The Strongest Link

Oct. 27, 2008
Protecting a company's most valuable asset, its brand, starts from the top of the supply chain

Protecting the corporate name or brand is a business strategy that dwarfs most other threats to profits and asset vulnerabilities. Theft, fraud, product tampering, counterfeiting and diversion can quickly erode consumer confidence, destroy profitability and markets faster than any other form of business loss.

Most of us think of theft in terms of single events, when in reality, the problem is far more dynamic. The cumulative effect of these seemingly innocuous losses can be in the millions of dollars. To the manufacturer or retailer, industrial pilferage curtails the ability to create wealth. It reduces markets and destroys marketing efforts, because without products to sell, clients will shop elsewhere.

Domestic and international supply chains are the breeding grounds for in-transit loss. The cost of theft of in-transit goods is estimated at easily more than $15 billion domestically and growing.

Understanding the Problem

To deal with the conditions of loss and their ramifications at the retail and consumer levels, you must understand both the vulnerabilities of unattended cargo and what actions can be taken to limit this vulnerability.

There are numerous best practices shippers can employ for the containment, security and control of unattended cargo, many of which are merely procedural and have no real cost. To stop theft, companies must seek solutions that harden targets, deter thieves and secure their unique supply chain against known threats. In order to be most effective, each security element must be planned with the entire supply chain in mind, including the integration of carriers and recipients into the chosen methodology.

Negative Impact of Theft

Although theft losses fall well behind damage in overall dollars, theft losses have a vastly greater negative impact on retailers and manufacturers. For drugs or food out of the care and control of the owner, for example, must be destroyed by law, even after recovery. For an electronic products manufacturer, a theft could mean the business, brand and product are competing with itself — against authentic stolen versions of its own brand in the same markets. When theft becomes a part of product distribution, brand owners lose their ability to determine markets and price points, because unauthorized resellers are marketing like goods. Further, businesses that deal in ancillary sales such as warranty protection, service contracts and peripheral devices lose their ability to attract these dollars for their resellers — instead they wind up servicing stolen goods.

When manufacturers lose control of which distribution channels its good are coming from, the result is a cheapening of the brand in the eyes of the consumer and an instant loss of market for authorized resellers. Only .5 percent of containers arriving at U.S. ports are currently opened for inspection; however, none of the inspectors are looking for stolen, counterfeit or diverted products. Because there is no possible way to identify the counterfeit or diverted goods, nor is Customs empowered to do these searches or identify such goods, the illicit products move freely in what can be termed an underground supply chain. At this point in time, the focus of government security at the port of entry level, is the interdiction of weapons people and illegal drugs coming in by truck, air, rail or container from points outside our borders. Federal mandates have moved every counter-theft task force to counter terrorism missions.

Economic Terrorism: A New Vulnerability

Another vulnerability that brand owners and retailers face is economic terrorism — using containerized freight to deliver a weapon seamlessly to their door. This can be a terrifying thought, as a weapon disguised as cargo can pass onto the dock of any store, warehouse or manufacturing plant with little effort. Trucks possibly filled with explosives are typically allowed to move through yards even if guards are present, so long as the paperwork and vendor documents are in order. Rarely do guards check trailer or container contents prior to allowing cargo to enter facilities. This is especially true in normal truck deliveries to retail stores, where no gates, guards or process controls are in effect.

Home-gown terrorists present an equal threat to the economic security of the United States when compared to foreign or offshore vulnerability.

Bolt Seals

Many foreign and domestic shippers seal freight containers and trailers with bolt seals, which cannot guarantee that the container doors have not been violated. The ease with which a container or truck door can be surreptitiously opened with a bolt seal in place is frightening, yet this tool was recommend by the ISO in its C-TPAT program under recommended best practices as detailed in ISO 17712, (that portion of which has now been retracted for obvious reasons).

Unless a shipper secures the keeper rods of a container or trailer with a cable or lock rod, the shipper is always vulnerable to forced entry through the bypass of the bolt. Additionally, unless a shipper uses indicative technology in concert with barrier technology, no one is empowered to inspect these doors before opening.

Lack of Prosecution

Supply chain losses account for untold millions in losses, yet the reporting of these losses is a rarity. Freight or cargo losses are considered low-priority property crimes and are rarely prosecuted fully in most states. Unfortunately, most cargo criminals are back on the streets to repeat their theft in days. It is typically not until they are apprehended by a cargo theft task force and prosecuted accordingly do they serve jail time.

