Freight Transportation Security and Productivity

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					   Fifth EU/US Forum on Intermodal Freight Transport
                        Jacksonville, Florida
                         April 11-13, 2002




                Freight Transportation

            Security and Productivity

                       Complete Report




Author:         Michael Wolfe
                North River Consulting Group


Prepared for:

                Office of Freight Management and Operations
                Federal Highway Administration
                U.S. Department of Transportation
                                                   Preface



      No essay on freight transportation security and productivity is likely ever to be
      truly “done.”      This important topic is dynamic, and Federal Highway
      Administration and the author welcome comments and suggestions. The points of
      contact are below.

      The paper is another in a series that provide analysis and discussion of the trends
      and issues affecting freight transportation productivity in the United States and
      North America. The working papers are circulated to generate discussion about
      emerging freight issues and may be updated in response to feedback from public
      and private sector stakeholders.

      The opinions expressed in the working papers are those of the authors, not the
      Federal Highway Administration.

      The series of trends and issues papers is available at FHWA’s web site:
      http://www.ops.fhwa.dot.gov/freight/adfrmwrk/index.htm.

      This working paper was prepared by Michael Wolfe of The North River Consulting
      Group, a member of a Battelle Team providing research and analysis support to the
      Federal Highway Administration, Office of Freight Management and Operations.
      The papers were prepared under contract DTFH61-97-C-00010, BAT-99-020.

      Bruce Lambert of the Office of Freight Management and Operations is the project
      manager. He is the primary contact for comments about all of the papers and may
      be reached at 202-366-4241, email Bruce.Lambert@fhwa.dot.gov.

      Mr. Wolfe may be reached at 781-834-4169, email noriver@att.net.


      A note for readers: If you are reading the MS Word version of the main paper on a
      computer, a navigable outline is available from anywhere in the paper. Click the
      “Document Map” icon on the Standard Toolbar to turn the map on or off. The map
      outline is live—click any topic and jump to it from anywhere in the paper.
      The paper is formatted to print best on 8.5 by 11 inch paper.




FHWA Office of Freight Management and Operations                                     Page ii
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                                        Table of Contents




        Executive Summary                                                I

      1. Introduction                                                    1
  Goals and Approach of the Paper                                        2
  The Connection Between Security and Productivity                       3

      2. Threats, Vulnerability, and Countermeasures                    6
  Threats                                                               8
  Vulnerability                                                        11
  Countermeasures                                                      13
    Types of Countermeasures                                           13
    Responsibility for Countermeasures                                 14
    Scope of Countermeasures                                           15
  The Security Planning Cycle                                          16

      3. Impact Assessment                                             17
  Three Types of Impacts                                               17
    Primary Impacts and Direct Secondary Impacts                       17
    Indirect Secondary Impacts                                         20
  Implications of Indirect Secondary Impacts                           21
    Security Costs                                                     22
    Operating Practices                                                26
    Long Term Infrastructure Requirements                              33
    Factors That Compound Economic Risks                               34
    Strategic Mobility and Defense Transportation                      39

       4. Win/Win Mitigation                                           41
  Perspectives on Win/Win Requirements                                 41
    Security Perspective                                               41
    Supply Chain Perspective                                           42
  Approaches to Win/Win Mitigation                                     43
    A Strategic Template: Integrating Both Perspectives                43
    A Vision of the Possibilities                                      44
    Improving Supply Chain Management                                  45
    Improving Visibility and Control                                   45
    Exploiting Other Technologies                                      49
    Hedging Risk for Better Long Term Profits                          51
    Reaping Lower Insurance Costs                                      51



FHWA Office of Freight Management and Operations                   Page iii
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       5. A Scan of Progress                                           52
  Air Freight and Small Package Express                                52
  Railroads, Motor Carriers, and Hazmat                                54
     Railroads                                                         54
     Highways                                                          56
     Hazardous Materials                                               58
  International Trade                                                  61
     Ports and Vessels                                                 61
     Borders and Cargo                                                 64
  Lessons Learned Overseas                                             69

       6. Integrating the Pieces--Conclusions                          70
  Balancing Priorities                                                 71
  International Trade                                                  72
     Border Protection vs. the Strategic Template                      72
     Harmonization                                                     73
     Reciprocity                                                       74
  Technology—Making Judgments and Accelerating Deployment              75
  Security Improvements Create New Risks and Beneficiaries             77
  Reducing Factors that Compound Economic Risks                        77
  Raising The Bar for Supply Chain Management and Security             78




FHWA Office of Freight Management and Operations                    Page iv
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                               Freight Transportation
                           Security and Productivity


      Executive Summary



          This paper is about the interplay between security and freight-related
          economic vitality. Its primary goal is to frame topics, put them in context,
          and stimulate discussion.      Another goal is to identify and suggest
          approaches that support both enhanced security and freight system
          productivity, which many refer to as win/win solutions. While it is not a
          policy paper, the author shares judgments, conclusions, and implicit
          recommendations throughout. One section of the main report scans freight
          security progress by mode and major function, such as hazmat and
          international trade; that section is largely omitted from the Executive
          Summary. All source credits are in the main report.



      Security and supply chain efficiency relate closely to each other. Some observe that
      global supply chains, trade, and containerization magnify security risks. Others
      argue that security countermeasures threaten supply chain efficiency. A few
      people suggest that integrated supply chains offer tools to better manage security
      risks while improving efficiency. All three points of view have merit and the
      stakes are huge.

      Improved productivity of freight transportation and logistics has been an engine of
      prosperity and competitive advantage, reducing total costs of production and
      freeing resources for other uses. Business logistics costs dropped from 16.1 percent
      of U.S. GDP in 1980 to 10.1 percent in 2000. Businesses made such progress by
      taking advantage of deregulation and applying information technology. They knit
      business functions together, collaborated across company boundaries, and
      increased efficiency through the disciplines of supply chain management. As
      inventories dropped, so did inventory variability and the variability of demand on
      transportation, permitting the shift of resources away from logistics. The six
      percent reduction in GDP share over twenty years generated a benefit, in 2000
      alone, of up to $600 billion in a $10 trillion economy.

      Freight transportation and the logistics systems into which it is woven have
      become lean and tightly coupled, but progress also created new risks.
      Predictability and reliable deliveries are critical and, as the paper will discuss, those
      characteristics are threatened by some efforts to increase security.

FHWA Office of Freight Management and Operations                                       Page ES-I
EU/US Intermodal Freight Forum                                                     April 11, 2002
THREATS, VULNERABILITY, AND COUNTERMEASURES
      A discussion about freight security and productivity will be more useful if it is set
      in the context of freight-related threats, vulnerability, and countermeasures. This
      section addresses those areas.

Threats
      Although it is very difficult to predict specific threats to specific targets, it is easier
      to predict the bigger picture: experts believe the U.S. and other developed nations
      can expect more catastrophic terrorism. Threats exist to freight infrastructure and
      operations. As September 11 emphasized, there is also a serious risk that terrorists
      will try to turn transportation assets into weapons. All of these threats may
      originate domestically as well as internationally. Domestic threats, which may
      come from extremist citizen groups or foreign terrorists operating in the United
      States, are also relevant to trading partners concerned about U.S. exports.



Vulnerability
      The consensus among knowledgeable observers is that the freight transportation
      system in the U.S. and internationally is quite vulnerable to terrorist attack.
      Vulnerability to freight-oriented terrorism is multi-faceted, reflecting the diversity,
      ubiquity, and openness of freight transportation systems—terrorists have an
      immense array of choices. Freight systems were designed and are operated for
      economic efficiency and profit, not for security. Increasing dependence on
      containerization and global supply chains multiply security risks.

      Vulnerability must be viewed from two perspectives; point attacks against a single
      element and systemic attacks against the infrastructure as a whole. Because of the
      decentralized and redundant character of the freight system, observers believed
      that systemic vulnerability was low. Several factors, however, challenge that
      conclusion. September 11 showed that terrorists could carry out operations that
      are more complex. Analysts are more aware of systemic risks via indirect attack
      upon supporting infrastructures, such as power generation or telecommunications.
      Finally, we are more aware that customer, operator, and public confidence in the
      freight transportation system are critical and subject to attack.



Types of Countermeasures
      There are two types of countermeasures: one to prevent attacks and another to
      mitigate the impact of attacks. Preventive countermeasures cannot stop all attacks.
      In most cases they improve the odds or deflect terrorist attention to less well-
      protected targets. Since security cannot be guaranteed, only managed, mitigation
      countermeasures are important.



FHWA Office of Freight Management and Operations                                        Page ES-II
EU/US Intermodal Freight Forum                                                       April 11, 2002
TYPES OF IMPACTS
      There are many ways to look at the impacts of terrorism and security measures and
      it is useful to divide them into three categories. Two categories relate to terrorist
      events and emergency responses to them. The third category relates more to
      economics and persist longer.



Primary Impacts and Direct Secondary Impacts
      Primary impacts result from successful terrorist incidents. The focus is on actual
      damage, casualties, and disruption. Direct secondary impacts encompass the effects
      of the rescue and recovery effort. The focus in this second type of impact is on
      clearing damage, mobilizing support resources, and mitigating congestion.

      The emergency response community describes dealing with these impacts as
      “consequence management,” which is a form of impact mitigation. Private firms
      may use different terms, but they also do consequence management. Firms that
      make and ship dangerous goods do the best job, motivated by a mix of self-interest,
      good citizenship, and regulatory mandate.



Indirect Secondary Impacts

      These impacts come from countermeasures, not terrorists. Initiators may be public,
      private, for-profit, or volunteer organizations. A short-term example was shutting
      down the U.S. aviation system after September 11. A longer-term example is
      continuing security delays in processing air cargo. Indirect secondary impacts may
      have profound implications because of their geographic breadth, functional scope,
      and potential persistence over time. Except for extraordinarily catastrophic events,
      such as multiple nuclear explosions, indirect secondary impacts are likely over time
      to outweigh primary and direct secondary impacts.

      Exhibit ES-1 illustrates how emergency events and countermeasures drive impacts,
      plus some of the mechanisms that operate in each type of impact. The left-hand
      column shows a classic planning cycle for terrorist threats. The dotted arrow
      below the countermeasures box indicates that total security is impossible and some
      successful terrorist events are likely to "leak through" over time.




FHWA Office of Freight Management and Operations                                 Page ES-III
EU/US Intermodal Freight Forum                                                 April 11, 2002
IMPLICATIONS OF INDIRECT
SECONDARY IMPACTS
      Indirect secondary impacts
      of security countermeasures
      are            fundamentally
      economic. They can erode
      productivity by increasing
      the cost of providing private
      and public services and by
      disrupting efficient business
      processes. Impacts also can
      be    positive,    such    as
      eliminating           network
      bottlenecks in mid-Atlantic
      rail service or improving
      intransit visibility.    Some
      indirect secondary impacts are rather straightforward and well commented upon.
      Other impacts are more subtle, or less obvious, or less the subject of public
      discussion.

                                               Exhibit ES-1, Security Events and Types of Impacts

Security Costs                                       Threats and                Types of Impacts
                                                     Assessments

      There is no comprehensive information about added costs of security measures,
                                                                            Indirect
                                                                           Secondary
                                                    and
      only suggestive discussions, anecdotes, Securityoccasional nuggets of data. For
                                                                            Impacts
                                              Countermeasures
                                                                           estimated that
      example, Robert Delaney, a respected observer of logistics trends, Costs, delays,
                                                                          unpredictability
      trucking and airfreight carriers would incur $2 billion in added security costs. If
      Delaney is correct, then his aggregate cost estimates should be considered relative
                                               Terrorist Events         Primary Impacts
                                                                        Damage & disruption
      to carrier profits and profit margins. That comparison makes security costs appear
                                                                        Direct in security.
      more daunting because margins will not sustain large new investmentsSecondary
                                                  Recovery
                                                      Measures                         Impacts
      Insurance is an important component of increased security costs. Rates, already
                                                                                 Congestion & disruption

      rising for most freight-related coverages, accelerated after September 11. No mode
      was unscathed. Better security practices should yield lower future premiums for
      theft coverage, but they are unlikely to lower terrorism or war risk premiums.
      Rates are a useful measure, but Total Cost of Risk is a better metric: “the sum of a
      company’s outlays for insurance, retained losses, and risk management
      administration.” Insurers raised deductibles, are refusing coverage in more cases,
      and some are withdrawing from cargo business lines. The Total Cost of Risk is
      rising faster than rates. Some shippers and carriers will be left with much greater
      risk exposure, and major losses could put corporate survival at risk.




FHWA Office of Freight Management and Operations                                              Page ES-IV
EU/US Intermodal Freight Forum                                                              April 11, 2002
Operating Practices
      It was unusual even a year ago to find much consideration given to a relationship
      between security risks and supply chain management. The events of September 11
      brought the topic to the fore, which was a productive side effect.

      Most discussion about security impacts on productivity addressed threats to Just-
      in-Time systems and inventory levels. Some discussion addressed sourcing closer
      to demand and adding redundancy, as several experts advised firms to shift some
      offshore production back to the U.S. The overall message was that there might be
      some fine-tuning, but no significant changes in supply chain practices.

      Moving from operations to business contingency planning, there were two themes.
      Some discussion was almost dismissive in tone, for example asserting that there
      have always been uncertainties in international trade and that you cannot predict
      terrorism. However, one writer detected more active but very private contingency
      planning and he forecast greater potential for change than the consensus view.

      The cautionary tone is more appropriate. The less concerned observers implicitly
      view September 11 as a one-time event, or assume that subsequent attacks will not
      produce significantly different government reactions. They are not considering the
      risk of repeated major terrorist events and greater government countermeasures.

      Underlying Dynamics. Reliability is critical to understanding the potential impacts
      of security on supply chain productivity. Driving unreliability out of the supply
      chain allows synchronizing production to demand, eliminating inventory, and
      increasing efficiency. Predictability is most important.

      In transportation, logistics costs increase and service levels decline as delivery time
      reliability decreases. Sensitivity to delivery reliability also appears to be directly
      related to supply chain tautness. Indirect secondary impacts are likely to fall
      hardest on long, lean, international supply chains.



Long Term Infrastructure Requirements
      Looking ahead one or two decades, private sector reactions to terrorism may affect
      public policy issues related to freight flows, infrastructure adequacy, and
      congestion. For example, FHWA forecasts regional freight increases up to 100
      percent by 2020 and Customs estimates that commerce through US ports will
      increase two-to-three times by 2020.

      Discussions of security impacts contain clues that may alter long-term forecasts.
      Talk of relocating sources of supply closer to demand would fade away if there
      were no more major attacks--but more major attacks are likely. Some events will
      disrupt supply chain flows and reinforce decisions to shrink sourcing patterns.


FHWA Office of Freight Management and Operations                                    Page ES-V
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      Given offshore cost advantages, revised sourcing is likely to slow trade growth
      rates, not reverse trends; but small percentage changes over decades have
      profound impacts. It seems prudent to pay greater attention to low point forecasts.



Factors That Compound Economic Risks
      Three factors multiply vulnerability to indirect secondary impacts. Each stands
      alone, but they can interact with greater effects. The terrorist risks will persist over
      time and so will these risk factors.

      “Wolfe’s Paradox.” This paradox suggests “overall logistics systems capabilities
      are growing simultaneously more robust and more fragile.” One irony that
      suggests the paradox is that sophisticated JIT supply chains are more subject to
      delivery disruptions than older, less efficient models.

      Well-tuned supply chain management systems excel in handling relatively small
      variations in supply or demand—variations within their competence and design
      capacity. Those systems cannot respond effectively to conditions far beyond their
      normal operating circumstances, such as large, sudden spikes in demand (a
      military surge) or plunges in supply (sudden imposition of tighter security
      controls). The events following September 11 may foreshadow future impacts of
      the paradox.

      “Complex Terrorism." Thomas Homer-Dixon used the term “complex terrorism”
      recently after describing how a well-organized but low technology assault on the
      nation’s power grid might disrupt traffic, water, sewer, and financial systems. He
      agrees that the “first rule of modern terrorism” is “Find the critical but non-
      redundant parts of the system and sabotage … them according to your purposes.”
      The risks of complex terrorism magnify Wolfe’s Paradox, which argues that
      logistics systems fragility increases with unanticipated failures in information
      infrastructure such as GPS, the Internet, telecommunications, or power supply.

      The Potential for Self-Inflicted Wounds. Exhibit ES-1 hints at an important
      feature of indirect secondary impacts. The feedback loop from successful
      “Terrorist Events” to “Threats and Assessments” implies these impacts are subject
      to sudden changes imposed by government security and regulatory bodies—
      indirect secondary impacts have an inherent instability.

      That instability powers a “next event/overreaction” hypothesis. Terrorists could
      find whatever damage they inflict in subsequent attacks to be less than that done to
      the U.S. and its trading partners through disproportionate overreactions—damage
      inflicted through indirect secondary impacts. One commentator asked “How
      rational will we remain after the second or third major successful attack?” Raw
      emotion and political overreaction may distort the plan/re-plan cycle.




FHWA Office of Freight Management and Operations                                    Page ES-VI
EU/US Intermodal Freight Forum                                                    April 11, 2002
WIN/WIN MITIGATION
      This section addresses the paper’s goal of identifying and discussing ways to
      enhance security and supply chain productivity at the same time. Improved
      security will be expensive, but it is possible to mitigate the total cost because some
      security measures, if they are designed and implemented well, can also improve
      efficiency, customer service, and theft losses. First, we propose an assessment tool
      and then we discuss several win/win examples.



