Securing the Air Cargo Supply Chain, Expediting the Flow of Commerce: a Collaborative Approach

Transcription

1 CARGO SECURITY ALLIANCE 927 STUYVESANT AVENUE UNION, NJ October 2009 Securing the Air Cargo Supply Chain, Expediting the Flow of Commerce: John A. Muckstadt Cornell University Cayuga Partners LLC Sean E. Conlin Deloitte Consulting LLP Walter H. Beadling Cargo Security Alliance Cayuga Partners LLC 2009

2 Securing the Air Cargo Supply Chain and Expediting the Flow of Commerce: Securing the Air Cargo Supply Chain and Expediting the Flow of Commerce: A Collaborative Approach 1. Executive Summary The Congressional mandate for 100% screening of air cargo carried on passenger aircraft originating in the U.S. takes full effect in August, This event has the potential to seriously disrupt the air cargo supply chain with severe economic consequences. Timely, effective implementation of the TSA s Certified Cargo Screening Program (CCSP) promises a solution, but only if shippers, industry associations and the air cargo industry work together to take quick action. Successful deployment of the CCSP depends upon adherence to, and the rapid adoption of, the 5 Principles of Secure Supply Chain Design and Operation, described herein. 2. Background: the Congressional mandate for screening air cargo The paradigm of passenger air cargo security was set to shift on August 3, 2007 when the 9/11 Act was signed. In addition to mandating security enhancements across the government, this law requires the Secretary of Homeland Security to establish a system to enable industry to screen 100 percent of cargo transported on passenger aircraft at a level of security commensurate with the level of security of passenger checked baggage within three years. To date, the impact of the 9/11 Act has minimally affected the air cargo industry as it reached the 50% screening milestone in February However, the full challenges of implementing the law will be felt as the 100% screening requirement approaches in August As the Transportation Security Administration (TSA) presses toward providing a flexible solution for industry, it does not anticipate any adjustment, extension, or elimination of the Congressional mandate. Given that cargo must be screened on a level commensurate to passenger baggage, the requirement of piece level screening is necessary to achieving the 100% mandate. This poses complex challenges to the current supply chain, as cargo arrives at an airport in large containers, pallets built up from smaller pieces of cargo from a variety of sources, and loose cargo that is often mixed together. Piece level screening will require each piece within those larger configurations to be deconstructed, individually screened and reconstructed, significantly increasing handling and processing time and costs. Initially, a Federally managed screening service, similar to that used for passengers and baggage, was considered to accomplish this task. This would consist of government employees performing the screening on millions of pieces of cargo. Given the nuanced details of the air cargo supply chain, this solution had many drawbacks. TSA employees performing piece-level screening of cargo would mean that a government worker would be inspecting and possibly opening each box, with little regard for the integrity of packaging, nor the special handling requirements of some goods, and little, if any, consideration given to the need for quick throughput. Additionally, screening cargo at the piece level at the airport would result in bottlenecks and delays. Alternatively, screening could be performed by the air carriers at airports. Although air carriers have screening capabilities, most facilities do not have the necessary operational scalability from a technology and logistics perspective. Even if on-airport facilities could adjust their operations, the bottleneck and delay issues would still exist. To eliminate these problems and achieve the required service levels, the costs would be prohibitive 3. TSA s Solution: a supply chain approach To the air cargo shipping industry, the 100% screening mandate increases complexity. Recognizing this, the TSA adopted a flexible supply chain approach that considers both security requirements and unique industry needs in the design of practical, workable screening systems. To enable this, the Certified Cargo Screening Program (CCSP) was established. The CCSP is a voluntary, facility-based, program in which Cargo Security Alliance 2009 Page 2 of 13 3/19/2010

