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Federal antiterrorism programs have spurred a sea change in supply-chain security.
Edward Teach, CFO Magazine
September 1, 2003
Every year, ships from abroad deliver more than 7 million cargo containers to America's seaports. Framed in steel, standard oceangoing containers typically come in 20- and 40-foot lengths and can carry payloads weighing up to 60,000 pounds. They are each a model of logistical efficiency — and collectively a security nightmare for the U.S. Bureau of Customs and Border Protection.
Two years after the terrorist attacks of September 11, 2001, Customs views ocean cargo containers as prime vehicles for smuggling weapons of mass destruction (WMDs) into the United States. Accordingly, the bureau has stepped up inspections of incoming containers from 2 percent to 4 percent of the total. "We look at 100 percent of those that are high risk," says Jayson P. Ahern, assistant commissioner, office of field operations. But that still leaves millions of containers unscrutinized.
The nightmare extends to the land and air. Millions of shipments stream annually through the Canadian and Mexican borders via truck and rail; millions more arrive by plane. Clearly, making sure that WMDs or other terrorist weapons do not enter the country is too difficult a task for the government to handle alone. And the stakes couldn't be higher. The detection of a WMD in a container at a U.S. port would cause significant disruptions at the borders — and the detonation of such a device would be catastrophic, by any measure.
That's why in the months since 9/11, Customs has launched a number of antiterrorism programs that solicit the cooperation of foreign governments and U.S. businesses. The oft-stated goal is to "push the borders back," extending a zone of security to the places where imports originate. One such program is the Container Security Initiative (CSI), in which Customs officers are deployed in foreign ports to help identify and screen high-risk containers. Another is the 24-hour rule, which requires carriers to submit a detailed manifest to Customs 24 hours before cargo is loaded on a U.S.-bound ship. (That rule is being amended to include advance manifests for air, truck, and rail shipments.)
For importers, perhaps the most significant antiterrorism initiative is voluntary: the Customs-Trade Partnership Against Terrorism (C-TPAT). Companies that apply for C-TPAT certification must assess the security of their supply chains and harden any weak links. A C-TPAT member can expect fewer inspections and expedited processing at the border — in effect, a fast lane through Customs.
While the government's determination to push borders back will doubtless add costs and delays, some experts say they haven't seen much disruption of international supply chains so far. "I don't hear any major importers say that the 24-hour rule has put a severe crimp in their inventory systems," says C. Randal Mullett, director of government relations at CNF Inc., parent company of logistics service provider Menlo Worldwide. "The steamship companies say it has impacted them and their customers, but it hasn't been a disaster."
Meanwhile, those who have done the C-TPAT self-assessment say that in the process, they have identified ways to slash supply-chain costs, reduce theft, and eliminate unnecessary payments of duties and taxes. Also, being C-TPAT certified is a prerequisite for Customs's Importer Self-Assessment program, whose benefits include removal from Customs audit pools.
But the reason usually cited first for signing a C-TPAT memorandum of understanding is to be a good corporate citizen. "Some companies call up and say, 'We understand this will help us get through your clearance process quicker,' " comments Ahern. "We're not interested in a company that starts the dialogue off like that."
Launched in November 2001, C-TPAT was initially open to major importers, brokers, and freight forwarders, then to terminal operators and carriers — collectively accounting for a significant percentage of vessel imports, says Ahern. The program builds on existing Customs-business partnerships to combat drug smuggling, including the Carrier Initiative Program and the Business Anti-Smuggling Coalition. Its seven charter members — BP America, DaimlerChrysler, Ford Motor, General Motors, Motorola, Sara Lee Branded Apparel, and Target — helped Customs develop security guidelines for international supply chains.
The aim was to set guidelines that would be effective but not cost-prohibitive. Consultants say that a company with good security practices can readily qualify for C-TPAT. To date, more than 3,800 companies have signed up for the program, says Ahern. "A lot of the companies had good supply-chain security initially," he notes. "We've learned from some of their best practices."
One such company is General Motors. Few companies were hit as hard by tightened security after 9/11 as the Big Three automakers were. About 88 percent of GM's imports travel via truck or rail, and in the wake of the attacks, shipments at the Canadian border that usually cleared Customs in as little as a few minutes languished up to "12 hours, 14 hours, 16 hours," says Kevin Smith, director of customs administration at GM.