A Win/Win Template Integrates Both Perspectives
      It is helpful to have a method to assess a proposal’s potential to improve both
      security and productivity. A simple way to do this starts by describing the
      evaluation criteria or filters that are important to each goal, and the following lists
      summarize those criteria. Weaving together those items produces a qualitative
      template—a conceptual model—to help design and evaluate improvements. This
      approach helps insure, for example, that security certification, notification, and
      verification processes get designed into the best supply chain management
      practices, and vice-versa.

      Security Perspective. These items appear to be the critical security-oriented
      filters with which to judge proposals:
             •   Assure the integrity of the conveyance loading, documentation, and
                 sealing process.
             •   Reduce significantly the risk of tampering in transit, ultimately with
                 comprehensive monitoring for tampering and intrusion.
             •   Provide accurate, complete, and secure information about shipments,
                 available to those who need it in a timely manner.
      Supply Chain Perspective. These are the critical supply chain-oriented filters:
             •   Adhering to the best security practices and standards would earn
                 commitments from government officials to process and inspect qualifying
                 shipments in ways that permit highly reliable and predictable processing
                 times.
             •   The best security and anti-tampering practices would be byproducts of
                 excellent supply chain management practices, not no-value additions.
             •   Commercial information given to authorities would be fully protected.
             •   Authorities will harmonize and standardize security processes.




FHWA Office of Freight Management and Operations                                  Page ES-VII
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Examples of Win/Win Approaches
      A Vision of the Possibilities.         Jonathan Byrnes, a software entrepreneur,
      shipping executive, and university lecturer, offers the most optimistic vision. He
      believes better “security can radically improve productivity if thoughtfully done.”
      Better security could be coupled with 20-30 percent supply chain cost reductions
      for “the normal stuff of commerce. ” The core of a “thoughtfully done” security
      regime would emphasize consistent, predictable flows and that would help drive
      more variance out of the entire system. In addition to improving transportation
      reliability, less variance could eliminate "undiscipline" within manufacturing
      plants, warehouses, and stores.

      Improving Supply Chain Management. Some improved business practices
      can yield a byproduct of better security. For example, Yossi Sheffi, Co-Director of
      MIT’s Center for Transportation Studies, suggested several strategies to reduce
      unreliable delivery times. He calls for improved vertical coordination within
      supply chains and better horizontal coordination to improve security within
      industries, cutting across supply chains. Sheffi also argues that standardization
      adds a security bonus to business benefits, “creating redundancy and the ability to
      recover quickly.”

      Improving Visibility and Control. Improving visibility into and control of
      supply chains is the single most recommended approach to simultaneously
      improve supply chain management and security. Inadequate visibility undercuts
      business performance and security. It aggravates the inventory bullwhip effect,
      limits flexibility, and provides opaque windows that may hide cargo tampering.
      Excellent visibility, however, offers three types of benefits. The first is efficiency
      and productivity, saving cycle time and labor hours. The second is service quality,
      as increased awareness adds flexibility and increases customer confidence. The
      third is shipment and service integrity, as better monitoring improves security
      against tampering and theft.

      The visibility discussion is confusing. People and firms mean many different
      things by “visibility.” The lack of clarity sows confusion, doubt, and delay in the
      marketplace, definitely slowing progress. To begin sorting this out, one must ask
      visibility of what, by what means, in what time frames, and from what sources?

      For a supply chain security discussion, visibility of shipment items and
      transportation assets are both important. Timeliness needs range from prior to
      vessel departure from overseas ports to nearly immediate for intrusion sensor
      violation alerts. Useful data may come from shippers, carriers, receivers, or third
      parties.

      There are two means to better visibility. The first is the information system(s) that
      manage, manipulate, and display visibility information. The second category is the
      event- or transaction-driven tools that convert a physical event into a data entry for
      the software systems. This category is critical because it determines the quality of
      source data in the software systems and constrains the value of those systems.



FHWA Office of Freight Management and Operations                                 Page ES-VIII
EU/US Intermodal Freight Forum                                                  April 11, 2002
      Technical problems related to visibility may not be trivial, but they appear much
      less difficult than institutional problems. The emphasis on security may provide a
      catalyst that increases the rate of progress and overcomes institutional resistance.

      High potential visibility technologies. There are five visibility-related
      technologies with potential to enhance both security and supply chain
      productivity.
             •   Supply chain software such as asset management tools and logistics
                 portals that are tuned to accommodate security applications.
             •   Electronic cargo seals.
             •   Other point-oriented and portable sensors that can monitor cargo and
                 conveyance conditions, such as contraband “sniffers.”
             •   Wide area communications integrated with sensors and GPS-like location
                 technologies.
             •   Biometrics tools to enable positive identification of authorized personnel.



INTEGRATING THE PIECES--CONCLUSIONS

      A recurring theme in security topics is trading-off expediency and effectiveness,
      speed and quality, interim and long-term progress. Security gaps need urgent
      attention, using the best tools at hand, but the tools at hand seldom provide the
      best answers. This applies, for example, to pushing cargo verification back in the
      pipeline (to origin ports or factories); to harmonizing international security regimes
      (bilateral or multilateral); and to applying new technologies (off-the-shelf or R&D).



Balancing Priorities
      Priorities are especially challenging to the public sector because of the wide array
      of security risks. This list summarizes the apparent priorities in the U.S. today, and
      it reflects reasonable choices. As the higher priorities are addressed, officials must
      move on to the lower priorities.

             •   Because of the potential for a “bomb in a box,” the top freight priority is
                 general cargo in international commerce. The Coast Guard, however, is
                 addressing all vessel types, not just containerships.
             •   The major domestic freight priority appears to be hazardous materials.
             •   Air cargo priority is greater for mixed flights than pure freighters.
             •   Domestic general commodity movements receive sporadic, idiosyncratic
                 security attention, such as spot checks at major bridges or tunnels.
             •   Exports receive little more than traditional export control reviews.



FHWA Office of Freight Management and Operations                                     Page ES-IX
EU/US Intermodal Freight Forum                                                     April 11, 2002
International Trade
      Border Protection vs. the Win/Win Template. The template provides a lens to
      assess current progress and initiatives. Some elements of the template are present
      in the developing programs, but there is still a considerable gap.

      The U.S. Customs Service is building on its history of successful partnerships with
      shippers and carriers. Industry partners, many of them part of sophisticated
      supply chains, could work with Customs on deeper integration of security and
      supply chain processes. Commissioner Bonner’s public statements also show an
      appreciation for the payoffs of richer integration.

      The gap widens when we shift from broad visions and strategies to more applied
      discussions and activities. The focus of Customs’ Container Security Initiative on
      certification and inspection in ten megaports is inconsistent with the template
      unless viewed as an essential interim step toward global uniformity.

      Harmonization. Since incompatible security standards among trading partners
      would not foster efficiency, harmonization should be multilateral and universal to
      best fit the win/win template. However, harmonization is difficult, affected by the
      number of sovereign states, international organizations of uneven effectiveness,
      and some divergence of interests. Sovereign equality notwithstanding, some voices
      are more influential than others. The magnets of big markets draw cooperation.

      U.S. officials recognize the value of harmonization. They are testing the
      willingness and limits of organizations such as the IMO to enact and sustain
      security measures that meet U.S. objectives. However, in the interest of speed, we
      see increasing attention to bilateral approaches. Although this may be the practical
      way to proceed, a bilateral focus may miss opportunities for multilateral solutions.

      Reciprocity. Reciprocity is necessary in an effective cargo security regime.
      Reciprocity implies massive changes for the U.S. in order to inspect exports.
      Fairplay noted that “pushing back borders” “would require customs agencies
      throughout the world to reverse their focus, from imports to exports.”

      Reciprocity is easy to accept in principal, but the “next event/overreaction”
      hypothesis could transform the psychological and political dynamics. This
      potential for escalating sensitivity makes it important to reshape the public dialog.
      Bringing reciprocity issues and concerns to the fore with the press, senior officials,
      and congressional leaders is a step to assure adequate resource allocation for export
      screening and to sustain reciprocity in difficult times.



Technology—Making Judgments and Accelerating Deployment
      Public and private sector leaders must make judgments about when new or
      improved security products and processes are sufficiently stable and cost-effective
      to merit deployment and—perhaps—regulatory mandates. An extended set of pilot


FHWA Office of Freight Management and Operations                                   Page ES-X
EU/US Intermodal Freight Forum                                                  April 11, 2002
      tests and demonstrations could be an excellent tool, with independently evaluated
      pilots addressing multiple scenarios and vendor products across the technology
      groupings. The old mass transit Service and Methods Demonstration (SMD)
      program offers a model. In terms of visibility, it would also accelerate progress to
      inject more clarity and consistency into the dialog.

      Reaping technology benefits also requires consistent and coherent standards, many
      of them international. Standards must be flexible enough to accommodate both a
      growing installed base and continuing technology improvements.



Security Improvements Create New Risks and Beneficiaries
      Virtually every security advance will carry the seeds of another problem. MIT
      faculty identified a “Conundrum of Security vs. Standardization: ” tighter security
      standards also create new security risks. They also pointed out that impacts will be
      asymmetric, as the costs and benefits fall unequally on firms and communities.



Reducing Factors that Compound Economic Risks
      Next Event/Overreaction Hypothesis. It is important that policy-makers and
      opinion leaders buffer potential overreactions to future attacks. The first challenge
      is to improve extended cargo security. The second challenge is for leaders to accept
      for themselves and then educate the public about the implications of imperfect
      security. As supply chain security expert Steven Flynn pointed out, we must frame
      debate so inevitable security breakdowns are treated as military losses in the course
      of an extended war, not as triggers for counterproductive overreaction. Prudent
      business leaders should also accelerate their firms’ preparedness measures and
      help educate the public sector.

      Complex Terrorism and Wolfe’s Paradox. To some extent, system managers
      and security experts are addressing complex terrorism, which most affects areas
      such as power distribution and telecommunications. It seems most important to
      identify, prioritize, and mitigate non-redundant items and processes and potential
      vicious cycles. Easing the paradox calls for rigorous efforts to understand the
      scenarios most likely to trigger fragility, then to prioritize and mitigate the risks.



Raising the Bar for Supply Chain Management and Security
      Security managers should encourage supply chain managers to extend vertical
      “intercompany operating ties” and horizontal security coordination within their
      industries and across supply chains. Standardization of processes and practices
      across an enterprise offers business and security benefits, creating redundancy and
      the ability to recover quickly.


FHWA Office of Freight Management and Operations                                  Page ES-XI
EU/US Intermodal Freight Forum                                                  April 11, 2002
      Both security and supply chain managers may find the win/win template helpful.
      If both groups keep in mind the goal of weaving together the best from both of
      their perspectives, it may be possible to make significant advances. “Thoughtfully
      done” security measures, as Byrnes put it, “can radically improve productivity.” It
      would be a signal victory to foster security while driving down variability from
      manufacturing through all the intermediate processes to the end-user.

                                                   ###




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                               Freight Transportation

                            Security and Productivity


      1. Introduction


      Prior to September 11, discussions of freight transportation security generally
      focused on controlling theft and reducing contraband—mostly drugs, but also
      illegal immigrants and export of stolen cars and construction equipment. An
      important professional group, the National Cargo Security Council, concentrated
      on theft in its materials, its meetings, and in the cargo security course it co-sponsors
      with the Global Maritime and Transportation School at the US Merchant Marine
      Academy. Two major industry partnerships program at US Customs, the Carrier
      Initiative Program (CIP) and the Business Anti-Smuggling Coalition (BASC),
      concentrated on drugs.1 A few specialized groups and individuals did address
      security against freight-oriented terrorism, but the topic seemed to garner less
      attention.

      After September 11, of course, the balance of the dialog changed. Preventing
      freight-related terrorism became a mainstream topic, and one observer said the
      definition of freight security had changed from theft-proof to tamperproof.2 The
      primary theme was how to plug gaps and prevent attacks on or through the freight
      transportation systems—how to reduce vulnerability and increase security. A
      second theme soon emerged, how to keep commerce active and vigorous while
      increasing security. Although one could look as security as a cost in a zero-sum
      tradeoff with productivity, it is also possible to frame the relationship in mutually
      positive, win/win terms.




      1
           NCSC’s web site is www.cargosecurity.com. The Customs information comes from
          conversation with a former Deputy Commissioner and the Customs web site, in
          hyperlinks from http://www.customs.ustreas.gov/top/sitemap.htm.    For another
          example see “Smart Moves Against Cargo Theft,” Edward Badolato, in Transportation
          Security, July 2000.
      2
           One illustration of the transition is that major network news programs now address cargo
          security, as NBC Nightly News did with a container security report from Los Angeles on
          January 6, 2002. Jonathan Byrnes, Senior Lecturer at MIT, offered the comment on
          definitions. “Global Terrorism and its Impact on Supply Chain Management,” MIT audio
          conference,              http://web.mit.edu/cts/www/news/current/terrorism.htm#jitua,
          November 2, 2001

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Goals and Approach of the Paper3
      This paper addresses the interplay between the themes of increasing security and
      economic vitality, particularly in freight-related operations. An important goal is
      to identify, highlight, and suggest approaches that support both enhanced security
      and freight system productivity. The legitimacy of that goal is reflected in
      Secretary Mineta’s target for cargo screening, “no danger, no delay,” and his
      pledge to the Congress to “continue to explore opportunities to make the cargo
      transportation system both more secure and more efficient.”4

      The approach is broad and integrative, intended to frame topics and stimulate
      discussion particularly in regard to the relationships among freight transportation
      vulnerability, security, and productivity. Although not a policy paper, the author
      shares his judgments, conclusions, and implicit recommendations throughout,
      especially in the final section.

      The paper does not focus on techniques and practices to improve physical security
      of freight-related infrastructure or operations. It addresses all of the freight modes
      except pipelines.

           •   The balance of the Introduction illustrates the economic importance of
               improving security in ways that support freight system productivity.

           •   Section 2 addresses the shape and nature of security threats and
               countermeasures against those threats. Threats and countermeasures set the
               context in which to consider the impacts of both terrorist acts and protective
               actions.

           •   Section 3 defines three types of impacts related to freight security, and then
               explores the implications most related to the economy and productivity.

           •   Section 4 is about potential solutions that may advance security along with
               supply chain productivity and profitability. It suggests a criterion to assess
               alternatives, and then reports on six possibilities.

           •   Section 5 offers a concise summary of the security situation and progress by
               mode and several crosscutting topics.

           •   Section 6 pulls the material together to identify gaps and offers conclusions
               and recommendations.




      3
          The author acknowledges help and counsel from many people in footnotes throughout the
          report. In addition, thanks to Susan Howland of the Howland Group for her frequent
          email distribution of relevant articles.
      4
          Remarks at the Summit On Homeland Security & Defense, November 27, 2001, from DOT
          web site. Statement before the House Subcommittee On Coast Guard And Maritime
          Transportation, December 6, 2001, from DOT web site.

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The Connection Between Security and Productivity
      Enhanced freight systems security can reduce efficiency and productivity by
      adding direct costs for shippers and carriers, and by disrupting well-tuned supply
      chain operations. The purpose of this section is to illustrate the huge stake that the
      U.S. and other economies have in supply chain efficiency and productivity.

      Improving productivity of freight transportation and logistics has been an engine
      of prosperity and competitive advantage. Productivity gains in these areas reduce
      the total costs of production, freeing resources to other uses. “The lower logistics
      costs means that society gets a higher output of goods and services from the same
      level of resources… a higher standard of living.”5 As a somewhat simplistic
      illustration, one could argue that two decades of logistics improvements, including
      freight transportation, delivered a benefit to the US economy in 2000 alone of up to
      a $600 billion.

      Exhibit 1 shows that, since 1980, the portion of the economy devoted to
      transportation was reduced by 22 percent, inventory-carrying costs dropped by 50
      percent, and overall logistics costs declined 37 percent. Business logistics
      consumed 16.1 percent of a $2.8 trillion US economy in 1980, but only 10.1 percent
      of the $9.7 trillion economy of 2000. That 6 percent reduction in relative logistics
      costs rounds out to $600 billion in a $10 trillion economy. 6

      Exhibit 1, Business Logistics Costs As A Percent of GDP, 1980-2000




      5
           For a good discussion of the mechanisms through which freight transportation
          productivity benefits prosperity and the economy as a whole, see “Economic Effects of
          Transportation: The Freight Story,” ICF Consulting and HLB Decision Economics, January
          2002.
      6
           “12th Annual State of Logistics Report: Managing Logistics in a Perfect Storm,” Robert
          Delaney and Rosalyn Wilson, June 4, 2001, Cass Information Systems and ProLogis, Inc.,
          pp. 8-9 and Figure 12.
      The author is responsible for the $600 billion illustration, not Delaney and Wilson. Since
       some of logistics’ reduced share of GDP may reflect disproportionately greater growth in
       sectors less dependent on logistics, not all of the $600 billion may be due to greater
       logistics productivity. The point here is not to estimate the precise dollar value, but to give
       an indication of the impact of logistics productivity improvements.

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      These productivity improvements rest on revolutions in deregulation and
      information technology. Deregulation permitted greater operating efficiencies to
      carriers and shippers, and information and communications technologies enabled
      managers to exploit the potential offered by deregulation and by optimizing
      fragmented, “stovepiped” approaches to logistics.

      Manufacturers and distributors applied—and continue to apply—information
      technology to reduce total inventories and inventory variability, characterized as
      “the bullwhip effect.” Less inventory volatility in the manufacturing and
      distribution sectors also helps transportation carriers because it dampens the
      variability of demand imposed on them, enabling greater efficiency.7

      Delaney and Wilson credit Alfred Battaglia, then of Becton Dickinson, with Exhibit
      2, which shows logistics’ evolution since 1960.8 Related but separate functions
      within firms were knit into the disciplines of materials management and physical
      distribution, then further integrated into logistics. An overlapping process began
      to extend the collaboration across firms, developing into supply chain management
      (SCM).