3 Muckstadt, Conlin and Beadling shipping and freight forwarding actors can become certified to screen cargo. The process to become certified involves implementing facility security standards, vetting necessary employees who will have access to screened cargo, training employees to perform security and screening roles, and implementing the processes and technology needed to screen cargo. Once certified, CCSP locations, know as Certified Cargo Screening Facilities (CCSF), can tender screened cargo through the air cargo supply chain, directly to air carriers, with no need for it to be screened at the airport. Properly implemented, the CCSP promises to maintain supply chain velocity and the overall flow of commerce without loss from theft, terrorism or other threats. The CCSP program is open to three primary participants in the air cargo supply chain: Manufacturers (OEM) and shippers from all industries that move enough cargo by of air can join the program and screen their goods as they are being packaged, thereby avoiding the need for specialized screening equipment and having others open and tamper with their goods. Freight forwarding companies and Independent Air Carriers (IAC) can participate in the program to provide screening and maintain secure custody of cargo on behalf of their shipping customers. Independent Cargo Screening Facilities (ICSF), a new business model that specializes in screening cargo destined for passenger aircraft on behalf of air carriers and indirect air carriers. A simplified schematic view of the CCSP supply chain depicting product flow options and the chain of custody can be found in Appendix II (1). TSA has recognized that there is not a one size fits all screening solution in the air cargo shipping environment. CCSP, unlike the on-airport, Federal or air carrier screening approaches, builds flexibility into the screening process in many ways. First, it provides the option for shippers to screen their products themselves; it also allows different types of commodities to be screened with processes and procedures that meet their specific and unique needs. Secondly, CCSP allows for a variety of screening methods and technologies to be used including physical search which many of the shipper participants can readily build into their existing packaging and shipping processes. In securing the air cargo supply chain, screening alone is not enough. TSA s supply chain approach is layered with other countermeasures against air cargo threats, such as vetting shipping companies and employees, facility security controls, chain of custody methods, and secondary screening. It is especially critical to establish and maintain a secure chain of custody that ensures cargo is not subject to tampering and compromise as it passes along the supply chain after it has been screened. In summary, TSA has taken an approach that allows industry to participate in securing the air cargo supply chain in a manner that minimizes costs and best suits their needs. By varying the nodes in which screening can take place there are many more options available to air cargo supply chain participants that provide for special circumstances and give more control over their products and logistics costs. 4. Challenges of Managing and Securing the Air Cargo Supply Chain The air cargo supply chain is, by definition, a high velocity supply chain. For shippers that move their products by air, lead times are critical and speed is of the essence; they are willing to pay significant premiums for it over other modes of transportation. Characteristics of cargo that has a need for speed include: high value items for which security is imperative and transportation costs relatively small, exports with short lead times, Just-in-Time manufacturing components, critical replacement parts, perishables, shipments with unique timing requirements and circumstances (e.g. human remains, life saving material), and goods that simply need regular, reliable arrival times over long distances. Industry segments that ship high volumes of goods by passenger aircraft are often specific to regions of the country. For example, complex, expensive machined parts for oil drilling are frequently shipped from Houston; fresh fish from the Northwestern US. Also, global high tech industries such as pharmaceuticals, computer parts, printers, semi-conductors, and Cargo Security Alliance 2009 Page 3 of 13 3/19/2010

4 Securing the Air Cargo Supply Chain and Expediting the Flow of Commerce: other electronics often depend on air shipments to move large volumes of product by both freight and passenger aircraft. For some products, the use of slower, less predictable modes of transport can be offset by carrying more inventories held in different nodes of the supply chain to compensate for longer lead times. The trade off is the cost of carrying this inventory, and the potential impact on customer service levels. Trucking is typically the most viable alternative to shipping by air. Depending on the distances involved, express trucking services can compete on speed of delivery and cost. Obviously this is not an option when longer distances or transcontinental shipping is required. To maintain competitiveness, it is imperative that the air cargo industry find solutions to minimize the added costs and processing time required by complying with the 9/11 Act mandate for 100% screening. Uncertainty: challenge and opportunity The enemy of speed and security in the supply chain is uncertainty. Demand uncertainty is so substantial in most supply chain environments that if it is not adequately addressed, it can severely degrade anticipated performance in terms of unit cost, speed, quality, and responsiveness. Close collaboration with supply chain partners can minimize the impact of uncertainty by better anticipating demand and identifying security exposures, and