"In many cases, in our just-in-time practices at our plants, they keep only four to eight hours of inventory at hand," says Smith. Consequently, GM assembly lines had to shut down until additional inspectors and National Guardsmen, aided by new screening technologies, cleared up the traffic jams. Today, GM's supply chain has returned more or less to normal, thanks to C-TPAT and the Free and Secure Trade (FAST) program for expediting truck shipments through Customs (see "Securing the Chain," at the end of this article).
It took GM, with its more than 10,000 suppliers, about six months to become C-TPAT certified. GM now contractually obligates its suppliers to be C-TPAT compliant, although they do not actually have to join the program.
Smith thinks the self-assessment can result in valuable process improvements for a company's customs department. "There are times when any company needlessly pays money in duties and taxes it could avoid if it had collected the right information at the right time," he says.
"If you focus on something, you can make it work a lot better. That's what all of our clients have experienced," comments Barry Wilkins, director of transportation and supply-chain security at Pinkerton Consulting and Investigations Inc. For example, one company with a decentralized supply chain learned through the C-TPAT self-assessment that it was importing a product in one division and exporting it out of another. "They realized they weren't taking the duty drawback," the refund of duties paid that the company was entitled to, says Wilkins. "They saved millions."
Most of Pinkerton's large, Fortune 500 clients have reaped the majority of the benefits from C-TPAT compliance by reducing the direct costs of cargo loss — along with the associated indirect costs, which are said to be five times greater — as they hardened their supply chains, says Wilkins. He adds that companies applying for C-TPAT have found ways to cut transportation expenses, reducing the number of carriers they use and leveraging the increased volumes to negotiate better rates.
At Singapore-based Flextronics, programs like CSI and C-TPAT have helped spur process improvements in terms of asset protection and supply-chain visibility, says Greg Stein, vice president of global transportation and trade compliance. The $14 billion electronics manufacturing services provider has a particularly complex supply chain, he says, with operations in 29 countries shipping product to 130 countries. Many of its customers are also C-TPAT compliant, adds Stein, and like GM, Flextronics mandates C-TPAT compliance in its contracts with suppliers and carriers. (Pinkerton and other consultants recommend the practice, says Wilkins.)
Approval of Flextronics's own application was pending at press time. Mary Gill, director of trade compliance for the Americas, estimates the five-month process involved anywhere from 80 to 100 employees on the cross-functional implementation team, including factory general managers and security-compliance coordinators.
Stripping and Searching
While many companies in C-TPAT are large multinationals like Flextronics, smaller importers have also joined with a modicum of effort and expense. New England Pottery Corp., a privately held, midsize importer, drew on in-house expertise to get with the program: its import manager, Bette Little, is also a licensed broker, "which is a little unusual for a company our size," notes Bill Yukna, vice president of finance. The Foxboro, Massachusetts-based company annually imports between 1,200 and 1,400 oceangoing containers' worth of goods from 14 countries, according to Yukna.
New England Pottery began the application process in September 2002, says Little, who made the case for C-TPAT participation at an informal meeting of the company's senior executives. She says it wasn't hard to convince them that the program was worth pursuing. Yukna agrees. Customers rely on New England Pottery for their just-in-time inventory practices, he points out, and C-TPAT certification gives them confidence that the company is doing everything it can to maintain a normal flow of product. Meanwhile, Customs is "stripping and searching more containers," says Yukna. "You get charged when they strip a container. And they charge you for putting it back together."
The security self-assessment turned up "little things they never thought of" at some overseas suppliers, says Little. For example, a container might have been consolidated "in the middle of the street," in the small townships where the pottery was made, instead of at the factory, says Yukna. "That's not a real secure scenario."
Once such problems were corrected, Little wrote a summary of the company's supply-chain practices and submitted the C-TPAT application in December 2002. In February 2003, at the end of the standard 60-day review, Customs certified the company as a C-TPAT partner. The external cost of certification was "very minimal," says Yukna, since New England Pottery was "fortunate enough to have someone like Bette internally." Little estimates that hiring an outside expert to guide a company through the process could cost anywhere from $30,000 to $50,000.