      Exhibit 2, Logistics Evolution to Supply Chain Management

      7
          Stanford’s Hau Lee and his colleagues are credited with naming and elaborating on the
          bullwhip effect. “The Paralyzing Curse of the Bullwhip Effect in a Supply Chain,” Sloan
          Management Review, Spring 1997.
      8
          “12th Annual State of Logistics Report,” pp. 5-6 and Figure 8.

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      Some of the earliest examples across firms were closer integration between
      shippers and their carriers and between materiel suppliers and their customers. An
      early example of shipper-carrier integration, Just-in-Time (JIT), continued to
      develop further into time-definite delivery expectations and performance. Materiel
      supplier-customer integration developed into Vendor Managed Inventory (VMI),
      in which buyers such as Wal-Mart provide point-of-sale store data to qualified
      vendors, such as consumer goods and tire manufacturers. The manufacturers
      assume responsibility to keep stores stocked, to avoid out-of-stock conditions, and
      to control inventories. Planning across firms became increasingly sophisticated, as
      with Collaborative Planning, Forecasting and Replenishment (CPFR) in the
      consumer goods industries.

      Supply chain management can acquire an extensive reach, for example “from my
      supplier’s supplier to my customer’s customer.” One of the most elaborate
      expressions of SCM is Make-To-Order (MTO) manufacturing, pioneered by Dell
      computer and its suppliers. MTO avoids filling the distribution chain with finished
      product in warehouses and store shelves. Instead, an MTO firm assembles final
      product in response to firm orders, then draws on its network of suppliers to
      provide the right components to the right assembly lines at the right times. Dell
      reportedly reduced parts inventory to 6.6 days compared to an industry norm of
      over 75 days. The process is an excellent example of what Byrnes and Shapiro call




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      “intercompany operating ties,” which can create huge savings after a company
      changes the fundamental way it does business.9

      Of course, in parallel with cross-function and cross-firm integration, there were
      also continuing improvements within functions. For example, starting around
      1990, long haul truckload common carriers began to exploit real-time satellite
      monitoring of vehicles and coupled multiple data streams in optimization models
      and decision support systems. Those carriers raised the bars of operating efficiency
      and service quality to customers.

      The combined effect of these innovations has been profound. Empty miles
      dropped, excess capacity eliminated, staffing streamlined, and inventory levels
      plummeted. These were the mechanisms that permitted the shift of resources from
      to logistics to other productive uses in the GDP—the 6 percent reduction over
      twenty years with the value of up to $600 billion freed up in 2000.

      The implication of the innovations is also profound when discussing security
      against terrorism. Freight transportation and the logistics systems into which it is
      woven have become lean and tightly coupled. Predictability and reliability of
      deliveries is critical and, as the paper will discuss, those characteristics are at
      greater risk in the new environment.




      2. Threats, Vulnerability, and Countermeasures


      The context of an event makes a difference. Events that cause extensive physical
      damage and loss of life evoke some responses regardless of their cause, but the
      perceived cause or context of the events also alters the response.

      Catastrophic accidents in freight transportation can be devastating. Exhibit 3
      summarizes three hazmat-related explosions in North American ports that claimed
      over 9,000 total casualties between them, in two cases destroying much of the host
      city infrastructure. The disasters in Texas City, Port Chicago, and Halifax
      provoked tremendous reactions—rescue, recovery, investigations, and corrective
      measures.

      All three events were accidents, but their scope and impact resonate in today’s
      terrorism-sensitive environment. The hostile intent of terrorism adds two factors to
      dealing with transportation disasters. The first is the need to assess criminal
      threats and vulnerabilities in addition to accidental risks. The second is
      psychological—both in dealing with terrorists and with responses to terrorist
      events. The psychological dimension, as we will discuss later, can be a significant
      multiplier to the impact of terrorist events.

      9
          “Intercompany Operating Ties: Unlocking the Value In Channel Restructuring,” Jonathan
          Byrnes and Roy Shapiro, Harvard Business School Working Paper No. 92-058, 1991. The
          Dell statistics are in “Economic Effects of Transportation” p. 4.

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      Exhibit 3, Greatest Port Disasters in North America

                        Texas City, TX              Port Chicago, CA            Halifax, NS
                         April 16, 1947                July 17, 1944        December 6, 1917
Event                Fire and explosion of         Explosion of military   Fire and explosion of
                     hazmat-laden ship             munitions along pier    hazmat-laden ship in
                     along pier                                            harbor
Killed                            576                        417                   > 1700
Injured                       > 2000                         390                   > 4000
Cargoes              Two ships loaded              4600 tons of bombs      “2,300 tons of wet
                     with ammonium                 and depth charges       and dry picric acid,
                     nitrate being recycled        already loaded on SS    200 tons of TNT, 10
                     into fertilizer from          E.A. Bryan, plus 430    tons of gun cotton
                     explosives                    tons of bombs           and 35 tons of
                                                   alongside an adjacent   benzol”
                                                   ship
Cause                SS Grandcamp caught           No cause determined.    Mont Blanc catches
                     fire at the pier and                                  fire after Imo rams her
                     exploded as the fire                                  near shore. Crowds
                     was being fought.                                     gather to watch.
                     Secondary explosion
                     on SS High Flyer,
                     docked nearby with
                     same cargo.
Comments             1,000 residences and          Explosion in a          “largest man-made
                     buildings destroyed.          military munitions      explosion until the
                                                   port minimized          atomic age.” 1,630
                                                   civilian casualties.    homes destroyed.
Sources:
        •    “The Texas City Disaster,” The Handbook of Texas Online,
             http://www.tsha.utexas.edu/handbook/online/articles/print/TT/lyt1.html. Also
             “The Texas City Disaster, April 16 and 17, 1947,”
             http://www.ezl.com/~fireball/Disaster20.htm.
        •    “Port Chicago Disaster - July 17, 1944,” U.S. Maritime Service Veterans,
             http://www.usmm.org/portchicago.html.
        •    “The Halifax Explosion,” Maritime Museum of the Atlantic,
             http://museum.gov.ns.ca/mma/AtoZ/HalExpl.html




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Threats
      Although they received insufficient attention, there were prescient assessments of
      terrorist threats before September 11, 2001, some of them related to freight
      transportation.

      The President’s Commission on Critical Infrastructure Protection published Critical
      Foundations: Protecting America’s Infrastructures in 1997. Although it concentrated
      on information infrastructures, the commission addressed physical infrastructures
      as well.     The commission concluded that the terrorist threat to critical
      infrastructure—that which is essential to the economy and continuation of
      government—was real, and it included transportation.

       The U.S. DOT’s Office of Intelligence and Security completed the Surface
      Transportation Vulnerability Assessment in 1998.10 The initiation of the project
      reflected an assumption that terrorism directed against transportation
      infrastructure deserved serious attention.

      The Commission on U.S. National Security in the 21st Century (known as the “Hart-
      Rudman Commission”) published three reports between September 1999 and
      January 2002. The commission reported in 1999 that transportation infrastructure
      was among the critical elements “bound to become targets” of terrorists and
      others.11

      The National Research Council, responding to a congressional mandate, chartered
      a committee that produced Improving Surface Transportation Security: A Research and
      Development Strategy in 1999. The Council followed in 2000 by publishing Stephen
      Flynn’s article, “Transportation Security: Agenda for the 21st Century.”12 Flynn
      directly addressed terrorist threats to transportation systems in the U.S. and
      sketched a scenario of biological weapons smuggled in an intermodal container.

      The National Commission on Terrorism (the “Bremer Commission”) addressed its
      topic for six months. Their report to Congress in 2000 concentrated on ways to
      improve counter-terrorism effectiveness.13

      The Report of the Interagency Commission on Crime and Security in U.S. Seaports,
      published in August 2000, included a chapter addressed to the terrorist threat to
      seaports. The Commission reported that “The FBI considers the present threat of
      terrorism directed at any U.S. seaports to be low, even though their vulnerability to




      10
         DOT withheld the report from distribution because it discussed detailed terrorist
       scenarios. However, in January 2002, DOT released Surface Transportation Vulnerability
       Assessment, General Distribution Version, Final Report, dated October 25, 2001.
      11
        New World Coming – American Security in the 21st Century (Phase I), Research and Analysis,
       p. 34.
      12
           TR News 211, November-December 2000.
      13
           Countering the Changing Threat of International Terrorism, June 7, 2000.

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      attack is high. The Commission believes that such an attack has the potential to
      cause significant damage.”14

      Types of Threats. DOT’s Surface Transportation Vulnerability Assessment discusses
      threats directed to transportation infrastructure and operations. The report notes
      that, regardless of mode—and this includes aviation—“critical assets fall into …
      five categories:

               •   Facilities (e.g., stations, terminals, ports, fuel transfer centers)
               •   Means of conveyance (e.g., roads, tunnels and bridges, tracks, waterways,
                   pipelines)
               •   Vehicles (e.g., trains, trucks, ships, buses)
               •   Supporting structures (e.g., power substations, locks and dams,)
               •   Control/Information technology (e.g., signal systems, Supervisory
                   Control And Data Acquisition System (SCADA), navigational aids/GPS,
                   cargo tracking systems, EDI).”15

      The report defines and discusses five categories of threats to the critical assets. The
      threats are explosives, cyber attacks, weapons of mass destruction (WMD),
      sabotage, and armed assault/hostage/barricade situations. It goes on to develop
      and present thirty-eight specific scenarios in four classes: physical, biological,
      chemical, and information/control system attacks. 16

      The DOT report, reflecting the environment prior to September 11, focused most
      attention on transportation as a target of terrorism. It gave less attention to
      terrorist threats that use transportation assets as vectors or means to deliver
      terrorist attacks to broader civilian, industrial, or military targets. The conversion
      of commercial airliners into missiles on September 11 sharpened awareness and
      concern about conversion of transportation assets into terror weapons.

      WMD include chemical, biological, and nuclear threats. In addition to inherent
      devastation they might cause, all appear magnified by their psychological impact,
      as reflected in the tremendous public attention paid to the few and essentially small
      anthrax incidents in September and October 2001. The New York Times published
      an excellent survey of chemical, biological, nuclear threats in November.17

      Hoaxes can be thought of as another type of threat. Although many hoaxes are
      malicious pranks, intentional and repeated false threats issued or leaked by
      terrorist groups can be both a psychological and a tactical weapon. The
      Interagency Commission on Crime and Security in U.S. Seaports reported that

      14
           Pages 61-62.
      15
        Surface Transportation Vulnerability… Final Report, p. 11. Although, one might better
       describe the first category as nodal facilities and the second as link infrastructure, the five
       categories are a useful categorization.
      16
        Ibid., p. 11. The scenarios are listed—not described—in the NRC’s Improving Surface
       Transportation Security: A Research and Development Strategy, p. 15.
      17
         “The Threats: Assessing Risks, Chemical, Biological, Even Nuclear,” William Broad,
       Stephen Engelberg and James Glanz, The New York Times, November 1, 2001.

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      hoaxes involving weapons of mass destruction increased from 74 in 1997 to 181 in
      1998.18

      Exhibit 4 offers a simple model for thinking about the sources and targets of
      transportation terrorism. It groups the targets into three categories, two of which
      (infrastructure and operations) include those in the Surface Transportation
      Vulnerability Assessment. The third category represents the first lesson learned from
      September 11, that we must address explicitly the probability that terrorists turn
      transportation into weapons.

      Another feature of the model is the
      explicit division of domestic and              Exhibit 4, Sources and Targets of
      international sources of threats.                            Threats
      Domestic threats may come from
      extremist citizen groups or foreign                                   Source of Threat
      terrorists operating in the United
      States. It is especially important to       Target of Threat        Domestic   International
      consider threats initiated in the
                                               Trans. Infrastructure        D1            I1
      U.S. from the perspective of
      international reciprocity.        Our Trans. Operations               D2            I2
      trading partners have as legitimate Non-Trans. Targets                D3            I3
      a basis to be concerned about
      weapons smuggled into their commerce from the U.S. as in the reverse. We will
      discuss reciprocity later in the report.

      Likelihood of Threats. It is extremely difficult to address the probability of
      terrorist threats. Classic safety risk assessments consider frequency (probability)
      and severity of impact, but practitioners acknowledge limits in using the approach
      for terrorism.19 The DOT Surface Transportation Vulnerability report does not
      address probabilities, only vulnerabilities.

      Intelligence estimates are essential to judge probabilities, but they are no panacea.
      Threat assessment, “the effort by government agencies to forecast the behavior of
      unseen enemies, even unknown ones, is at best an imprecise art that depends
      largely on the quality of the intelligence from which it is drawn. Many agencies do
      it, and they often disagree.” “When you have a very creative group of people like
      Al Qaeda, they are capable of surprising us."20



      18
           Report, p. 63.
      19
         For example, Cheryl Burke of the Dupont Safety, Health and Environment Excellence
       Center, made this point during her presentation, “Security Risk Management in the
       Transport of Hazardous Materials,” in session #302 of the 2002 Transportation Research
       Board Annual Meeting. A spokesperson for the American Insurance Association
       reportedly said “Terrorist strikes are man-made and cannot be forecast.” (“Businesses Hit
       by New Insurance Rates,” Joe Ruff, Associated Press, November 12, 2001.)
      20
        "The Threats: Assessing Risks." The article attributes the second quotation to Kenneth
       Pollack, deputy director of national security studies at the Council on Foreign Relations
       and a former official at the Central Intelligence Agency. The president of the Association
       of Former Intelligence Officials, Gene Poteat, offered another perspective that reinforced

FHWA Office of Freight Management and Operations                                            Page 10
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      While the likelihood of specific threats to specific targets is very difficult to
      determine, the overall likelihood seems disturbingly clear. Knowledgeable
      observers willing to speak publicly are explicit that they believe the U.S. and other
      developed nations can expect more instances of catastrophic terrorism. For
      example, former Director of Central Intelligence John Deutch expects “The United
      States and its European allies will be the targets of a series of terrorist attacks on the
      scale of Sep. 11.” The likelihood of additional significant attacks is both an
      underlying and explicit theme in recent works by Thomas Homer-Dixon and
      Stephen Flynn. Even Secretary of Defense Rumsfeld, following up on the
      president’s State of the Union address, “warned that ‘new adversaries’ will gain
      access to powerful weapons and launch attacks that ‘will grow vastly more deadly
      than those we suffered’ Sept. 11.” 21

Vulnerability
      The consensus among knowledgeable observers is that the freight transportation
      system in the U.S. and internationally is quite vulnerable to terrorist attack. One
      example is the FBI’s judgment about seaports, described earlier. Another example,
      not without irony, is the statement in the Surface Transportation Vulnerability report
      that “None of these surface transportation modes currently exhibit a substantial
      security or anti-terrorism profile, particularly when compared to the emphasis
      commercial aviation places on these activities.”22 The irony, of course, is that the
      events of September 11 made clear the vulnerability of the mode with the more
      substantial security profile.

      Vulnerability to freight-oriented terrorism is multi-faceted, reflecting the diversity,
      ubiquity, sheer scope, and openness of freight transportation systems—terrorists
      have an immense array of choices. From this perspective, increasing dependence
      on and growth of containerization, intermodalism, and global supply chains
      multiply security risks. The common goal of existing systems underlies and




       the view of Mr. Pollack (“Has American Intelligence Failed Us?” Remarks at the Annual
       Meeting of the National Cargo Security Council, Nov ember 7, 2002.) Security
       professionals try to anticipate terrorist creativity by "Red Celling," having outside experts
       play terrorist roles to challenge security improvements (Commander Dan McClellan, DOT
       S-60, personal conversation.)
      21
         “Deutch predicts more Sept. 11-type terrorism,” MIT news release on John Deutch’s
       lecture   on    Combating     Catastrophic     Terrorism, November      21,   2001.
       www.mit.edu/newsoffice/nr/2001/deutch.html.
      “The Rise of Complex Terrorism,” by Homer-Dixon is in Foreign Policy, January-February
       2002. “America the Vulnerable” by Flynn is in Foreign Affairs, January/February 2002.
       Flynn was explicit about his view that further catastrophic attacks are likely in his
       presentation to the 2002 Transportation Research Board Annual Meeting panel #423,
       “Challenges and Impact of Increased Border Security on Trade and Transportation.”
      “Rumsfeld Cites Terrorism in New Call for Military Reform,” Thomas E. Ricks, Washington
       Post, February 1, 2002, p. A12.
      22
           P. 8.

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      explains all of these characteristics: with few exceptions, freight systems have been
      designed and operated for economic efficiency and profit, not for security.23

      The National Research Council, in its discussion, correctly points out that the
      vulnerability must be viewed from two perspectives. There is an important
      distinction between point attacks against a single element and systemic attacks
      against the infrastructure as a whole, and the NRC concludes that surface
      transportation systems are more vulnerable to point attacks than systemic attacks:
      “Because of the decentralized, multimodal character of surface transportation,
      mounting a system-wide attack with large spatial and temporal impact would be
      difficult. Experience with natural disasters suggests that even the simultaneous
      destruction of multiple elements of the system has less impact on its ability to
      operate than one might expect. The surface transportation infrastructure has many
      redundancies and is quite resilient. In most places, at most times, a variety of
      transportation options and alternate routes are available.”24

      Four qualifiers apply to the NRC conclusions. First, as the authors themselves
      would likely concede today, the logistical difficulty of coordinating “multiple,
      coordinated attacks [that] could have systemic consequences” seems much less
      potent a protection against vulnerability than it did before the highly coordinated
      attacks of September 11. Second, the NRC did not address the aviation system, and
      its dependence on a single integrated traffic control system creates an avenue to
      systemic vulnerability. Third, as we will address later in the paper, it may be
      possible to systemically disable surface transportation by indirect attack upon its
      supporting infrastructures, such as power generation or telecommunications.
      Finally, vulnerability extends beyond physical capabilities. Customer, operator,
      and public confidence in the freight transportation system are critical, and they too
      are subject to attack.

