http://www.tfreview.com/feature/risk/chain-custody-how-smart-containers-can-mitigate-transportation-risk

Chain of custody - how smart containers can

mitigate transportation risk

How can trade financiers be sure the trade they

finance is what they think it is? JIM GIERMANSKI explains how tracking technology

gives containers ears and eyes

For those outside the global supply chain, there is sometimes a level of uncertainty about what is

involved in transporting goods from one side of the world to the other. Financial institutions that

provide the funds and financial guarantees to

... the trade they finance is what they think it is? JIM GIERMANSKI explains how

tracking technology gives containers ears and eyes... Jim Giermanski is chairman of

Powers Global Holdings www.powersintlinc.com ...

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Feature | 11 October 2013

Risk

For those outside the global supply chain, there is sometimes a level of uncertainty about what is

involved in transporting goods from one side of the world to the other. Financial institutions that provide the funds and financial guarantees to keep the supply chain flowing – along with insurance companies – make it their business to understand the risks and areas of vulnerability. Failure to do so can result in higher insurance premiums, litigation surrounding discrepant trade finance documents – and the risk of being a victim of fraud.1

Container shipping In other words, financing international trade relies on a practical knowledge of the global supply chain process and how the underlying goods are transported around the world.

In his article, ‘Container shipping and the economy, stimulating trade and transformations worldwide’, Marc Levinson, former business editor of the Economist, observes: “The container is at the core of a highly automated system for moving goods from anywhere to anywhere with a minimum of cost and complication.

“The container made shipping

cheap and changed the shape of the world economy.”2

For those not familiar with the specifications and standards of a shipping container, Figure 1 provides a summary.

The ‘smart’ shipping containerSecure material asset recording and tracking (SMART) containers are shipping containers that use container security devices (CSDs) to provide the essential information on cargo and its movement.

Smart containers are defined not by their hardware but by what they are programmed to do. The sophistication of CSDs includes:�� the simple reporting of location only

when they are interrogated by an RFID (radio frequency identification) land-based transceiver; �� tracking and tracing features provided

by satellite and cellular technologies; �� actual real-time detection and reporting

of a container’s internal environment and integrity; and �� a chain-of-custody system.

In jurisprudence and law enforcement, chain of custody refers to the integrity of evidence and requires documentation and a paper or electronic trail showing the “seizure, custody, control, transfer, analysis, and disposition

of physical and electronic evidence”. Smart containers can provide this evidence.

User perspectivesEach type of smart container delivers different benefits for each type of user. For example, if you are a national retailer, you might want to know only the location of your container because of its potential role in inventory availability connected to your sales events in different regional markets. Governments, however, may care about the location of their sensitive, hazardous, or military cargo. Financial institutions involved in lending or guaranteeing payment need data on the ownership, control, and movement of cargo for the purposes of documentary credits.

Other shippers of high-value cargo may want to ensure that their containers do not deviate from a prescribed route of travel. This is known as geo-fencing. For instance, a container programmed with geo-fencing detects a variance between where it should be and where it is, suggesting a hijacking or being sent to the wrong consignee or the wrong location. Each benefit is programmed based on the specific needs of the shipper, carrier, or consignee.

ResponsesSmart containers can also respond

TFR OcTObeR 201338

Smart thinkingHow can trade financiers be sure the trade they finance is what they think it is? JIM GIERMANSKI explains

how tracking technology gives containers ears and eyes

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to inquiries. The user and/or their international control centre (‘platforms’) can communicate with them, depending on the programming, sensors and technology used, in real-time or close to real-time. They can also tell you electronically:�� the contents of the container;�� who supervised loading the cargo and

who is accountable for the accuracy of the contents at origin; �� the time the container was sealed; �� when it left its origin;�� its route; �� its internal environment; �� its progress; �� whether it deviated from its course;�� its arrival at port of embarkation; �� when it was loaded aboard the vessel; �� whether the vessel was breached; �� when it arrived at the destination

port; and �� who opened it and verified the cargo at

its final destination.

They have a sophisticated, comprehensive chain-of-custody system that begins at the stuffing (loading) of the container at origin and maintains, monitors and reports its integrity to the end of the global supply chain path at destination.

However, no system is 100% effective and technology should not be regarded as a substitute for practical common sense and using one’s instinct.

Identification of partiesSmart containers have to include the identification of the party responsible and personally accountable for final inspection of the cargo prior to its sealing and dispatch and subsequent international movement to destination. Someone has to take responsibility for confirming the cargo on the bill of lading or booking sheet, for activating the smart container system, and for locking the doors. This responsible party must be vetted for integrity and competence. Equally, there must be a counterpart at the destination. Both parties are electronically connected to the smart container system.

At activation, the accountable party becomes an integral element in the smart container security system. Once the container is activated by using a unique electronic protocol inserted in the electronic memory of the container device, it can be read at almost any time during the voyage through satellite communication.

This activation also allows the smart container to notify appropriate parties of an unauthorised breach or to report the

condition of the container or, depending on the sensors used, to report the type of the cargo within the container. It can report its own hijacking.

When a smart container is opened at the destination by an equally accountable person and cargo is missing, with no breaches detected, recorded and reported, the accountable person at origin can face either disciplinary or, at worst, criminal action by appropriate authorities. The worldwide control centres offer the capacity to serve as a third-party electronic record of the transaction recorded automatically in its servers.

