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Stanford GSB News

 

Coping with Security Costs of Terrorist Threats to Supply Chain Management

January 2004

STANFORD GRADUATE SCHOOL OF BUSINESS—Every business day, 17,000 truck-sized containers, each loaded with as much as 30 tons of cargo, flood into American ports. Carrying everything from rebuilt automobile transmissions to electronic components and perfume, they are at the very heart of global commerce.

But since September 11, 2001, national security officials and shipping industry leaders have been wrestling with the enormous threat to security those containers could pose. "Every container destined to enter or pass through the United States should be treated as a weapon of mass destruction," Rob Quartel, CEO of FreightDesk Technologies, said last year at a meeting of the Senate Subcommittee on Technology, Terrorism, and Government Information.

Because only a small fraction of incoming containers are inspected—the Brookings Institution estimated recently that customs officials inspect only about 2 percent of all containers arriving in the United States—there have been calls to double or even triple that number.

But researchers at Stanford's Graduate School of Business say that simply ratcheting up traditional security measures at American ports would be expensive, harmful to the economy and, worst of all, not very effective.

What makes increased container-by-container inspections so expensive?

Not only would the additional labor add cost to the final product but increased inspections likely would cause delays, thus lengthening the time it takes goods to get to market. Since the length of the delays would be hard to estimate, companies dependant upon just-in-time manufacturing practices would have to carry more inventory (itself an expense) to be certain that products or materials are on hand when needed.

Instead, professors Hau L. Lee and Seungjin Whang suggest a radically different model, patterned after the Six Sigma quality improvement program pioneered by Motorola and later adopted by thousands of corporations around the world.

Six Sigma programs changed the quality control process that had focused on finding defective goods via inspection after they were manufactured. The new process concentrated on modifying product design and adopting new procedures to catch sub-quality goods much sooner and ultimately reduce the overall number of defects.

Rather than attempting to find dangerous cargo via inspections at the point of entry into the United States, Lee and Whang call for shifting the emphasis to the foreign ports where containers are loaded onto ships, and even to factories and distribution centers where containers are filled with goods. The result, they say, is greater security and a more efficient supply chain.

"In manufacturing, the way to eliminate inspections is to design and build in quality from the start. For supply security, the analogy is to design and apply processes that prevent tampering with a container before and during the transportation process," the researchers wrote in a Stanford research paper titled Higher Supply Chain Security with Lower Cost: Lessons from Total Quality Management.

In that paper, Lee and Whang present a mathematical model that demonstrates the value of proactive port security.

They compared the costs to a major Silicon Valley electronics manufacturer if the government decides to inspect twice as many of the company's containers to the cost of proactive inspection. They found that the company, which asked not to be identified, could save approximately $1,000 on each of the 4,300 containers it ships each year (a total of $4.3 million) while making its supply chain significantly more secure.

Indeed, the government is already experimenting with a number of methods to reduce what the researchers call "brute force" inspections.

They include:

  • The Customs-Trade Partnership Against Terrorism, or C-TPAT. The joint effort involves multiple countries and rewards shippers and carriers that certify the use of best security practices with expedited processing at U.S. ports of entry. The Customs Service, of course, will conduct periodic audits to be sure the practices are actually being carried out.
  • The Container Security Initiative, or CSI. Under CSI, the United States and governments of some trading partners are working toward a series of bilateral agreements to permit exchange of customs officers and more screening of shipments at outbound ports. The initiative calls for better monitoring and documentation of all workers who help load international cargo and of the process used to seal the containers.
  • The Smart and Secure Tradelane Initiative, or SST. Under SST, three large seaport operators, representing over 70 percent of the world's container traffic, will collaborate to develop automated tracking, detection, and security technology for containers entering U.S. ports. Eventually, containers leaving the participating ports will be equipped with special seals to detect tampering during transit.

People in the industry are now talking about "smart containers" fitted with electronic gear capable of detecting changes in temperature or air pressure that would indicate a hole has been drilled in a container. That's important because sophisticated smugglers, and perhaps terrorists, sometimes carefully cut open a container to avoid the seal while removing (or adding) to the contents, Lee explained during an interview. Other gear would detect the presence of certain chemicals, biological elements, or radioactivity.

Existing containers can't be refitted with enough gear to make them "smart," but seals can be added to detect tampering and then pass that information on when scanned by electronic readers in much the same way tolls are collected from commuters whose vehicles are equipped with electronic tags.

Lee, a member of the Council on Strategic Security, whose members are drawn from the military and private industry, says he believes the current initiatives are moving in the right direction, but he cautions that the effort will be difficult. One hurdle: Evaluating the oceans of data that better monitoring produces will require the use of sophisticated data mining technologies.

And because the research collected by Lee and Whang is based on a limited sample, Lee is now working on a much broader study at the Port of Seattle that should provide a larger and more varied data set.

As he learns more, Lee, who is now on sabbatical, expects to make security a larger part of the curriculum in his MBA classes at Stanford. "The links between security and the supply chain are becoming increasingly important. The subject deserves much more attention."

—by Bill Snyder

Related Information

Higher Supply Chain Security with Lower Cost: Lessons from Total Quality Management
Hau L. Lee and Seungjin Whang
GSB Research Paper #1824, October 2003

Supply Chain Security Without Tears
H. L. Lee and M. Wolfe
Supply Chain Management Review, Vol. 7, No. 1, Jan/Feb 2003, 12-20