      Systemic concerns aside, there are legitimate concerns about the vulnerability of
      critical transportation physical infrastructure to point attacks. For example, DoD’s
      concern preceded September 11. The Critical Infrastructure Protection (CIP) Team
      at the Transportation Engineering Agency had been performing “Transportation
      Infrastructure Criticality And Vulnerability (TRI-CAV) assessments for all of the
      major Power Projection [bases], ammunition depots, and other key sites of interest to
      DOD.” In a post-September 11 example, the Transportation Research Board (TRB)
      and the American Association of State Highway and Transportation Organizations
      surveyed all 50 states in regard to the security of their critical transportation
      infrastructure.25

      It seems fair to conclude that vulnerability to direct terrorist action extends across
      all six cells in Exhibit 4. The main focus of this paper, however, is less on

      23
         Most of the exceptions to this general rule reflect state-oriented attempts at national
       security, such as the choice of wider gauge railroad track in the Soviet Union to help
       defend against German or NATO attack.
      24
           Improving Surface Transportation Security, p. 20.
      25
        The quotation is from TEA’s web site, http://www.tea.army.mil/sa/ci.htm, emphasis
       added. The state survey results are on both the TRB and AASHTO web sites.

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      vulnerability to specific terrorist attacks than it is on systemic economic
      vulnerability, including indirect or second order disruption caused by security
      countermeasures.

      Estimating the Potential Impact of Terrorist Action. Once one determines that
      threats exist, that they are reasonably likely, and that large elements of the
      transportation system are vulnerable, it makes sense to estimate the potential
      impacts of successful terrorist attacks. The DOT Surface Transportation Vulnerability
      Assessment followed this approach in some detail, developing explicit attack
      scenarios and estimating their potential impacts. The methodology produced three
      categories: catastrophic, very serious, and moderate. The report explained them as
      follows:26

           “Scenarios judged as possessing ‘catastrophic’ impacts tend to represent
           situations where large numbers of people are affected by explosives or
           chemical/biological toxins, or where a key infrastructure element, such as a
           major bridge, tunnel or dock, is damaged or destroyed by a large explosive force.
           These situations include … specific infrastructure segments whose loss would
           have the most serious impacts on traffic patterns and the economy.

           “Those scenarios judged to have a ‘very serious’ impacts include smaller
           explosives causing damage to individual infrastructure elements which would
           cause significant traffic and economic impacts but which could be more readily
           repaired or rectified.

           “Finally, those scenarios with ‘moderate’ impacts deal with individual violent
           criminal acts, such as shootings, as well as disruptions to information and
           communications systems by ‘cyber’ attacks.”

      Although one may disagree with particular conclusions—such as relegating
      disruptions of information and communications systems to the moderate
      category—such an estimation process makes sense as the precursor in the planning
      process to identifying and developing protective countermeasures.

Countermeasures
      We can look at countermeasures from at least three points of view: the type or
      intent of the countermeasure, who is responsible for the countermeasures, and the
      scope of the countermeasure.

            TYPES OF COUNTERMEASURES
      There are two broad types of countermeasures: those intended to prevent attacks
      and those intended to mitigate the impact of successful attacks.

      Preventive countermeasures can vary widely depending on the mode and on the
      specific targets. Examples related to protecting point targets—such as bridges,
      tunnels, and terminals—include guards, remote sensors and barriers, access

      26
           P. ix, emphasis added.

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      restrictions and inspections, and diversion of especially hazardous shipments.
      Examples related to protecting operating processes and freight flows include
      procedures to assure the integrity of cargo marshalling and loading, vetting
      personnel who are permitted to handle cargo or documentation, automated
      monitoring and intrusion detection for goods in transit, and non-intrusive
      inspection technologies. The latter class of examples requires collaboration among
      shippers, carriers, and receivers, across public sector agencies, and among
      international trading partners.

      Other preventive countermeasures operate away from transportation facilities and
      equipment. Examples include traditional intelligence collection about threats and
      advanced data mining techniques applied to cargo flow and manifest information,
      searching for anomalies.

      Preventive countermeasures are rarely perfect. In most cases they merely improve
      the odds or tend to deflect terrorist attention to other, less well-protected targets.
      As one observer put it, security cannot be guaranteed, only managed.27 This
      underlines the importance of the protective or impact mitigation type of
      countermeasure.

      A classic approach to impact mitigation is to harden potential targets, rendering
      them less susceptible to destruction or disruption. One example was on display on
      September 11, when the terrorists crashed an airliner into a wing of the Pentagon
      that had been rebuilt and reinforced to resist explosive blast—there were many
      reports that, had the crash occurred in an older part of the building, casualties and
      damage would have been much greater. Other forms of hardening include
      protecting ventilation systems and insuring electrical independence from the
      power grid for key facilities. Both rail passenger cars and hazmat tank cars have
      been structurally reinforced to withstand crashes and derailments.

      Another approach to impact mitigation is to encourage redundancy so that it
      becomes increasingly difficult for terrorists to shut down an important part of the
      freight system. Redundancy can be improved by adding equipment or capacity
      and by eliminating network bottlenecks.

            RESPONSIBILITY FOR COUNTERMEASURES
      Many public and private entities are responsible for security countermeasures. The
      public sector includes an array of U.S. federal agencies, multiple agencies within
      each state and most municipal governments, and a number of regional compacts.
      It also includes international institutions with wide variations in authority. The
      private sector includes transportation carriers with differing ownership stakes in
      their rights of way but shared interest in offering reliable and secure service. This
      sector also includes the manufacturers, distributors, and retailers who require that
      reliable and secure transportation service. Finally, the private sector also includes
      non-governmental organizations, such as the Red Cross, that tend to focus on
      countermeasures that mitigate impacts.


      27
           Lance Grenzeback, Cambridge Systematics, private correspondence, January __, 2002.

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      The diversity and diffusion of responsibility is a source of strength and weakness.
      The strength, sometimes overlooked, is not trivial because it is driven by vested
      interests that provide multiple constituencies for improved security. A simple
      example is the commitment of a state or local government to protect its citizens.
      Another example is the awareness of carrier and shipper managers that business
      survival may depend on both safeguarding key assets and assuring continuity of
      operations in the face of disaster.

      The weaknesses of this situation are manifest. Diffuse responsibility implies gaps
      and overlaps, greater friction in coordination and planning, turf fights, and
      arguments about financial responsibility. Important actions can be overlooked,
      delayed, or stymied.

      Senator Fred Thompson noted the weakness with wry irony when he said “The
      good news is that there are over 40 federal agencies working on terrorism and
      security. The bad news is that there are over 40 federal agencies working on
      terrorism and security.”28

      President Bush addressed the weakness by establishing the Office of Homeland
      Security to focus all counter-terror activities.       Although skeptics remain
      unconvinced that Homeland Security has sufficient institutional authority to
      integrate and focus all of the security-related agencies and their efforts, it is a
      recognition of the need to do so and a step in that direction.29 On a smaller scale,
      the Congress established the Transportation Security Administration to knit
      together a more coherent and effective approach to transportation security.

            SCOPE OF COUNTERMEASURES
      The third perspective for countermeasures is their scope or theater of application.
      We can think about the issue in terms of improved security for international trade
      in contrast to domestic commerce.

      Since 27 percent of the U.S. GDP is related to international trade, and since the
      most virulent terrorist threats are believed to originate outside the U.S., it is natural
      to focus on providing better security for the goods, conveyances, and people who
      enter the country from abroad. Given the relevance of globalization and integrated
      supply chains, it is important to think about improving the security of global
      commerce, not just border defense. There are positive indicators, reflected in
      growing comments by government leaders about “pushing back the borders.” On
      the other hand, at least one observer expressed concern that the name and focus of




      28
           Several news sources attributed the comment to Thompson on October 25, 2001.
      29
        Unless it relates directly to transportation security and productivity, the debate over the
       mission, functions, and powers of the Office of Homeland Security is beyond the scope of
       this paper. However, for an interesting point of view that addresses both Homeland
       Security and state and local governments, see “To Bioterror, a Local Response,” Amy
       Smithson, The New York Times, October 20, 2001. A more classic critique is in a Times
       editorial of February 7, 2002, “Revisiting Homeland Security.”

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      the Office of Homeland Security directs attention and the framing of issues in the
      wrong direction, towards border defense rather than secure global supply chains.30

      Although many federal agencies are concerned with border security, the major
      actors tend to be the Customs Service, the Coast Guard, the Immigration and
      Naturalization Service, and the Department of Agriculture. Customs alone has
      over sixty interagency agreements in place to enforce the laws and regulations that
      are assigned to other agencies.31 Other parties include U.S. and overseas port and
      airport authorities, terminal operators, transportation carriers, shippers, and local
      law enforcement and emergency services agencies.             Non-U.S. government
      authorities, such as Customs officials, are also involved.

      Domestic commerce is also a legitimate focus for countermeasures. Domestic
      shipments of highly hazardous materials could inflict serious harm and we have
      discussed the general sense that the freight system is vulnerable. Foreign or
      domestic terrorists can sabotage domestic freight transport or convert it into
      weapons from within the U.S. In addition, much of the non-bulk imports blend
      almost seamlessly with domestic commerce as they move inland.

      One can argue that more agencies and firms are concerned with security
      countermeasures for domestic commerce than for U.S. international trade since the
      different modal freight networks touch nearly every commodity and every
      transportation node and link in the U.S. DOT’s safety regulatory agencies have
      higher profiles in domestic commerce. Virtually all police and emergency response
      jurisdictions should have some level of counter-terror security involvement,
      including concerns related to freight transportation. Finally, firms large and small,
      shippers and carriers, have varying degrees of concern with security
      countermeasures. Large firms that ship dangerous goods or have international
      supply chains are likely to be most aware, but one could argue that smaller, less
      sophisticated firms should get more attention because they are more likely terrorist
      targets.

The Security Planning Cycle
      The preceding sections described the major elements of a classic planning cycle for
      dealing with terrorist threats and countermeasures. Exhibit 5 both simplifies and
      expands on that process.




      30
        The observer is Stephen Flynn, in personal discussion, January 15, 2002, and “America the
       Vulnerable,” p. 9.
      31
           Based on personal discussions with senior Customs enforcement officials in January 2002.

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      The top box represents much of the
      process described above: identifying                  Exhibit 5, Security Planning
      threats, determining their seriousness and                      and Replanning
      likelihood, assessing vulnerability, and
      assigning priorities. That analysis sets the
      stage for the second box: developing,
      evaluating, resourcing, and implementing
      security countermeasures to prevent and
      mitigate the effects of terrorist actions. The
      dotted arrow below the countermeasures
      box indicates that countermeasures are                            Threats and
      imperfect, and some successful terrorist                          Assessments
      events are likely, over time, to “leak
      through” improved protective measures.
      Any successful terrorist event should itself                       Security
      trigger two activities. The first is rescue                    Countermeasures
      and recovery action to assist casualties,
      remove debris, and restore service. The
      second activity is a classic element of
      iterative planning: using the new                               Terrorist Events
      information to reconsider plans, resource
      allocations, and countermeasures.
                                                                         Recovery
                                                                         Measures

      3. Impact Assessment


Three Types of Impacts
      Terrorism impact assessment goes far beyond scenario-planning exercises similar
      to those described above in the “Vulnerability” section. It seems fruitful to
      distinguish among three types of real-world impacts. Two are connected to
      emergency responses, but the third is longer-term and most noteworthy for its
      economic effects.

          PRIMARY IMPACTS AND DIRECT SECONDARY IMPACTS
      The first type is primary impacts, the direct results of successful terrorist incidents.
      The focus is on actual damage, casualties, and disruption. While the Surface
      Transportation Vulnerability report estimated damage from scenarios, primary
      impacts concentrate on real-world events.

      The second type is direct secondary impacts, encompassing the real-world effects
      of the rescue and recovery effort. For example, what are the tonnage, trucking, and
      staging requirements to clear the site of the World Trade Center? How many
      thousands of people and pieces of equipment had to be mobilized and moved, and
      from how far away? What are the congestion and disruption effects caused by the
      recovery process, and how might they be mitigated?


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      Both primary and direct secondary impacts are familiar terrain to those
      experienced in disaster recovery from earthquakes, catastrophic weather events,
      and accidents such as the port explosions described in Exhibit 3. These impacts
      involve federal, state, local, and volunteer organizations in responding to and
      mitigating the effects of disasters and their aftermaths.

      The Federal Emergency Management Agency is expert in coordinating and
      managing responses to such events. The Federal Response Plan (FRP) is the critical
      reference document for interagency cooperation and execution, and it addresses
      transportation. The scope of the FRP, which was put into effect after the September
      11 attacks, appears to concentrate on direct secondary impacts. In terms of
      transportation, the main emphasis appears to be on coordinating and expediting
      the movement of recovery teams, equipment, and materials.32

      The emergency response impact categories have financial and economic aspects,
      such as budgetary impacts on governmental agencies, liabilities for insurance
      companies, personal and business casualty losses, and lost economic activity.
      However, the major focus is usually on physical and operational indicators, such as
      casualties, infrastructure losses, and rescue and recovery.

      Managing primary and direct secondary impacts. Dealing effectively with these
      types of impacts is important. Effective response can reduce pain and suffering for
      victims, yield more efficient use of scarce recovery resources, quicken economic
      recovery, and improve the public’s morale and faith in government institutions.

      Managing primary and direct secondary impacts can be described as
      “consequence management,” the term used in the emergency response community.
      Done well, consequence management is a form of impact mitigation. At least one
      writer pushed that idea to what seems an untenable extreme, arguing that superb
      consequence management of the effects of WMD would be a defensive measure by
      deterring terrorist action.33

      The federal government improved its consequence management capabilities in the
      mid- to late-1990’s and those improvements helped in the immediate response to
      the attacks of September 11. The GAO reported in 2001 “FEMA has generally
      addressed the key lessons learned from its experience in coordinating federal
      consequence management activities after the Oklahoma City bombing. … FEMA
      identified three major actions that needed to be taken: (1) create guidance to
      facilitate agencies' coordinated response to terrorist events, (2) ensure that state and
      local emergency plans [address] terrorism [and] the Federal Response Plan, and (3)
      establish an adequate number of emergency response teams to deal with mass
      casualties. Improvements in these areas have been made across the board. FEMA
      has updated the Federal Response Plan to address how federal agencies, states, and

      32
        The FRP is not a generally available document. Information about it is drawn from two
       discussions with emergency response managers in U.S. DOT’s Office of Emergency
       Transportation in November 2001.
      33
         “Weapons of Mass Destruction and the Homeland Threat: Deterrence through
       Consequence Management,” by David A. Tagg, US Naval War College, February 5, 2001.

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      localities would work together to respond to an act of terrorism, and states are
      increasingly modeling their emergency operations plans on the federal plan. ... In
      1997, FEMA reported to the Congress and to the President that the states had the
      basic capabilities to respond to disasters but were not well prepared for a terrorist
      incident involving a Weapon of Mass Destruction.”34

      State and local capabilities are critical to deal with primary and direct secondary
      impacts. The World Trade Center attacks illustrated the difficulties of delivering
      outside help immediately after a mass casualty attack—experts reportedly say
      “cities are on their own during the first 14 hours of a major attack or disaster.” The
      press is also highlighting success stories, such as the unusual readiness of San Jose,
      CA, to deal with nuclear, chemical, or biological attacks. 35

      Private firms have their own interests in “consequence management,” even if they
      do not use that term. Firms that make and ship dangerous goods arguably do the
      best job planning and preparing to handle primary and direct secondary impacts.
      Their efforts, rooted in a mix of safety-related regulations, enlightened self-interest,
      and good citizenship, would be valuable in responding to hazmat-related terrorist
      events. In fact, the chemical industry acted quickly after September 11 to adapt its
      safety perspective to security concerns, including risk reduction. Three industry
      associations worked together to develop and publish Transportation Security
      Guidelines for the U.S. Chemical Industry within three months of the terrorist
      attacks.36

      When shippers of more benign products do contingency or emergency planning,
      they do it because of their own perceived business interests, not because of
      regulatory pressure. Proprietary interests keep the plans private. As we will
      discuss in a section on security’s impact on operating practices, there appear to be
      wide variations in the seriousness of such planning in regard to terrorist attacks.

      The leading professional association in physical distribution, the Council for
      Logistics Management (CLM), is attempting to help firms better understand and
      prepare for the primary and direct secondary impacts of future terrorist events.
      CLM announced a supply-chain security research project for 2002 to create user
      tools to prepare for and respond to disruptions caused by natural disasters and
      computer viruses as well as terrorism.37




      34
        “Combating Terrorism: FEMA Continues to Make Progress in Coordinating Preparedness
       and Response,” General Accounting Office, March 1, 2001.
      35
        The quotation is from “Security-minded San Jose Showing Other Cities How,” Tatsha
       Robertson, Boston Globe, December 26, 2001.
      36
        The associations are the American Chemistry Council, the National Association of
       Chemical Distributors, and the Chlorine Institute. The Guidelines are on the web,
       www.cmahq.com/cmawebsite.nsf/s?readform&nnar-54bnk5.
      37
         “Securing the Supply Chain,” http://www.clm1.org/research/progress.asp.        “CLM
       Studies Security,” David Biederman, Traffic World, date?