planning mitigation strategies accordingly. Collaborative relationships that focus on reducing the uncertainty in operating environments by employing improved information systems and business processes will result in more efficient, secure supply chain performance. However, these collaborative arrangements by themselves cannot compensate for fundamentally flawed and operationally ineffective manufacturing, distribution and logistics environments. Well conceived and designed systems, security procedures and protocols are required. Those CCSP participants including air cargo shippers, freight forwarders and air carriers who manage uncertainty best will gain competitive advantage; those who do not participate, or fail to manage uncertainty well, are at greater risk for failure and vulnerability to security threats. High velocity supply chains and high security supply chains have much in common; it can be argued that you cannot have one without the other. Both depend on visibility to minimize uncertainty - the ability to know where things are, when, and where they are going next. High velocity supply chains are based upon repeatable, consistent processes to eliminate uncertainty through end-to-end efficiency and speed. Fortuitously, secure chains of custody are based upon repeatable, consistent processes to eliminate uncertainty through end-to-end traceability and uniquely identifiable, readily detectable and verifiable cargo integrity. The Applicable Laws of Supply Chain Physics (1) The 1 st Law of Supply Chain Physics is Local Optimization = Global Disharmony. Supply chain partners acting independently and in their own self-interest will destabilize and slow down the air cargo supply chain system, increasing overall costs and vulnerability to security threats. Lack of standards and clumsy, inconsistent hand-offs among supply chain partners exposes the supply chain to a multitude of threats. Global coordination and collaboration are required to expedite the flow of commerce and maintain supply chain integrity. The 2 nd Law of Supply Chain Physics is Little s Law, (L = λ W): The average amount of inventory in a system is equal to the product of the demand rate and the average time a unit is in the system. The penalty for lack of speed is higher inventories and lower customer service levels; the costs of this are quantifiable and vary from case to case. Most CCSP cost estimates focus on facilities, operations and screening technology. The hidden cost of screening air cargo without an efficient, collaborative supply chain is far greater. Impeding the flow of commerce will lead to inventory build ups and reductions in customer service that will have serious, far-reaching economic consequences. Cargo Security Alliance 2009 Page 4 of 13 3/19/2010

5 Muckstadt, Conlin and Beadling According to Professor David Menachof of the Cass Business School, City University, London: Using 2010 estimates of the value of air cargo shipments, an average one day delay for half of all shipments will result in an industry-wide inventory carrying cost of $537million for just US domestic shipments. If international air cargo shipments are included [not yet subject to a deadline], this cost to the supply chain increases to $1billion... Much of the reasons for the costs are the need for the supply chain to absorb the extra inventory needed to maintain on-time delivery... Note that these costs will occur even if freight is shifted from air to road transport which might end up being faster than the delayed air shipment but slower than the original air shipment transit time. (2) As noted above, supply chain performance and security are closely linked; hence, we propose the Supply Chain Security Corollary to Little s Law: The longer inventory is held in the system, the more vulnerable it is to tampering, contamination, terrorism and theft. Said another way, the faster inventory moves through the system, the lower is the exposure to, and costs from, tampering, theft and security risks. The 5 th Law of Supply Chain Physics is Collaboration and efficient supply chain design reduce uncertainty, increase velocity (and security), and improve operational and financial performance. The active participation of shippers, industry associations and the air cargo community, working closely with the TSA and international regulatory bodies to develop effective standards, protocols, procedures and technologies, is prerequisite to securing the global supply chain. Further, given inefficiencies in the current air cargo system, advanced system design and optimization techniques, together with closer coordination at local, regional, national and international levels, can effectively negate the impact of enhanced security measures and expedite the flow of commerce. 