Inventory Management, Logistics, Transportation

NOTE: This article was written prior to the recent US corporate tax rate decrease to 21% and increase in the Ontario minimum wage to $14/hour.

Executive Summary

 

            Opening a distribution centre staffed by 501 full time minimum wage employees in Richmond, Virginia would be $2,462,771 per year less expensive than in Cornwall, Ontario. Due in large part to a lower minimum wage rate difference of $1.76 (CAD) and a mandatory employer contribution requirement differential of $625,045 per year, which aid it to surpass its unfavourable current exchange rate difference of 33%. Employees in Richmond generally experience lower quality of life, stemming from shorter, unsubsidized parental leave and un-mandated minimum paid vacation compared to their Canadian counterparts. Richmond’s favorable 5,806 unemployed citizens will provide a more advantageous pool of potential employees should high workplace turnover occur. The one critical unknown relevant factor lies in the lack of a profit forecast, which impedes this report from applying the considerably higher American corporate tax rate of 38.9% compared to the Canadian rate of 15.5%.

 

Introduction

 

The following information was gathered to aid in the site selection determination for a distribution centre comprised of 501 minimum wage employees. Various site selection factors were considered in establishing whether Cornwall, Ontario or Richmond, Virginia would be the most appropriate location given their respected provincial/state and federal staffing constraints. The predominant factor taken into consideration was staffing, which includes wage rates and employee benefit entitlements. Cash flow is another influential factor as it relates to the significant exchange rate in converting CAD to USD. Lastly, employment taxes rounded out the decision making process, as the province of Ontario, the state of Virginia and their respective federal counterparts require differing tax contributions from employers. This report will conclude by evaluating the above mentioned factors and figures to give recommendations as to the advantages and disadvantages of opening a distribution centre in both locations.

 

Background and Discussion

 

            As the predominant motive for the location of this distribution centre is based on overall cost reduction to the organization, it is evident how this situation relates to both an offshore factory and a source factory site selection process. As the facility is to employ 501 full time staff at minimum wage, it relates to both strategies in that regard. Another site selection consideration similarity lies in how the state of Virginia has a low minimum wage rate of $7.25 USD per hour ($9.64 CAD) (“2017 Minimum Wage By State”). The lower Canadian exchange rate balances out the higher Ontario minimum wage rate of $11.40 per hour, to some extent. Whether or not there is to be development of the local population can be argued either way. As 501 employees are to be paid at the minimum wage rate, that would not significantly develop the lives of the local population financially to a large extent. That situation would relate to an Offshore site selection strategy. However, it could be argued that if employees are to be taken from a segment of the population that is currently unemployed, that would in fact contribute to the development of the local population. The latter would put a small dent in either Richmond’s 4.3% unemployment rate (“Richmond, VA Economy At A Glance”) or Cornwall’s rate of 8.1% (Baker, Lois Ann), constituting the site selection decision making process to relate to the Source strategy. The one piece of information that is lacking is whether or not management is to be taken from the selected location’s local population, or whether they are to be expatriates.

 

            Another factor to be considered is the federal corporate tax rate of the country in which the proposed new distribution centre will reside. Canada’s corporate tax rate is relatively low at 15.5% while the rate within the United States is 38.9%. These figures cannot be applied to this particular situation at this time as profit forecasts have yet to be calculated, however they should certainly be taken into consideration. In addition, the WSIB rate of $2.43 per $100 insurable dollars (“2017 Premium Rates”) would likely be required for a distribution centre in Ontario, which provides workplace liability insurance coverage. Amounting to $288,677, this figure was omitted from calculations as it was not requested for analysis.

