The war on terrorism has produced at least one unintended side effect—a wholesale rethinking of the way Corporate America moves and distributes freight. Now that the U.S. government has imposed stricter homeland security measures on carriers of all stripes, logistics managers could be forced to make big changes to their basic supply chain management practices. They may have to hold some buffer inventory, source more components domestically, or consider alternative modes of transportation. Indeed, the practice of logistics may be permanently altered by the events of Sept. 11, 2001.

But that's not to say this is the end of supply chain management as we know it. Although companies may be forced to modify their inventory and distribution strategies, most experts believe that they will still adhere to the central tenet of supply chain management—that synchronizing production to demand avoids excessive inventory, enhances an operation's efficiency and reduces costs. "We've achieved too much flexibility in performance to lose much in this process. 'Just in Time' will bend, but it will not break," says Robert V. Delaney, a vice president at Cass Information Systems Inc. in Bridgeton, Mo., who publishes an annual report on the state of the U.S. logistics market.

Following the Sept. 11 terrorist attacks on the Pentagon and World Trade Center, the government clamped down on the movement of people and freight at seaports, airports and border crossings with Mexico and Canada. Shippers scrambled to maintain delivery schedules as their operations were thrown into disarray by tightened national security measures.

The grounding of U.S. aircraft immediately after the attack forced integrated carriers and freight forwarders to shift cargo from the sky to the ground. Although most passenger and cargo airlines resumed operations a week later, some forwarders reported that they were still moving a high volume of expedited shipments over the road at press time. "We're seeing more freight transitioning off airplanes into trucks that can provide overnight service," says Ed Hogan, chief executive officer of HBI Priority Freight of Herndon, Va., which provides fleet transportation for forwarders on the East Coast.

The shift to ground movements was driven not only by flight cancellations on the part of financially strapped airlines but also by tightened Federal Aviation Administration (FAA) security regulations. The new FAA rules divide airfreight shippers into two groups: known and unknown. Under the government's definition, a known shipper is someone who has conducted business with a carrier or forwarder since at least September 1999. Known shippers can continue to conduct business as usual with their carriers and forwarders; so-called unknown shippers, by contrast, are required to have their freight held for 48 hours prior to placement on an aircraft.

The reductions in flight schedules by both domestic and foreign carriers have also forced forwarders to move more cargo over the highway than in the past. Hogan notes that when Reagan National Airport in Washington, D.C., was closed (the airport was shut down from Sept. 11 to Oct. 4), his company arranged for freight bound for the nation's capital to be flown to Atlanta and then trucked north.

Shippers moving products by other modes also ran up against tighter security measures. In early October, the Coast Guard was put on its highest state of alert since World War II. It issued a rule requiring all commercial vessels entering U.S. ports to provide a 96-hour advance notification detailing ship crew and the presence of any dangerous cargo. About 5.8 million containers are processed each year at U.S. seaports.

At the same time, Customs has stepped up spot inspections of containers, although maritime shippers appear to be coping with the extra scrutiny. "We have only occasionally had a delay with ocean containers from a customs inspection standpoint,'' says Roger Vogt, director of physical distribution at Lego Systems Inc. of Enfield, Conn., which imports a significant volume of freight from Europe.

Other companies have revised their shipping patterns to import goods through new points of entry. Limited Distribution Services Inc. used to clear most of its imports through customs in Columbus, Ohio. But Nicholas J. LaHowchic, the company's CEO, says that his company now clears goods intended for the West Coast in Los Angeles instead. "Prior to the attack, zero delay in cycle time was our goal," he notes. "Now, like everyone else, we've experienced some delays, but we're on track."

Transborder trucking also slowed to a crawl in the days immediately after Sept. 11, particularly along the Canadian border, where fewer customs agents have historically been assigned to check vehicles. Ford, for example, was forced to shut down five North American plants due to border delays and a slowing economy, reports Della DiPietro, a representative for the giant automaker.

By October, the pace of both northern and southern border checks had picked up somewhat as Customs redeployed inspectors, extended work shifts and started using the services of the National Guard. "Commercial traffic takes about an hour to an hour and a half longer [to cross] on a busy day," says Tom Wade, the former president of the Laredo Transportation Association, about traffic delays on the southern border. But operations have not caught up as quickly at the northern border. Peter Robinson, senior director of corporate communications for Jevic Transportation, a Delanco, N.J.-based motor carrier, reports that trucks now face a six-hour delay crossing into Canada, a process that used to take about an hour.

Railroads have encountered the fewest service disruptions of any transportation mode, although this industry too suffered some problems early in October. As a precautionary measure, the rail carriers restricted some hazardous materials shipments for a three-day period when the United States began its bombardment of Afghanistan. But that's now in the past. "As far as we can tell, rail service is operating normally," says Tom White, a spokesman for the Association of American Railroads, based in Washington, D.C.

Though shippers seem to have adjusted to the current state of heightened security, there may be further restrictions to come. At press time, Congress had begun enacting legislation to prevent terrorist assaults on the homeland, starting with an airport security bill that creates a Transportation Security Administration in the Department of Transportation, makes all airport screeners federal employees (for now), and establishes security measures for tarmac areas. Other bills filed in the House and Senate could impose tighter requirements on shippers and carriers, and it seems likely that international shippers, in particular, will face new rules and restrictions.

The transportation delays resulting from increased inspections will almost certainly cause just-in-time and global shippers to rethink their logistics strategies. "There's been a realization that an extended global supply chain is a two-edged sword," comments Theodore R. Scherck, president of the Colography Group Inc., a transportation research firm in Atlanta. "We have worked with extended supply chains that use time-definite transportation and sophisticated information technology to replace inventories and [minimize] the number of times a widget must be handled from the point of production to the point of consumption. But it carries a risk—lean inventories and extended supply chains magnify any interruption of flow. This war footing has more impact on a lean supply chain than it does on older models."

