Otis Project Utilizing Backhaul Consolidation to Reduce Transportation

Otis Project Utilizing Backhaul & Consolidation to Reduce Transportation Cost Team members: Mao, Yangxu Qiao, Huicong Qu, Hongyi Stankiewicz, Michael Xu, Li 11/17/2009

Agenda • Introduction – Background – Project Scope – Objective • Optimization Opportunity – Current Cost Structure – Optimization Strategies • Backhaul • Consolidation • Conclusion 2/28

Introduction - Background and Scope • Otis Elevator Company – World’s leading manufacturer, installer and maintainer of elevators, escalators and moving walkways – Suppliers and customers across the world • Project Scope – North America Distribution – Inbound Logistics Optimization – TL & LTL Shipment Modes 3/28

Introduction - North American Distribution Network 4/28 : 4 Regional Distribution Center (RDCs) : 55 Suppliers

Introduction - Major Suppliers Supplier State Frequency (times/month) Average Weight (lbs) Total Costs (dollars) Nogales AZ 92. 78 24118. 71 $1, 524, 340 Rome GA 21. 56 4243. 17 $79, 490 Battleboro NC 17. 22 20413. 57 $223, 280 Indianapolis IN 13. 22 26564. 58 $109, 800 Brazil IN 7. 67 15942. 28 $68, 990 Richmond VA 6. 89 7396. 61 $70, 300 Hatfield PA 6. 67 8784. 28 $80, 620 East St Paul MB(CA) 6. 11 36990. 65 $270, 100 Roanoke VA 5. 33 19888. 40 $28, 650 Focus on suppliers with highest costs and frequencies 5/28

Introduction - Project Objective • Better utilize cross dock/ distribution centers • Increase utilization of existing backhaul and line haul • Consolidate TL shipments into dense line hauls between RDCs • Increase TL densities 6/28

Optimization Opportunity - Current Cost Structure $1, 400, 000. 00 LTL to VA 2% TL Cost LTL Cost $1, 200, 000. 00 TL to CA 21% $1, 000. 00 LTLto CA 2% $800, 000. 00 TL to VA 50% TL to TX 7% $600, 000. 00 LTL to TX 1% $400, 000. 00 TL to IL 15% $200, 000. 00 LTL to IL 2% $0. 00 TX 7/28 CA VA IL

Optimization Opportunity - Optimization Strategies • Strategy 1: Backhaul – Where? – Pinning on Nogales and East St Paul – Cost on the way back with full truckloads is nearly FREE! • Strategy 2: Consolidation – At RDCs – At suppliers 8/28

Optimization Opportunity - Strategy 1: Backhaul Frequent shipments from Nogales to 4 RDCs 9/28 : RDC’s : shipments between Nogales and RDCs

Optimization Opportunity - Strategy 1: Backhaul Data of shipments from Nogales From To 4 RDCs ONTARIO GRAND PRAIRIE Nogales RICHMOND WOODRIDGE Frequency/month 30+ 2/2 days Avg. Weight 27, 739 27, 928 22, 887 23, 023 • Backhaul Opportunity • Assumptions • High Frequency • High Capacity • Location 10/28 • Nearly free backhaul • Time window of 3~7 days • Enough capacities to carry goods back

Optimization Opportunity - Strategy 1: Backhaul Direct shipments from suppliers to CA RDC 11/28 : destination : suppliers : RDCs : direct shipments

Optimization Opportunity - Strategy 1: Backhaul Way back with truckload through backhaul 12/28 : destination : RDCs : truck delivery and backhaul : suppliers : shipments to the nearest RDC : shipment to destination

Optimization Opportunity - Strategy 1: Backhaul Direct shipments from suppliers to TX RDC 13/28 : destination : suppliers : RDCs : shipments to the nearest RDC

Optimization Opportunity - Strategy 1: Backhaul Way back with truckload through backhaul 14/28 : destination : suppliers : RDCs : truck delivery and backhaul : shipments to the nearest RDC

Optimization Opportunity - A Backhaul Example: Battleboro Backhaul Originally…. …. VA RDC Battleboro TX RDC Supplier BATTLEBORO Consol pt VA RDC 15/28 Avg. Weight of TL #TL Shipments 20, 044 lbs 30 in 3 Qts Miles to Consol pt TL Rate 2($/mile) 113 mile $5. 5 Distance 1261 mile TL Rate 1($/mile) Direct Route Total Cost $2. 28 $86, 230 Cost to Consol pt Cost Reduction $86, 230 * 113/1261 * 5. 5/2. 28 = $18, 640 $67, 560 Cost to Consol pt = To. Tal Cost * Miles to Consol pt/Distance *TL Rate 2/TL Rate 1

Optimization Opportunity - Cost Reduction From Backhaul $450, 000. 00 Original Cost (include Nogales) $400, 000. 00 New Total Cost $600, 000. 00 Original Cost (include Nogales) New Total Cost $500, 000. 00 $350, 000. 00 $400, 000. 00 $300, 000. 00 $250, 000. 00 $300, 000. 00 $200, 000. 00 $150, 000. 00 $100, 000. 00 $50, 000. 00 $0. 00 TX RDC 16/28 CA RDC

Optimization Opportunity - Cost Reduction From Backhaul Original Cost Total New Cost Reduction (including Nogales) Percentage TX RDC $408, 384 $241, 015 $167, 368 40. 98% CA RDC $552, 863 $352, 708 $200, 154 36. 20% Remark: • Table above shows the costs of all shipments from all suppliers to TX and CA RDCs, except Nogales. • If backhaul is applied, large savings will appear. 17/28