Trust but Validate
The C-TPAT process doesn't end with certification but with validation: Customs has to verify that a company's security self-assessment is accurate. "If you say you have a chain-link fence around your plant, you have to show them the fence," quips GM's Smith. At press time, GM was 1 of only 15 or so C-TPAT companies that had been validated by Customs.
Jayson Ahern says Customs's next step will be to open the C-TPAT program to foreign manufacturers. "We think that will go to the heart of supply-chain security in the overseas locations," he says. As for reports that the program will eventually be closed to new entrants, Ahern says the bureau has considered the prospect but has not made a final decision. Customs still welcomes "good corporate citizens that want to actively get engaged with the program," he says, but "we also need to make sure we have a manageable program."
Both C-TPAT and CSI face significant challenges in terms of staffing, strategic planning, and accountability as they ramp up, according to a report issued in July by the General Accounting Office. How does Customs gauge their success so far? CSI has resulted in the interception of some contraband items, including a shipment of automatic weapons; no terrorist-related materials have been found. Ahern points out that several times in the past few months, the Department of Homeland Security has declared an alert level of orange, meaning a high risk of terrorist attack. But despite the heightened precautions that the alerts called for, says Ahern, "these programs, CSI and C-TPAT, were able to keep the borders open for trade coming into this country with minimal delay."
For importers, the security recommendations for C-TPAT fall into seven categories: (1) procedural security, (2) physical security, (3) access controls, (4) personnel security, (5) education and training awareness, (6) manifest procedures, and (7) conveyance security. The recommendations, which are maintained on the Bureau of Customs and Border Protection's Website (www.customs.gov), may seem intimidating at first.
"When people read the Customs Website, they get concerned," says Barry Wilkins of Pinkerton Consulting and Investigations Inc. "They think [C-TPAT] is going to take an inordinate amount of resources, and they're going to have to make huge capital investments — and particularly in today's economic environment, they say, 'I don't know, it's voluntary; am I really getting benefits?' "
But by the time Wilkins has walked executives through the process, "they see that it's not that onerous," he says, either for the company or its suppliers. "The security process is standard issue in most companies, and in many factories overseas," explains Wilkins. "The fact that you need to control access to your sites — most companies do that, in all countries. Some are better than others; some have improved. The fact that you need to know what you're shipping and receiving — most companies already know that.
"You can control access in a number of ways — with cameras, electronics, or guards," continues Wilkins. "In China, most factories have a guard force trained by the Red Army. They don't have cameras — but you wouldn't fool around over there!" he says with a laugh. "In countries like the United States, there's a lot of good electronics and closed-circuit TV. You do find areas for improvement, but for the most part, a lot of these requirements are already being done. Maybe some companies need, say, 25 percent improvement. But that hasn't required extensive capital investments or ongoing expense."
Last March, managers from Hasbro told a meeting of the Council of Logistics Management that the company spent about $200,000 to implement C-TPAT. The Pawtucket, Rhode Island-based toy company, with revenues of $2.8 billion, ranks 45th in the United States in terms of container-import volume. It projects annual operating costs for C-TPAT to be $112,500 — a minuscule 0.004 percent of revenues.
Securing the Chain
Customs-Trade Partnership Against Terrorism (C-TPAT, launched November 2001). Companies joining this voluntary program must conduct a thorough self-assessment and strengthening of their supply-chain security, and agree to periodic reassessments. Main benefit: fewer inspections for WMDs.
Container Security Initiative (CSI, January 2002). Customs officers are being deployed in foreign ports to help identify and screen high-risk containers. So far, 19 of the world's 20 largest ports have agreed to participate in this program.
Free and Secure Trade (FAST, September 2002). For speedier Customs clearance, FAST requires parties to a truck shipment to be C-TPAT certified. Drivers must undergo a rigorous vetting; trucks are outfitted with special transponders. First introduced for the Canadian border, a program for the Mexican border starts this month.
Operation Safe Commerce (November 2002). New procedures and technologies for increasing the security of container shipments are being tested at three major U.S. ports in this federally funded program.
24-Hour Rule (December 2002). Carriers must file a detailed manifest with Customs 24 hours before containers are loaded on a ship in a foreign port. Additional rules proposed in July call for manifests to be submitted 1 hour before trucks arrive at the border (30 minutes for FAST trucks); 2 hours for rail carriers; and 4 hours for air carriers, or no later than "wheels up" for North American flights.