Government-mandated security: Good medicine for supply chains?

By James Aaron Cooke -- Logistics Management, 9/1/2006

Last month's thwarted terrorist plot to blow up passenger flights from London to the United States has reminded us of our nation's vulnerability and has led to renewed calls for tighter security. Once again, safety advocates are pointing fingers at security holes in the supply chain—be they at airports, seaports, or truck terminals. And once again, there are calls to screen all cargo placed in the bellies of passenger planes and all ocean containers passing through our ports.

With such talk spreading over the nation's airwaves, shippers are bracing themselves for another round of government initiatives to strengthen Fortress America. Naturally they're worried about the cost ramifications, especially since it's estimated that the cost to the U.S. economy of security measures implemented after the 9/11 terrorist attacks has totaled more than $150 billion—$65 billion of which was spent on supply chain security.

The private sector has already borne a large portion of those costs. And it seems likely that any new security proposals will add to the costs of warehousing and shipping goods.

But an interesting study that was released last month should allay such fears somewhat. The study, conducted by Stanford University's Global Supply Chain Management Forum, found that security measures put into effect after 9/11 might have had an unintended but positive consequence: stronger supply chains.

The Stanford study, Innovators in Supply Chain Security: Better Security Drives Business Value, was funded by the National Association of Manufacturers and IBM. It examined the practices of 11 manufacturers and three logistics-service providers that had made significant security investments following the 2001 attacks.

Contrary to fears that security measures would raise costs and crimp distribution operations, the study found, those initiatives actually produced a host of benefits. For instance, most of the companies saw improvements in supply chain visibility, supply chain efficiency, customer satisfaction, inventory management, and cycle and shipping time. In some cases, the benefits actually outweighed the costs of the security measures.

The report also suggests that government-mandated security programs might be beneficial. One example is the Customs-Trade Partnership Against Terrorism (C-TPAT), a voluntary initiative that calls for international traders to beef up supply chain security. Researchers found that despite initial concerns that C-TPAT might hinder trade, compliance actually speeded up cross-border movements. The report noted that 88 percent of the C-TPAT participants studied experienced a reduction in customs inspections of their shipments, and 63 percent saw fewer inspection-related delays.

Most importantly, perhaps, companies actually improved their bottom lines by implementing security measures. Because they had improved supply chain visibility, 38 percent of the study participants achieved cost savings through better inventory management. Some 75 percent reported a reduction in cargo theft, and 50 percent said they saw a reduction in cargo tampering.

Granted, the study sample was rather small from which to draw a scientific conclusion, and it's reasonable to ask whether companies of all sizes and industries would achieve similar benefits. Still, the findings are intriguing in light of the mounting calls for more supply chain security, and the authors suggest an interesting conclusion: Enhanced security may not, in fact, impose financial burdens without benefits, as is commonly believed. In the end, government-mandated security programs might be good medicine for a company that wants to improve its supply chain.

You can read the study results for yourself at www.nam.org/supplychainsecurity.