Although logistics executives at several leading companies acknowledged privately that strategy reviews were under way, none wanted to reveal their plans publicly. But it's clear that some companies are re-examining whether offshore manufacturing makes sense if global shipments are to be subject to extended delays at points of entry into this country. Domestic sourcing avoids gateway problems and gives shippers more flexibility to shift modes if an emergency arises. "Some companies are looking at relocating manufacturing from overseas," confirms John Simpson, the president of the American Association of Exporters and Importers, which includes 500 member companies. "They're concerned about supplying the U.S. market from a foreign plant."

Scherck says that he expects many companies to adopt a continental sourcing model for their Asian, European and North American markets. Instead of relying on a global supply chain, they will procure product for consumption in the same region of the world. "It's dawning on companies that most goods moved to market are not valuable enough to be sourced in high-cost, high-speed channels," says Scherck. "Low-cost, low-value, high-weight goods simply cannot be moved in some of the global supply chain models because the goods' value is not sufficient to support the required transportation costs."

Companies worried about the possibility of supply disruptions are keeping a close watch on port security legislation currently making its way through Congress. "They are waiting to see what kind of legislation Congress enacts and what kind of delays it will create," Simpson reports. "They're also waiting to see what response Customs and the INS [the Immigration and Naturalization Service] make when they get additional resources." If it appears that a lot of new inspectors will be deployed," he adds, "the prospect of delays will cause companies to put their contingency plans in place."

Besides establishing supplementary sources of supply, many companies appear to be drawing up contingency plans for shifting shipments from one mode to another in the event of a crisis. "As you design your manufacturing and distribution network, you now have to have another layer of constraints," says consultant Joseph Martha of Mercer Management Consulting in Lexington, Mass. "People have to have contingency plans in place in case border crossings go from three hours to 15."

"This year will be a huge challenge," warns Rocky Wilson, president of Shaker Express in San Diego, a cargo handler and trucker that hauls freight for the airlines in southern California. "Just-in-time inventory will have to go back to [a point where] product is staged close to where it's needed so a truck can get it there [in an emergency]." Because the airlines' financial plight has resulted in service cutbacks, Wilson says, he also expects more international shippers to switch their cargo from air to ocean.

But Scherck notes that, prior to Sept. 11, companies were already migrating from expensive air shipments toward greater use of surface transportation for their time-definite freight as the economy deteriorated. "Although we'll still move goods on a time-definite basis," he says, "shippers will move to lower-cost alternatives even if they have to accept that they'll lose a day in transit."

At this point, motor carriers have provided the flexibility to keep time-definite freight moving on schedule as airlines cut back flights. But some industry experts are worried that the nation's trucking capacity could be strained to the limits next year. Rising insurance premiums and in some cases, the absence of coverage could sideline some motor carriers, reducing freight capacity. The remaining truckers—especially haulers of hazardous materials—are likely to raise rates. "Shippers can expect 7- to 10-percent rate hikes just to cover the costs of increased insurance premiums [for bulk hazardous materials shipments]," warns Cliff Harvison, president of the National Tank Truck Carriers Association in Alexandria, Va.

With the possibility of service disruptions looming, companies may reinstitute the practice of holding buffer stock—at least for critical components. "Just-in-time practitioners need to think about creating some kind of buffer," advises Martha. "This is not going to go away in the next six to 12 months."

Massachusetts Institute of Technology professor and logistics software entrepreneur Yossi Sheffi recommends that manufacturers, in particular, adopt an inventory management practice he dubs "Sell-One-Store-One." Under this plan, companies would designate a certain level of inventory as strategic emergency stock. This stockpile would only be drawn upon in the case of an extreme disruption. "The concept of strategic emergency stock is similar to the philosophy that led the United States to keep strategic oil reserves," Sheffi explains.

Will these safety stocks result in an enormous cost to industry? Probably not. Even if companies are forced to create inventory cushions, many believe that the economy can absorb such a stock buildup without disrupting supply chain management patterns. Delaney of Cass Information Systems estimates that companies will need to set aside only an additional 5 percent of their inventory as safety stock.

But others wonder whether U.S. industry can afford to go back to the old days, where companies built up safety stock to handle unexpected swings in demand. "We've spent years taking out inventory and costs," says Bill Villalon, president of the Americas region for APL Logistics in Oakland, Calif., "and I don't think we'll go back and build in big buffer stocks."

Accenture consultant Al Delattre says food manufacturers will be more likely to employ buffer stocks than their counterparts who work with high-value goods. The latter, he believes, will be more likely to choose strategies that involve alternative supply sources and transportation. "A lot of companies are still reluctant to post insurance in the form of inventory," adds Delattre, who's based in Los Angeles.

Many experts believe that the war on terrorism will accelerate the current trend toward purchasing sophisticated supply chain management software. Applications that provide inventory visibility give logistics managers the tools to react to emergencies arising out of a war. "I see more contingency planning based on our having full visibility over inventory and then being able to redeploy inventory in transit and at rest," says Villalon.

Until Congress passes new security legislation, the full impact of any new transportation- and commerce-related restrictions will remain uncertain. Yet one thing is clear: This coming year, logistics managers will face a whole new series of challenges brought about by homeland security measures and the war on terrorism. "As supply chain managers, we've tried to drive out time and cost for the past decade," says Accenture consultant Delattre. "Now, we have to add time and cost back in. The challenge is how to do it in the most effective way."