|
Article Excerpt
Abstract
This article examines implications for global supply chains posed by security threats in the U.S. and elsewhere, and identifies actions for addressing those threats. The principal goal is to design security into the supply chain rather than seek to mitigate consequences after the fact. Redesigning supply chains to make them robust and resilient can help avoid and mitigate the impact of disruptions, whether from security breaches or other causes. Such efforts' require collaborations with partners across the supply chains and with governments. The short-term costs of such security measures can be balanced against the long-term gains from improved supply chain performance and improved customer relations.
**********
Globalization is a central fact of the global economy, involving increasing amounts of overseas components sourcing, overseas production, global factory networks, and lengthy geographically dispersed supply chains servicing international markets across the world. However, the physical infrastructure underpinning globalization is under threat (National Defense University 2002), possibly compromising nations' abilities to trade goods and services internationally, in turn affecting economic growth, employment, and overall prosperity. Overseas shipping now accounts for over 90 percent of worldwide trade, with the preponderance of non-bulk cargo shipped via containers. If ports are closed, trading partners are no longer trusted, and container movement is interrupted along with world trade, reducing supplies of goods and in-process inventories, shutting down factories, and causing layoffs around the world. Consumer choice is reduced, with fewer goods and possibly higher prices. Smooth operation of the international trade and transportation infrastructure is essential to global well-being.
When supply chain executives were asked about their perception of supply chain challenges, they ranked "assuring container security" as the most important challenge, over managerial considerations such as reducing inventory, reducing lead time variance, and reducing stock-outs (A. T. Kearney 2004, Fig. 1). In the same survey, one executive noted that his company was willing to do "whatever it takes to guarantee container security" (ibid., 4). Companies with strong brands are likely to be even more concerned about the overall impact of a security breakdown on their brand value and corporate reputation. Security is now an essential and central part of the supply chain and all supply chain participants must develop strategies and skills to cope with these new security demands (Banomyong 2005). Russell and Saldanha (2003) estimated that security-related supply chain modifications could cost around $65 billion and suggested that firms would have to develop close partnerships with both government and supply chain members in order to tackle the security issues effectively.
[FIGURE 1 OMITTED]
This article begins by setting out a generalized model of the supply chain and outlining an approach to managing supply chain disruption. In the second section, we highlight and discuss the various points of security vulnerability across the supply chain. We also discuss the role of government in responding to security threats and governments' interaction with firms. We review how technology developments can help in combating security threats. We then discuss firm-level strategies for developing secure supply chains. We conclude with suggestions for action for firms seeking to enhance supply chain security.
A GENERALIZED MODEL OF THE SUPPLY CHAIN
Monczka, Trent, and Handfield (2005) see the supply chain as having three inter-related segments: supplier relationship management, internal supply chain management, and customer relationship management. Rice and Caniato (2003) subdivide the supply chain in terms of physical, information, and freight dimensions. They also point to additional distinct aspects of the supply chain including the transportation modes used, transportation facilities, manufacturing systems, people employed across the supply chain, and information technology.
Management's task is to design the overall supply chain across the three subsystems, to be consistent with its overall strategic objectives, and then to configure how various tasks, processes, physical facilities and infrastructure, means of transportation, human resources, and product and information flow will be aligned across the supply chain, while complying with government regulations. This approach is demonstrated in Table 1. This generalized model has several implications for coping with disruptions, including security-related disruptions:
* For smooth functioning of the supply chain, management would have to ensure that all components of the supply chain--tasks, physical goods flow, transportation, information flow, people, etc.--are deployed effectively and as planned. Disruptions, whether security related or otherwise, could occur at any level along the supply chain, at the facilities level, at information flow or transportation of goods, or elsewhere. Ensuring smooth supply chain functioning requires guarding against disruptions at all levels of the supply chain.
* Table 1 also clarifies the fact that only one of the three subsystems, internal supply chain management, is under full control of management. The other two subsystems are governed by shared responsibility. Guarding against disruptions, including that from security threats, would require collaboration with suppliers and with customers.
* Table 1 also highlights the importance of strategy in the supply chain, with the implication that supply chain disruptions can prejudice achieving strategic objectives as much as affecting the delivery of goods. Any changes to the supply chain, to avoid or reduce disruptions, should be consistent with overall strategic objectives.
* Moreover, as supply chains become globally dispersed and scattered across many nations and cultures and encompassing greater distances, there is a greater possibility that disruptions can occur at distant locations, making prevention and mitigating response more complex. Trent and Monczka (2002) emphasize that global sourcing requires integration across global locations and functional groups. This means that guarding against and responding to disruptions will require collaboration across nation states and cultures, with both domestic and foreign supply chain partners and customers.
Risk Management and Supply Chain Disruption
Risk management focuses on identifying the sources and nature of risk, assessing the consequences, and then developing measures to avoid or mitigate risk (Kleindorfer and Saad 2005; Chopra and Sodhi 2004). These three distinct phases of risk management--namely, risk specification, risk assessment, and risk mitigation--can be used to analyze the supply chain as set out in Table 1.
Sources of Risk. Terrorism and security threats are not the only cause of supply chain disruptions. Threats to the supply chain can be due to natural risks (hurricanes, floods, and earthquakes), operational or routine risks (plant breakdowns, material shortages) and random but purposeful events such as terrorist-related risk. Disruptions also can occur due to epidemics such as SARS, environmental accidents, and from political instability. Mitroff and Alpaslan (2003) consider security--and terrorism-related risk along with disruptions caused by normal accidents and natural events, distinguishing terrorism-related risk by highlighting the fact that acts of purposeful agents are at the heart of such risk. This suggests that protecting against security threats and terrorism-related risks to the supply chain can be studied in the context of responding to general disruptions to the supply chain.
