Avoiding a chokehold

Report focuses on vulnerable trade hubs, suggests shippers plan now for how to contend with a major disruption. By Eric Johnson It’s hard to wrap one’s arms around the idea of supply chain security, and there are a couple of reasons. For one, no two companies have the same profile, meaning every company is exposed to different sets of risks. Second, it’s frankly hard to visualize all the terrible things that could go wrong, both natural and man-made, much less prepare for those events. Yet failing to build resilience and flexibility into supply chains isn’t an option, either. A wide-ranging new report from the global consultant PwC attempts to give the industry a long-term playbook for how to go about improving supply chain security — in particular, proactively planning for hard-to-predict major events. The report, Transportation & Logistics 2030: Securing the Supply Chain, is the fourth in a series PwC is producing about what the global transportation and logistics industry will look like two decades from now. Much has already been written on the topic of supply chain security, so the report attempts to cover all the fundamentals, while also taking a forward tack. “While there has been some literature written, this publication is a future- and foresight-oriented document,” Gautam Basu, Nordic operations improvement consulting leader for PwC, and a member of the editorial board for the 2030 series, told American Shipper. “This particular series is future-oriented, so it was purposeful to look at a 20-year time horizon. Looking at investment decisions that carriers and consignees can use as a framework to harden their operations.” The report also focuses sharply on the bottlenecks and chokepoints of international trade lanes, which it calls the Achilles’ heels of the global transportation industry, stressing that shippers and carriers build alternative routings in their networks in case the worst happens. PwC estimates that 90 percent of global trade flows through 39 bottleneck regions. “All prognoses indicate that global trade will increase in the future and along these so-called gateway regions,” the report said. “It isn’t enough to simply react. Supply chain security is not crisis management. Supply chain security is proactive: It hinders attacks before they happen. Supply chain security will have failed if such catastrophes start to occur.” As a specific example, the report said 14.8 percent of containerized and air freight traffic moves through the Hong Kong-Shenzhen freight cluster, “so a disabling attack here would have a huge impact. Because logistics hubs drive economic activity, successful attacks could also threaten economic stability. “Logistics hubs are determined by trade flows, but chokepoints such as channels, narrows and bridges are critical spots for global supply chains, and they’re an unavoidable part of the landscape,” the report continued. “Chokepoints, geographic features where there’s only one narrow way across a strait, valley or bridge, are a potential weak point. Disrupting traffic through the Panama Canal, Suez Canal or the Strait of Malacca, for example, would slow down freight flows significantly.” That much may seem obvious, but comparatively little contingency planning has been undertaken to prepare for such disruptions, Basu said. “It’s difficult to come up with a quantifiable solution, because you’re looking at end-to-end supply chains with as many as 25 to 30 parties touching a container, for example,” Basu said. “But security is only good as its weakest links. When you look at supply chain networks, you’re looking at a global footprint. So you’re not only looking at your own operations, but your supplier, and your suppliers’ suppliers, even your suppliers’ suppliers’ suppliers.” A map in the report shows just how many vulnerable spots there are, either due to geographical constraints or because of poor economic or political conditions in nearby countries. “You look at these chokepoints and the risk levels, there are several factors involved,” Basu said. “There is the sociopolitical and economic stability of the regions touching these chokepoints. There are a number of parameters that have nothing to do with supply chain, but could affect supply chain.” Basu said the first step for a company is to map out its supply network, “starting as deep as you can from the upstream supply base. “You look at the dependencies within the network, and map the vulnerabilities and risks within that network,” he said. “You ask, what would be the contingency and business continuity plan to be proactive or reactive to an event? The auto industry and high-tech industries were severely hampered (after the Japanese natural disasters in March) because in many cases they didn’t have secondary suppliers outside of Japan. So it’s taken months of disruptions to recover and return to normalcy. So you come up with contingency and continuity plans based on those risks.” When asked how companies could realistically introduce alternative plans for bypassing such crucial chokepoints, he said the goal is just to get companies thinking about being prepared. “The main thing is to increase the flexibility of the operation,” Basu said. “The chokepoints are there and well traveled. Shippers and carriers still have to use, say the Gulf of Aden, but would it behoove them to find alternative routings if, for example, the threat level returns on a daily basis? Companies have to really put some operational flexibility into practice.” The report also looks at how hubs themselves may be affected by major