Economics of Security: Costs and Benefits

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Economics of Security Costs and Benefits

• Logistics Security Forum
• Frontlines International Supply Chain Week
• 18 September 2003

Alan L. Erera and Chelsea C. White III The
Logistics Institute Georgia Institute of
Technology
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Outline

• Background
• Supply Chain
• Impact of Security on Transportation
• Impact of Security Inspections on Port Costs
• Impact of Security Inspections on Supply Chain
  System Costs

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The Logistics Institute - Overview

• The Logistics Institute (TLI)
• Creating logistics knowledge through
  engineering, economic, and business research
• Disseminating logistics knowledge though
  education and training
• Applying new logistics knowledge through joint
  industry/academic practice

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TLI-Asia Pacific A collaborative partnership
The Georgia Institute of Technology
The National University of Singapore
Singapore Economic Development Board
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Supply Chain

• A supply chain, or an extended enterprise a
  network of independent companies, often located
  in different countries and time zones, seeking
  mutual business advantage.
• Goals
• To design, manufacture, and deliver the right
  products, of the right quality at the right time
  to customers faster than the competition (better,
  cheaper, faster)
• To win customers in the presence of competition

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Importance of international trade

• Growth in import goods trade total value
• 1990 500B
• 2000 1,300B
• 2001 1,200B
• Growth rate in trade (8) surpasses growth rate
  in GDP (3) for three decades
• Ratio of international trade value to GDP value
  increases
• 22 in 2001 versus 13 in 1990

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Security Transportation

• Security in auto assembly since 11 Sept 2001.
  Border crossing time trucks hauling auto parts
  from Canadian suppliers to U.S. assembly plants
  went from 15-20 minutes to 3-8 hours.
• The results
• Management more safety stock, move away from
  JIT, due to border crossing delays gt reduced
  productivity
• Design build supply chains so that components do
  not cross international borders gt reduced
  productivity move away from globalization
  flexibility to handle disruptions
• Uncertainty can have significant negative
  impact on productivity of global networks!

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Economic impact of security

• According to Fortune (The Friction Economy, 18
  February 2002) the impact on U.S. supply chains
  due to higher shipping costs, increased
  inventories, border closures, increased travel
  times and other changes as a direct result of the
  11 September 2001 terrorist attacks is estimated
  to be 150 billion per year.

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Economic impact of security

• Efficient security requires new processes
• Cost impacts of new processes
• Infrastructure/enabling technology investment
  costs
• Recurring incremental transaction costs
• Indirect costs due to changes in design or
  operations
• Benefits of new processes
• Societal benefit
• Reducing transaction costs for importation
• Regulation compliance to limit liability
• Benefits of visibility systems
• Customer service and accounting, but operational?

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Research Objective

• Understand quantitative cost impact on
  productivity of new freight security initiatives
  (CSI, C-TPAT, advance manifest rules) on
• Mega-ports (e.g., Singapore).
• Customer supply chains.
• Understand the enabling role of ITS technology,
  e.g., wireless communications, RFID,
  transponders.
• Operational benefit of advance information

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International Sea Trade

• Statistics
• 7MM ocean containers enter U.S. annually (2002)
• Import mode share (value) 46 ocean, 23
  airfreight, 18 truck
• Import mode share (weight) 79 ocean, 0.3
  airfreight, 8 truck
• WMD shipped by container could cause
  damage/disruption costing the economy 1T
  (Brookings Report, 2002)
• Inspection levels
• 2-10 of arriving containers

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Impact on Seaports

• Transshipment port inbound outbound ships,
  staging areas
• CSI implies adding security inspection processes
  and staging area
• Port of Singapore
• 330,000 U.S.-bound containers annually

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Transshipment Seaport

Sea
Land

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Criteria considered

• Number of container moves
• Extra handling moves for screening?
• Total time required for transshipment
• From an inbound to an outbound vessel ready for
  lading

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Major issue

• When will port operators know which containers to
  be inspected?
• Possibilities
• Before in-bound ships dock
• Incrementally, as the containers are removed from
  the in-bound ships
• Even later in the port management process

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Implications/questions

• Operational How should these containers be
  processed so as to minimize criterion of
  interest?
• Firm strategic What is the upper bound on the
  percentage of containers undergoing security
  inspections so that additional transshipment time
  is not competitively significant?
• Policy What is the operational value of knowing
  which containers are to be inspected
• Before the in-bound ships dock?
• While the in-bound ship is being unloaded?
• Even later?

