SCITC_2006_Chris_Lofgren

Transportation & Logistics Leaders

Challenges and opportunities: Responding to international supply chainsChristopher B. Lofgren, Ph.DPresident and Chief Executive Officer

pg.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

Truckload• One-Way Van• Dedicated• Expedited• Specialized• Bulk

Logistics• Supply Chain

Management• International

Logistics• Transportation

Management

Intermodal• TruckRail®

• TruckRail ® Express

pg.3

Schneider’s 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

pg.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

pg.5

Global price competition is forcing companies to employ China as a source strategy option.

200 – 400 Miles

Industrial Geography Shift: 1950-Present

Source: MergeGlobal North America Port Congestion Impact Model

Late 90’s

5,000 – 8,000 Miles

80’s – 90’s

60’s – 70’s

1950’s

North America America

China

1,000 – 1,500 Miles

Industrial Center of Gravity

pg.6

Transit-related inventory costs rise – up to 100 percent higher.

Ratio Of Logistics Factors

Domestic vs. International

0

5

10

15

20

25

Transit Time Transit Variation # Of Entities Transport Costs Administrative Costs

Inte

rna

tiona

l/Dom

est

icC

omp

lexi

ty F

acto

r

Domestic Mexico Asia

Source: Schneider Research 2006

pg.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

Seasonal and Promotional Sales as a % of Total Retail Sales

0%

20%

40%

60%

80%

Apparel HomeI mprovement

Consumables (grocery)

Electronics General MerchandisePromotional Seasonal Total

pg.8

Consumer goods imports have grown 171% over the last ten years.

Source: Census BureauDriving strong growth in container volume.

Import & Container Growth

0

15000000

5000000

10000000

20000000

25000000

30000000

35000000

40000000

45000000

2005

Teu

's

19951996 1997 19981999 2000 2001 20022003 20040

50

100

150

200

250

300

350

400

450

$ M

illio

ns

TEUs Consumer Goods Imports

pg.9

This growth in imports, principally from Asia, have driven large volumes to West Coast ports.

New York

Philadelphia

Long Beach

Tacoma

Seattle

HoustonNew Orleans

Everglades

Savannah

Charleston

Virginia Ports

Baltimore

1.32.0

6.7

7.5

2.3

2.1

2.1

2.01.9

Miami1.1

1.6.2 .8

.6

4.8

.2Oakland

LosAngeles

Source: MergeGlobal North America Port Congestion Impact Model

U.S. Containerized Imports and Exports by Port: 2005Millions of Cargo Bearing TEUS 1/

Today, the west coast handles over 50% of the container volume.

pg.10

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

Source: Census Bureau

pg.11

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

Source: Census Bureau

This is not without implications.

pg.12

U.S. Port Size & Growth

0

2000000

4000000

6000000

8000000

10000000

12000000

14000000

16000000

Long Bea

ch/L

A

Oakla

nd

Seattl

e/Tac

oma

Charle

ston

Hampto

n Road

s

Mia

mi (

FY)

New Y

ork/N

ew J

erse

y

Savan

nah

Houston

Teu

's

0

2%

4%

6%

8%

10%

12%

14%

16%

18%

Size Growth

These strategies have pushed growth to smaller ports at greater transit times.

China To North America Transit Times In Day

0 10 20 30

Seattle, WA

Oakland, CA

LosAngeles, CA

Vancouver, BC

Manzanillo, MX

Houston, TX

Savannah, GA

Norfolk, VA

Elizabethport, NJ

Miami

And, stress is being placed on transportation infrastructure, traditional freight flows, and ultimately inventory levels.

Source: Census Bureau

pg.13

Current & Projected Container

Vessel Fleet

0

5000000

10000000

15000000

<2,000 2,000-

3,999

4,000-

4,999

5,000-

7,999

8,000+

TE

U's

2005 2010

Panamax

But, most of the shipping capacity being added cannot pass through the Panama Canal.

Source: Census Bureau

Therefore, constraining growth to Gulf and Eastern ports from China, Korea, and Japan.

pg.14

The west coast flows require increased intermodal capacity at the time when the railroads are reducing their coverage.

Rail NetworkMiles of Road Operated

0

50

100

150

200

250

1960 1980 1990 2005

1000

's

Source: Census Bureau

Intermodal Network# of Markets with Ramps

0

50

100

150

200

1960 1980 1990 2005#

of

Ma

rke

ts

pg.15

Average Intermodal Train Speed

Major U.S. Railroads

19

21

23

25

'200

3:1

'200

3:3

'200

4:1

'200

4:3

'200

5:1

'200

5:3

‘200

6:YTD

MP

H

Western RR's Eastern Railroads

Additionally, growing volumes of international and domestic containers, along with reduced average train speeds have created congestion.

Source: Census Bureau

Domestic Trailers

ISO Containers

55%

DomesticContainers

24%

LTL Motor Carriers

UPS

20%USPS

Major Intermodal Market Segments, 2004

ISO Containers

55%

DomesticContainers

24%

Source: IANA

LTL Motor Carriers

UPS

20%

This has resulted in lower service levels when supply chains are demanding higher.

pg.16

Rail Capital Needed to Reduce Truck Volume 10% in 2015

0

2

4

6

8

10

12

14

16

18

20

Current Spend Spend Required ForFull SystemMaintenance

Spend For Growth Spend To GainMarket Share

Rai

l Cap

ital

$B

Current Full Maintenance Growth Market Share

Recent rail capital expenditures are not designed to take share from motor carriers.

Source: Schneider National, Inc., AAR

Therefore, growth in heavy freight will put more pressure on over-the-road trucking.

pg.17

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.

pg.18

Real Change in Line Haul Cost Inputs

(Before Productivity)

0.6

0.8

1

1.2

1.4

1.6

1.8

LaborFuel

Equipm

entRisk

Overhead

Inde

xed

to 1

970

= 1

1970 2000 2010

Source: Schneider National, Inc. Market Research

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

This must lead to increased prices to bring supply in balance with demand.

pg.19

CL 8 Truck Productivity

0.80

0.85

0.90

0.95

1.00

1.05

1992 1994 1996 1998 2000 2002 2004

To

nm

iles

Per

Act

ive

Veh

icle

(M

)

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

Are we killing the golden goose?

Source: Schneider National, Inc. Market Research

pg.20

Freight Infrastructure Investment - Public & Private % Of GDP - 2005

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

U.S China Euro India

The United States has the best transportation infrastructure, but others are investing more.

Source: Census Bureau

Almost all of U.S. investment is for maintenance of existing infrastructure.

pg.21

Transport Cost Per $GDP

0

0.05

0.1

0.15

0.2

U.S. Europe China

Co

st /

$ G

DP

1980 2004 2015

Transport performance is a major contributor to economic competitiveness.

Source: Schneider National

Note: Costs are normalized to account for different lengths of haul.

Our system sets the global standard, but is now at risk.

pg.22

Summary

Surface transportation is a critical part of a country’s 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.

Transportation & Logistics Leaders

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