The Dynamics of Supply Chain Security Is this the Calm Before the Storm? September 21, 2004

Northeast Supply Chain Conference

The Dynamics of Supply Chain Security

Is this the Calm Before the Storm?

September 21, 2004

Michael WolfeNorth River Consulting Group

[email protected]

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Sources & References for Supply Chain Security, Productivity, & Technology*

Security and productivity• “Some Good News on Cargo Security” (2004)• “The Dynamics of Supply Chain Security” (for the G-8, 2004)• “Security must yield an economic benefit” (2003)• “Supply Chain Security Without Tears” (2003, with Hau Lee)• “Freight Transportation Security and Productivity” (2002)• “Defense Logistics…” trends and implications (2001)

Technology for security and productivity• Smart Container Product and Market Reports (forthcoming, w/ HSRC)• “APEC Secure Trade Project Preliminary Conceptual Plan,” (2004)• “Technology Views and Issues” (2004)• “Automating Security: Do E-Seals Make Sense?” (2003)• “Target Capabilities for the ‘Future Smart Container’” (2003)• “Technology to Enhance Freight Trans. Security & Productivity” (2002)• “Electronic Cargo Seals: Context, Technologies, & Marketplace” (2002)• “Trends in Freight Identification Technology” (1998)

*Articles and papers by Mike Wolfe

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Outline

Cargo theft todayCargo theft today The ‘rules of the game’ are fragile Smart containers Forecasting the market

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Cargo Theft US cargo theft: $18 billion Global cargo theft: $50 billion

Those statistics are inadequate• Law enforcement est.: ~60% is not reported• DOT report: claims, admin make total $20-$60 b. • Real cost of loss still not addressed

– Sales lost to stolen goods– Disrupted customer service – Impact on brand reputation

• Industry view: total cost = ~3-5x value of lost goods

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A Better Estimate: Total Cost of Cargo Theft

FBI/NCSC estimate: ~$18 billion

Corrected for underreporting: ~$30 billion

The total cost of US cargo theft rounds to:

>$100,000,000,000 >1 % of the US GDP

3-5 X real cost adjustment: ~$90-$150 billion

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Larger Significance of Theft and Contraband Issues

Terrorism is the main threat• Potential direct losses from events• Potential indirect losses from countermeasures

Cargo theft and contraband • Help educate terrorists• Help fund terrorists• Can divert security attention

On the other hand….• Reducing vulnerability to terrorism will cut into

theft and contraband

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Outline

Cargo theft today

The ‘rules of the game’ The ‘rules of the game’ are fragileare fragile Smart containers Forecasting the market

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Threats, Countermeasures, and Impacts

Impacts

Direct, Primary Impacts

Damage & disruption

Threats and Assessments

Security Countermeasures

Terrorist Events

Recovery Measures

Indirect, Secondary Impacts

Costs, delays, unpredictability

Congestion & disruption

Emergency response

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Potential for Self-Inflicted Wounds

“How rational will ‘we’ remain after a second or third major terrorist attack?”

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Regulatory DynamicsImpacts

Direct, Primary Impacts

Damage & disruption

Threats and Assessments

Security Countermeasures

Terrorist Events

Recovery Measures

Indirect, Secondary Impacts

Costs, delays, unpredictability

Congestion & disruption

Inherently Unstable

“Next Event/Overreaction?”

What are the implications for your business?

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Implications of Supply Chain Security Dynamics

Micro: • You better ‘tune’ your supply chain to handle

shocks from changing security mandates

Macro:• Government should be acting to buffer the impact

Techno:• Smart container technologies lie ahead

Done right, new technology can enhance national security at the same time we

enhance business performance

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Outline

Cargo theft today The ‘rules of the game’ are fragile

Smart containers Forecasting the market

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What is a Smart Container? Three main ingredients

• An ISO standard “sturdy box”• Processing power• Communications

Goal is better visibility and control for:• Conveyances and equipment • Goods in transit

Smart containers require smarter networks

There is no standard

definition

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Potential Processing Power Security sensors -- some are:

• Intrusion detection• Chemical and radiological • Human presence

Efficiency & quality sensors -- some are:• Temperature• Empty/partial/full load status

Location determination Memory, both fixed and flexible Decision logic

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Smart Container Communications

Long range/regional/global• Satellite – global• Satellite - regional• Cellular – regional

Short range/portal/choke point• Radio Frequency Identification (RFID)

– Terminal gates– Container cranes– Dock doors

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Some Attractions of Smart Container Technologies

Improve chain-of-custody seal validation• Automation rather than human (non)inspection

Reduce labor impacts• Cost and workload

Provide container tracking information• Reduce time, cost, and service quality impact of mis-

routed containers

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Supply Chains Can Make Money with Better Visibility and Control

Better operating efficiency• Fleet, equipment, and labor utilization• Less wasted effort

Better operational effectiveness• More reliable customer service• Inventory savings• More flexible operations

Shipment integrity• Less theft of goods and services

Mostly for Carrier

Shipper & Carrier

Shipper & Carrier

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Examples of Potential Benefits

Smart and Secure Tradelanes, Phase I• Economic assessment on one of 18 tradelanes

– ~$400 benefit to shipper per container load

US TDA/APEC “BEST” projects• Economic assessment of one tradelane

– 80% probability of >$200 benefit to shipper per container load

Cautionary note• These are small samples

Hopeful note• Carriers and terminal operators should benefit as well

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Outline

Cargo theft today The ‘rules of the game’ Smart containers

Forecasting the market

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The Prospect for Smart Containers

With or without security pressures … With or without DHS research … Smart containers will be deployed for

commercial reasons, to make money• The question is when, not whether• Moore’s Law will bring them to the market

In 1985, satellite monitoring of trucks seemed like a pipe dream.

