Supply Chain Security & Productivity

Supply Chain Security & Productivity Freight Security Issues Talking Freight Seminar Series 15 September 2004 Chelsea C. White III The Logistics Institute

Claim & Outline • Claim: New U.S. security initiatives improve U.S. homeland security and have ancillary benefits, such as improved productivity and reduced pilferage (“win-win”). • Outline: • CSI, ‘pushing back the borders’ • Off-shoring and supply chain productivity • Importance of foreign trade to the U.S. economy • Example

Goal • Pre-screen ocean containers at foreign ports • Stop contraband/weapon before departure • “Distribute” screening processes • The good • Uses (potential) idle time at foreign ports to conduct screening • Have forced shippers to improve asset visibility • The not so good • Information timing requirements • Disruptive effects on port export or transshipment operations and supply chains?

CSI + 24 hour rule • Carriers and/or NVOCCs must submit cargo declaration 24-hours prior to loading a vessel at a foreign port • Much earlier than previous (hours prior to arrival) • Freight description • “precise narrative” or 6-digit commodity code • No more: “freight-all-kinds”, “various retail products”, … • Difficult for consolidators? • Requires automated data transfer to CBP • Confidentiality • Rule allows targeting of containers at CSI ports

Supply Chain Productivity • A key reason for off-shoring is cost • Costs under consideration: • Product • Logistics • Transportation • Inventory • Storage • If total cost is lower off-shore, then consider going off-shore

Effect of Lead Time on Profit • Lead Time: the time it takes to move a good from origin to destination • Geographical separation of manufacturing and market results in: • Longer lead times (bad) • Higher lead time variability (bad) • Lower unit production costs, if component manufacturing occurs in an inexpensive labor market (good) • Decreases in lead time mean and variability and in unit production costs help justify the separation • Costumer service level (CSL): the probability a customer will find the desired product on the shelf • Safety stock (SS): the amount of extra inventory kept on hand to insure the CSL is achieved.

Lead Time Increase Results in Safety Stock (and hence cost) Increase

Variability in Lead Time Reduces Profits

Reducing Unit Production Cost Increases Profit

U.S. GDP & Trade HistoryGDP growth has averaged 3.2 %/year; trade in goods, services is now 22% of GDP Source: Bureau of Economic Analysis

21st Century/Information EraGlobal economy is being built on information, telecommunications, and low-cost, long-haul transport by water, rail, and air; north-south NAFTA trade is expanding rapidly Atlantic Coast Canadian Border Pacific Coast Gulf Coast Source: Transearch and FHWA Freight Analysis Framework Project Mexican Border

China in the Global Economy • China is the “world’s largest factory” in the early 21st century, it produces: • More than 50% of the world’s cameras • 30% of the air conditioners and TVs • 25% of washing machines • Almost 20% of refrigerators • More than 33% of DVD-ROM drives and personal desktop and notebook computers • About 25% of its own mobile phones, color televisions, personal digital assistants, and car stereos Note: Information on this page is based on December 2003 issue of Foreign Affairs. Reference: C. Kwan, Deloitte

China in the Global Economy • China’s consumption rate grew annually at about 8.8% to 10.1% from 2000-2003 • Color televisions sets in almost every urban home • Refrigerators and washing machines in more than four out of five homes • Videodisc players and air conditioners in 50% of homes • Microwave ovens in almost 1/3 and computers in 1 out 5 • Biggest market for cell phone with 200 million in use and average monthly sale of about $2 million Note: Information on this page is based on December 2003 issue of Foreign Affairs. Reference: C. Kwan, Deloitte

Expanding U.S. China Trade Relations U.S.-China Trade ($US billions) • Sino-U.S. bilateral trade expanded 23.2% in 2003. • U.S. exports to China rose 28.5% in 2003. • U.S. imports from China rose 22.3% in 2003 • China is the second largest trading partner of the U.S. Source: U.S. International Trade Commission. Ref: C. Kwan, Deloitte

Possible Supply Chain Productivity Impacts • Statement: “CSI has forced us into improving visibility … haven’t seen any negative.” • However, there may be situations where inefficiencies may occur. We illustrate with an example.

Possible Supply Chain Productivity Impacts Consider the following two-scenario example. For both scenarios: • Goods move from origin port (e.g., Singapore) to destination port (e.g., LA) • Single product is shipped in units of container loads • Vessels leave the origin for the destination periodically • Total travel time is a fixed, known number of days • Objective: keep customer service level constant using safety stock

Scenario 1: Inspect at origin port • Port of origin is CSI compliant • Each container may be inspected at origin port before it is loaded on a vessel bound for the destination port • If a container is selected for screening, the inspection time is variable • All containers arriving at destination port receive ‘green lane’ treatment and are not inspected • 20% likelihood of ‘role over’ for inspected containers • Time between sailings is 7 days

Singapore Los Angeles unload load 15 days inspect Inter-sailing Time: 7 days Scenario 1

Scenario 1

Scenario 2: Inspect at destination port • Port of origin does not conduct security screenings • Each container may be inspected at destination port upon arrival • If a container is selected for screening, the inspection requires a stochastic service time • All containers arriving at destination port receive ‘green lane’ treatment and are not inspected

Non CSI port Los Angeles unload load 15 days inspect Scenario 2

Scenario 2

Summary • Example – illustrated when ‘pushing back the borders’ may adversely affect supply chain productivity • More detail on the research can be found at www.isye.gatech.edu/setra/

Supply Chain Security & Productivity