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          INDIRECT SECONDARY IMPACTS
      Given this paper’s emphasis on freight security and productivity, and excepting
      extraordinarily catastrophic terrorist events—such as multiple nuclear explosions—
      one could argue that primary and direct secondary impacts may pale over time in
      comparison to the third type of impact.

      The third type is indirect secondary impacts, which are produced by
      countermeasures intended to prevent or mitigate terrorist incidents. Defenders
      against terrorism produce these impacts, not the terrorists. Initiators may be
      public, private, for-profit, or volunteer organizations. Actions may be reactive or
      anticipatory. A short-term example of the former was shutting down the U.S.
      aviation system for several days after September 11. Longer-term examples of the
      latter include delays in processing air cargo to ensure against contraband or
      reduced flexibility for international shippers and forwarders in how they manifest
      cargoes.

      Indirect secondary impacts may have profound implications because of their
      geographic breadth, functional scope, and potential persistence over time. First,
      these impacts can affect much wider audiences than the other types of impacts. For
      example, although the September 11 flights originated at three airports and went
      down in three other locations, the impacts of subsequent protective measures affect
      virtually all commercial passenger and cargo flights into and out of the U.S.
      Second, we can see that the post-September 11 countermeasures are affecting
      operating practices in other modes of transportation and functions ranging from
      staffing, through cargo documentation, to inspection procedures and more. Third,
      these impacts may become a “new normalcy,” dramatically changing operating
      practices for years.

      Exhibit 6 illustrates how emergency events and countermeasures drive the three
      types of impacts, plus some of the mechanisms that operate in each type of impact.




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                           Exhibit 4, Security Events and Types of Impacts

                                   Threats and                     Types of Impacts
                                   Assessments
                                                                         Indirect
                                                                        Secondary
                                   Security                              Impacts
                               Countermeasures
                                                                        Costs, delays,
                                                                       unpredictability

                                Terrorist Events                     Primary Impacts
                                                                     Damage & disruption


                                    Recovery                         Direct Secondary
                                    Measures                              Impacts
                                                                    Congestion & disruption




Implications of Indirect Secondary Impacts
      The introduction to this paper described the substantial benefit that transportation
      and logistics productivity delivered to the US economy and to its trading partners
      over the last two decades. The portion of GDP devoted to transportation and
      inventory dropped six percent, producing an annual economic bonus that may
      have been worth as much as $600 billion in 2000.

      Indirect secondary impacts of security countermeasures are fundamentally
      economic and they can erode productivity gains in two ways. The first mechanism
      is by increasing the cost of providing services--most terrorism countermeasures
      affect operating and capital budgets of firms in addition to those of government
      agencies. The second and more interesting mechanism of productivity erosion
      occurs when security considerations disrupt or change efficient business processes.

      Although indirect secondary impacts can be positive—such as eliminating network
      bottlenecks in mid-Atlantic rail service or improving intransit visibility—they can
      also impose direct and indirect costs on shippers, carriers, public sector bodies, and
      consumers.

      Some indirect secondary impacts are rather straightforward and well commented
      upon. Other impacts are more subtle, or less obvious, or less the subject of public
      discussion.

      The following sub-sections address additional security costs, changes to operating
      practices, and implications for long-term infrastructure policy planning. Following
      that, subsections address hypotheses that imply significantly greater risks to the


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      economy: a paradox inherent in logistics systems modernization, its interaction
      with complex terrorism, and the possibility for self-inflicted wounds.

           SECURITY COSTS
      One measure of the indirect secondary impact is the added cost of security
      measures to carriers and shippers. As of this writing, there is no comprehensive
      information, only suggestive discussions, anecdotes, and occasional nuggets of
      data.

      Robert Delaney, a respected observer of logistics trends, estimated that trucking
      and airfreight carriers would incur $2 billion in added security costs. He did not
      consider rail, maritime, or hazardous materials issues, “where the implications of
      security are far greater.” An article in The Wall Street Journal illuminated the source
      of these costs with an anecdote about a bulk chemical carrier that rehired a recently
      let go, $5000-a-month, night-shift security guard at its Newark, NJ terminal.38
      Improved terminal fencing and surveillance monitors are other component cost
      examples.

      An attempt to collect more focused carrier and shipper security cost information
      was largely unsuccessful.39 The only concrete cost information available so far is
      for the motor carriers that haul arms and ammunition for DoD. The Military
      Traffic Management Command (MTMC) increased significantly the security
      requirements for these shipments, creating new costs for the government and
      carriers. MTMC approved security-related rate increases of 20-25 percent by late
      autumn 2001. In contrast, there were no security-related rate increases for general
      motor freight carriers.40

      If Delaney is correct about the costs for motor carrier and airfreight operators, then
      it would be useful to consider his aggregate cost estimates relative to carrier profits
      and profit margins. Such a comparison makes the security costs appear more
      daunting. Joe Bryan, another expert observer, wrote “There's ample information to
      make the point that margins will not sustain large new investments in security.”41

      Available data, covering about sixty percent of the for-hire trucking industry, show
      an average net profit margin (net income divided by revenue) in 2000 of 2.7
      percent. Since for-hire trucking is about a $160 billion industry, the net profit

      38
         “’Just In Time’ Will Bend But Not Break,” Robert Delaney in a “Delaney’s Dugout”
       commentary on the Cass Information Systems web site, www.cassinfo.com/bob_jit.html.
       Delaney also estimated security-related increases in inventory carrying costs. Since those
       costs flow from changes in operating practices, we will discuss them in a subsequent
       section. The WSJ piece is “Freight-Transportation System Gets More Expensive, Slower,”
       Daniel Machalaba and Rick Brooks, September 27, 2001.
      39
         Efforts included discussions with industry association representatives and modal
       observers, plus library and web searches by the author and the DOT library staff.
      40
        The service changes and costs are discussed more fully in the portion of the paper that
       addresses hazardous materials.
      41
        Personal correspondence, January 23, 2002. Bryan generously provided the modal profit
       margin information presented below.

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      margin yields a very rough estimate of $4.3 billion in total profit. If one makes two
      more assumptions—that when Delaney wrote of carriers, he meant for-hire
      trucking, and that at least three-quarters of his estimated $2 billion in carrier
      security costs would fall to motor carriers rather than airfreight operators—then we
      are looking at security costs in excess of one third of total for-hire trucking profits
      in 2000—and profits are significantly lower now.42

      There is insufficient information to draw a comparable scenario for airfreight
      carriers. There are no industry-wide figures and many carriers have mixed
      operations that occlude visibility of airfreight profitability. FedEx offers good data,
      although the numbers include their ground operations as well as air. In 2000
      FedEx reported a net profit margin of 3.8 percent on revenue of $18 billion. Of
      course, that margin is not indicative of airfreight carrier financial health in the
      aftermath of September 11 and 2001’s recession, when some were estimating U.S.
      aviation industry losses of $5 billion for 2001.43 Some of the U.S. government relief
      funds appropriated for the aviation industry in September have helped with short-
      term security costs, but that does not alter Bryan’s fundamental caution expressed
      above.

      The nine Class I railroads posted an average net profit margin in 2000 of 7.3 percent
      on revenues of $34 billion. Bryan points out that this wider margin is no indicator
      of robust financial health or the ability to make significant new investments in
      security. Railroading “is one of the most capital intensive industries there is … so
      while margins look better than trucking, the reality is they are worse off. The
      industry as a whole has failed to earn its cost of capital for years.” The Association
      of American Railroad’s Vice President for Policy and Economics reinforced Bryan’s
      argument when he told a National Freight Forum working session that security
      costs “could quickly erode all company profits.”44

      The marine industry is also characterized by thin profit margins, but accurate and
      comparable data are hard to obtain for liner (container) operations because some
      firms do not report publicly while others do not break out liner results. Fortune
      quotes an A.T. Kearney officer in London, "container shipping is a chronically
      unprofitable industry. You don't see decent returns on capital for sustained
      periods of time." Although there is disagreement about liner profitability in 1998




      42
         Bryan’s information was “compiled by Transportation Technical Services from reports
       filed with the US and State DOTs. The reports capture companies accounting for around
       60% of for-hire industry revenue; small truckers are not required to report to DOT, and
       some big ones ignore the filing requirement (UPS is captured, for example, but Schneider
       isn't.)” Ibid.
      43
        “Logistics Leads Response,” Morton, Hyland, Aichlmayer, and Freeze, Transportation &
       Distribution, October 2001, p. 26.
      44
         Bryan’s “figures are compiled by the American Association of Railroads, from reports
       filed with US DOT. [The nine Class I railroads] … represent over 90% of rail industry
       dollars.” Craig Rockey described the potential profitability impact at the National Freight
       Forum on December 13, 2001.

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      and 1999, there is no question that recession and September 11 combined to
      eviscerate liner financial returns in 2001.45

               Insurance Costs
      Insurance is an important component of increased security costs for carriers and
      their shippers. Rates for ocean general cargo coverage, already rising in 2001, are
      accelerating: “increases that had been 10% to 15% are now in the 25% to 30% range,
      a pace spurred largely by the terrorist attacks…” Experts expect further
      acceleration as major reinsurance treaties expire in the first, second, and third
      quarters of 2002 and primary insurers factor higher reinsurance costs into the
      premiums they charge their customers. Hull insurance rates appear to be rising
      faster than cargo rates, although from more depressed levels and with less dollar
      impact. However, there are also reports that some marine underwriters increased
      war-risk rates from “a standard 2.5 cents per $100 of value to $3.75.”46

      Air cargo insurance rates are sharply higher. “Premiums for war-risk insurance,
      which [covers terrorism] … are rising more than 1000% for carriers that operate in
      ‘troubled areas,’ while others are seeing increases of 600% to 800%. … Liability and
      hull insurance is going up 80% to 100% for carriers with clean records and more
      than 200% for those with poor records.” The impact of the war-risk increases is
      buffered for six months, because most governments agreed to cover them for six
      months after September 11. If that buffer disappears, coverage comparable to
      earlier levels would result in significant airfreight rate increases to shippers.47

      The president of the Association of American Railroads (AAR) told the Senate
      Commerce Committee that the rail industry faced an insurance crisis comparable to
      the airlines. Underwriters were planning to exclude coverage for terrorist acts and
      raise rates significantly for remaining coverage.48


      45
        "The New Wave in Giant Ships," Philip Siekman, Fortune, November 12, 2001. An OECD
       report asserted that the five top liner performances met the average of firms in the Dow
       Jones Transportation 20 Index, but there was a convincing refutation of that analysis.
       ("World Shipping Council’s Analysis and Comments on the OECD Secretariat’s Paper,
       'Liner Shipping Competition Policy Report,'” December 2001, pp. 17-20.) 2001's profit
       deterioration is illustrated in "APL's 93% fall in profit pushes NOL into the red," Philip
       Damas, American Shipper, March 30, 2002. Robert Blair, WSC Director of Economics, was
       also a valuable source via personal correspondence.
      46
        “Insurance premiums rise,” Art Garcia in JoC Review and Outlook, 2002, p. 35-36. William
       Power, former managing director at Marsh McLennan, estimated cargo rate increases of at
       least 15 to 20 percent for “clean risks” with no previous losses; he expected the increases to
       be more substantial for customers with less perfect records (personal conversation,
       December 2001).
      47
        William Armbruster covers air cargo for the Journal of Commerce group. The quotation is
       from “Get ready to pay,” JoC Week, November 12-18, 2001, p. 38. He reports that
       expiration of war-risk buffer and restoring coverage levels could nearly quadruple security
       surcharges, bringing them to fifty cents on a one-kilo shipment from the U.S. to central
       Europe—“half the average base freight.” “ID for ‘known shippers,’ JoC Week, October 15-
       21, 2001, p. 25.
      48
         Edward Hamberger’s Senate statement is in “US railroads seek help on security,
       insurance costs,” Reuters newswire, November 1, 2001.

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      Insurance for hazmat truckers is of particular concern. By two months after the
      attacks there were reports that rate were up “more than three-fold which in turn is
      pushing freight rates up by 10%.” There are also concerns about reduced or
      eliminated coverage for terrorism.49

      Rates are a useful indicator, but insufficient. The better metric is the Total Cost of
      Risk, “the sum of a company’s outlays for insurance, retained losses, and risk
      management administration.” Badly stung by September 11 losses estimated as
      high as $70 billion, insurers are doing more than raise rates. They raised
      deductibles by as much as two-to-ten times, they are refusing coverage in more
      cases, and some firms are withdrawing from cargo and hull business lines
      altogether. In the airfreight market, underwriters dropped war-risk coverage limits
      from $1.5 billion to $50 million. The effect is that the Total Cost of Risk is
      increasing faster than rates. Perhaps more important, some shippers and carriers
      will be left with significantly greater risk exposure, so that major losses could put
      corporate survival at risk.50

               Total Security Costs
      This paper concentrates on security in regard to freight transportation and logistics,
      and a major concern is security’s impact on the total economy and prosperity
      through its intervening impact on logistics productivity. Given that concern, it is
      reasonable to note that non-logistics security costs will also burden productivity
      and prosperity.

      Nobel laureate economist Robert Solow, speaking informally, estimated the macro
      cost of security at “1-2% of GDP”—which implies between $100 and $200 billion
      per year. Solow considered this a bump in the road, requiring some economic
      adjustment, but essentially manageable within a growing economy.51 To put this in
      perspective, other economists estimate that, before September 11, the U.S. private
      sector spent $54 billion annually on crime prevention.52

      Richard Berner, Chief U.S. Economist of Morgan Stanley, took a less sanguine view,
      noting that terrorism is imposing persistent long-term costs, including some as
      indirect as growing military budgets and bioterrorism’s effect of slowing mail
      service. “Together, those costs could represent a new form of supply shock, like a

      49
         “Protecting The Hazmat Supply Chain,” White Paper Developed by the Freight
       Transportation Security Consortium, Response to USDOT BAA - DTRS56-BAA-0002,
       November 2001. This paper is freely available at transearch.com.
      50
         The quotation is from a report on insurance costs in 2000, “Cost of Mitigating Risk Fell
       Last Year,” David Katz, CFO.com, December 12, 2001. The range of deductible increases is
       from Power, and Garcia and other sources mention the issue of shrinking coverage. The
       airfreight information is from “ID for ‘known shippers.”
      51
        “Nobelist Solow examines economy and Sept. 11 effects,” MIT News Release, November
       19, 2001, reported on a talk Solow gave at MIT. The estimate of 1-2 percent of GDP was
       mentioned not in the release but in the author’s December conversation with MIT’s Yossi
       Sheffi, who attended Solow’s talk. (http://web.mit.edu/newsoffice/nr/2001/solow.html)
      52
        The $54 billion “includes $20 billion for security guards, $5 billion for access-pass systems
       and $500 million for airport security.” “Companies Are Seeing Efficiencies Erode As
       Security Worries Drag on Productivity,” Greg Ip, The Wall Street Journal, October 24, 2001.

FHWA Office of Freight Management and Operations                                               Page 25
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      longer-term tax on the economy that will hurt growth [and productivity] and could
      boost inflation. … Whatever each economist's estimate has been for productivity
      growth in the next few years — and thus for sustainable economic growth — this
      shock means it must come down.”53

      Wall Street Journal reporter Greg Ip was closer to Berner than Solow. “In ways that
      are only beginning to surface, Sept. 11 could add friction to an economy that had
      been discovering new ways to eliminate it.” “There aren't reliable historic
      benchmarks for how much added security will cost private enterprises and subtract
      from economic growth. Some expenditures will fuel economic activity. The
      security-guard business should boom. But this type of spending won't add to
      overall productivity, economists say.” Ip also noted “Expenditures to improve
      Americans' safety are ‘socially productive but economically unproductive.’”54

      Investment manager Steven Rattner was also cautionary in The Washington Post.
      “business must now face increased expenses that bring no greater output or
      efficiency. Every new guard or mail screener hired by a company adds to its
      workforce and its costs without adding one widget to its output. Every extra hour
      …. [spent in disaster planning] has the same effect. ”55

       In addition to private costs, including Delaney’s final figure of $20 billion in partial
      annual logistics security costs, there are three important clusters of public security
      costs. The first is the federal Homeland Security expenditure, which may be
      increased to $38 billion in FY 2003. The second is growth in the defense budget
      beyond that expected before September 11; the total increase requested for FY 2003
      is $48 billion. The third is states, local governments, and public agencies such as
      port authorities that are also incurring non-trivial security costs.56

      Although we lack comprehensive cost information, it appears the Congressional
      Budget Office is in the midst of a study to estimate total security costs, and the
      results should be illuminating.

            OPERATING PRACTICES
      It was unusual even a year ago to find much consideration given to a relationship
      between security risks and supply chain management practices. As this author
      observed in 2000, “indirect vulnerability to disruption [that is, indirect secondary
      impacts] hardly appears on any radar screen."57



      53
           “The Terror Economy,” The New York Times, October 23, 2001.
      54
        “Companies Are Seeing Efficiencies Erode.” Ip attributes the final quotation to Gail
       Fosler, chief economist of the Conference Board.
      55
           “War Is Hell, Especially on the economy,” November 8, 2001; p. A31.
      56
        Republican aides on the House Budget Committee are said to expect Homeland Security
       increases of $150 billion over ten years. “Anti-Terrorism Cost Exceeds $60B,” Alan Fram,
       http://apnews1.iwon.com/article/20020106/D7GSC2RO1.html, January 6, 2002.
      57
        The paper on the implications of defense transportation and logistics trends, written in
       2000 and released in May 2001, is one of FHWA’s Freight Analysis Framework theme

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      Not surprisingly, the events of
      September 11 brought the topic          Exhibit 7, Relationships Between
      more to the fore and the discussion                 Security and Supply Chain
      has moved in at least three                         Practices
      directions, summarized in Exhibit
      7. The first, addressed in this             • Security countermeasures can
      section,     is    that     security            threaten supply chain efficiency
      countermeasures, especially those
      related to international shipments          • Global supply chains and trade
      and airfreight, put the efficiency              magnify security risks
      and productivity of integrated
      supply chains at risk. The second,          • Integrated supply chains offer
      already touched on in the                       tools to manage security risks
      discussion of vulnerability, is that            and improve efficiency
      global supply chains, growing
      trade, and prosperity create or
      magnify security risks. The third, discussed in the section on “Win/Win
      Mitigation,” is that integrated supply chains offer an excellent vehicle to manage
      security risks while improving efficiency and customer service. There are
      crosscurrents among those directions, but all are valid.