5. The Five Principles of Secure Supply Design and Operation The Essential Foundation: Integrated Systems Efficient air cargo supply chains require five interconnected systems: engineering (system design), marketing (customer facing), cargo handling and processing, inbound / outbound logistics, and financial management. Compliance with the CCSP introduces another critical component to this mix: the need for cargo screening and a secure chain of custody. Shippers and the air cargo Industry are justifiably concerned that the introduction of this extra step to the supply chain management process has the potential to slow the system down, impeding the flow of commerce with damaging financial effects. Opportunities for improved supply chain speed and efficiency tend to be at the boundaries of these systems. The greatest advantages will come from focusing on (1) integrating the five systems intraorganizationally, (2) integrating the supply chain processes with collaborating supply chain partners, and (3) implementing an integrated, systemic approach to supply chain security and employing best practices throughout the system. But integration alone will not achieve unimpeded supply chain flow; management must learn to deal explicitly with the impact of uncertainty on the supply chain decisions they make. While sharing data is essential, simply passing data will not be sufficient to substantially reduce the impact of uncertainty; predictable, verifiable, repeatable processes, close collaboration with supply chain trading partners and the effective use of advanced information technology and tools are the keys to achieving and sustaining a secure, high velocity air cargo supply chain. Application of the Five Principles of Secure Supply Chain Design and Operation (3) can mitigate the impact of enhanced security procedures and increase the flow of commerce. Secure, high velocity supply chains share several key attributes. We have identified five guiding principles that provide the essential foundation for securing the air cargo supply chain while expediting the flow of commerce. Each principle is explained below, with illustrations of its applications. Cargo Security Alliance 2009 Page 5 of 13 3/19/2010

6 Securing the Air Cargo Supply Chain and Expediting the Flow of Commerce: Principle # 1: Know the Customer Principle # 1- Concept Without a clear understanding and definition of customer requirements, a secure, high-velocity air cargo supply chain cannot be established and sustained. To gain that understanding requires constant research and collaboration with supply chain partners, the construction of an information infrastructure to capture transaction data, and the storage and analysis of these data from a strategic, tactical and operational perspective. Further, the needs of the customer must be understood within the context of the supply chain system within which it operates, the products it ships and the threats to which they are vulnerable that can vary considerably from location to location and time to time. All of these requirements must be thoroughly understood to establish the foundation for constructing responsive, efficient, secure supply chains. Principle # 1 - Application to the Air Cargo Supply Chain Supply chain security and logistics requirements vary greatly by type of shipper, commodity or product, operating location and destination. For example, the logistics and screening requirements for perishable flowers, certain fruits and live foodstuffs (i.e., Maine lobsters) which are packaged in boxes, crates and tanks respectively are very different than those for high-value semiconductor chips which are susceptible to electronic discharge and may be shipped in special, palletized containers. Other examples include jewelry, fine art and human remains, which are often shipped by air and must have special handling protocols because post screening re-inspection in the event of an alarm is problematic. All demand the speed of delivery provided by air freight, but storage and handling protocols, scanning and secure sealing techniques, and the chain of custody for each are very different. These industry-specific requirements call for the development and use of unique procedures, security protocols, sealing and identification technologies and transportation strategies designed to speed processing and ensure the chain of custody from the shipper to the carrier. In turn, requirements will influence, and in some cases dictate, the supply chain management strategy. It is therefore imperative that shippers, air cargo logistics services providers and their industry associations work closely with the TSA to establish practical standards as quickly as possible if the impending deadline is to be met. Principle # 2: Adopt Lean, Secure Operating Philosophies Principle # 2: Concept Over the last decade shippers, freight forwarders, 3PL s, IAC s and air carriers have focused on creating lean organizations and business processes. Internal lead times have been shortened and made more predictable, set up times and work-in-process inventories reduced. But for maximum supply chain efficiency, all supply chain trading partners must design, align, and execute their jointly operated processes so that the entire chain has the desired attributes: response times must be short, predictable and repeatable. Thus lean, secure supply chains must be designed as a system that responds quickly and predictably to fluctuations in demand and available capacity. To date, most lean initiatives have been pursued within the enterprise. To attain maximum efficiency - with increased security - across the chain of custody, lean philosophies must be extended beyond the boundaries of individual organizations to include all supply chain partners. No combination of software systems and information technology can compensate for a poorly designed physical operating environment and inefficient, sloppy execution. Principle # 2: Application to the Air Cargo Supply Chain A recent study of the application of Business Process Reengineering (BPR) on the air cargo handling process identified substantial benefits in overall throughput through lean operations (4). Overall, the Cargo Security Alliance 2009 Page 6 of 13 3/19/2010

