Paying for Protection in the Transportation Market

May 22, 2006
Ground transportation pays plenty to keep supply chains safe

Anyone who's been following the recent Dubai Ports World brouhaha might believe that America is most vulnerable to terrorist attacks against its seaports. They would be right to be concerned about that possibility. But the need for security hardly stops at the gates of U.S. ports.

Air and ocean security have been getting most of the attention lately. But few seem to notice that there are millions of potentially dangerous targets moving every day in this country's domestic transportation and distribution infrastructure.

For instance, every day a half-million hazardous materials shipments move by truck, and thousands of rail cars filled with chemicals travel around the country. A terrorist with a little imagination and burglar's tools could target a warehouse where chemicals and other potentially deadly materials are stored.

There doesn't seem to be a national strategy for the security of domestic transportation and distribution. Instead, these market segments are subject to a hodgepodge of regulations. But there is a common denominator: money. Railroads, motor carriers, and warehouses are paying plenty to keep their customers' cargo safe, and they seem intent on passing at least some of those costs on to shippers.

The View From the Rails

Nobody in the railroad industry is against better cargo security, but carriers do worry about the cost of increased security inspections and delays at border crossings. Nancy Wilson, vice president of security for the Association of American Railroads, says railroads have no choice but to ask shippers to pay more. "Our rates are based on overall operating costs, and security is part of that overall cost."

State and local regulations also weigh heavily on rail executives' minds. Any operator will tell you that there's no bigger time- or money-waster than having to comply with 50 state regulations when one federal law would do. And now even municipalities are ruling in the name of security which cargoes they will or will not accept.

One example is the recent move to ban hazardous rail shipments in Washington, D.C., where rail cars pass within 300 yards of the U.S. Capitol. If the disputed rule should be upheld by the courts, carriers will be faced with a confusing patchwork of regulations. "We do know there are a number of other jurisdictions poised to issue similar bans based on the outcome of that case," Wilson says.

There's also concern about the frequent turnover among Department of Homeland Security officials in charge of freight security. "I see the government making the same mistakes over and over," Wilson says. "I don't want to say they're not responsive. But I will point out that with the perpetual musical chairs going on with DHS and its field offices, we're constantly reeducating government officials."

No More Free Ride

Truckers also face costly constraints on their operations. Drivers for New England Motor Freight (NEMF), a leading regional LTL carrier, experience daily delays while navigating enhanced security measures in and around New York City, notes Vice Chairman Jon Shevell. Drivers are forced to pull over more often to have their loads inspected, and morale suffers when they must show the same loads to different officers, he says.

Stepped-up security checks also incur costs in terms of manpower. The trucking industry is already facing a shortage of up to 20,000 drivers per year; every measure that tightens driver security makes it more difficult to recruit new personnel, trucking executives say. That leads to higher costs because trucks that would otherwise be in commerce must sit idle.

Truckers, who operate on thin margins at the best of times, are already coping with diesel costs that have doubled in four years, plus higher costs for insurance, wages, and real estate. They simply can't afford to absorb additional costs, they say. "Shippers have to realize it's a new world out there," says Shevell. "The days of the free ride are over."

Truck-terminal security does not come cheap. Still, carriers should implement stringent security measures because it's sound business practice, says John Tabor, director of corporate security at National Retail Systems (NRS), a third-party logistics and trucking firm. NRS' 80-acre facility in North Bergen, N.J., is secured by special fencing, lighting, and closed-circuit cameras, among other measures.

But not all security efforts are pricey. Gene Klein, supply chain manager for food-service giant Sysco Corp., praises the Department of Transportation's Highway Watch program, which enlists the eyes and ears of the nation's truck drivers in the war on terrorism. "It raises awareness and sends the message that we're not soft targets anymore," he says. "There's no cost to that." Although such programs can be very effective, he adds, they don't eliminate the need for other security measures.

New Rules for Warehousing

Warehouse security experts say their jobs have changed since 9/11. Although it's still about protecting merchandise and personnel, the "how" and "against whom" have expanded.

"Everybody wants to do what's right, and not have their goods held up," says Robert Shaunnessey, executive director of the Warehousing Education and Research Council (WERC). "But there are some complicated issues that raise questions about security. The problem nobody wants to do talk about is if somebody wants to break in and take over a building, they can do it."

Some warehouse operators say security regulations for their industry may be costly, but they also pay dividends in reduced losses from theft, lower insurance claims and premiums, and improved efficiency-provided rules are uniformly set and enforced.

Warehousemen also give high marks to the U.S. government's Customs-Trade Partnership Against Terrorism (C-TPAT) program. They say C-TPAT, which aims to improve the security of international supply chains, helps them because imported merchandise is screened long before it reaches their facilities.

