The impact of security on global trade


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The impact of security on global trade

  1. 1. The Impact of Security on Global Trade BY ADRIAN GONZALEZ DECEMBER 5, 2001 ARC INSIGHTS# 2001-051E KEYWORDS: Global Trade, September 11, Security, Customs, FAA, Known Shipper, GLS, SCPM SUMMARY: Global trade is inherently complex. Fulfilling an order from one country to another in- volves the transfer of information, documents, goods, and money between various parties such as manufacturers, freight forwarders, carriers, and customs. Compliance with trade regulations, namely screening orders against restricted party lists and ensur- ing that the necessary documents are completed, has historically been the primary focus of companies that operate across borders, especially companies in regulated industries such as chemicals, high-tech, and pharmaceuticals. th The tragic events of September 11 , however, have intro- “We must reaffirm the importance of duced a new level of complexity: ensuring the security of knowing your customer and consider the shipments. Robert Bonner, US Customs Commissioner, bestoverall ‘air-tightness’ of your supply chain, summarized the challenge in a recent speech: “We must reaf- from factory floor, to loading dock, to transportation to our border.” firm the importance of knowing your customer and consider- Robert Bonner, US Customs Commissioner the overall ‘air-tightness’ of your supply chain, from factory floor, to loading dock, to transportation to our border. Every single link in that chain must be made more secure against the terrorist threat.” ANALYSIS: In the aftermath of the attacks, companies with lean manufacturing strategies and highly distributed supply chains experienced the most problems. Ford Motor Company, for example, lost over 12,000 units of production as a result of the attacks (or about 23 per- cent of its weekly plan, according to Automotive News). The primary reasons for the shutdowns were the grounding of airplanes and 18-hour delays at the borders, which prevented the delivery of critical components from suppliers in Canada and Mexico. Line-side inventory of less than two hours is common in the automotive industry. How- ever, there is a delicate balance between keeping minimal inventory and replenishment cycle times. Any disruption to the latter will have significant consequences, as was proven in September and in years past. Toyota, for example, was forced to shut down 18 plants in 1997 when its sole supplier of brakes experienced a fire. ENTERPRISE AND AUTOMATION STRATEGIES FOR INDUSTRY EXECUTIVES
  2. 2. ARC Insights, Page 2 As a short-term solution, safety stock levels have been increased to account for the longer lead times, thereby increasing inventory-carrying costs. What remains unclear, however, is the long-term impact implementing security measures will have on both cy- cle times and cost. At the moment, both metrics are on the rise. Passing the Buck Transportation providers have incurred significant costs over the past couple of months as a result of tighter security measures, and they expect these expenses to continue through the foreseeable future. In an industry where profit margins are thin, carriers cannot afford to absorb these costs, especially in a soft economy. Not surprisingly, many transportation providers have added so-called “security fees” to their rates. For exam- Low Time-Determinate ple, some steamship lines are imposing a $300 per TEU fee forInventory Replenishment containers destined for Middle Eastern ports, while trucking companies have levied flat fees of $50 per bill of lading. While these charges may be warranted, the opportunity for abuse exists. Carriers should, therefore, provide shippers with a clear understanding of how these costs are incurred. On the flip side, shippers must be proactive in making sure its carriers are A Delicate Balance compliant with security measures. It Pays To Be Known The FAA recently issued a directive that prevents cargo from traveling on passenger air- planes unless it’s sent by a “known shipper.” In order to qualify as a known shipper, a company must have completed at least twenty-four airfreight shipments since Septem- ber 1, 1999 with their designated freight forwarder, and the cargo tendered for movement has to be similar to previous shipments. Companies that don’t meet these criteria must submit themselves to a site inspection by the freight forwarder, which in- cludes a tour of the facility and a review of financial documents. The goal is to establish the legitimacy of the shipper’s business. After the contract is signed, there is a seven-day waiting period before any shipments can be accepted, and the initial shipments are transported via cargo-only airplanes. This policy obviously makes it difficult and expensive for companies to change freight forwarders or to develop new relationships. In addition, the policy effectively reduces airfreight capacity since “unknown shippers” will not have access to cargo space on pas- senger flights. The net result is higher airfreight charges, which will impact industries such as high-tech that rely heavily on air transportation. © 2001 • ARC Advisory Group • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • USA • UK • Germany • Japan • India
  3. 3. ARC Insights, Page 3 Get in the Fast Lane According to Commissioner Bonner, Customs is still operating at Level 1 alert (its high- est level of security) and it will remain at that level for the foreseeable future. Level 1 equates to “sustained, intensive anti-terrorist operations across the country, to include heightened levels of inspection and scrutiny of people and goods.“ Translation: a greater probability for delays. As a countermeasure, the US and Canada announced a pact on December 3, whereby the US will deploy National Guard troops and military helicopters to patrol the 5,525-mile-long border between the two countries. In the words of Attorney General John Ashcroft, “There were a lot of things in the congestion around the border that hurtIncreased both nations. We dont want to be shutting down our automotive Government Long LeadSecurity Regulations Times industry because we dont have a fast enough inspection process.” Moving forward, it’s clear that companies must develop auditable security processes that comply with customs regulations currently under development. Specifically, com- panies must focus on: • The physical security and integrity of plants, both within the enterprise and those of suppliers • Background history of employees • Security practices of logistics partners and carriers • Shipment routes (i.e. countries of origin and interim stops) Simply stated, security compliance will play a critical role in establishing lead times, which ultimately dictate the effectiveness of lean manufacturing strategies. According to Bonner, “Those companies that adopt or have a program that meets security standards will be given the ‘fast lane’ through border crossings and through seaports and other ports of entry.” Does lean manufacturing or JIT make sense moving forward? Yes, but not without changing the status quo. RECOMMENDATIONS: • Determine where you are today in terms of meeting security requirements and de- velop an action plan to close the gaps. • Develop stronger relationships with government agencies, particularly US Customs, the FAA, and Department of Transportation. Take greater responsibility for ensur- © 2001 • ARC Advisory Group • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • USA • UK • Germany • Japan • India
  4. 4. ARC Insights, Page 4 ing compliance with both trade and security regulations, not only within your com- pany but across your supply chain.• Establish closer, more collaborative relationships with suppliers, carriers, and other partners that are capable and willing to meet security requirements; phase out part- ners that fail to make progress.• Invest in technology that facilitates compliance, such as global logistics software (GLS) and “smart tags” that can monitor the status of a container.• Information replaces inventory. Therefore, acquire better visibility of inventory and supply chain activities by implementing a Supply Chain Process Management (SCPM) solution or participating in a collaborative network.For further information, contact your account manager or the author at circulation: All EAS clients. © 2001 • ARC Advisory Group • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • USA • UK • Germany • Japan • India