7 Muckstadt, Conlin and Beadling combined processes of operations, transportation, delay, inspection and storage were reduced from 120 steps to 18 steps and overall cycle time by 74%, while facility capacities and staffing remained constant. Delays in the process were almost completely eliminated through process improvement; no additional automation was incorporated to achieve these results. Computer simulation models are powerful tools that can be used to guide lean process development for optimal facility efficiency, throughput and performance. For example, the Air Cargo Screening Facility (CSF) Operations Model (5) provides decision support and what-if analysis to answer questions that are encountered in the design and operational phases of an Air Cargo Screening Facility. This model has been used to plan requirements for storage and screening capacity, staffing, outbound logistics and material usage (e.g., tamper-evident tape and seals) and also to estimate facility throughput and inprocess inventory levels to help develop accurate estimates of facility set-up and operating costs. For example, changes in the receiving and sorting processes recommended using this model resulted in projected reductions of late shipments by over 90% with the same level of resources. Another study conducted with a major air carrier at Toronto Pearson Airport used a similar computer simulation technique to analyze air cargo operations at a new state-of-the-art cargo facility, equipped with automated material handling and fully computerized inventory control systems, validating the approach (6). The purpose of the study was to develop new processes to ensure that products and services were properly aligned with customers needs. The tool was used successfully to quantitatively evaluate and compare different policies, business practices and procedures within a given set of operational and business constraints. The model can also be used in evaluating scenarios such as the effect of an increase in cargo volumes or changing service level policies. Principle # 3: Create a Secure Supply Chain Information Infrastructure Principle # 3: Concept The air cargo industry has taken advantage of advances in information technology to make great strides in improving its information infrastructure. Although actual performance frequently falls short of the desired level of performance, it is now possible for all partners in the secure air cargo supply chain to share demand information, shipment status and location, screening and logistics requirements and up-tothe-minute air carrier schedules. But true collaboration requires more than just data exchange between successive supply chain partners. Rather, it requires joint planning of inventory, packaging, consolidation, screening and logistics strategies, and executing the resulting plans quickly and reliably on a continuing basis. How various capacities (inventory, transportation, storage, screening, air lift, peak load) are used daily and over longer time horizons must be considered from a systems perspective, not just a local point of view. The secure air cargo supply chain information infrastructure must be capable of responding effectively to frequent changes in demand and logistics requirements. Re-planning the use of capacities may need to be done daily and in some cases on an hour-to-hour, minute-to-minute basis for maximum responsiveness and efficiency. Principle # 3: Application to the Air Cargo Supply Chain One of the world s leading international freight forwarders is currently implementing an innovative, integrated information system in its CCSF s (7). The system is capable of capturing all of the information about an air cargo shipment, down to the piece level, from the moment it arrives at the facility until it exits the facility for delivery to the air carrier. For inbound cargo shipments the system records the delivery truck driver s ID and photo, and scans in the Bill of Lading. Once in process, the CCSF operator records the Master Air Way Bill (MAWB) number and weight, identifies the technology used to perform the screening and then records the House Air Way Bill (HAWB) number and weight. The system automatically generates and records bar coded, tamper- Cargo Security Alliance 2009 Page 7 of 13 3/19/2010