               Public Discussion
      Most discussion about security impacts on productivity in the trade press and
      serious print journalism addressed threats to Just-in-Time systems and inventory
      levels. Not surprisingly, in the month or so after the attacks, commentators mixed
      anecdotes with attempts to look ahead. A survey by Purchasing done a week after
      the terrorist attacks, found “9 percent of supply chain managers saw no effect on
      deliveries, 52 percent reported a slight impact, but 39 percent encountered major
      disruptions.” London’s Supply Management warned “Procurement practitioners
      should be ready for disruption to international supply chains.” Consultants at EBN
      focused on diversions from airfreight to other modes. Canadian Transportation &
      Logistics concentrated on border delays and JIT impacts. Purchasing noted Alan
      Greenspan’s testimony to the Senate banking committee that “tighter border
      restrictions on trucks-along with the unprecedented drop-off in the use of air
      freight-‘has caused dramatic curtailments of production at some establishments
      with tight just-in-time supply chain practices.’" Mercer consultants wrote in The
      Wall Street Journal that “Ford shut down five of its U.S. plants, in part because the
      company could not get enough engines and drivetrain parts from suppliers in
      Canada.” They advised carrying “more buffer inventory…. focus[ing] on the most
      critical parts or those that come from a single international source.” There were
      several reports that Ford decided to establish safety stock inventories for some key
      Canadian components, and that the Manufacturers Alliance saw ''Businesspeople




       papers.   (Page 8 of the revised paper; the link to             the   report   is   at
       http://www.ops.fhwa.dot.gov/freight/adfrmwrk/index.htm.)

FHWA Office of Freight Management and Operations                                      Page 27
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      are starting to talk about keeping more robust inventories to guard against future
      disruptions.''58

      Another theme in public discussion, minor compared to JIT and inventory levels, is
      sourcing closer to demand and adding redundancy. JoC Week, for example, took a
      step in that direction when it reported that corporations are “taking a new look at
      alternative routing, visibility software, service providers, and mode usage.” One
      example is “to move Asian import goods through the Panama Canal to the East
      and Gulf coasts.” Mercer consultants advised, “Manufacturers should be more
      selective about where their critical parts are coming from. … companies should
      investigate purchasing from domestic, even regional suppliers, in order to
      minimize trans-border shipping delays.” MIT’s Yossi Sheffi wrote in CIO that after
      “introducing security into the equation,” it might make sense to have one supplier
      abroad and one in the U.S. The importance of redundancy was mentioned by
      several of the DOT modal administrators who participated in the “Spotlight on
      Security and Recovery” at the TRB 2002 Annual Meeting.59

      The major message from these commentators was that there might be some fine-
      tuning, but no significant changes in practice. JoC Week’s cover story in October on
      contingency planning noted some shippers concluded that “terrorist attacks are too
      infrequent and unpredictable to warrant any systematic plan that anticipates
      them,” and that “recent events hadn’t … prompted a drastic contingency re-
      evaluation” because “moving goods internationally has always been subject to

      58
        The Purchasing survey was reported in “Managers Rethink 'Just-in-Time' Inventory
       Management,” Computerworld, December 24, 2001) , p. 46.
      “Supply chains face major disruption and higher costs,” Liam O'Brien, Supply Management,
       October 4, 2001.
      “Shipments Disrupted As Flights Are Grounded -- Security Issues Create Long-Term Cost
       Concerns,” Laurie Sullivan and Jennifer Baljko Shah, Ebn, Sep 17, 2001,
       www.ebnonline.com.
      “Responding to Terrorism, Getting a handle on the long-term effects of Sept. 11 on trade
       and transportation,” Julia Kuzeljevich, CT&L, October 2001.
      “Base rates stable, but who will pay extra security costs?,” Tom Stundza, Purchasing, Nov.
       1, 2001. Stundza also reported that Ford and General Motors “found themselves at risk,
       lacking key components.”
      “When Just-in-Time Becomes Just-in-Case,” Joseph Martha and Sunil Subbakrishna, WSJ,
       October 22, 2001.
      The Economist went further, reporting that all big three auto makers were “forced to stop
       production until parts could be expedited through the border congestion.” “Taking stock;
       Business and terrorism,” September 22, 2001.
      Ford’s use of safety stock is in Martha and Subbakrishna and in “A Nation Challenged: The
       Suppliers, Agents of Recovery Under Stress,” Claudia Deutsch, The New York Times,
       October 9, 2001.
      59
        “What if?” Tirschwell, Dupin, Armbruster, Atkinson, Mongelluzo, and Edmonson, JoC
       Week, October 15-21, 2001.
      “When Just-in-Time Becomes Just-in-Case.”
      “Build Safety Stock, Then Forget You Have It,” CIO, November 15, 2002.
      The “Spotlight” was Session 148, January 14, 2002.

FHWA Office of Freight Management and Operations                                           Page 28
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      uncertainty and disruption.” Some JIT practitioners might adopt buffer stocks for
      “critical single source” suppliers, but that was regarded as nothing new.
      Purchasing reported “Analysts say [JIT practitioners] aren't likely to completely
      revamp their systems just yet or to switch supply from truck to rail.” By mid-
      November, JoC Week noted that an array of commentators and practitioners agreed
      that shipping patterns showed no signs of hedging behaviors, inventory patterns
      showed no signs of buildups, and any changes in inventory practices involved no
      more than adding a “small extra margin” to JIT stocks. Robert Delaney estimated
      that if safety stocks amounted to five percent of business inventories—and his
      careful wording did not commit him to such an estimate—then the annual carrying
      costs would amount to $18 billion. The Economist, which rarely shrinks from strong
      editorial judgments, concluded soon after the attacks “Much of this is tinkering at
      the edges, or nudging along something that was taking place anyway. Nobody yet
      thinks that the terrorist attacks will have any deep and lasting effect on how
      America does business. An inevitable increase in freight costs is not going to wipe
      out the benefits of manufacturing in low-cost countries abroad.”60

      In early January 2002, Logistics Management editor James Aaron Cooke published a
      broad and balanced review of the post-September 11 supply chain experience and
      prospects.61 Cooke saw more active reconsideration and more potential for change
      than the consensus reflected in the preceding paragraphs. The attacks, he wrote,
      caused “a wholesale rethinking of the way Corporate America moves and
      distributes freight.” Especially if and as government imposes stricter “security
      measures on carriers of all stripes, logistics managers could be forced to make big
      changes to their basic supply chain management practices. They may have to hold
      some buffer inventory, source more components domestically, or consider
      alternative modes of transportation. Indeed, the practice of logistics may be
      permanently altered by the events of Sept. 11, 2001. But that's not to say this is the
      end of supply chain management as we know it.”

      Contrary to the skepticism about contingency planning noted above, Cooke
      reported, “logistics executives at several leading companies acknowledged
      privately that strategy reviews were under way, [and] none wanted to reveal their
      plans publicly. But it's clear that some companies are re-examining whether
      offshore manufacturing makes sense if global shipments are to be subject to
      extended delays at points of entry into this country. Domestic sourcing avoids
      gateway problems and gives shippers more flexibility to shift modes if an

      60
           “What If?” p. 12.
      “Base rates stable…”
      “No stockpiling of inventory,” Helen Atkinson, JoC Week, November 12-18, 2001, pp. 40-
       41.
      Delaney asserted that U.S. business inventories totaled $1.5 trillion in 2000 and that a five
       percent buffer worth $75 billion in working capital would require the $18 billion annual
       carrying cost. ’Just In Time’ Will Bend But Not Break”.
      “Taking stock…”
      61
        “Brave new world,” Logistics Management & Distribution Report, January 1, 2002. Also at
       www.manufacturing.net/lm/index.asp?layout=articleWebzine&articleid=CA189908&pub
       date=1/1/2002

FHWA Office of Freight Management and Operations                                             Page 29
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      emergency arises. ‘Some companies are looking at relocating manufacturing from
      overseas,’ confirms John Simpson, the president of the American Association of
      Exporters and Importers, which includes 500 member companies. ‘They're
      concerned about supplying the U.S. market from a foreign plant.’”

      Some of Cooke’s sources described a trucking industry scenario that may result in
      JIT problems and demand more buffer stocks even with no further terrorist
      incidents or troublesome countermeasures: “some industry experts are worried
      that the nation's trucking capacity could be strained to the limits next year. Rising
      insurance premiums and in some cases, the absence of coverage could sideline
      some motor carriers, reducing freight capacity. …

      “With the possibility of service disruptions looming, companies may reinstitute the
      practice of holding buffer stock—at least for critical components. ‘Just-in-time
      practitioners need to think about creating some kind of buffer,’ advises Martha [of
      Mercer]. ‘This is not going to go away in the next six to 12 months.’”

      In the judgment of this author, the cautionary tone struck by Cooke’s sources is
      more appropriate than the almost dismissive stance reflected in earlier paragraphs.
      The less concerned observers seem implicitly to view the world through a filter that
      treats the catastrophic terrorism of September 11 as a one-time event, or assumes
      that subsequent attacks will not produce significantly different government
      reactions. They are not considering either the direct or indirect secondary impacts
      of repeated major terrorist events and government countermeasures flowing from
      those events. This paper addresses dynamics that could be unleashed by
      subsequent terrorist events in the section on “The Potential for Self-Inflicted
      Wounds.”62

               Underlying Dynamics
      It is helpful to address the dynamics that are critical to the impact of security on
      supply chain productivity. If “the central tenet of supply chain management [is]
      that synchronizing production to demand avoids excessive inventory, enhances an
      operation's efficiency and reduces costs,” then driving unreliability out of the
      supply chain is critical to accomplishing that synchronization. Predictability is
      more important than transit
      time.63
                                         Exhibit 8, Minimum Logistics Cost Versus
      ICF Consulting and HLB             Transit Time for Various Levels of
      Economics, although focusing       Reliability.*
                                                                                             CV = 0       CV=0.2     CV=0.4      CV=0.8        CV=1.6
      62
        There is an effort underway by the logistics profession to help firms better understand
                                                  25,000

       and prepare for the Direct Impacts of future terrorist events. At the end of December, the
                                                   Estimated Total Logistics Cost




       Council for Logistics Management announced a supply-chain security research project to
                                                  20,000

       create user tools to prepare for and respond to disruptions caused by natural disasters and
       computer viruses as well as terrorism. “CLM Studies Security,” David Biederman, Traffic
                                                  15,000

       World.
                                                                                    10,000
      63
         The quotation is from “Brave New World,” but the conclusion is the author's. A recent
       survey of 17 major shippers ranked the most important indicators for transportation. On-
                                                  5,000
       time pickup and delivery topped the list. (Georgia Tech Logistics Institute survey
       reported in "Stating the Obvious," Carol Birkland, Fleet Equipment, February 2002, p.4.
                                                    -
                                                                                             0        2        4        6       8         10      12

                                                                                                               Transit Time (Days)
FHWA Office of Freight Management and Operations                                                                                        Page 30
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                                                                                       * Transit time reliability is expressed using the
                                                                                       coefficient of variation CV. CV is defined as the ratio
                                                                                       of the standard deviation to the mean
      on highway transportation, assert, “logistics costs [and service levels] are shown to
      be highly dependent on both transit time and transit time variability. The
      sensitivity to transit times increases significantly for higher values of variability.”
      As Exhibit 8 illustrates, this means that increasing variability does increasing
      damage to cost (and service) levels as transit time increases.64

      ‘Increasing transit time variability’ is another way of saying ‘deteriorating delivery
      time reliability.’ As delivery reliability drops, not only do cost and service impacts
      increase—as one would expect—but they also increase faster as total transit time
      increases.

      We can also assert that (for any transit time or distance) cost and service level
      sensitivity to delivery reliability is directly related to the tautness of the supply
      chain. At least in the short term, lean, tightly coupled supply chains that use time-
      definite delivery will be hurt more by deteriorating reliability than will less
      efficient supply chains characterized by “Just-in-Case” inventory practices.
      Purchasing illustrated this relationship when it observed after September 11 that
      “most [JIC] manufacturers, … those that make and stock products in advance using
      inventoried components, have reported that shipping delays haven't noticeably
      affected their production.” Bryan bolsters the assertion in a different way, arguing
      that the greater “fragility in a low inventory system is purposeful, in that
      breakdowns are supposed to be exposed, understood, and prevented– not covered
      over.”65

      The ICF/HLB analysis focused on transit time. While the relationship between
      transit time and distance varies with mode choice and other service arrangements,
      one can use total distance as a crude proxy for total transit time. Roughly
      speaking, the sensitivity to unreliability is going to be greater for long supply
      chains than for shorter ones.

      The same analysis concentrated on domestic highway moves, where institutional
      barriers to freight movements associated with political boundaries are relatively
      trivial and, in any case, are subsumed in total travel time. It seems fair to assert
      that, for any given transit time or distance, ICF/HLB’s coefficient of variability
      would be greater for moves that involve national borders than for domestic moves.

      As a result of these arguments, and not surprisingly, extended global supply chains
      can be especially vulnerable to schedule disruptions, whether caused by an
      immediate terrorist event or by unpredictable security delays at border crossings.
      Further, the most sophisticated time-definite or JIT global supply chains are the
      most vulnerable. Indirect secondary impacts are likely to fall hardest on long, lean,
      international supply chains.




      64
           “Economic Effects of Transportation: The Freight Story,” p. 16.
      65
        (“Base rates stable…”) Joseph Bryan’s quotation is from a memo to the author, February
       14, 2002. Quoting further, “In the just-in-time concept, you got rid of inventory in part
       because it covered your sins, and in this way you raised quality and productivity.”

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      An interviewer quoted Theodore Scherck, president of the Colography Group,
      "There's been a realization that an extended global supply chain is a two-edged
      sword…. We have worked with extended supply chains that use time-definite
      transportation and sophisticated information technology to replace inventories ….
      But it carries a risk—lean inventories and extended supply chains magnify any
      interruption of flow.” Scherck also tied this relationship to security impacts,
      noting, “This war footing has more impact on a lean supply chain than it does on
      older models."66

      Overcoming the Dynamics. MIT’s Yossi Sheffi has written a thoughtful article that
      recognizes these dynamics.67      He suggests three types of investments in
      redundancy as preparedness against terrorism, the first of which is blended
      sourcing, mixing some higher cost domestic production with predominant use of
      lower cost offshore sourcing. In terms of the preceding discussion, blended
      sourcing would reduce a firm’s average supply chain distance and travel times,
      thus reducing the impact of unreliability.

      The second type of investment begins with a passionate but nuanced argument in
      favor of retaining JIT. Sheffi recognizes the JIT vulnerability argument but,
      supporting Bryan’s position, he asserts JIT is more valuable because of quality
      improvements than because of distribution cost savings.68 He proposes that firms
      hedge against another terrorist attack with a form of buffer stock he calls “Strategic
      Emergency Stock, ” managed with a “Sell-One-Store-One” (SoSo) inventory
      discipline.    SoSo should be managed in JIT fashion, used only for extreme
      disruptions, not for smoothing day-to-day fluctuations. Sheffi acknowledges the
      practical challenges of adhering to SoSo’s discipline.

      Sheffi recommends a third set of redundancy investments in knowledge. This
      includes developing backup emergency business processes, and documenting
      supplier and customer relationships thoroughly in Customer Relationship
      Management (CRM) software systems.

      Sheffi uses an insurance analogy to justify preparedness investment costs as a
      means to hedge risk and increase the expected value of profits over time. In the
      context of our earlier discussion of insurance costs, one can also think of these
      investments as ways to reduce the Total Cost of Risk to an enterprise.

      Overall, when one knits together the more analytic perspectives and the public
      discussion, one must conclude that defending against terrorist threats puts the
      efficiency of integrated supply chains at some risk because it is no longer prudent
      to optimize operations so completely around cost minimization. However, as we


      66
           Colography Group is a transportation research firm; quoted in “Brave New World.”
      67
        “Supply Chain Management under the Threat of International Terrorism” will appear in
       the next issue of the International Journal of Logistics Management. The author reviewed
       Sheffi’s draft dated December 2001.
      68
        “... having large inventories on hand creates complacency, which masks quality problems
       in the manufacturing, procurement, and other processes,” p. 5.

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      will discuss later, there are also opportunities to modify operations in ways that
      improve both security and
      business interests.
                                             Exhibit 9, Freight Tonnage Growth by
          LONG TERM                          Region, 2000-2020
           INFRASTRUCTURE
           REQUIREMENTS
      There is another, long-term                   Central                    89%
      dynamic implicit in private sector
      reactions to terrorism that may               Southern                   89%
      affect public policy issues related
      to patterns of freight flows, port            Northeast                  79%
      throughput               estimates,
      infrastructure adequacy, and                  Western                    100%
      congestion.