The smart container offers an electronic receipt of delivery. This is achieved by ensuring only approved and authorised individuals at both origin and destination open the container. (see Figure 2). A specialised electronic key protocol usable only by these authorised and approved individuals ensures complete security all along the logistics chain.

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“Smart containers have a sophisticated,

comprehensive chain-of-custody system that reports

its integrity to the end of the global supply chain

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Figure 1: Container shipping – key facts

Container shipping is different from conventional shipping because it uses ‘containers’ of various standard sizes – 20 ft (6.09 m), 40 ft (12.18 m) , 45 ft (13.7 m), 48 ft (14.6 m), and 53 ft (16.15 m) – to

load, transport and unload goods. As a result, containers can be moved seamlessly between ships, trucks and trains. The two most important, and most commonly used, sizes today are the 20-ft and 40-ft lengths. The 20-ft container, known as a Twenty-foot Equivalent Unit (TEU) became the industry standard reference so now cargo volume and vessel capacity are commonly measured in TEU. The 40-ft length container – literally 2 TEU – became known as the Forty-foot Equivalent Unit (FEU) and is the most frequently used container today.

The container sizes need to be standardised so that the containers can be stacked efficiently – literally, one on top of the other – and so that ships, trains, trucks and cranes at the ports can be specially fitted or built to a single size specification. This standardisation now applies across the global industry, thanks to the work of the International Organization for Standardization (ISO) which set standard sizes for all containers in 1961.

Proper loading or ‘stuffing’ of containers is very important to the safety and stability of the containers and the ships, trucks and trains that transport the containers. In 2008, the World Shipping Council (WSC), together with the International Chamber of Shipping (ICS), published Safe Transport of Containers by Sea – Industry Guidance for Shippers and Container Stuffers to aid those loading containers.

Source: www.worldshipping.org/about-the-industry/containers

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Supply chain components

‘Who’There are many components in the supply chain, and each has a distinct and valuable purpose in getting cargo from its source to its destination. The most important, of course, are the buyer and seller, then the carrier. There is also the financial institution without whose help there would probably be no purchase or movement of goods.

Additionally, there are international conventions such as the UN Convention on Contracts for the International Sale of Goods which has become US Federal law and Incoterms®2010 rules which provide buyers and sellers the option of using multiple but legally distinct trade terms often directly impacting conditions of bank documents and letters of credit (LC).3

The other very important link is the person who verifies the cargo at origin. And, as of July 2013, the Customs and Border Protection (CBP) programme 10+2 has the requirement of Importer Security Filings (ISF). This penalises the importer for an erroneous or imprecise description of the cargo.4

‘What’The ‘what’ is directly connected to the identification of the cargo, its quantity, its destination and any manifest data linked to that cargo’s movement through the global supply chain. The what of cargo movement can satisfy CBP’s e-manifest requirements and the Automated Commercial Environment (ACE) programme. The what also relates to the question what happened, if anything, to the cargo during its voyage.

‘When’‘When’ can be one of the most critical elements of the global supply chain as financing may be linked to the life cycle of the open account trade transaction and repayment issues. For example, from a US perspective, when was the cargo loaded? When did it leave? When did it arrive at the debarkation port? When did it arrive at the US port? When did it leave the US port, and when did it arrive at destination? These are all important components of and natural questions about the global journey.

‘Where’The positioning of where the cargo is in the supply chain at any given moment can

be provided by the use of smart containers. As already indicated, geo-fencing detects a variance between where it should be and where it is, suggesting a hijacking or being sent to the wrong consignee or the wrong location. Geo-fencing is applicable to vessel and land conveyance movements and potential settlement dates depending on where the cargo is at any particular time.

‘Why’ All stakeholders have reasons for controlling the supply chain. Retailers and upcoming sales; pharmaceutical manufacturers and their concern with trans-shipping risks, the introduction of counterfeit products into their shipments and the safety of their pharmaceutical product itself; and lenders who have payments tied to delivery or title or LC presentation. Importers also require accuracy in filing Customs requirements.

Finally, there is a need for the electronic documentation of movement from loading at origin to unloading at destination as evidence in case of legal action.

EvidenceEssentially, the use of smart containers that provide the chain-of-custody control process also provide an automatic audit trail and system for defending oneself against liability and financial risks. All the chain-of-custody electronic data carried in or transferred from CSDs is saved in servers of the control platform providing electronically stored information (ESI).

This is now discoverable in civil matters as a result of changes to the Federal Rules of Civil Procedure. The data provide each stakeholder with retrievable and usable information should any type of litigation or recovery procedure be undertaken by another stakeholder.

Container security programmes and devices offering the control chain-of-custody technology do offer compelling risk mitigation in logistics management. From a trade finance perspective, depending on the type of finance used in the trade deal, they can mitigate open account, documentary collection, and letters of credit risks by providing the electronic data needed to verify the terms and conditions of the international sale and its cargo movement. Most reputable shipping lines provide information on available container-tracking tools on request.

Jim Giermanski is chairman of Powers Global Holdings www.powersintlinc.com

References

1. See ‘Warehouse woes, how to protect

your commodities supply chain from fraud’

in TFR, March 2013, at www.tfreview.com/

node/8757

2. See www.worldshipping.org/pdf/container_

shipping_and_the_us_economy.pdf

3. See www.iccwbo.org/products-and-

services/trade-facilitation/incoterms-2010/

4. See www.cbp.gov/xp/cgov/trade/cargo_

security/carriers/security_filing/

Figure 2: Example of a smart container

Source: www.guardfreight.com

Risk

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