8 Securing the Air Cargo Supply Chain and Expediting the Flow of Commerce: evident package tape and seals and allows recording of pallet and/or ULD and truck seal numbers, as necessary, to uniquely identify the screened items and establish a secure chain of custody. All transactions are time-stamped for later retrieval and analysis, should it prove desirable or necessary. The system also generates all the CCSP-related reports required by the TSA automatically, periodically or on demand. Optionally, the system can be interfaced to screening devices to capture images and data related to the screened cargo, and linked external databases to perform personnel checks and incorporate truck and air carrier schedule updates in real-time. In addition to the obvious productivity benefits, the data captured by the system can be used for forensic track and trace should it prove necessary, and provides the foundation for collaborative planning and scheduling with supply chain partners and air carriers to better coordinate supply chain activities and expedite cargo flow. Used with simulation tools, the data can also be used to optimize material flow, capacity utilization and facility throughput. Systems like this one are essential to maintaining air cargo supply chain security while expediting the flow of commerce in a cost effective manner. Principle # 4: Integrate Business Processes Principle # 4: Concept Business processes must be established both intra- and inter-organizationally. These processes, coupled with the information infrastructure, support the efficient flow of material through the supply chain. While much attention has been placed on understanding business processes within shipper and air cargo handling organizations, it is essential to understand what processes must be built inter-organizationally among trading partners and logistics services providers - to leverage, enhance and optimize their capabilities to expedite the flow of commerce. Principle # 4: Application to the Air Cargo Supply Chain The shortest distance between two points is a straight line, and the quickest, and cheapest, most secure route in the CCSP supply chain is directly from shipper to airside, without passing Go (i.e., through an intermediate node). The CCSP allows for this, and it is the right answer for many shippers. However, it is dependent upon collaborative, integrated business processes and between shipper and air carrier, or Freight Forwarder/ ICSF / IAC and air carrier, enabled by tightly coupled information systems as illustrated in Principle # 3. Prerequisites are sharing and knowledge of up-to-date, real time flight status information; optimal load configurations of screened cargo; tamper-evident packaging and sealing to ensure a secure chain of custody; rapid delivery and capacity for unloading at the airport; knowledge of exactly what s coming in, when, on the part of the carrier to help consolidate, weigh / balance and expedite handling of outbound loads; and readily verifiable cargo integrity. These conditions can only be realized by tightly integrated, collaborative business processes; the procedural discipline and information capture demanded by the extra step in the CCSP create an environment within which this is possible. Benefits include more predictable lead and flow times, reductions in cargo handling, storage costs and wait times, better facility and aircraft utilization and increased velocity with less inventory in the air cargo supply chain. Having said this, the current air cargo supply chain is extremely complex, and the requirements for 100% screening at the piece level create new challenges. For example, there is a need to segregate screened and unscreened cargo at the airport, and (at this writing) between incoming international and outbound domestic flights. These problems can be addressed through process reengineering, the application of lean, secure operating philosophies and simulation tools such as those described in Principle #2, and by Principle #5, the implementation of unified, advanced Decision Support Systems. Cargo Security Alliance 2009 Page 8 of 13 3/19/2010

9 Muckstadt, Conlin and Beadling Principle # 5: Unify Decision Support Systems Principle #5: Concept Researchers have designed supply chain Decision Support System (DSS) environments for the air cargo industry for decades. These environments are typically based on different philosophical models. Also, they differ in how they forecast demand and how they drive logistics, handling and storage decisions. Their goal is to generate plans and schedules that consider some of the elements of the supply chain. No matter which approach is taken, these systems and their embedded rules dictate many daily supply chain activities. Therefore, they have a substantial impact on operating behavior, and consequently on overall supply chain performance, operational effectiveness and security. How much they enhance air cargo supply chain performance depends upon both the accuracy of their input data and the modeling approaches employed. We believe that these decision support systems need to address uncertainty in an explicit manner most do not. Principle # 5: Application to the Air Cargo Supply Chain A recent study applied advanced Decision Support Systems techniques for planning and scheduling to the problem of scheduling truck arrivals at the Hong Kong International Airport - HKIA (8). Assumptions included collaborative