 

Analysis

 

Staffing

 

            Staffing and human resource factors are critical when determining the site for a distribution centre. As it is after low skilled, minimum wage employees, an analysis of the current minimum wage rates in Ontario and Virginia is crucial. Ontario currently stands at $11.40 per hour (CAD) (“Minimum Wage”) while Virginia has a rate of $7.25 per hour (USD) (“2017 Minimum Wage By State”) or $9.64 CAD. For simplicity, all figures moving forward in this text and its corresponding appendix will be in CAD. Using trendline in Microsoft Excel, we can forecast the Ontario minimum wage rate to climb approximately $0.20 per hour each year, to $12.40 per hour by the year 2022. In contrast, Virginia’s minimum wage unemployment rate has not changed in the past 7 years and is expected to remain constant at $9.64.










With a present rate difference of $1.76 per hour in favour of Richmond, VA and a projected difference of $2.76 in five years, Richmond is clearly less expensive when considering the minimum wage by itself. Gross payroll for a full time employee at minimum wage in Cornwall is $23,712 and $11,879,712 for 501 employees while the equivalent employee in Richmond would cost $20,044 and 501 employees would cost $10,041,986.

 

Employment Insurance

 

            To determine the end dollar amount for employing 501 minimum wage workers in Cornwall and Richmond, taxes and expenses must be considered.  An employer’s contribution requirements include employment insurance (EI), health care costs, minimum vacation requirements and compulsory government pension plan contributions based on the gross employee payroll. In Canada, an employer is to pay EI contributions of 2.632% for each employee’s salary which amounts to $624 per employee or $271,095 for all 501 employees in 2017. The American equivalent of EI is The State Unemployment Tax Act (SUTA) and The Federal Unemployment Tax Act (FUTA). The SUTA rate for new employers in the state of Virginia is 2.53% (Virginia State Tax Information”), which equals $202 per employee and $101,402 for all 501 workers. FUTA is calculated at a rate of 0.6%, equaling $42 per employee and $21,042 for all 501. Combining SUTA and FUTA amounts to $166,651, which will cost the distribution centre $104,444 less than its Canadian counterpart.

 

Healthcare Contribution

 

Opening the distribution centre in Cornwall will require payment of Ontario’s Employer Health Tax at a rate of 1.95% (“Employer Health Tax”). This will amount to $462 per individual and $231,654 for all 501 workers. The state of Virginia charges a Medicare rate of 1.45% (“Employer’s Tax Guide”) amounting to $291 per individual and $145,609 for all 501 employees. Virginia is once again less expensive than Ontario at a differential of $86,045.

 

Vacation Requirements

 

            Vacation requirements are a one sided financial expense, however it requires overall productivity and organizational moral to be taken into account. As the state of Virginia classifies vacation as a fringe benefit, it does not require employers to offer paid vacation time or vacation contributions (“Labor and Employment Law”). However, in Canada, employers are obligated to provide two weeks of paid vacation every year plus vacation pay, which “must be at least four per cent of the “gross” wages (excluding any vacation pay)” (“Vacation”). This expense not only amounts to $948 for the individual and $475,188 for all staff, it will result in decreased overall productivity due to an average of 19.3 employees always being on vacation. This therefor decreases the 501 staff down to 482, while the distribution centre will continue to pay for 501 employees. On the other hand, mandatory vacation time and pay will lead to higher workplace moral and likely increased productivity in the long run.

 

Government Pension Plan

 

            Both locations require tax contributions in the form of government pension plans. The Canada Pension Plan requires a 4.9% contribution by both the employer and the employee on all income between the first $3,500 year and up to $53,000 (“T4032-ON – Payroll Deductions Tables – CPP, EI, And Income Tax Deductions – Ontario – Effective January 1, 2016”). This will amount to $990 per employee and $496,184 for all 501 employees. The United States offers a pension plan in the form of Social Security, where a rate of 6.2% is taxed for each employee (“Employer’s Tax Guide”). Social Security will cost the distribution centre $1,243 per individual and $622,603 for all 501 staff. Social Security is a rare example of an American tax program costing companies more than their Canadian counterpart, accounting for a $126,419 difference in favor of the Canada Pension Plan.

