Traffic congestion impacts metrics 21
DOT
23 Keep Freight Flowing!
Recommendations 1. Routinely include business advisors who move freight in your discussions. Integrate Freight Advisory Committees into the mainstream no siloes. 2. Remember the first and last mile connectors in your plans. 3. Use technology and innovation wherever possible. 4. Continue to push for infrastructure improvements. 5. Use strategic zoning, smart land use policies, economic development incentives, and effective truck route planning to buffer freight activity centers from population centers. 6. For both short- and long-term, small- and large-scale infrastructure planning, use real-time/real-world data that is readily available from various high-tech sources (Inrix, ATRI, USDOT s truck data feed). 7. Don t assume that all truck drivers, shippers, and loads require the same speed and reliability for the haul, While speed is important, reliability is the key to success. 24
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