sharing of current flight schedules with air carriers, a focus on air cargo handling operations for outbound flights only, and adequate docking capacity at the airport. There are a number of outbound flights with confirmed air waybills; the terminal operator schedules arrivals of the delivery trucks so that some of the shipments can be transferred directly to the departing flights without requiring extra handling and storage at the terminal, an approach that is analogous to that permitted in the CCSP for screened cargo. The model also considers that multiple shipments (for different air carriers) may be delivered to the airport on a single truck, and that cargos come in different sizes and weights, which adds complexity to the cost minimization computation, but accurately reflects the way things work in the real world. The benefits of using the advanced scheduling algorithm relative to the random, First Come, First Served (FCFS) in the current system at HKIA were substantial, with an average cost savings of 39.2%. The savings are due to the ability of the advanced scheduling approach to coordinate the arrivals of trucks so that a larger percentage of shipments can be transferred directly to the line-up areas, saving their handling and storage costs. In addition to cost savings, this advanced scheduling approach has the added advantage of avoiding congestion at the air cargo terminal and guarantees that all shipments will arrive on time, eliminating late shipments (an average of 3.9% of all shipments in the FCFS approach) and reducing truck wait times, which averaged 99 minutes from arrival to unloading, substantially. As previously noted, the less time cargo is in transit and waiting means fewer opportunities for tampering, theft and sabotage. Planned follow-on research will incorporate stochastic programming techniques to explicitly represent uncertainty in the scheduling process.. 6. CCSP Benefits: Security is Free Although few would disagree with the need for increased air cargo security, most shippers and the air cargo community view the mandate for 100% screening as a cost burden and impediment to supply chain flow. We believe that proper implementation of the CCSP can meet the dual objectives of security while maintaining, and in some cases accelerating, supply chain flow through improved collaboration and better use of information to take advantage of inefficiencies in the current system. Cargo Security Alliance 2009 Page 9 of 13 3/19/2010

10 Securing the Air Cargo Supply Chain and Expediting the Flow of Commerce: Analogies can be drawn between the implementation of manufacturing quality programs in the 1970 s and 80 s to improve the U.S. s competitiveness in the face of low-cost, high quality products from Japan. American manufacturers were reluctant to take on the quality programs practiced by Japanese manufacturers that were viewed as costly and burdensome. Phillip Crosby, quality control manager of the Pershing missile program, implemented a Zero Defects program that yielded a 25% reduction in the overall rejection rate and a 30% reduction in scrap costs, more than paying for the program. Crosby's prescription for quality improvement was a 14-step program outlined in his landmark 1979 book, Quality is Free (9), which quickly became the rallying cry of the manufacturing quality movement in the U.S. He believed companies that established similar initiatives could realize savings returns that would more than pay for the cost of their quality programs. In the same way, we believe that shippers, freight forwarders and ICSF s that embrace the air cargo security program in the CCSP together with advanced collaborative supply chain management techniques will find that the benefits far outweigh the costs. These may come from a variety of sources, including: Reduced Annualized Loss Expectancy (ALE) from lower exposure factors due to the introduction of enhanced security measures and fewer occurrences of loss; reduced loss from theft and mishandling of cargo resulting in lower insurance costs; shipment visibility and a consistent, monitored, auditable chain of custody across the air cargo supply chain for enhanced shipment flow, tracking and traceability; improved operational efficiency, lower supply chain system inventories, increased customer service levels and cash flow through process optimization and advanced supply chain planning and scheduling techniques; and of course, a significantly reduced possibility that catastrophic terrorist acts will occur. Given the program s potential benefits, the mantra of the CCSP may soon become Security is Free. 7. The Shipper s Dilemma: to screen or not to screen For shippers, the decision to participate in the CCSP and screen goods in-house versus outsourcing screening to an intermediary or an air carrier involves the evaluation of many variables, among them facility set-up costs and operating costs, inventory policies and customer service and satisfaction concerns. The following tables summarize these considerations: 1. Cost Considerations In-house screening Secure screening and storage areas Improvements in general facility security Implementation of new operational procedures (i.e. chain of custody methods) Screening technologies Training costs STA certification costs Third party security assessments IT infrastructure to manage screening and security operations Liability Maintenance of initial cost areas Outsourced screening Direct screening fees from screening entity Indirect fees from screening entity, which may include insurance, transportation, chain of custody methods costs Screening contract set-up Management and monitoring costs Cargo Security Alliance 2009 Page 10 of 13 3/19/2010