Warehouses that process, pack, or store food, drink, and dietary supplements must comply with the Public Health Security and Bioterrorism Preparedness and Response Act of 2002. That law requires them to track, verify, and document exactly which parties have "touched" such products. That's added a significant administrative and cost burden on the industry.

Sysco's Gene Klein characterizes the private sector's response to the Bioterrorism Act as an effective effort to protect the nation's food supply. "This is not an adversarial relationship with the government, it's a hand-in-hand partnership to find a solution that works for everybody," he says.

More background checks

The pressure to step up background checks for transportation workers is increasing. A "Transport Workers Identification Card" (TWIC) is now in development. This national ID card would be required for as many as 10 million workers in the trucking, rail, air, maritime, and related industries.

The Transportation Security Administration estimates that over the next three years, 400,000 truck drivers annually will have to undergo up to four separate background checks: for the Commercial Drivers License hazmat endorsement, for port and aviation work, for their own companies, and for a federal fingerprinting requirement. No doubt more than a few will simply choose another profession.

That's what the transportation industry must deal with now. And what would security experts like to see coming out of Washington in the future? "I would like to see inspections based on threats," says the AAR's Wilson. "I'm not sure what we have today is truly risk-based."

Truckers Worry About Security Costs

The trucking industry doesn't just need better locks, experts say. It also needs real-time satellite tracking for all trailers; hand-held computers that tell drivers what is on the truck and what is not; and thorough background checks on drivers to ensure that one carrier's bad apple doesn't turn up in the cab of another's truck.

In principle, motor carriers are all for security; after all, it will protect their customers' shipments from theft as well as from terrorist attacks. But because the U.S. trucking industry is so large-more than 7 million drivers are involved in interstate commerce-and the average profit margin is 2 to 4 cents on the dollar, any mandate to increase security is seen as cost-prohibitive.

As security technology, such as trailer-tracking devices becomes more affordable, truck security overall will improve. But the technology itself needs to be smarter than the criminals that seek to defeat it.

"Thieves know how to disable a GPS (global positioning satellite device)," says John Tabor, director of corporate security at National Retail Systems (NRS), a third-party logistics and trucking company. "What they can't defeat is a box inside a trailer containing a tracking device. The technology piece is catching up to the thieves in that respect."

The driver, meanwhile, may be the weakest link in the security chain. It's estimated that up to one-third of all truck drivers do not undergo thorough background checks. Thanks to the driver shortage, which the American Trucking Associations pegs at 20,000 drivers a year and expects to reach 80,000 in the next decade, there's always some carrier willing to take a chance on a warm body.

A typical background check costs somewhere around $100. That may not sound like much, but it adds up fast. According to Tabor, those checks aren't always reliable. "We've found with a lot of drivers, you call and get a clean check even though you later discover that driver has a history of law-enforcement violations."

Some carriers would like to see a domestic program similar to the Customs-Trade Partnership Against Terrorism (C-TPAT), which helps secure international supply chains. "There's nothing in place for a domestic carrier to be C-TPAT-certified," Tabor says. "Because I don't cross a border, I'm not eligible for that program. But I'm moving 9,000 trailers at any one time on the highways of this country. We should know what's in those 9,000 trailers."

The recent emphasis on extending border security out to encompass other countries is fine as far as it goes, says Tabor. "But all those 9/11 terrorists were sitting in place in the United States when the attacks happened," he points out. "We're not doing anything to strengthen our infrastructure."

Cargo Theft Gets Some "Respect"

A little-noticed provision in the recently renewed USA Patriot Act now places cargo theft among a compilation of serious crimes that the FBI tracks nationally through its Uniform Crime Reporting Program. It's a change that may go a long way toward making a dent in cargo crime, which is estimated to cost U.S. business a staggering $25 billion a year.

In the past, cargo crime did not have its own category in police reports. Sometimes it was listed as larceny; other times it would be recorded as motor vehicle thefts or even as "miscellaneous" crime. And there was no central database of cargo crimes that shippers, carriers, and law enforcement could rely on. The result has been that efforts to solve such crimes have largely been ineffective, experts say.

Although cargo-crime task forces have been established around the country in cities such as Los Angeles, Miami, and New York, they tend to be underfunded and underappreciated.

That situation should improve with the addition of the cargo-crime category to the national crime-reporting system. That provision was included in the Cargo Theft Prevention Act, sponsored by Rep. Cliff Stearns (R-Fla.). The bill was rolled into the Patriot Act, which President Bush signed into law on March 8.

The Patriot Act also increased the penalties for cargo crimes. Theft of cargoes worth less than $1,000 can now draw three years in jail. Theft of cargoes worth in excess of $1,000 can now mean up to 15 years in jail.

Logistics Management Contributing Editor John D. Schulz is a veteran transportation and logistics journalist and industry consultant.