Additional Backhaul Opportunity - Backhaul to East St Paul • Potential backhaul/line haul – Find TL shipments with high frequencies – For example, shipments from East St Paul to VA RDC 18/28 From EAST ST PAUL To VA RDC Frequency (times/month) 7. 3 Mode Full Truckload (30, 000 lbs)

Additional Backhaul Opportunity - Backhaul to East St Paul • Assumptions: – Backhaul is almost free – Time window of 4 days is accepted • Utilize this opportunity – Find shipments from suppliers near VA RDC to IL RDC – Make use of backhaul to East St Paul to realize the above shipments • Cost reduction Suppliers near Richmond 19/28 Shipment to Woodridge Distance to Richmond Total Cost New Cost Reduction BATTLEBORO 54 939 113 $94, 618 $11, 386 $83, 231 DAVENPORT 9 1183 770 $17, 845 $11, 615 $6, 230 HATFIELD 23 773 277 $34, 482 $12, 356 $22, 126 HIALEAH 16 1391 943 $12, 091 $8, 197 $3, 894 RICHMOND 19 831 0 $13, 688 $0. 00 $13, 688 ROANOKE 28 756 193 $18, 508 $4, 725 $13, 783 TOTAL 　 　 　 $191, 231 $48, 280 $142, 952

Optimization Opportunity -Strategy 2: Consolidation • Assumptions: – TL and larger LTL cost less than smaller LTL – The time window is flexible • Strategy – In the case that shipments are first sent to their nearest RDCs, some of them may have chances to be consolidated there and shipped to the final destinations respectively. – All TL/LTL shipments are consolidated at suppliers’ locations in a certain time window (e. g. one week), then shipped to the nearest RDCs. 20/28

Optimization Opportunity -Consolidation at RDCs Consolidate LTL shipments having common destination All supplies except Nogales Remark: LTL Separate nearest RDC TL or larger LTL Common destination RDC • Consolidation at RDCs does not save a lot (only 2. 76%) • TL shipment cost is high between IL and VA • Because of low frequency, most LTL shipments can’t be consolidated due to a fixed time window. • Therefore, try to add capacity to TL shipments on this route 21/28

Optimization Opportunity -Consolidation at Suppliers Consolidate at each supplier All suppliers except Nogales 22/28 TL or larger LTL Consolidate shipments having common destination Separate nearest RDC TL or larger LTL Common destination RDC

Optimization Opportunity -A Consolidation Example: Rome Original Cost • $50, 000 New Cost Data: Rome, Feb, 2009 Ship date 2/9/2009 2/9/2009 2/11/2009 2/11/2009 2/17/2009 2/18/2009 2/20/2009 2/24/2009 2/26/2009 From ROME ROME ROME ROME ROME To GRAND PRAIRIE ONTARIO RICHMOND ONTARIO RICHMOND GRAND PRAIRIE ONTARIO RICHMOND $26, 000 Rome LTL 487 939 683 224 1059 487 1329 918 549 355 2032 2002 1294 190 480 533 885 8880 Cost $93. 46 $150. 40 $196. 71 $84. 60 $127. 17 $97. 36 $208. 21 $245. 23 $158. 12 $84. 60 $419. 02 $205. 14 $161. 88 $87. 98 $144. 00 $153. 14 $124. 81 $670. 98 • Green route: existing shipment routes • Red route: New routes when utilizing backhaul 23/28 Cost Reduction $24, 000 VA RDC Time window is 1 day. Original total cost: $793 New cost by this consolidation: $370 We save $423 (53%) What if the time window is 3 days? Original total cost: $1446 New cost by this consolidation: $650 We save $796 (55%)

Optimization Opportunity -How To Estimate LTL Rate • TL rate=charge/distance • LTL rate is concave in weight $800. 00 $700. 00 $600. 00 $500. 00 $400. 00 $300. 00 $200. 00 $100. 00 $0. 00 0 24/28 2000 4000 6000 8000 Not always available 10000 12000 LTL weight 2048 2499 2918 3563 3888 5286 6910 7440 8044 8880 10418 11155 16083 TL Charges $209. 86 $257. 89 $299. 01 $365. 10 $394. 64 $429. 30 $562. 51 $594. 41 $653. 30 $670. 98 $700. 68 $752. 03 $1, 104. 71 i. e. $1026

Optimization Opportunity -Summary of Strategy 2 • The strategy of consolidation at suppliers saves $47, 000 out of $2, 597, 000 (only 1. 81%) • The strategy of consolidation at RDCs cannot save – The TL cost between the two RDCs (IL and VA) is HIGH – Do NOT have more chances to consolidate shipments from other suppliers at the nearest RDC because of the fixed time window • Better to consolidate both LTL and TL at suppliers and then ship them DIRECTLY to the destination RDCs 25/28

Summary of Results Optimization Strategies Backhaul to Nogales for shipments to TX and CA Consolidating LTL shipments at RDC’s Consolidating LTL shipments at suppliers Total 26/28 Cost Reduction to Entire Inbound Transportation 13. 95% 0. 06% 1. 81% 15. 92%

Conclusion • All TL & LTL shipments to TX and CA can be shipped to the nearest RDCs and then use backhaul to Nogales • Find other backhaul opportunities, e. g. East St Paul to VA RDC • The shipments to VA and IL RDCs should be shipped directly to the destinations 27/28

Thank you 28/28