 

Parental Leave

 

            While parental leave does not necessarily cost the organization direct out-of-pocket expenses, there are some less upfront ways in which it affects staffing. The Federal Government of Canada offers 55% of the employee’s salary over a 12-month period, for which one parent is entitled to maternity leave. It was recently announced the individual can extend the same income rate over 18 months, bringing it to 33% of their initial salary (Kohut, Tania). While Canadian employers are not required to contribute any funds to parental leave, it is customary for many organizations to top off that amount to the employee’s regular salary. On the other hand, the state of Virginia requires employers to provide their employees with only 12 weeks of parental leave, which is not subsidized by state or federal governments. The downside of Canada’s 12 to 18-month maternity leave entitlement for employers is they have to maintain that position or an equivalent position for the return of the employee, while benefits of paternal leave include a higher quality of life for the employee and less employee disenchantment. Virginia’s shorter and unsubsidised parental leave forces parents of newborns back to work much sooner, causing a smaller HR burden in the short run, but decreases employee quality of life and workplace moral.

 

Unemployment Rate

 

            A region’s unemployment is an indicator of the availability of labour. The unemployment rate of both Cornwall and Richmond are encouraging for the opening of a sizeable distribution centre. Cornwall’s current unemployment levels sits “at or slightly below national and provincial levels” at 8.1% (June 2015) (Baker, Lois Ann). Virginia’s unemployment rate is nearly half of Cornwall’s, at 4.3% as of January 2017 (“Richmond, VA Economy At A Glance”). One could interpret these figures to show that Cornwall has a larger available labour force, however, when taking their respective total populations into account (Cornwall 46,000 as of 2016) (“Cornwall Demographics & Population Information”) (Richmond 221,679

as of 2016) (“Demographics”) Richmond has roughly 2.6 times the number of unemployed individuals as Cornwall at 9,532 to 3,726 respectively.

 

Region

Population

Unemployment Rate

Number of unemployed

Difference

Cornwall

46,000

8.1%

 3,726

-5,806

Richmond

221,679

4.3%

 9,532

 5,806

 

Exchange Rate

 

         While this report focusses in large part to the staffing factors which affect site selection, as the two proposed locations are located within different countries, the cash flow factor of exchange rates is to be considered. The CAD to USD exchange rate has fluctuated considerable over the past decade ranging from below par to 135.52% (“XE Currency Charts: USD to CAD”). This forecast was derived using a trendline which takes into account each year’s average exchange rate from 2007 to 2016 (“Annual Average Exchange Rates”).

            It determines the recent increase to be rather drastic when compared to less recent years and suggests a less steep climb in the coming 5 years. An above par exchange rate considerably favours setting up the distribution centre in Richmond as it has a direct impact on net payroll expenses.

 

Conclusion

 

            Taking into consideration all required contributions including employment insurance, health care, vacation and government pension plans, the city of Richmond, Virginia is clearly the less expensive option. As setting up a distribution centre, staffed with 501 full time minimum wage employees in Richmond will result in a net payroll of $10,932,642 per year vs $13,395,413 per year in Cornwall, and considering how lower operating costs is the primary objective in this site selection process, the decision is clear. Richmond, Virginia should be selected due to its total net payroll cost savings of $2,462,771 per year when compared to Cornwall, aided by a lower minimum wage rate and a net benefits cost savings advantage of $625,045 per year.

 

Differences

Cornwall, On

Richmond, VA

Benefits and Taxes per Employee Difference

 $1,248

-$1,248

Net Benefits and Taxes Difference

 $625,045

-$625,045

Net Payroll per Employee Difference

 $4,916

-$4,916

Total Net Payroll Difference

 $2,462,771

-$2,462,771

 

            Unsubsidized parental leave and un-mandated minimum vacation requirements run the risk of contributing to decreased workplace moral and overall productivity. However, in Virginia, management will have the option of employing these two benefits should they choose to, as opposed to having them forced upon the organization by the Federal Government of Canada.

