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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
2
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
3
Outline
Cargo theft todayCargo theft today The ‘rules of the game’ are fragile
Smart containers
Forecasting the market
4
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
5
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
6
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
7
Outline
Cargo theft today
The ‘rules of the game’ The ‘rules of the game’
are fragileare fragile Smart containers
Forecasting the market
8
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
9
Potential for Self-Inflicted Wounds
“How rational will ‘we’ remain after a
second or third major terrorist attack?”
10
Regulatory Dynamics
Impacts
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?
11
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
12
Outline
Cargo theft today
The ‘rules of the game’ are fragile
Smart containers Forecasting the market
13
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
14
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
15
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
16
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
17
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
18
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
20
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
21
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
Little Evidence of Smart Container Economic Value
I - Slow Slow, Specialized
and Limited Adoption
II - Sour
Reluctant Adoption Over High
Resistance and Delaying Tactics
© North River Consulting Group
24
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
Little Evidence of Smart Container Economic Value
I - Slow Slow, Specialized
and Limited Adoption
II - Sour
Reluctant Adoption Over High
Resistance and Delaying Tactics
© North River Consulting Group
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
25
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
Little Evidence of Smart Container Economic Value
I - Slow Slow, Specialized
and Limited Adoption
II - Sour
Reluctant Adoption Over High
Resistance and Delaying Tactics
© North River Consulting Group
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
26
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
Little Evidence of Smart Container Economic Value
I - Slow Slow, Specialized
and Limited Adoption
II - Sour
Reluctant Adoption Over High
Resistance and Delaying Tactics
© North River Consulting Group
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
27
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
28
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
29
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