Profit from secure supply chains

In the days following September 11, 2001, air freight came to a halt during the temporary closure of air travel, while trucks stacked up at border crossings such as the Ambassador Bridge between the U.S. and Canada.

These events focused attention on the possibility of even more extreme trade disruptions, and brought forth new regulations such as the Advanced Manifest Rule, which calls for precise manifest information 24 hours prior to cargo being loaded onto U.S.-bound vessels.

Manufacturers responded to the changed landscape by spending billions. In the chemicals industry alone, American Chemistry Council members in the council's Responsible Care security program poured $2 billion into enhanced security. But do such investments yield business benefits besides pure risk reduction?

Recent studies suggest there are business benefits to be had from security strategies. One such study, conducted by Stanford University and released through The Manufacturing Institute, the research arm of the National Association of Manufacturers, claims companies investing in supply chain security can expect to see substantial benefits in reduced transit times and inventory.

"Businesses should invest in supply chain security," maintains Dr. Lesley Sept, assistant director at Stanford's Global Supply Chain Management Forum. "The study indicates the business benefits are there."

Study participants such as The Dow Chemical Co., Midland, Mich., see the correlation. "From our perspective, supply chain security is good business," says Henry Ward, director of transportation safety and security. "We view security as one of the steps we take to make sure we remain a reliable supplier of goods to the marketplace."

Ward says Dow's efforts to improve supply chain visibility and security led to a 50-percent improvement in the time it takes to identify and resolve trade transit problems, and a 20-percent inventory reduction at internal or external receiving locations. Other study participants report similar gains, including an average 29-percent reduction in transit times, and a 50-percent increase in asset visibility.

But the tie between security measures and business benefits is intertwined with other drivers. Dow uses RFID and a global positioning system (GPS) to track large intermodal containers as they move from North America to Asia, says Ward, but the drivers for the technology implementation were operational efficiencies and cost reduction—not just security.

What's more, says Ward, while Dow uses specific technologies in support of security, it integrates these efforts with larger corporate programs for risk management and business continuity planning. It also sees collaboration with government and its supply chain partners as crucial. "We take an integrated approach to supply chain security, which means we look at it holistically," Ward says.

Computing and IT services giant IBM, Armonk, N.Y., was another survey participant.

"By looking at our processes and seeing exactly where our freight was moving—and how much time it was taking at each step—we tightened up our processes, which not only improves security, but transit times," says Debbie Turnbull, program manager for supply chain security in IBM's import compliance office.

IBM has been working on supply chain security for decades due to the high value and relatively small size of the servers and other high-tech gear it ships. Turnbull sees potential business gains from security, if companies look beyond the latest gadgetry and meld security with the visibility needed to streamline supply chains.

Tim Minahan, a former industry analyst and now a VP at Procuri, a vendor of hosted supply management solutions, says, "Very few companies have effective supply chain security systems in place, either for monitoring security issues, or for reacting to problems."

Systems that monitor logistics events are important to security, adds Minahan, but spend-analysis tools that look for sourcing vulnerabilities also play a role in risk reduction.

"Companies have tried to lower costs by just-in-time procurement and single sourcing, but the pendulum can swing too far toward lower costs, and expose the supply chain to disruption," says Minahan.

Greg Aimi, a director with Boston-based AMR Research, says supply chain event management systems that foster better visibility boost both security and performance. Also important, he adds, is participation in voluntary government initiatives such as the Customs-Trade Partnership against Terrorism (C-TPAT) administered by the U.S. Customs & Border Protection (CSB) agency. Under C-TPAT, companies must demonstrate to the CSB that they have solid security measures in place to achieve a Tier 3 status that grants them benefits like fewer random inspections.

When companies install event-management systems or document chain-of-custody procedures for goods as part of C-TPAT, says Aimi, they are better able to eliminate inventory "black holes" that lead to excess safety stock. "When you get to that level of knowledge all the way up the supply chain, you begin to embody the information needed for a supply chain visibility infrastructure," he says.

At Dow, physical site security measures and facility access-control systems have been around for decades, says Ward. Besides such baseline measures, says Ward, Dow also uses supply chain visibility solutions and an automated restricted-party screening system that checks new customer data against government lists.

More recently, says Ward, Dow deployed RFID technology and a GPS to track intermodal containers headed across the Pacific to Asia. "We track the container using RFID smart tags and smart box technologies, and by coupling that with GPS—whether it be the trucks moving from the manufacturing site to the port, or the ship moving from the port of origin to the destination—it gives us complete visibility," he says.

Other security-related efforts from Dow are more long-term in nature. For example, Dow is working with Union Pacific and the Union Tank Car Co. on the development of anext-generation rail-tank car.

In a similar vein, says Ward, Dow also supports government efforts aimed at consistency of international trade regulations, such as the U.S. Coast Guard's collaboration with the International Maritime Organization to bring more consistency to port security rules. This summer, Dow also set up an advisory panel on chemical security chaired by former 9/11 Commission Vice Chairman Lee Hamilton. "There is considerable technology involved in supply chain security, but the other critical element of everything we do with security is collaboration," says Ward.

IBM's Turnbull says advanced security technology needs to build off of low-tech methods such as gates, employee badges, and standard operating procedures. "You wouldn't want to be dependent on any single process or technology," she says. "You want multiple overlapping layers so that if there is a potential gap in one, it is eliminated by coverage from the other layers."

IBM uses RFID tags to track server shipments in Europe, says Turnbull, and also developed a special controller for monitoring containers. This Tamper Resistant Embedded Controller, or TREC device, can monitor approximately 65,000 conditions—e.g., temperature and humidity changes, changes in the tilt of a container, and intrusion detection. Using GPS, data can be transmitted to an event-monitoring middleware layer.

IBM is partnering with Danish supplier Maersk Logistics to make use of the TREC devices. The first pilots include one within IBM's own supply chain, and two external ones. Security is one potential use for TRECs, says Turnbull, but they also could be used to sense changes in the condition of food shipments, or sensitive electronics such as flat panel displays. For example, if a shipment of green bananas falls out of specification as fresh produce during transit, real-time monitoring would give the seller better information for rerouting the shipment for other purposes—such as selling it to a maker of mashed baby food.

Says James Preuninger, CEO of global trade management vendor Management Dynamics, "Ten years ago, people didn't see trade compliance and security as adding value to the business. That's changed pretty dramatically. People understand there is the ability to automate processes, eliminate steps, take manual processes out of the play, and provide greater intelligence to decision makers."