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Logistics, Supply Chain Management, Transportation
The Tesla Semi-trailer truck press launch on November 17th, 2017 wowed a hanger full of tech enthusiasts who likely have never stepped foot inside a logistics office or an actual semi themselves. I mean come on, when was the last time you heard a logistician cheer and scream in that manner? The first of its kind electric semi boasts the following impressive claims:
  • 500 miles of range on a full charge at maximum weight
  • 30 minute charge time to 80% capacity
  • 0-60mph in five seconds with an empty trailer
  • 60mph in 20 seconds with a max load of 80,000lbs
  • A one million mile warranty
  • No brake pads to replace
  • No transmission to replace
  • Nuclear explosion-proof glass
  • Zero emissions – the big one!
All resulting in Tesla claiming for their semi to have a true cost-of-trucking at least 20% lower than a traditional diesel truck. However, things get interesting when platooning, or convoying as Elon Musk calls it, is taken into account. What is Platooning? Put simply: platooning is how semi-autonomous vehicles will disrupt the logistics industry, driving down prices all the way down the supply chain to the end user, laying off many truck drivers in the process. Platooning trucks and trailers is similar to rail transport. The driver-equipped semi in the front acts as a locomotive, while autonomous trucks are pulled behind using radio frequencies acting as rail cars. This leads to the cost savings associated with not requiring a driver, their subsequent salary and benefits, to operate every truck. That said, while Musk claims Tesla has already developed this technology and is confident it will result in 10x higher highway safety for truckers and commuters, there are many unclear details as to how platooning will operate. My questions include:
  • Will the platooning semis have to be equipped with drivers? That would defeat the purpose of autonomous vehicles
  • If not, what will the cabins look like? Will there even be a cabin? You wouldn’t really need one…
  • What is the maximum number of trailers that can platoon behind one driver equipped semi?
  • Will Megacharge stations have the ability to handle the semi numbers associated with multiple platoons? Will this cause excessive wait times at Megacharge stations?
In platooning, or “convoying”, the Tesla Semi is said to poses half the true cost-of-trucking of a diesel truck. Musk claims a platoon of Tesla electric Semis can beat the price of rail, while the convoy would remain far more flexible, not being tied to a network of railways. This is not particularly fair to diesel trucks, as it is only a matter of time until they too will gain the ability to platoon. In reality, many limitations regarding platoon trailer size will likely be caused by government restrictions, as we all know that technology moves exceptionally faster than government regulation. Also, don’t expect to see a convoy of any number of semi-autonomous trailers blocking up your city’s downtown core any time soon. Platoons will only be utilized for long-haul trips on major highways and possibly in remote areas, at least in its primary stages. Drivers will certainly be required for shunting purposes, in a way acting as tug boat operators within the distribution centre lot and for last mile delivery if the convoy is to split up. Some have proposed integrated offices in the cabin, so that drivers who are being platooned (and are therefore not driving) can perform logistics documentation and paperwork. However, I have a hard time believing 4PL logistic companies will pay to train all their drivers to perform work already performed by their centralized logistics coordinators.
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Logistics, Supply Chain Management, Transportation

Hyperloop pod transportation has gathered plenty of attention in recent years where magnate propelled capsules are pushed upwards of 1,200 km/h with an average speed of 700km/h. Additionally, Hyperloop transportation is completely automated, which promises to eliminate delays and overbooking. While consumers are quick to fantasize of the benefits of high speed Hyperloop travel, the ramifications of Hyperloop freight cargo will be felt throughout the supply chain, and in consumer’s wallets.












There are currently 10,000 trucks en route from Toronto to Montreal every day, with delivery lead time totaling half a day. A similar Hyperloop will take half an hour, while contributing to a reduction in highway traffic in the process.

 

Benefits:

Inventory

Hyperloop’s fast speed and promised reliability will support lean and Just-In-Time inventory practices. Organizations will have the ability to hold less inventory, therefore decreasing their required warehouse footprint, payroll, operational and overhead costs.