11 Muckstadt, Conlin and Beadling 2. Other Business Considerations In-house screening Greater control over lead times and facility security controls Minimal delays due to reduced scrutiny downstream, especially for goods that are difficult to screen with technology Opening the packaging downstream may have significant adverse affects on the product and/or customer requirements (e.g. agriculture, human remains, high value goods) Efficient in-house processes make costs and quality more controllable As an IAC or ISCF, may be able to offer services to others Outsourced screening Size and scale of goods shipment may not be conducive to in-house screening benefits (i.e. too small to screen efficiently and cheaply) Goods do not travel frequently on passenger aircraft Nature of business operations do not focus on security controls Current business model outsources most logistics operations A chart that may be useful to companies trying to decide on participating in the CCSP can be found in Appendix II (2): Are you prepared for 100% screening? 8. Summary and Conclusion: a Call to Action The Congressional mandate for 100% screening of cargo carried on passenger aircraft will take effect in August, This is a fact; it will not change. The air cargo supply chain is built for speed; adding another step to the process for the purpose of ensuring security has the potential to slow down and disrupt the system with severe economic consequences. The air cargo system obeys the Laws of Supply Chain Physics; speedy, efficient operations and security are complementary. Adherence to the 5 Principles will allow shippers, the air cargo community and air carriers to develop collaborative management systems and deploy Best Practices solutions to secure the supply chain and expedite the flow of commerce; however, this will take time to implement. The TSA s Certified Cargo Screening Program provides a flexible framework to enable these systems. At this writing, a great deal of work remains to be done. The apparent, but deceiving, availability of excess capacity in the current system, combined with a lack of awareness and, in some cases, denial, of the impending deadline and tools available through the CCSP, particularly among the shipping community, threatens to undermine the program and preclude deployment of effective solutions in time to forestall serious, disruptive bottlenecks when the mandate takes full effect. It is imperative that shippers become aware and knowledgeable of the CCSP to make informed business decisions about how to best participate. At the same time, shippers, their industry associations and the air cargo community must immediately begin working together to develop the standard procedures, protocols and collaborative business processes needed to provide the requisite levels of security without compromising supply chain throughput. This can still be accomplished, but the clock is ticking. The alternative is to let the invisible hand, aided and abetted by the TSA, sort the problem out over time, as it inevitably will. This messy, costly and painful process is avoidable and unnecessary. The time to act is now. Cargo Security Alliance 2009 Page 11 of 13 3/19/2010

12 I. Bibliography Securing the Air Cargo Supply Chain and Expediting the Flow of Commerce: 1. Muckstadt, J.A.; Murray, D.H; Rappold, J.M.; Principles of Supply Chain Leadership, unpublished Menachof D, Russell, G. (2009), 'Shocks and Longer Term Effects of 100% Air Cargo Screening', Distribution Business Management Journal, Volume 8, 2009; [Peer Reviewed] 3. Muckstadt, J.A.; Murray, D.H; Rappold, J.M.; Collins, D.E.; Guidelines for Collaborative Supply Design and Operation, Information Systems Frontiers, Volume 3, Issue 4; December, M.R. Rotab Khan; Business process reengineering of an air cargo handling process, Int. J. Production Economics 63 (2000) 99} Cayuga Partners / Cargo Security Alliance; 6. Nsakanda, A.L.; Turcotte, M.; Diaby, M.; Air cargo operations evaluation and analysis through simulation, Simulation Conference, Proceedings of the 2004 Winter Start Page: 1790 End Page: 1798 vol.2 ISSN: ISBN: Volume: 2 Issue: 7. Regiscope Cargo Cam and Screening Cam ; 8. Ou, Hsu and Li: Scheduling Truck Arrivals at an Air Cargo Terminal, Production and Operations Management, pp. 1 15, r 2009 Production and Operations Management Society. 9. Crosby, Philip; Quality is Free. New York: McGraw-Hill, II. Appendices 1. TSA Chart: Supply Chain approach to Air Cargo Screening Cargo Security Alliance 2009 Page 12 of 13 3/19/2010

13 Muckstadt, Conlin and Beadling 2. Self Evaluation Card: Are you prepared for 100% Screening? Cargo Security Alliance 2009 Page 13 of 13 3/19/2010