Security must yield an economic benefit

Security must yield an economic benefit

Public discussion about the economics, affordability and effectiveness of supply-chain security is off target in two ways. First, while we address the importance of security costs to trade and commerce, we pay too little attention to the importance of those costs to security effectiveness itself. Second, we frame the discussion about security economics too narrowly, as "economic assessments" about security innovations' focus on costs and tend to ignore potential benefits. Both shortcomings slow progress on supply-chain security.

Most industry leaders and government officials emphasize the economic importance of implementing the right security measures. Clearly, added costs would drag down economic performance - reducing profitability, slowing economic growth and holding back prosperity.

Many of these people acknowledge that well-designed and implemented security programs can yield concrete business benefits, such as improved efficiency. That realization was an important step forward in framing the debate about security after September 2001. However, those of us who advanc-ed that argument did not go far enough.

If we do not craft and implement supply-chain security enhancements that yield measurable, traditional business benefits, then we fail on two dimensions. In addition to the widely appreciated economic harm, costly security measures will also be partially self-defeating in terms of security.

Expensive security, even if mandated and regulated, engages market dynamics in the wrong direction. When security is a net cost, the inescapable incentive is to oppose, delay, deflect and evade the incurrence of excess costs. Some will cheat on security to avoid costs, like they do on customs declarations and valuations.

Even a law-enforcement official who says the priority must be on security effectiveness must recognize that positive economic impact is the most effective route to enhanced security.

Industry and government leaders both focus too narrowly on security costs. Industry leaders discuss security innovations in terms of "affordability." Government programs, such as Operation Safe Commerce, use the broader language of "economic analysis" for their evaluations, but when you ask about methodology, it seems limited to analyzing the cost of innovations.

The most important security measures in terms of economic impact are those that change business practices. For example, ocean carrier executives commented recently on the unexpected benefits they reaped from the 24-hour manifest rule: Having complete shipload information a day in advance enables more efficient vessel planning and terminal operations - what began as a modest-cost security measure turned into an economic enhancement, at least for the carriers.

The most common prescription to improve both security and productivity is to enhance supply-chain visibility and control. Specific proposals include a mix of technology and business-process innovation, although the emphasis has been on technologies. Examples include smart containers, electronic cargo seals, and cargo-condition and threat-detection sensors as well as more effective advanced electronic shipment reporting to government agencies.

Industry leaders, especially among ocean carriers, have been intensely skeptical about the effectiveness and cost of new visibility technologies. Having worked around and with new technologies for most of my career, I believe skepticism is a healthy attitude to bring to the table. To be successful, new technologies must be well-conceived and well-implemented, especially in terms of integration into labor and business practices - and that is a non-trivial challenge.

We now have preliminary evidence that the business benefits of security-visibility enhancements can exceed the costs. The first phase of Smart and Secure Tradelanes reports benefits of about $400 per container load to shippers of average-value goods. Benefit estimates developed at Stanford University included modeling of safety stock and other inventory benefits. If the customers of ocean carriers can achieve those benefits from better visibility, then the carriers and terminal operators may also achieve meaningful business benefits.

Data from a single pilot does not make a definitive case for visibility innovations such as smart containers or e-seals. However, it should capture one's attention and focus our efforts. Future secure-trade pilot programs should concentrate on measuring the business benefits, if any, of security innovations while they collect data on security impacts and costs.

Michael Wolfe is a principal of The North River Consulting Group and a member of the Strategic Council for Security Technology. He writes and speaks about supply-chain security, productivity and technology. He may be contacted at noriver@att.net.