      FHWA’s Freight Analysis Framework prepared a set of trade and freight forecasts
      through 2020. Exhibit 9 shows regional variations, up to a doubling in the western
      states. Trade volumes through ports are forecast much higher. For example, U.S.
      Customs estimates that commerce in US ports will increase between two and three
      times by 2020. 69

      All of the estimates and discussions of logistics security impacts to date appear to
      be much shorter term. However, those discussions contain clues to changes that
      may alter the shape of the long-term forecasts--security considerations may modify
      the comparative advantages in cost and quality that cause trade to flow and grow.70

      We referred earlier to comments by logistics analysts that mitigating security risks
      caused them to think about how they source materials, bringing production closer
      to consumption. Were there no more major terrorist attacks, that restructuring
      perturbation would probably damp out with little impact. However, given the
      passion and skill of terrorists and the imperfect nature of security measures, it is
      most likely that there will be more major terrorist events. At least some of those
      events will disrupt supply chain flows and reinforce logisticians’ decisions to revise
      and shrink sourcing patterns.




      69
           The Freight Analysis Framework forecasts may be reached through
       http://www.ops.fhwa.dot.gov/freight. Exhibit 9 reflects Reebie Associates 1998 data and
       WEFA economic data and forecasts. John Vickerman cited the Customs data in his
       presentation, “US Chamber of Commerce Study on Port and Intermodal Capacity,” at the
       National Freight Forum Workshop, January 13, 2002.
      70
        Steven Rattner’s observation is especially relevant. “Another post-Sept. 11 phenomenon
       could be slowing globalization. More open borders and expanding trade have contributed
       meaningfully to economic growth, particularly in the United States…. All in all, sand has
       been added to the gears of an economy that seemed to have become almost frictionless.”
       “War is Hell.”

FHWA Office of Freight Management and Operations                                           Page 33
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      The implications begin with a possible shrinkage in rate of growth of offshore
      sourcing and more attention to domestic production. Given offshore cost
      advantages, we are talking about slower trade growth rates, not reversal of trends.

      Small percentage changes have profound impacts when compounded over
      decades. It is too speculative to estimate concrete impacts, but it seems prudent to
      pay greater attention to low point forecasts rather than the best and high point
      forecasts based on pre-September 11 algorithms.

      Another implication is that economic growth is likely to be marginally slower over
      time. If security concerns modify sourcing and supply chain behavior so they are
      driven less completely by cost and efficiency considerations, then the security
      concerns are causing the choice of somewhat higher cost options. Over long
      periods of time, higher cost logistics options cut into productivity, growth, and
      prosperity.

           FACTORS THAT COMPOUND ECONOMIC RISKS
      Indirect secondary impacts are essentially economic. They operate on the economy
      through two mechanisms, added costs of security and changes in operating
      practices that affect productivity and prosperity.

      This section addresses three factors that multiply the risks of—and vulnerability
      to—indirect secondary impacts. Each factor can stand alone, but they are of more
      concern because they can interact with compounded effects.

      The interaction of these factors is especially important because the risks will persist
      over time. All agree the war on terrorism will not be quick, but we should look to
      history for models of what that could mean. The 14th century gave Europeans the
      start of the Hundred Years War and the 17th century gave them the Thirty Years
      War. Closer to home, the 20th century gave us the 55 year Cold War.

               “Wolfe’s Paradox”
      One healthy reaction to September 11, as noted earlier, is much greater
      consideration given to the relationship between security risks and supply chain
      management practices. Commentators, analysts, and political leaders address the
      importance of minimizing the economic impacts of security countermeasures.

      Economic vulnerability may be greater than appreciated because of a contradiction
      inherent in complex systems and in the application of information technology to
      logistics. “Wolfe’s Paradox” offered the hypothesis that “overall logistics systems
      capabilities are growing simultaneously more robust and more fragile.”71 The


      71
        The following paragraphs draw on the author’s Freight Analysis Framework Theme
        Paper on the implications of trends in Defense logistics. ("Defense Logistics: From
        Stovepipes to Focused Logistics, Including a Post-September 11 Epilog," December 2001,
        www.ops.fhwa.dot.gov/freight/adfrmwrk/index.htm.)
      Frank Hassler named “Wolfe’s Paradox” after the author first observed and described the
        contradiction. “Technology Evolution & Its Impact on Transportation & Logistics,”
        annotated briefing, Volpe National Transportation Systems Center, August 5, 1997, p. 10.

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      paradox is hinted at by the irony that sophisticated JIT supply chains are more
      subject to delivery disruptions than older, less efficient models.

      The best-designed and executed software systems are potent, but not omnipotent.
      Well-tuned supply chain management systems excel in handling relatively small
      variations in supply or demand – variations within their competence and design
      capacity. However, those same systems cannot respond effectively far beyond
      their normal operating circumstances. Business processes dependent on such
      systems are likely to become brittle and fragile when confronted with large, sudden
      spikes in demand (such as a military surge) or plunges in supply (such as the
      sudden imposition of tighter security controls). 72

      The paradox gathers strength because it extends beyond supply chains built
      around particular firms such as Dell Computer or Wal-Mart. Global relationships
      among suppliers, intermediate and final manufacturers, intermediaries, carriers,
      distributors, and retailers are much more complex and interwoven. Most firms of
      any substance are part of multiple supply chains and, from a risk perspective, it is
      more helpful to think in terms of supply webs or networks rather than individual
      chains.

      At best, dependencies across chains are sure to exceed managers’ awareness
      because no management team can have more than a partial view of interwoven
      chains. Interdependencies may not be recognized at all. Disruptions in one supply
      chain are very likely to affect others. As Homer-Dixon suggests, “critical systems
      [are] so complex that they are replete with vulnerabilities that are very hard to
      anticipate.”73

      Webs of lean supply chains imply that transportation disruptions would cause
      wider, deeper impacts sooner than suggested by historical experience, such as with
      strikes and natural disasters. Lean systems mean fewer buffers before widening
      circles of factories shut down. Such impacts will be even greater during business
      cycle peaks because capacity is fully used and systems are more susceptible to
      congestion.

      Thinking about the paradox reinforces the conclusion that drastic or unexpected
      increases in security measures could equate to a sudden downward spike in
      available supply, triggering disproportionate impacts in very lean supply chains.
      The longer such measures—such as port and border closures—persist, the greater
      their impacts would be, starting with congestion.74 The events following
      September 11 may best be considered a foreshadowing of the paradox’ impact.



      72
         Murtha and Subbakrishna express it a bit differently, “Logistics software and other
       information systems tend to assume a stable environment. They make forecasts based on
       historical averages and cannot accommodate shocks that change the rules of the game.”
       “When Just-in-Time Becomes Just-in-Case.”
      73
           “The Rise of Complex Terrorism,” p. 61.
      74
         As Bryan pointed out in his memorandum, “the direct and cascading effects of
       transportation service disruptions on supply chains grow with their duration.”

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                  “Complex Terrorism”
      Thomas Homer-Dixon used the term “complex terrorism” recently after describing
      how a well-organized but low technology assault on the nation’s power grid might
      disrupt traffic, water, sewer, and financial systems.

           “We’re easy prey because of two key trends: First, the growing technological
           capacity of small groups and individuals to destroy things and people; and,
           second, the increasing vulnerability of our economic and technological systems
           to carefully aimed attacks. … [C]ommentators have … paid far less attention to
           the second [trend], and they’ve virtually ignored their combined effect. Together,
           these two trends facilitate a new and sinister kind of mass violence—a ‘complex
           terrorism’ that threatens modern, high-tech societies in the world’s most
           developed nations.”75

      Homer-Dixon argues that redundancy is the critical factor in the resiliency of a
      complex network. The “first rule of modern terrorism” is “Find the critical but
      non-redundant parts of the system and sabotage … them according to your
      purposes.”76

      Some complex networks have inherent and unpredictable instabilities with
      feedback loops that can produce “vicious cycles” that spread quickly. He mentions
      examples in the U.S. electrical, telephone, and air traffic systems.

      Homer-Dixon’s arguments touch on grave questions of vulnerability and security,
      many of which are beyond the scope of a paper on freight-related security. An
      important implication is to expand system assessments to identify non-redundant
      parts and potential vicious cycles, prioritize them, and begin remediation. Another
      implication is that the risks of complex terrorism and “weapons of mass
      disruption” multiply the weight of Wolfe’s Paradox. That happens because the
      paradox argues that logistics systems fragility also increases with unanticipated
      failures in information infrastructure such as GPS, the Internet,
      telecommunications, or power supply—all potential targets of complex terrorism.77

                  The Potential for Self-Inflicted Wounds
      Exhibit 6, Security Events and Types of Impacts, illustrated the three types of
      security impacts. The exhibit also hints at another reason why indirect secondary
      impacts can be tremendously important. The feedback loop from successful
      “Terrorist Events” to “Threats and Assessments” implies that these impacts can be
      very dynamic because they are subject to sudden changes imposed by government
      security and regulatory bodies. Indirect secondary impacts have an inherent
      instability.


      75
           “The Rise of Complex Terrorism,” p. 53, emphasis added.
      76
           He credits the rule to Langdon Winter, “a theorist of politics and technology,” p. 57.
      77
        GPS is of major and growing importance to transportation and logistics managers, and a
       DOT report has raised concern about the vulnerability of GPS services. ("Vulnerability
       Assessment of the Transportation Infrastructure Relying on the Global Positioning
       System," Volpe Center, released September 2001).

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      That instability powers a “next event/overreaction” hypothesis. Terrorists could
      find whatever damage they inflict in subsequent attacks to be significantly less than
      that done to the U.S. and its trading partners through ill-managed U.S.
      overreactions—damage inflicted through indirect secondary impacts.              (This
      hypothesis does not suggest that reactions will necessarily be disproportionate,
      only that they might be.)

      Publicly available security and countermeasure discussions since September 11
      have been dominated by a focus on the lessons and implications of that day’s
      watershed events—but relatively devoid of discussion about how the U.S. would
      or should react after a second or third major successful terrorist event, especially if
      one or more of those attacks were delivered via freight transportation systems.
      One commentator put the question directly: “How rational will we remain after the
      second or third major successful attack?”78

      The planning and re-planning cycle illustrated in Exhibits 5 and 6 suggests a
      careful and thoughtful process—new information from successful terrorist events
      is analyzed, priorities and resource allocations changed, and countermeasures
      revised.

      Raw emotion and political overreaction may distort the plan/re-plan cycle,
      especially if people are inflamed by another audacious mass-casualty event.
      Citizens, journalists, Homeland Security managers, and politicians are all
      vulnerable to impatient overreactions in the face of what seems to be another large,
      self-evident security failure.

      Stephen Flynn mentions the potential for self-imposed blockades on trade imposed
      in the name of security. He considers the proclivity to overreact as a potent
      weapon that we put in the hands of terrorists bent on weakening the power of the
      U.S. In his view, it is essential to our national security—and to that of our friends—
      to establish more effective extended cargo security, accept and educate the public
      that this security cannot be perfect, and learn to manage the results of virtually
      inevitable security breakdowns as military losses in the course of an extended war,
      not as triggers for counterproductive overreaction. 79

      Flynn puts the economic risk in perspective this way: “with 91 percent of all
      transoceanic imports and 95 percent of all transoceanic exports of general cargo

      78
         Norman Ornstein asked the rhetorical question on WAMU radio’s “The Diane Rehm
       Show” (January 2, 2002). Two presenters raised the issue at the 2002 TRB Annual Meeting.
       The first was this author before the National Freight Forum Workshop (“Freight
       Transportation Vulnerability, Security, and Productivity: A Brief Status Report,” January
       13). The second was Stephen Flynn in session 423, “Challenges and Impact of Increased
       Border Security on Trade and Transportation,” January 15. Since then, the topic has been
       discussed more generally. For example, one attendee at an OECD "brainstorming session"
       on maritime security estimated detonation of a containerized WMD would halt world liner
       traffic up to four months because of public demand for more security inspections.
       "Brainstorming security," Traffic World online, March 18, 2002.
      79
        In addition to Flynn’s post-September 11 works and discussions already cited, see “Cargo
       Intelligence: National security specialist is concerned about US response to terrorism,” JoC
       Week, November 5-11, 2001, p. 30.

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      moving in a maritime container, if we had to shut down all container traffic in
      response to a terrorist event that exploits that system while we struggle, after-the-
      fact, to develop a [more] credible system of security, we effectively would be
      shutting down global commerce during that period since there is no real alternative
      to the box for cargo shipments.”80

      Some public and industry officials recognize that a challenge exists. The Container
      Security Group is an interagency and industry effort that drafted recommendations
      intended for the Office of Homeland Security. Its report noted the importance of
      minimum threshold requirements to ensure the continuation of international trade
      in the event of another terrorist incident. The report recognized that the economy
      would be imperiled by a federal reaction to a terrorist incident that simply shut
      down all U.S. ports.81

      In February 2002, the topic became more visible when Chris Koch, president of the
      World Shipping Council, testified before a Senate committee, "The government
      must have a strategy and the capability to ensure that trade continues to flow, even
      if there is an incident…. The alternative would create an even greater incentive for
      terrorists to target the transportation industry, because the consequences would be
      so destructive."82 Such recognition is a step forward, but more vigorous action is
      needed.

      Homer-Dixon reinforces this author’s and Flynn’s arguments two ways. First, he
      suggests that the biggest impact of September 11 was on “collective psychology
      and our subjective feelings of security and safety.” Second, he suggests that “via
      the multiplier effect of our … emotional response,” September 11 had profound
      economic impact. “The total cost of lost economic growth and decreased equity
      value around the world could exceed a trillion dollars.” Given the small cost of the
      attack, future terrorists might see “an economic multiplier of over a millionfold.”83

      Three conclusions flow from the above. First, it is important for policy-makers and
      opinion leaders to take initiatives now, such as those suggested by Flynn, to buffer
      potential overreactions to future terrorist attacks.           Second, this “next
      event/overreaction” hypothesis implies that prudent business leaders accelerate
      their security preparedness measures beyond those indicated in most of the trade
      press. Third, we are subject to grave economic harm if a clever terrorist attack
      triggers all three factors—such as shutting down communications networks with
      freight-related attacks that promoted an extreme security response and disabled,
      tied up, and overwhelmed integrated logistics systems. Given Osama bin Laden’s
      October message to his followers—‘look for the key pillars of the U.S. economy and

      80
        Personal correspondence, February 2002. An analogous point appears in “OPERATION
       SAFE COMMERCE, Prototyping a Secure International Trade Corridor,” version of
       February 2, 2002, p. 3.
      81
         The report is not available to the public. All information about the CSG in this report is
       from discussion with the DOT co-chairs of the CSG Technology Subgroup.
      82
        “Carriers Want "‘Unified, Coordinated Strategy’ For U.S. Security Rules,” American
       Shipper, Shippers' NewsWire, February 20, 2002
      83
           “The Rise of Complex Terrorism,” p. 58.

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      strike them’—it makes sense to work on neutralizing the factors that compound
      our vulnerability.84

             STRATEGIC MOBILITY AND DEFENSE TRANSPORTATION
      Freight transportation vulnerability, security, and productivity issues affect defense
      transportation and strategic mobility. Defense transportation activities can, in turn,
      affect commercial transportation and logistics effectiveness.          Both sets of
      relationships are addressed in a separate Freight Analysis Framework theme paper
      drafted in 2000 and expanded in December 2001 to address implications of
      September’s terrorist attacks.85 This section highlights security-related aspects of
      that paper.

      One of four major trends observed in Defense logistics and transportation in 2000
      was "sensitivity to some safety and security issues is increasing." September 11
      galvanized that sensitivity. The attacks focused attention on potential terrorist
      threats both to US armed forces and installations, and to turning military materiel
      and transport into instruments of terror directed at civilians and civil
      infrastructure. There has been a watershed change, increasing the sense urgency
      and devotion of resources to DoD Force Protection and Critical Infrastructure
      Protection.

      Critical Infrastructure Protection. Increased Force Protection is evident today at
      the gate of every defense installation, where access and inspection controls have
      increased by an order of magnitude. Physical barriers are greater, protective forces
      are more numerous and obvious, clearance procedures more thorough and
      limiting, and many bases have been closed to visitors.

      Procedures are not uniform, apparently because of initiatives taken by local
      commanders. Delays can be significant and variable, and this has had an impact
      on the schedule reliability of freight shipments in and out of defense installations.
      For example, Federal Express informed DoD officials that they could not meet
      contract standards for small package delivery times because of the delays and
      variability caused by tighter inspections of trucks and packages entering posts and
      bases.86

      Infrastructure protection extends beyond installation gates. For example, MacDill
      AFB in Florida sits on a peninsula and the Air Force, working with Coast Guard,
      established a 1000-yard security zone that is to remain clear of boats at all times.87
      Given DoD's modal transportation programs to assure transportation

      84
        October 20, 2001 videotape, reported by Leonard Cross, ARUP Security Consulting,
       during his panel presentation, Session 183, “Security in the Nation’s Ports and on the
       Waterways,” TRB Annual Meeting, January 14, 2002.
      85
           “Defense Logistics.”
      86
        Personal conversation with a senior defense transportation official. Some variability
       within and among installations may be an effective security strategy, but that does not
       appear to account for all local inconsistencies.
      87
         USTRANSCOM new release, November 23, 2001, "Homeland Defense Coast Guard
       security zone, boat registration keeps MacDill mariners safe."

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      infrastructure availability between deployment bases, known as Power Projection
      Platforms, and ports—the programs are Highways, Railroads, and Ports for
      National Defense--one may take for granted that there is closer coordination
      between DoD, transportation firms, and all levels of civil government to protect
      bridges and tunnels that are critical to DoD.

