Avoiding Post-Traumatic Theft Disorder

Avoiding Post-Traumatic Theft Disorder

In fall 2009, a truckload of computers was stolen from a manufacturer’s distribution center in the Midwest. The resulting claim of $500,000 did major damage to the claims history for the manufacturer. The company spent $75,000 on a closed-circuit television system, an improved alarm system, new fencing and an upgraded guard service — all of it likely to be a big help in preventing another major theft at the facility. Of course, the load of computers was still gone.

Building a security system after a major cargo theft is like shopping when you are hungry — everything looks good, and you may buy things you don’t need or can’t use.

We could call this “post-traumatic theft disorder.”

To avoid that, a security manager must build a case for prevention, urging an investment that minimizes risk and helps corporate leadership understand the contribution a true security program provides.

Starting this process requires an understanding of the risk and must start with the product itself. Is it easy to handle and store? Is it high in value by piece, or only in bulk? Can the loss of the product affect the investment in unique or first-release items? Is there a threat to the public if the goods are not used or stored properly, or if they are misused (such as with explosives)?

The risk of theft hits various segments of the supply chain differently, and that also should be reflected in the assessment of the risk. The manufacturer (shipper), for example, is more concerned with brand integrity and contamination of certain products, while the primary concern of the carrier may be its relationship with the shipper as its customer. The warehouse operator’s concern is likely similar to that of the carrier, but the legal liability may not be the same as the carrier’s liability.

Value to each of the parties, then, differs by their positioning and relationships within the supply chain.

Cargo theft is a relatively low-frequency, high-impact event, which again leads to some of the difficulty security managers have in explaining the need for supply chain security to corporate management. Here are three approaches to selling the concept to management:

-- The security manager for a cell phone manufacturer wants to upgrade warehouse and transit security. The security manager can easily make the case that a warehouse theft could cost $10 million to $15 million, and $2 million from a truck.

The phones likely would be sold at a significant discount, and the manufacturer might have to provide services and warranty protection for individual buyers, even if it could prove the phones were originally stolen, because the buyers would be far downstream from the thieves and couldn’t practically be held culpable.

A more abstract argument can be made that stolen cell phones are used by criminals, and even by terrorists in the manufacture of explosive devices.

More pragmatically, insurance rates would rise, customers would be deprived of the phones, an investigation would take time and cost money, and the manufacturer might have to eat the cost of a deductible.

-- The security director for a pharmaceutical company wants to place covert tracking systems in all loads in transit. A loss easily could reach $30 million and have a major impact on insurability. And the Food and Drug Administration issued a letter in April indicating the FDA may request the recall of pharmaceuticals already in the supply chain when a theft occurs.

Value for this company could be 10 or 20 times retail, plus the risk of harm to the public if the product is adulterated, with major damage to corporate reputation and increased governmental scrutiny. Those issues present a strong case for management to consider.

-- A metals manufacturer makes critical parts for a high-tech medical equipment product. The parts aren’t particularly expensive to make, but the company is relatively small and is pressed to keep up with demand. A truckload is worth only $50,000, but replacement of any one truckload would take at least three weeks, and the business represents nearly half of annual company revenue.

The logistics manager wants to place tracking devices with initial cost of $400 and a $55 monthly contract in every load so they can be recovered quickly if they’re stolen. The value here is in business risk rather than the intrinsic value of the product. If management sees only the replacement value of the product and not the business risk, additional security may be hard to sell.

Security managers need to think about value within the context of their own business and their customers. When selling cargo security to management, security managers need to consider value as both physical and contingent costs.

How a company is exposed when cargo is stolen is always more than what it costs to replace the goods, and the impact of contingent costs may far outweigh the physical loss. The best approach is to put prevention first and avoid becoming a victim of “post-traumatic theft disorder.”

Alan F. Spear is director of cargo security loss control at Chartis and chairman of TAPA Americas. He can be contacted at alan.spear@chartisinsurance.com.