 

Lower product costs for consumers and businesses

With the decrease in inventory costs highlighted above, consumer and industrial goods prices will decrease. These cost savings will ripple down the supply chain, all the way to the wallets and budgets of consumers and businesses.

A decrease in traffic along the 401, 7 and 417 highways

If high-speed TransPod travel becomes widely adopted, a decrease in commuter and freight traffic on the highways commuting between Toronto and Montreal or between Toronto and Montreal, Toronto and Ottawa, and Ottawa and Montreal (depending on whether TransPod Hyperloop or Transpod One meet the required Transport Canada regulations). This will directly lead to a decrease in highway transportation between those destinations. Transpod travel will subsequently force traditional trucking and rail companies to lower their rates and lead to shorter delivery lead time throughout all modes.

Increase in Tourism

A decrease in travel time will benefit the domestic tourism industry. Time savings resulting from the alleviation of airport security, the elimination of delays and of course, the significantly faster speed of Transpod travel, will motivate business and domestic tourists to displace themselves for more business, weekend and holiday trips.

 

Environmental Benefits

Mass-transit Transpod pods are propelled electronically at low speeds: during arrival and departure, then magnetically for the majority of the time. Resistance (air) is continuously vacuumed out of the tube using a passive system, leading to ultra-low aerodynamic drag. This results in a highly efficient and environmentally friendly mode of long-range transportation.

Truck Drivers Should Not Be Affected

As the proposed Canadian Hyperloop route is unlikely to be completed prior to 2025, truck drivers are most likely to already have been disrupted by driverless trucks in the form of platooning.


In Canada, two Hyperloop start-ups are competing for regulatory rights from Transport Canada to construct the first domestic route.

TransPod Hyperloop has proposed an eastern Canadian route, back-and fourth from Toronto to Montreal. The trip is estimated to take 30 minutes.

Hyperloop One’s proposed Canadian route runs from Toronto, through Ottawa, ending in Montreal. Time estimates are as follows:

  • Toronto to Ottawa in 27 minutes
  • Ottawa to Montreal in 12 minutes
  • Toronto to Montreal in 39 minutes

Photo Credit: Hyperloop One, TransPod Hyperloop

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Logistics, Supply Chain Management, Transportation
The second day of the 2017 Chartered Institute of Logistics and Transport Conference was supposed to focus on disruptive change and positioning the sector to grow and prosper. As the most prevalent disruptive change in the industry of transportation will most likely be driverless trucks in the form of platooning, it was interesting to watch as the traditional transport companies acted rather defensive and dismissive of this innovation, all the while stressing of their razor-thin margins and lack of drivers. on panelist dismissed the idea, rhetorically asking the audience “does anyone know how much this will cost?”. Considering the current challenge of finding quality drivers, the mass retirement of baby boomer generation drivers, coupled with the direct savings from cutting driver salaries, benefits and human error would no longer be required with driverless trucks, the initial investment costs will be offset within only a few years. Sebastien Gendron, CEO, Transpod Hyperloop, walked the audience through the design concept for his hyperloop vacuum train which could one day shuttle passengers and cargo. He arrived late, which in a way reinforced the need for his traffic alleviating concept. When asked by an audience member if the other traditional transportation company executives would be willing to utilize this contraption, the same pessimistic panelist was quick to dismiss the hyperloop concept, citing potential conflicts with Transport Canada regulations.

It’s always easier to find fault with  disruptive technology than it is to embrace it. The panelists would rather move forward doing what their companies have always done despite the numerous problems within their soon to be outdated technology, rather than investing and innovating. Sure, there is risk in the investment and development of new technology. However, the risk remaining complacent in a time of incremental technological growth will ultimately lead to their extinction.

Watch my video report for an outline of the Chartered Institute of Logistics and Transport Conference day 2.

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