GLOBAL SUPPLY CHAIN VULNERABILITIES "A chain is no stronger than its weakest link" (William James)

Used by special permission from Dr Tom OConnor Email Dec 31, 2010 14:02

A global supply chain (GSC) disruption event can have significant consequences. Whenever the American West Coast ports shut down for more than a day or two, the loss to the U.S. economy is between $10 and $20 billion. Port disruptions from hurricanes cause losses as high as $180 billion (Werling 2007). Far more damaging would be a terrorist attack on one or more maritime ports with a weapon of mass destruction or radiological dispersal device. Such an attack could very well create a "tipping point" that results in a "cascade effect" leading to economic chaos and political destabilization on a global scale. There is an inherent lack of resiliency to the GSC with many "jugular points" of vulnerability. The International Chamber of Shipping estimates that 90% of world trade involves the maritime domain, making it the life blood of the global economy. Clearly, no one wants global economic collapse or trans-continental instability, so GSC security must be of paramount importance. World-wide maritime activity involves more than 30,000 ocean-going ships (over 10,000 tons) underway on any given day. They are operated by over 150 different national flags, with increasing foreign ownership of shipping and U.S. ports. In a typical year, U.S. ports receive about 60,000 calls from such ships, and most are unloading their intermodal shipping containers. About 500 million of these containers are received in the U.S. every year, and about 16 million of them are loaded onto trucks or railroad cars for transhipment throughout the U.S. The process of off-loading is mostly computerized and automated. Also, numerous smaller ships arrive and unload their cargo every day, and none of the figures cited here even count the significantly growing air cargo transportation traffic. In fact, air cargo transportation is growing so rapidly that by 2025, it may very well achieve the levels that maritime transport now enjoys. In order to ensure both domestic and global economic security, maritime security must incorporate GSC security, and it all begins with education and awareness of what GSC is and its inherent vulnerability. WHAT IS A SUPPLY CHAIN? A supply chain is a system of moving a product or service from a supplier to a customer. The assumption behind the "chain" part of the model is business thinking that any distribution function adds value via the organizational benefits of putting people, technology, and equipment to good use together. It is similar to, but not the same as, logistics (which adds the value of time, storage, and getting finished products to the right customer). Supply chains, by contrast, are intimately connected with the movement of raw materials (natural resources, parts, or recycled material) in the most cost-efficient way possible (given that different suppliers may want to team up to save on distribution costs to the same customer, or the distributors may team up, or the customers may team up). The

goal is to best match supply with demand by getting suppliers, manufacturers, and retailers all working together on the same page. The following illustration of a basic supply chain may be helpful:

A typical supply chain usually starts with extraction of some raw material followed by a series of intermediate production steps (such as refinement, sorting, or merging) as well as storage in nearby places. Further (and more finished) production steps are usually done in remote geographical locations (near a port) and generally involve larger storage facilities. These larger storage facilities are traditionally considered the "suppliers" (the original raw material handlers being called the "supplier's suppliers"). Suppliers control the market prices that customers (and ultimately the "customer's customers") compete for, and each customer seeks to minimize their costs with little knowledge of other players in the game (except for when connectivity occurs by trade agreement, alliance, or partnership). Connectivity (one customer finding out about another customer) may also occur via tariff practices in some countries with particularly transparent business or banking operations. Otherwise, the general rule is an open market and free enterprise, making it entirely possible that some customers pay more for the same product shipped from the same location. In any event, the distribution costs are minimized by same shipments to roughly the same location for different customers. Not only is efficiency gained on the distribution side, but other market mechanisms (pricing, inventory levels, the building of new warehouses) help the whole supply chain produce overall efficiencies. Since the 1980s, a whole field called Supply Chain Management has emerged which has computerized (and made even more efficient) the processes of sourcing and coordinating purchases from suppliers. SUPPLY CHAIN VULNERABILITIES There are so many ubiquitous types of risk that it would be pointless to list them all, and much of what constitutes good risk management is simple common sense. What Lynch (2009) makes clear is the only way a supply chain can work is one for all, all for one. In today's world, it is impossible to separate the supplier from the company or the company from the customer. Over the past decade, there has been relentless customer demand for better value at less cost, individual customization, greater choice, faster delivery, higher quality, exceptional service, and more recently increased environmental and social consciousness. However, at the same time, the supply chain footprint has changed -- with

outsourcing, off-shoring and customer/vendor empowerment -- so the organizations exposure to uncertainty has increased. Risk and uncertainty is dynamic and multi-faceted. Lynch (2010) suggests the following ten essential laws: If you don't manage and lead change, you'll have to surrender to it -- you can't change the past Begin by defining the paradigm, don't fight the parasite -- risk is like a constantly mutating virus Manage your business DNA -- know your business model, know your surroundings Demand trumps supply -- analyze market needs and customer factors Never set up your suppliers for failure -- trust but verify Focus on managing the weakest links -- find the best foreign labor you can afford Managing the parts does not equal managing the whole -- don't get sidetracked dealing with thieves and pirates If risk management isn't part of the solution, it will become the problem -- develop a predisruption intelligence plan The best policy is knowing what's in your policy -- choose your insurance wisely and know its benefits Manage the risk as you manage your own -- eventually, your supply chain links will become unique and personal, so let them become personal because you'll develop whistleblowers you can rely on THE WORST RISKS Clearly, the worst risk is the "Nuke in the Cargo Hold" scenario. Muzinich (2010) reports that since 1995, there have been 18 cases of illegal maritime trafficking of weaponsgrade highly enriched uranium and plutonium. The country of North Korea provides some examples of shipping banned weapons. For example, in December of 2002, the Spanish navy intercepted the So San and found several scud missiles capable of being fitted with nuclear warheads headed toward Yemen. In the summer of 2009, North Korea was caught at it again, with the Kang Nam 1 incident, which involved a ship headed toward Myanmar (Burma). REFERENCES Aven, T. (2010). Misconceptions of risk. NY: Wiley. Center for American Progress. (2008). Safe at home: A national strategy to protect the American homeland: The real central front. Washington DC: CAP. Geman, H. (2009). Risk management in commodity markets: From shipping to agriculturals to energy. NY: Wiley. Lynch, G. (2009). Single point of failure: The ten essential laws of supply chain risk management. NY: Wiley. Muzinich, J. (Aug 03, 2010). "The nuke in the cargo hold." InsiderOnline, Heritage Foundation. [online] Reform Institute. (2008). Chain of perils: Hardening the global supply chain. Alexandria, VA: Reform Inst.

Werling, J. (2007). "The impact of port disruptions on the U.S. economy." Dept. of Economics: Univ. of Maryland. Last updated: Aug 08, 2010 Not an official webpage of APSU, copyright restrictions apply, see Megalinks in Criminal Justice O'Connor, T. (Date of Last Update at bottom of page). In Part of web cited (Windows name for file at top of browser), MegaLinks in Criminal Justice. Retrieved from http://www.drtomoconnor.com/rest of URL accessed on today's date.