Risk Assessment. The risk assessment phase focuses on the consequence or impact of specific risks. In the case of a global supply chain, risk assessment is concerned with understanding supply chain vulnerabilities along their entire geographically dispersed length, as well as among their various elements, from goods, to information, transportation modes, and people. Sheffi and Rice (2005) adopt such a view in developing a vulnerability map for a company, categorizing both the likelihood and consequences of various threats, and highlighting those threats that have a high likelihood of occurrence and can cause severe consequences.
Supply chain characteristics can themselves contribute to vulnerability. Hendricks and Singhal (2005b) suggest that an overemphasis on efficiency--characterized by single sourcing, low inventories and buffer stock, and limited slack--can create greater vulnerability to disruption. Similarly, supply chains that involve greater geographic distance, extend to many countries, and involve many distinct cultures are more vulnerable to disruption, as are supply chains that place greater reliance on outsourcing and have numerous supply chain partners. Security-related risks are magnified in supply chains that are already vulnerable along the lines outlined above.
Beyond the supply chain itself, how the supply chain is linked to overall strategy can affect vulnerability. For example, supply chains seek to deliver a designed product. The product design dictates how it is articulated into the supply chain and how various elements of the complete product are assigned to internal and external sources. As noted above, a greater dependence on outsourcing increases supply chain vulnerability. The length of the product life cycle also matters, with shorter product cycles more affected by sudden supply chain disruptions.
Lee and Whang (2005) point to some of the consequences of supply chain disruptions (whether caused by security-related causes or other reasons), including increased cost; delivery disruption; interruptions in the smooth flow of product and service; time delays; uncertainty as to quantity, quality, and timely arrival; traffic and port congestion; and longer cycle times. Further, indirect consequences can include lower service levels, which could affect long-term customer relations, and higher insurance premiums due to security and other risks of supply chain disruption. Hendricks and Singhal (2005a) found that supply chain disruptions, such as manufacturing delays, supplier failure, quality problems, and internal errors, led to firm under-performance in the stock market as well as in operational performance. They cite reductions in operating income, return on sales, return on assets, and sales growth as consequences of supply chain disruptions, while also noting increased costs and inventories. Such performance shortfalls were observed to last as long as two years after the initial disruption. These consequences point to the real cost of disruptions, including those caused by security-related causes, and suggest that the costs of safeguarding against security problems should be balanced against the gains from avoiding disruptions, the gains from improved customer relations and lower insurance premiums, and the gains from avoiding outcomes such as deteriorating supply chain performance.
Risk Mitigation After specifying and assessing risk, firms can respond by attempting to mitigate risk. Mitigation can consist of attempting to reduce the damage caused by supply chain disruptions, or taking actions to prevent or reduce the chance of supply chain disruptions. Given the sources of vulnerabilities, an early warning system can focus on these sources and help trigger timely awareness of potential and actual disruptions, allowing for earlier mitigation and reduction of losses. Mitigation systems can also assign responsibility, detailing who should focus on which areas of security threats.
Mitigation can range from designing and maintaining back-up systems in reserve and developing response plans for worst-case scenarios, to rethinking product design, redesigning supply chains, and focusing on loss avoidance rather than mitigating losses.
The latter approach, of proactive prevention, is similar in spirit to the underlying philosophy behind TQM (total quality management), which focuses on process control rather than output control, using analysis to find the causes of out-of-control procedures, and then aims to remedy these root causes. Lee and Whang (2005) stress the importance of drawing on lessons from TQM in supply chain risk mitigation, particularly in attempting to avoid security-related risk rather than responding after the fact to events caused by security breaches.
In the next section, we draw on the above ideas to analyze security and the supply chain in greater detail.
SECURITY AND THE SUPPLY CHAIN
Security-based disruptions can occur at various points along the supply chain. Containers are one of the major sources of security concerns. Containers have been used to smuggle illegal immigrants, weapons, and drugs. In Italy, a suspected terrorist was found in a container with a false aviation mechanic's certificate, maps of airports, and security passes (he later escaped while on bail) (The Economist 2002). The consequences of the use of a WMD (weapon of mass destruction) or discovery of such a device in a container can be serious; estimates suggest that a WMD explosion and the resulting port closure could cost $1 trillion, while a twelve-day closure following discovery of an undetonated WMD could cost $58 billion (O'Hanlon 2002, Gerencser et al. 2002).
Large containerships with cargo capacity exceeding 4,000 ton-equivalent units (TEUs) each will account for the bulk of container traffic in the future. For example, in 2005, COSCO, the China Overseas Shipping Company, launched the Cosco Long Beach, an 8,000-TEU containership, at the Hyundai shipyards. This transition to larger containerships increases the need for governments, port authorities, and international traders to oversee their security, as well as the security of increasingly larger volumes of containers. From the perspective of U.S. firms and the U.S. government, security measures are equally necessary at the ports of departure of goods, as they are at their points of entry into the U.S. Of the top ten U.S. container trade partners, seven are from Asia, the other three from Europe (UNCTAD 2003). China and Hong Kong together account for about one third of total container trade with the U.S., while the top ten foreign ports together account for about half of U.S.-bound containers.
Of course, containers are only one part of the overall security issue. Containership operators, and operators of other vessel types such as dry bulk ships, tankers, and LNG carriers, also need to be secure, as do motor and rail carriers. In the U.S. alone, more than eleven...
|
