safe harbors

If securing the nation's seaports sounds like mission impossible, it probably is. Each day, approximately 17,000 containers enter U.S. ports.What's inside those big boxes? Aircraft parts, DVD players, knitted hats, coffee, biohazards. Biohazards? It's entirely possible, and there's no guarantee that inspectors would ever find them. Right now, only about 350 containers are inspected each day, leaving the remaining 16,650 or so wide open for terrorists bent on smuggling explosive, radioactive or biologically hazardous materials into the United States.

The Department of Homeland Security is struggling with the port security issue, but critics are unimpressed with its progress to date. "We're paying a lot of attention to airport security but we're not paying as much attention to container security as we ought to," says General John Coburn (U.S. Army, retired), chairman of the Strategic Council on Security Technology. "The threat is horrendous."

There have been calls to step up inspections, but no one in the industry sees that as a serious solution. Importing is already slower and costlier than it was pre 9/11. Pulling more containers aside for inspections at ports of arrival would only raise labor costs and create more delays. And consumers would pay the price. Faced with delays, manufacturers—particularly those that depend on just-in-time deliveries—would need to carry even more inventory, thereby increasing their costs (and ultimately, their customers' costs as well).

The alternative to screening containers on arrival, of course, is tightening up security further back in the supply chain. But that won't be easy: The number of parties in a given company's supply chain can easily exceed 25 and a single international voyage can entail 35 to 40 shipping documents. Still, that may be the best course. "We've really got to get a closed-loop system that assures containers are secure before they enter the United States," says Coburn.

In the last two years, both government and industry have put together pilot projects, programs and initiatives aimed at enhancing the security of cargo arriving at the nation's ports from overseas. Many shippers are already familiar with ITN, CSI, the Smart and Secure program and C-TPAT (see sidebar). But there are other initiatives under way too. In late May, for example, the first 12 Operation Safe Commerce (OSC) intermodal shipping containers arrived on U.S. shores from a remote location in Central America. The containers are part of a federally funded program that lets participants test various loading processes and different types of container seals.

OSC participants will also be experimenting with high-tech tracking and data gathering technologies. As additional containers are sent over the next few months, researchers will have the opportunity to test the efficacy of Webenabled video, electronic container sealing, radio frequency identification (RFID) devices and even GPS satellite tracking. OSC has funded projects at the three largest U.S. container load centers—New York/New Jersey, Seattle/Tacoma, and Los Angeles/Long Beach.

Factory sealed
While shippers tinker with technology, two professors from the Stanford Graduate School of Business have suggested an even more radical approach to the container security problem. In a recent research paper, Higher Supply Chain Security with Lower Cost: Lessons from Total Quality Management, professors Hau Lee and Seungjin Whang propose that the container inspection process be pushed back not just to the port of origin but all the way back to factories and distribution centers where containers are filled with goods. Lee and Whang argue that preventing tampering from the outset would not only eliminate the need to increase inspections but would also make the supply chain more efficient.

"In manufacturing, the way to eliminate inspections is to design and build in quality from the start," says Lee. "For supply chain security, the analogy is to design and apply processes that prevent tampering with a container before and during the transportation process."

That will take time, of course. New processes would have to be designed and put into place. In the interim, the authors note, manufacturers can save a lot of money by arranging for inspections at the foreign ports where the containers are loaded onto ships, rather than at the U.S. port of entry.

To bolster their point, the authors profiled a major electronics manufacturer that actually did what they're suggesting and arranged to have its shipments inspected at the Port of Singapore. The manufacturer, which participates in the Smart and Secure Tradelane Initiative pilot program (see sidebar), got the port's permission to seal the containers at the docks. Several hundred containers were tagged and tracked, and the Port of Seattle verified that the seals worked when the containers arrived.

From a financial perspective, the results were breathtaking. The study determined that the company could save approximately $1,000 on each of the 4,300 containers it ships yearly—a total of $4.3 million.

"The gains are a byproduct of having better visibility throughout the entire supply chain," says Lee, explaining that inspecting product earlier in the supply chain allows companies to cut way back on the amount of spare inventory they hold. In addition, containers would likely move through the supply chain faster and reach the market sooner.

Who stands to gain?
Lee is currently expanding his case study from one company to include several diverse manufacturers. He hopes to produce a white paper by the end of the year with a fuller description of the benefits and a discussion of who in the supply chain benefits the most.

"We'll conduct an economic analysis and establish a baseline to show the value of smart and secure trading, how the benefits are achievable in a variety of industries, and how the benefits are distributed through the supply chain," says Lee, noting the report will break down the savings for ports, shipping companies, manufacturers and distribution companies. Lee believes this information will help to overcome the major challenge—determining which companies have the most to gain by investing in container security technology. "Today, it is unclear who should invest to make this work," he says.

It's also unclear when—if ever—the system proposed by Lee and Whang will see widespread adoption. One obstacle is getting the U.S. government to approve "green light" lanes at ports for products that arrive pre-inspected (meaning they could move directly into the U.S. commerce stream upon arrival). Another is educating—and equipping—manufacturers so they can take advantage of the enhanced supply chain information they receive— for example, cutting back safety stocks when they learn that a shipment arriving from Singapore in two weeks will not require inspection. Lee says few manufacturers have the ability to capture this information, let alone act on it.

"The majority of shippers set safety stock levels and don't know how to adjust them, even with that information," he says. "This information is very powerful, but only if utilized intelligently."