Northeast Supply Chain Conference The Dynamics of Supply Chain Security Is this the Calm Before the Storm? September 21, 2004 Michael Wolfe North 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) T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 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’ are fragile are 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

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

19 Outline  Cargo theft today  The ‘rules of the game’  Smart containers  Forecasting the market

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 Two Major Drivers

24 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, : No container terror event  Scenario II, : Container terror event in 2005

25 Highlights of Scenario I, : 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 Highlights of Scenario II, : 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 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)** – “Freight Transportation Security and Productivity” (2002) – “Defense Logistics…” trends and implications (2001) –  Technology for security and productivity Smart Container Product and Market Reports (forthcoming, with HSRC) – Mike Wolfe “APEC Secure Trade Project Preliminary Conceptual Plan,” (2004) – from Mike Wolfe “Technology Views and Issues” (2004) –Cairo Transportation Security Forum Resource Guide, “Automating Security: Do E-Seals Make Sense?” (2003) – “Target Capabilities for the ‘Future Smart Container’” (2003) – from Mike Wolfe “Technology to Enhance Freight Trans. Security & Productivity” (2002) – Technology Appendix, doc “Electronic Cargo Seals: Context, Technologies, and Marketplace” (2002) –Reachable from the Intermodal Freight page at “Trends in Freight Identification Technology” (1998) – from Mike Wolfe *Articles and papers by Mike Wolfe**Co-authored with Hau Lee, Stanford