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Results
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Results
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Results
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Results
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Impact on Supply Chains

• Global supply chains imports
• Examine effects of new security
  policies/regulations on supply chain operations
• Single product importer
• Objective meet demands with 95 confidence
• Inventory impacts
• Security inspections introduce uncertainty into
  lead time
• More uncertainty higher inventory levels
• Impacts vary by mode, security design

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Implications/questions

• Operational How should reorder points and safety
  stocks change given new lead time uncertainties?
• Firm strategic Should the supply network be
  reconfigured due to potential inventory impacts?
  Choice of export mode/port? Partial domestic
  sourcing?
• Policy What is the cost burden placed on
  shippers by different freight screening
  possibilities?

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Scenario 1 Ocean Freight CSI

• If inspected containers miss a sailing, they are
  booked on the next.
• Containers inspected with probability r
• Non-inspected containers on todays sailing
• Inspected containers 0.8 probability today, 0.2
  next week

Singapore
Los Angeles
unload
load
12 days
inspect
Carrier schedule once every 6 days
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Scenario 1 Results

• At even 5 inspection levels, safety inventory
  levels jump 30
• Caveat only 5 jump for inventory level at
  reorder

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Scenario 2 More frequent service

• If inspected containers miss a sailing, they are
  booked on the next.
• Containers inspected with probability r
• Non-inspected containers on todays sailing
• Inspected containers 0.8 probability today, 0.2
  next sailing

Singapore
Los Angeles
unload
load
12 days
inspect
Carrier schedule once every 3 days
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Scenario 2 Results

• At even 5 inspection levels, safety inventory
  levels increase only 10
• Benefits of more frequent service for flexibility

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Scenario 3 Ocean Freight Non-CSI

• All containers make their sailings!
• Containers inspected with probability r
• Non-inspected containers clear Customs in 1 day
• Inspected containers 0.8 probability today, 0.2
  tomorrow

Singapore
Los Angeles
unload
load
12 days
inspect
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Scenario 3 Results

• At 5 inspection level, safety inventory increase
  less than 2
• Benefit to shipper for inventory management!

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Scenario 4 Air Freight Inspection

• If inspected containers miss a flight, they are
  booked on a later flight.
• Containers inspected with probability r
• Non-inspected containers on todays flight
• Inspected containers 0.8 probability today, 0.1
  tomorrow, 0.1 day after tomorrow

Singapore
Los Angeles
unload
load
2 days
inspect
Carrier schedule two flights a day
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Scenario 4 Results

• At 5 inspection level, we see a 15 increase in
  safety stock required
• Air freight has high value goods! Inventory
  carrying high!

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Operational benefit of advance information to
shippers

• Current research
• Visibility systems should eventually reduce
  transaction costs for shippers
• Is there additional value to advance information?
• Different decisions in inventory management?

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Preliminary results

• FIFO inventory systems
• Orders placed later arrive later
• Result to date
• In FIFO systems, there is no benefit to advance
  information!
• Optimal inventory policy is unchanged
• Non-FIFO systems
• Expediting options
• Domestic, short-lead-time suppliers (higher )

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Summary thoughts

• When thinking about costs/benefits of new
  security policies and technologies for
  compliance, do not neglect indirect costs and
  benefits!
• Policies change operating environment, and
  providers and shippers will adapt. Model the
  cost impacts!
• Technologies change operating environment, and
  may allow providers and shippers to improve
  operations. Model the potential benefits!

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