That Federal jurisdiction would take precedence on interstate commerce is a misconception, because the federal government has disbanded all FBI cargo theft task forces in light of a more pressing threats of terrorism.

Since cargo theft (except where cigarettes and their federal and state taxes losses are concerned) rarely gets on the federal radar screen, brand owners, carriers and shippers have little solace in law enforcement as a viable preventative remedy.

Additionally, brand owners rarely report certain types of losses to their insurance companies or carriers, not only because of the negative press that can follow such an event, but also because, in many cases, insurance is not a viable financial recovery method.

Carrier's coverage can be non-existent or revert to the Carmack Amendment at 60 cents-per-pound, regardless of commodity (or they may be exempt from any responsibility if their employees were involved). Insurance (less deductible thresholds) is only effective if purchased for a particular loss or damage event.

The Impact of Theft Across the Chain

There are certain unique negatives to associate with theft-related losses for each member of the logistic chain, and each has its own unique financial downsides.

The manufacturer must consider full financial loss if goods cannot be recovered, because of the high cost of re-manufacturing, the disruption to the supply chain, the possibility of higher insurance costs and higher freight costs for the second shipment. Additionally, the manufacturer must incur investigative costs, and possible customs payments for the original shipment and the replacement. In cases where goods mysteriously disappear, litigation and subrogation throughout the supply chain will dwarf the costs of the original product loss.

The carrier many not own the goods, but it still feels considerable impact from losses. The carrier has possibly lost the equipment carrying the load and, based on the contract of carriage, may be responsible for the loss if it is higher than the carrier's deductible threshold. Most carriers are under-insured, but shippers consistently fail to read their tariffs to know their limits of liability before selecting carriers. In this highly competitive market, a carrier can easily lose major clients if its statistical “theft losses” are made public. By losing tractor, truck, chassis or trailer assets, the carrier may be effectively limiting its ability to do business at 100-percent capacity, thus adversely affecting the ability to create profits.

For the retailer, in-transit product losses represent a far greater threat to profitability since without goods to sell, clients will go elsewhere.

Cargo Security Is A New Business Paradigm

Failure to be proactive in supply chain security can result in catastrophic losses. Other people handling your freight do not have the same ethical standards as you.

Be certain to create standards of care that ensure and/or identify security issues before the goods change hands. If everyone in the supply chain benefits from the security procedures and products you employ, then everyone will use them. By creating a business culture of product and brand protection through the use of technology and process controls, you empower your employees and those handing your goods to take better care of them.

SIDEBAR: Cargo Security Best Practices

Vulnerability Assessment for those exposed to theft should:

1. Identify risk exposure to your product or company.

2. Measure your risk with known metrics and intelligence in your business.

3. Consider how your security plan enables you to recover after the loss or disaster and decide on the most appropriate defense strategy.

4. Fund and implement solutions based on the financial impact of a loss to your company.

5. Monitor and measure the effectiveness of your planned solutions and update them over time.

Planning and Execution of security processes for carriers and shippers

1. Develop a written cargo security action plan covering all aspects of your supply chain. Include risk assessments, carrier selection, packaging, sealing and contingency planning for a disaster.

2. Set shipping and receiving standards of care for your employees, carriers and for your vendors.

3. Work with your carriers or shipper counterparts to assist them in creating a secure supply chain.

4. Train everyone on the techniques you employ.

5. Secure your shipping and receiving sites.

6. Review levels of liability with vendors, including bills of landing, carrier tariffs and responsible parties for losses; and coordinate that data with your insurance provider.

7. Log, audit, track and monitor all loss events.

8. Know who to call and action to take in the event of theft.

9. Assess shipping methods for the most appropriate for each item or class of goods. Review the speed, efficiency, routes, safety and security of your supply chain and audit them periodically.

10. Integrate loss prevention personnel and standards of care in your logistics department as well as into your business culture.

11. Develop a strategy which analyzes your strengths, weakness, vulnerabilities , threats to your company and for conditions of loss or terrorism. Once identified plug up the gaps!

Erik Hoffer is a graduate of Northeastern University, holding a degree in Industrial Psychology. He also holds an Associates degree in Transportation and Traffic Management from NYU. He recently retired from the company he founded in 1977 which is now a public corporation, manufacturing his patented technologies in barrier and indicative sealing devices. After a short retirement of almost 1.5 hours, he began a new company in Southwest Florida manufacturing more of his patented anti theft devices for trucks and trailers. Mr. Hoffer has over 20 original product technologies to his credit along with many patents.