disruptions. “The danger of significant disruption may be greater in smaller regions, which are dependent on single hubs or only a few critical infrastructural nodes,” the report said. “For example, Singapore is proud to operate one of the world’s busiest and most important intermediate hubs. Eighty-five percent of the total cargo traffic going through Singapore continues on to other regions, underlying its immense importance as a gateway region. An attack on Singapore’s harbor could have drastic consequences for the country’s economic prosperity — and also for the other regional economies, which use the harbor as a transshipment hub. Likewise, a piracy-induced long-range rerouting of ships around the Strait of Malacca directly to ports in China, Indonesia and Japan would be significant for the local economy of this region.” The report takes a pulse of 80 experts mostly based in Europe and Asia, and breaks them into two rough groups: • Those “concerned” that supply chain risks will become more troublesome through 2030. • Those who are “relaxed,” somewhat sure the industry’s security innovation will match the severity of most problems. “Concerned” experts in the study worried that “rising unemployment and an enlarging gap between rich and poor countries and individuals will drive even greater numbers of attacks on supply chains.” The “relaxed” experts in the panel said security measures are improving, with future innovation preventing the rate of supply chain attacks from growing. Concerned experts expect future attacks to be concentrated on these chokepoints, while relaxed experts see terrorists focusing their attention on more heavily traveled transport routes, not necessarily the specific cargo chokepoints. “That could pose its own issues, since as they point out, it will become almost impossible to prevent such attacks if they could take place everywhere within global supply chains,” the report said. Panelists overwhelmingly said regulations designed to increase security have increased transport times. “Increased security means additional time for verification, searches, audit and the like,” the report said. “The experts argue for the development of new performance criteria, too. Once shipping times increase, logistics service providers may look to shift the focus from delivery times to other aspects of customer service. For example, they may develop new service offerings around ‘secure’ delivery. And delivery to countries facing a severe threat may become a specialized service that only some carriers are willing to offer.” The panelists also foresee that security audits (along the lines of those mandated by the United States’ Customs-Trade Partnership Against Terrorism) will be mandated by governments by 2030. Incidentally, they saw this as a good thing. “The question some pose is not whether audits will happen, but rather whether the trusted shipper concept will reach back as far as the raw material stage,” the report said. But PwC doesn’t project governments taking a leading role in helping to execute supply chain security. While the regulatory demands will increase, the industry will have to develop its own measures to combat piracy, terrorism and natural disasters. In light of all these threats, PwC suggests that companies carefully consider the appropriateness of the long-time tenets of supply chain — lean and just in time. “Transportation and logistics companies will have to be much more flexible in their transportation routing in order to avoid ‘hot spots’ that pose problems for security in transit,” the report said. “And supply chain managers will need to take into account higher transport costs, longer travel times and potential problems meeting schedules when alternative transport routes are used. Business models based on time-critical deliveries may be squeezed out of the market.” Basu emphasized to American Shipper that lean principles need to be modernized to account for these new security dynamics. He said the typical tradeoffs for supply chain managers have been costs, service and lead time. “Lean and just in time were initiatives introduced in the ’70s and ’80s that focused on rationalizing the supply base,” Basu said. “What we’re seeing now is reliability is paramount. It’s not just a function of reducing costs. How much would it cost if your cargo was hijacked? And not just in terms of the cost of goods lost, but in terms of brand reputation. It’s having risk processes in place. That’s the new frontier of what we’re looking at.” Basu also spoke about scenario planning, a key tool used by PwC in the report, to predict the unpredictable events that could severely disrupt supply chains. Basu referred to them as “steep forces.” “We use this method to better understand high-impact, low-probability events,” he said. “What if insurance companies don’t insure cargo in high-risk waters? What if a cyber attack shuts down Schiphol airport or the Port of Long Beach? How do governments react to that? “Scenario planning prepares the organization to prepare for this. It’s not so much that these scenarios have to be 100 percent accurate, it’s more about how these organizations prepare for these types of scenarios. It’s a good road to go down to identify what these scenarios can be.” As the report phrases it: “Organizations need to understand their business environment, and the social and economic systems in which they operate. Careful observation can often turn up early indicators that a wildcard might be in the offing. And good planning is nearly always more effective than scrambling to react after the fact.”