In 1990, Schneider National deployed Qualcomm’s

OmniTRACS

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Looking Ahead on Technology

DHS Advanced Container Security Device • HSARPA aims for the “Future Smart Container”• “6 walls” intrusion detection• Integrated WMD and stowaway sensors• Highly reliable and inexpensive

Potential commercial availability• Starting 2008

Forecasting Smart Container Growth

SMART CONTAINER MARKET DYNAMICS: FRAMEWORK FOR MAJOR DRIVERS

Regulatory Demands

Low Regulatory

Pressure for Smart Containers

High Regulatory

Pressure for Smart Containers

Strong Evidence

of Smart Container

Economic Value

Economic Benefits

Little Evidence of Smart Container Economic Value

© North River Consulting Group

Two Major Drivers

SMART CONTAINER MARKET DYNAMICS

Regulatory Demands

Low Regulatory Pressure for Smart

Containers

High Regulatory Pressure for Smart

Containers

Strong Evidence of Smart Container Economic Value

III - Sweet

Typical New Technology “Lazy S”

or “Hockey Stick” Adoption Curve

IV - Steroidal Accelerated

Enhancement and Adoption

Economic Benefits


I - Slow Slow, Specialized

and Limited Adoption

II - Sour

Reluctant Adoption Over High

Resistance and Delaying Tactics


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Regulatory Demands


Containers


Containers


III - Sweet





Economic Benefits




II - Sour




Regulatory Demand for Smart Containers

North River Assessment:• High regulatory pressure for

smart container adoption can come only after a meaningful container-oriented terror event

Scenario I, 2004-2012: • No container terror event

Scenario II, 2004-2012: • Container terror event in 2005

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Regulatory Demands


Containers


Containers


III - Sweet





Economic Benefits




II - Sour




Highlights of Scenario I, 2004-2012:No Meaningful Container Terror Attack

Classic new technology introduction, with an R&D boost from war on terror (Cell I)

Competitive pressures shift market decisively as successful early adopters reap benefits (Cell III)

Smart containers will become accepted best practice for supply chain operations during forecast period

Security benefits• Significant reduction in cargo theft

and smuggling• Enhanced protection against

terrorist exploitation

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Regulatory Demands


Containers


Containers


III - Sweet





Economic Benefits




II - Sour




Highlights of Scenario II, 2004-2012:Serious Container Terror Attack in 2005

At time of attack, smart container benefits still unproven (Cell I)

Political overreaction to attack produces premature mandates for smart container technologies (Cell II)

Forced use accelerates learning curves for benefits (move towards Cell IV)

Market for and use of smart containers builds faster and higher than Scenario I

Security benefits• Significant reduction in cargo theft

and smuggling• Enhanced protection against

terrorist exploitation

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Keep Technology in Perspective

Technology is not magic• “Just because it’s electronic doesn’t mean it’s better”• Good processes and discipline are critical• Institutional challenges are toughest

Technology is not irrelevant• “Just because it’s electronic doesn’t mean it’s a mistake”• Smart technology can

– Enhance good processes– Simplify demands on the workforce

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In Closing, Prepare for a Storm…

In terms of supply chain strategy, your major concern in terms of cargo security should be ‘what happens after the next terror event?’• The ‘rules of the game’ will shift• The shifts may not be rational or pretty

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Thank you for your attention

Mike Wolfe [email protected]

Extra Material Follows:Sources and reference locations

Sources & References for Supply Chain Security, Productivity, & Technology*

Security and productivity• “Some Good News on Cargo Security” (2004)

– Journal of Commerce, July 26, 2004• “The Dynamics of Supply Chain Security” (2004)

– G-8 Summit edition of The Monitor, Univ. of GA, Center for International Trade and Security• “Security Must Yield an Economic Benefit” (2003)

– Journal of Commerce, December 1, 2003• “Supply Chain Security Without Tears” (2003)**

– www.manufacturing.net/scm/index.asp?layout=articleWebzine&articleid=CA278114• “Freight Transportation Security and Productivity” (2002)

– http://ops.fhwa.dot.gov/freight/publications/SecurExecSumm.doc• “Defense Logistics…” trends and implications (2001)

– http://www.ops.fhwa.dot.gov/freight/theme_papers/theme_paper_index.htm

Technology for security and productivity• Smart Container Product and Market Reports (forthcoming, with HSRC)

– Email Mike Wolfe• “APEC Secure Trade Project Preliminary Conceptual Plan,” (2004)

– email from Mike Wolfe• “Technology Views and Issues” (2004)

– Cairo Transportation Security Forum Resource Guide, www.tda.gov• “Automating Security: Do E-Seals Make Sense?” (2003)

– www.eyefortransport.com/index.asp?news=33911&nli=freight&ch=• “Target Capabilities for the ‘Future Smart Container’” (2003)

– email from Mike Wolfe• “Technology to Enhance Freight Trans. Security & Productivity” (2002)

– http://ops.fhwa.dot.gov/freight/publications/Security Technology Appendix, 4-25-02.doc• “Electronic Cargo Seals: Context, Technologies, and Marketplace” (2002)

– Reachable from the Intermodal Freight page at http://www.its.dot.gov/ifreight/ifreight.htm• “Trends in Freight Identification Technology” (1998)

– Email from Mike Wolfe ([email protected], 781-834-4169)*Articles and papers by Mike Wolfe **Co-authored with Hau Lee, Stanford

mailto:[email protected]

The Dynamics of Supply Chain Security Is this the Calm Before the Storm? September 21, 2004

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