1. 2011 Chairman’s Quality Award
1
Logistics Strategy to the
Supply of ISF to Brazilian OEMs
Belt: Thales de Toledo Verga
EBU Mid Range Brazil

2. 3/22/2
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DFSS Project Review
Project Name: Define Logistics to Import ISF from China to Brazil.
Green Belt: Thales de Toledo Verga
Sponsor: Luis C. Faraj
Program Name: Hawkeye / Veneto
Program Leader: Thales T. Verga
DFSS MBB: Ana Paulo Marimoto
Team Members: Luis Chain - Mktg & Sales Exec. Manager
Lucio Nubile - Operations Director
Airton Cardoso - Quality Exec. Manager
Sonia Fanhani - Controler
Sidclei Silva - Finance Manager
Eneida Trichtl - Order Entry & Materials Mngr
Adilson Carvalho - Logistics Supervisor
Alexandre Balista - Tax Planning Supervisor
Ricardo Schalch - Sales Manager
Rosane Rodrigues - IT Manager
Andre B Campos - Product Engineer
Adriano Rishi - Engineering Director
Ana Paula Marimoto - DFSS MBB

3. Objective:
Ensure the ISF logistics from China to Brazil will be profitable to CMI and meet OEM´s expectations in
terms of competitiveness, firm period and inventory (safety stock) prompt availability.
Belt: Thales Verga Type: DFSS
Sub-BU: Midrange Entity: Midrange
Days to Close: 58 Project Avoidance: $42 M
Major Improvements:
– Transfer pricing avoidance to import ISF from China to Brazil: $ 620 / engine (average);
– Firm period reduced in 60% (from 12 to 5 weeks);
– Inventory (safety stock) transfered from China to Brazil (prompt availability);
– Mitigation of risks w/ both Customs strikes and in transit delays (delivery on time);
– Reduction of exposure to ex-rate volatility (prices firmed in USD, not in local currency R$).

4. Project Background
Those are the issues for CBL to supply ISF to the Brazilian OEMs:
Transfer Pricing: The Brazilian importer (in this case CBL) must earn a minimum mark-up of
60% on each product subjected to manufacturing. Therefore, transfer pricing in Brazil (PRL60)
eliminates the pricing competitiveness for ISF.
– The 1st target of this Project is to eliminate transfer pricing applicability by using a bonded
warehouse in Brazilwith the OEM as a formal importer of the ISF.
Inventory availability: Brazilian OEMs require inventory of engines in Brazil to avoid shortage of
engines in their assembly lines. To avoid shortage of ISF (made in China), OEMs are requiring 4 –
5 weeks inventory in Brazil (due to potential Customs strikes, in transit delays, etc...).
– The 2nd target of this Project is to transfer inventory from China to Brazil by using a bonded
warehouse in Brazil.

5. Project Background
Those are the issues for CBL to supply ISF to the Brazilian OEMs:
Firm period: Brazilian OEMs accept a firm period of 5 weeks for engines produced in Brazil. ISF
imported from China would require at least 12 weeks due to the additional 8 - 9 weeks for sea
freight and Customs clearance. CBL´s competitors produce engine in Brazil and they can offer the
4 weeks firm period. Therefore, OEMs do not accept 12 weeks firm period for the ISF.
– The 3rd target of this Project is to reduce firm period for ISF to achieve 5 weeks
by using a bonded warehouse in Brazil.

6. Measure Phase
Concept Generation: define logistics options available to import ISF
Cause & Effect Matrix: evaluate logistics options & impact over business
Pugh Concept: select the best logistics option

7. Measure Phase
Process Map: definition of the best logistics option chosen
FMEA to the best logistics option chosen

8. Analyze Phase
The best logistics option is the one when “OEM imports ISF from China by
using a bonded warehouse and upfit is supplied by BFCEC.
DO´s DONT´s
Transfer Pricing (PRL60) is not
applicable.
OEM must be involved in the import
process as the formal importer.
Inventory belongs to the OEM after
localization.
Inventory belongs to CMI until ISF is
cleared by the OEM in the bonded
warehouse.
CMI safety stock (inventory) is
based in the bonded warehouse in
Brazil (quick availability)
OEM has to open a branch in the
bonded warehouse (CNPJ) for
clearance at Customs.
Firm period and lead time reduced
to meet OEM expectations.
Get from CMI approval for a bonded
warehouse (it is necessary to the
import process).
Price: in USD for engine, avoiding
exposure to ex-rate (conversion
from USD to Real).
Negotiate w/ OEM approval to this
new logistics process (OEM
becomes the formal importer).
There is an extra-cost in the engine
to include bonded warehouse in the
process (USD200 / engine).

9. Analyze Phase
Cost avoidance: USD 42 M from 2012 to 2015 (estimated).
Annual cost avoidance: USD 10.5 average (estimated).
Avoidance to the transfer pricing per Shop Order
(USD 620 average)

10. Control Plan
• MAN: bonded warehouse implemented in Jan/12;
• Agrale: bonded warehouse to be implemented in Aug/12.
Find control plan below for the bonded warehouse implementation to Agrale.

11. Lessons Learned / Shared
The inclusion of the Brazilian bonded warehouse in the ISF logistics flow from China to Brazil is
the best choice to meet local OEM’s requirements while bringing the best positive financial return
to Cummins.
it eliminates the transfer price applicability (sales price w/ 60% mark-up over cost) and
therefore leverage the ISF competitiveness in Brazil from a cost standpoint;
it reduces Cummins exposure to ex-rate volatility because OEM pays for the ISF in USD
(price does not have to be converted from US to the local currency - Real);
it enables Cummins to reduce the firm period from 12 to 5 weeks, which is the same firm
period offered by competitors with engines made in Brazil;
it transfers the iventory (safety stock) from China to Brazil, giving to the local OEMs the
same reliability offered by Cummins´competitors with engines made in Brazil.
it mitigates potential delivery delays associated to risks like Customs strikes and in transit
delays because safety stock is based in Brazil.