      Hazardous and Sensitive Shipments. DoD paid close attention to the safety and
      security of hazardous and sensitive shipments prior to September 2001, reflected in
      the pride with which munitions transportation officials described their
      micromanagement of highway shipments in the continental US. Despite that, DoD
      has moved aggressively to increase control and security, as we shall discuss in a
      later section on security of hazardous materials.

      Vulnerability to indirect secondary impacts. The Defense trends paper argued
      that DoD’s ability to meet increasingly ambitious strategic mobility timelines for
      major combat forces are at risk because of transition challenges from commercial
      business to military deployment. Those transition challenges are greatest for rail
      and specialized motor carriers, and would be greater still during times of robust
      economic activity.

      The paper went on to suggest a defense corollary to Wolfe’s Paradox, “supply
      chains essential for strategic mobility are becoming simultaneously more robust
      and more fragile.” The corollary seems to be more potent than the basic paradox
      because the stakes of national security impacts can so exceed those of commerce.
      Lean inventories and JIT distribution in support of military engagements mean that
      the costs of transportation disruptions or logistics failures may be measured in
      blood and mission failure, not just dollars.

      The pre-September 11 edition of the paper observed “risks and pressures may be
      greater still if … future adversaries direct asymmetric attacks, such as infiltration or
      sabotage, against U.S. logistics lines of communication.” The post-September 11
      Epilog emphasized that defense capabilities could be impaired by terrorist
      disruptions to the supply chains of defense contractors as well as those targeted at
      DoD operations.88

      Security Issues. Among the open issues identified in 2000 and revalidated in
      December 2001 was “Maintaining Safety, Improving Security, and Reducing
      Vulnerability.” Three of its component items relate to this paper:

               •   DoD, its carriers, and law enforcement officials must improve the
                   physical security of munitions, weapons, classified, and high-value
                   shipments.

               •   There is a national need to understand and reduce direct vulnerabilities
                   of the freight transportation system to asymmetric attacks, and to
                   mitigate the effects of such attacks.


      88
           Pp. 23 and 32.

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                •   There is a national need to better understand and mitigate the indirect or
                    second order vulnerabilities to asymmetric threats – where congestion
                    effects or unintended consequences of security countermeasures may
                    disrupt freight system operation.89




      4. Win/Win Mitigation


      Richard Garwin put the challenge nicely: we need approaches to security that
      “contribute not only to the reduction of threats but to the lowering of the cost of
      reducing threats.”90 Garwin was referring not to cheaper inspection methods, but
      to modifying security and supply chain processes so that both work better.

      Although it is clear that new security costs will be substantial, some security
      measures—if designed and implemented well—can produce multifaceted benefits.
      Perhaps the title of this section might be “Win/Win/Win/Win Mitigation” because
      the best approaches should produce simultaneous (but imperfect) improvements in
      counter-terrorism security, efficiency, customer service, and theft reduction.

Perspectives on Win/Win Requirements
             SECURITY PERSPECTIVE
      If we look at Win/Win requirements for security and supply chain management
      from the perspective of improving security, there are three key ingredients.
      Shipments that met these hurdles would qualify for the least intrusive inspection
      and the fastest and most reliable security processing. Each description that follows
      outlines the highest security goals.91

      First, it is essential to assure the integrity of the conveyance loading process so that
      only proper cargo is loaded, that it is documented accurately and completely, and
      the conveyance is locked and sealed to the highest standards. At its best, this
      includes approved subordinate processes, and the processes are followed. They
      begin with screening and vetting personnel who stage, pack, stuff, document, and
      verify cargo and who seal containers and conveyances.              Each of those cargo
      processes and the computer systems that are part of them would be standardized,
      certified, transparent, and conducted in controlled environments. Conveyances
      must be locked and sealed with high quality equipment, under proper controls,
      and the identification information entered into all transport documentation.
      Shipment information must be safeguarded. All of the subordinate processes will

      89
           P. 33.
      90
        “The Many Threats of Terror,” Richard Garwin, The New York Review of Books, November
       1, 2001, pp. 16-19.
      91
        “OPERATION SAFE COMMERCE,” p. 3, identifies three things that customs analysts
       must do “when trying to identify the high risk as opposed to the low risk.” The items
       overlap with the first three described below.

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      be subject to periodic verification or audit by some independent authority. The
      overall program would be very similar to an International Standard Organization
      (ISO) quality assurance program. Firms that qualify would be more than “known
      shippers,” but would meet the highest standards and might be “trusted agents.”

      Second, processes must reduce the risk of tampering in transit. The end state
      includes comprehensive monitoring for tampering and intrusion—whether
      tethered or untethered—coupled with wide area notification of such events at the
      times they happen. In includes cargo condition monitors for dangerous goods,
      such as temperature or pressure sensors.        It includes business processes that
      assure verification of seals at every handoff and proper security at intermediate
      terminals and staging areas. Documentation is kept current, accurate, and
      complete, and is delivered or made available to authorized parties according to
      clear guidelines. Carriers that met such hurdles would be “trusted carriers.”

      Third, information about shipments must meet several requirements. It must be
      accurate, complete, secure, and available to those who need it in a timely manner.
      ‘Complete’ means sufficiently detailed, for example, to provide Customs and Coast
      Guard personnel with needed information on true contents, shippers, and
      consignees. Secure means safe from hackers. Available in a timely manner
      probably means prior to vessel loading in foreign ports.

      Of course, the description of these ingredients is extreme and, except for certain
      commodities and modes, impractical today because of feasibility or economics.
      The point, however, is that they provide a security-oriented filter against which to
      judge win/win alternatives.

          SUPPLY CHAIN PERSPECTIVE
      When we look at Win/Win requirements for security and supply chain
      management from the perspective of improving supply chain management, there
      are four requirements.

      First, the best security practices and standards, when adhered to, would result in
      commitments from Customs and other appropriate officials that they will process
      and inspect such shipments in ways that permit highly reliable and predictable
      processing times. Security officials would maintain Deming-like process control
      charts showing processing time distributions for shipments belonging to different
      classes of security standards. Security officials would meet regularly with shippers
      and carriers at the highest certification levels to explore ways to improve both
      reliability and security.

      Second, the best security and anti-tampering practices would flow naturally as
      byproducts of excellent supply chain management practices, not as no-value
      additions. The best practices in supply chain management for both efficiency and
      customer service would throw off the levels of control, accountability, and
      transparency that satisfied the highest requirements of security managers.

      Third, granular and detailed information provided to authorities for security
      purposes would be fully safeguarded. From a supply chain perspective, that

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      means protecting proprietary and competition-sensitive data, such as insuring that
      freight forwarder client detail is not freely available to ocean carriers.

      Fourth, security processes would be harmonized and standardized.              For
      international shipments, this implies multilateral consistency, agreed methods of
      enforcement, and genuine reciprocity.



Approaches to Win/Win Mitigation
            A STRATEGIC TEMPLATE: INTEGRATING BOTH PERSPECTIVES
      The strategy to achieve the goals from both perspectives is to weave security
      certification, notification, and verification processes more inextricably into the best
      supply chain management practices, and vice-versa. Broadly, that strategy offers a
      template to use in making judgments about progress improving security
      effectiveness and augmenting productivity.

      Flynn, writing from the security point of view for international commerce, notes
      “the new global economy model is decentralized. Many different companies often
      control a product through subcontracting drop shipping and franchises. ...
      Therefore, [it is necessary] … to identify security at each sequential stage in order
      to validate the entire delivery system.” He is closely associated with the proposed
      Operation Safe Commerce beta project, which identifies these discrete stages in the
      supply chain:

               1. “Product Origination (the factory and/or subcontract manufacturing)
               2. “Product Shipping to export facility (transportation company)
               3. “Export Stage repackaging and shipping (export broker)
               4. “International Transport (freight company)
               5. “Export Arrival and Storage (warehouses, customs facilities)
               6. “Cargo Break-up into multi-product facilities (drop centers, distribution
                  warehouses)
               7. “Product Arrival and Storage at the buyer’s facility.”

      An integrated supply chain strives to smooth each of these processes, the
      transitions between them, and the overall process using quality assurance
      practices; timely, accurate, and complete information; and decision support tools.
      That means superb supply chain management, for its own purposes, uses practices
      that also reduce exposure to tampering risks, build chains of custody and audit
      trails, and produce detailed data flows that can empower security screens and
      sophisticated analyses—what Flynn calls “virtual inspection.”92




      92
           “OPERATION SAFE COMMERCE,” pp. 4 and 3.

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      Implications for governments. Successful implementation of this strategy requires
      vigorous government leadership and collaboration. At least two implications
      relate to international agreements and practices concerning security regimes—
      standards, processes, expectations, technologies, and penalties.

      First, the security regimes must be harmonized internationally. Ocean carriers, for
      example, have legitimate reasons to expect government authorities across trade
      lanes to have consistent and integrated approaches to security. Paraphrasing a
      shipping association executive who was speaking informally, “do not put us in a
      situation where we have to respond to different electronic seal requirements in
      North America, Asia, and Europe.”

      Second, the security regimes must be genuinely reciprocal. U.S. trading partners
      have as much reason and legitimacy to be concerned about the integrity and
      security of American exports as the U.S. does in the reverse. As we shall address
      later, there are serious practical challenges and potentially destabilizing emotional
      and political implications to bilateralism.

           A VISION OF THE POSSIBILITIES
      The most optimistic vision of what is possible comes from Jonathan Byrnes, Senior
      Lecturer at MIT, chairman of a returns management software company, and former
      president of FastShip Atlantic. He believes better “security can radically improve
      productivity if thoughtfully done.” To Byrnes, this might reduce the cost of supply
      chain operations by 20-30 percent from what are considered good levels today.
      His focus is “the normal stuff of commerce,” which he described as “A” products
      with box values ranging between $20 and $500—perhaps 25 percent of shipments.

      The crux, to Byrnes, is driving more variance out of the system, going beyond
      delivery time reliability and minimizing safety stock. He sees major gains coming
      through better materials handling and setup, eliminating undiscipline at the
      manufacturing plant, warehouse, and at the customer end.

      The basis for driving out such variance is smoothing recurring flows within long-
      term trading relationships. Long-term recurring flows are the foundation for
      “trusted agent” levels of security as well as a lever for damping out “undiscipline.”
      That implies a “thoughtfully done” security regime would emphasize and offer the
      most reward to consistent, predictable flows.

      Longer transit times are preferable if predictability increases. Byrnes also proposed
      “Channel Express Lanes …. [as an] approach to creating efficient, secure product
      flows … a special high-security logistics channel -- an express lane through
      government checkpoints. … Such high levels of security would not be possible for
      every shipment, so companies would have to prioritize flows.”93



      93
         The quotations and numbers in the first three paragraphs are from a personal
       conversation, December 2001. Byrnes outlined the Channel Express Lane in “Consortium
       Approaches to Planning for Supply Chain Disruptions, Changing Definition of Security:
       From Theft-Proof to Tamper-Proof,” his section of MIT’s “Global Terrorism and its Impact

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      No other discussion uncovered in this project approaches Byrnes’ bold assertion of
      possible security-related productivity improvements, but there are other creative
      suggestions that look to provide economic benefits along with security.

           IMPROVING SUPPLY CHAIN MANAGEMENT
      This section addresses improved business practices that may have a byproduct of
      better security. Sheffi, for example, suggested several strategies to reduce
      vulnerability to unreliable delivery times. He believes supply chain managers
      should go “Back to Basics.”94

      Sheffi calls for “redoubled” efforts to improve vertical coordination throughout
      supply chains, meaning the links from component makers through assemblers,
      carriers, distributors, and retailers. Building on successes such as VMI and CPFR
      would enable firms to improve the quality of their combined forecasts, mitigate the
      inventory bullwhip effect, and improve responsiveness to disruptions. What
      Byrnes and Shapiro called “intercompany operating ties” also give better tools to
      meet and exceed “trusted shipper” standards.

      Another proposal is for better horizontal coordination to improve security within
      industries, cutting across supply chains.      Sharing lessons learned and best
      practices might lower security costs, improve security, and soften vulnerability to
      unknown supply web interdependencies as described under Wolfe’s Paradox.95

      Sheffi sees standardization as “a countermeasure that produces day-to-day
      benefits,” and as something beneficial at any time but with extra significance in
      terms of preparedness. “[C]orporations with several warehouse management
      systems, multiple order entry systems, several incompatible manufacturing and
      financial systems, are more vulnerable than companies who standardized their
      operations.” Standardization of processes and practices across an enterprise is
      “One of the most important tools in creating redundancy and the ability to recover
      quickly.”

           IMPROVING VISIBILITY AND CONTROL
      Improving visibility into and control of supply chains is the single most
      recommended approach to simultaneously improve supply chain management and
      security.   Although much of the discussion—including in this paper—uses the
      term “visibility” as a kind of shorthand, pure visibility alone is necessary but not
      sufficient. However, if one assumes that visibility is integrated with and feeds
      control and management operations, then it produces multi-layered benefits.



       on Supply Chain Management.” For more on Byrnes’ views on variability, see
       “Intercompany Operating Ties.”
      94
        “Supply Chain Management under the Threat of International Terrorism,” pp. 8-13. The
       standardization material referred to below is on p. 8.
      95
         One can, of course, argue that standardization increases some security risks at the same
       time. We address such issues in the section “Security Improvements Create New Risks
       and Beneficiaries.”

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      Sheffi gives a useful description of the supply chain visibility problem: “Many
      logistics managers are still describing the transportation system they are dealing
      with as a ‘black hole’ – shipments disappear when tendered to the carrier and no
      information is available to either shipper or consignee until the shipment is
      delivered. … Tracking industrial shipments has proved to be a significantly more
      challenging problem [than for consumers using UPS or FedEx] – it involves multiple
      carries and ‘hand-offs,” and it requires integration with manufacturing, inventory
      and purchasing -- since logistics managers need to know not only what is in-transit,
      but also what is available in stock, what is on-order, and when orders will be
      available from suppliers. And they deal with thousands of items every day.”96
      Another reason industrial shipments are more difficult is the commonly used
      distinction that UPS and FedEx operate “closed loop” systems, entirely under their
      own control, compared to the “open loops” that characterize international
      container traffic.

      Inadequate visibility undercuts business performance and security. It aggravates
      the inventory bullwhip effect, limits ability to reprioritize and redirect shipments
      en route, and provides opaque windows that may hide cargo tampering.

      Exhibit 10, illustrates the underlying visibility challenge.97 Most industrial and
      commercial shipments involve nested freight relationships. Pieces at each level in
      the nesting have—or should have—their own unique identifier. At each stage in a
      move, at each reconfiguration (such as container from flatcar to highway chassis
      and tractor), all of the relationships among the nested items should be updated and
      remain current, correct, complete, and available to all appropriate parties.

      The visibility discussion is confusing.
      People and firms mean many different                      Exhibit 10, Nested Freight
      things by “visibility.” The lack of clarity                        Relationships
      sows confusion, doubt, and delay in the
      marketplace, definitely slowing progress.                                    Conveyance

      To begin sorting this out, one must ask                                                                    Every shipment is a
                                                                                                                   chain of nesting
      visibility of what, by what means, in                                                   Container
                                                                                                                  transactions that
                                                                                                                      should be
      what time frames, and from what                                                                                transparent

      sources?                                                                                        Pallet


            •   Some focus on visibility of items                                                              Multipack
                being shipped, others on items
                                                            Nesting is
                ordered or forecast. Still others           the root of                                               Part
                focus on assets, such as reusable       freight tracking
                                                           complexity
                totes, freight conveyances, and       Courtesy of The North River Consulting Group

                transport power units.
            •   Many consider visibility to be access to databases, pulling transaction data
                that is already in someone’s computer even though it may be of uneven
                quality. Others think of visibility as the provision of event-driven data

      96
           P. 9, emphasis added.
      97
         “Trends in the Use of Intermodal Freight Identification Technology,” presented to the
       first Intermodal Freight Identification Technology Workshop, June 1998, p. 9.

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               pushed from bar code or radio frequency identification (RFID) readers or
               satellite transponders.
           •   Visibility timeliness is often misleading because of inconsistent use of the
               terms like ‘real-time.’ There are important differences between real-time
               access to a data base—which may have stale data; real-time transaction
               information from a railroad Automatic Equipment Identification reader—
               which can become stale until the railcar passes another reader; and near-
               continuous information and polling capacity from a satellite-based mobile
               sensor and location reporting system.
           •   At least three clusters of firms sell visibility. The first is transportation and
               logistics service providers—carriers, warehousemen, terminal operators,
               and forwarders. The second is an array of information service providers—
               from third party resellers of rail and air traffic system data to web-native
               services like Intraa and GT Nexus. The third category is hardware and
               system solution vendors—including RFID and satellite system component
               vendors, specialized solution providers, and major system integrators.

      Given this is a supply chain security discussion, visibility of items and assets are
      both important. Timeliness needs vary depending on the application, ranging from
      prior to vessel departure from overseas ports for Customs pre-clearance, to 96
      hours in advance for Coast Guard screening, to nearly immediate for intrusion
      sensor violation alerts. The sources must be integral to the actual supply chain
      operations, whether delivered from operators, third party services, or specially
      integrated links to security review and regulatory bodies.

      It is especially useful, however, to emphasize the distinction between the modes or
      methods of better visibility. The first category is the information system(s) that
      manage, manipulate, and display visibility information. This category cuts across
      carrier and 3PL systems and web-based e-business services, and it may include
      decision support tools. Such systems may be immensely sophisticated in their
      algorithms and data analysis routines, providing control tools in addition to
      visibility. Carriers also apply these tools for security risk management, sifting
      customer data looking for anomalies. In the past, such data mining concentrated
      on smuggling, but now it includes counter-terrorism.98

      The second category is the event- or transaction-driven tools that convert a physical
      event (loading an item into a trailer or hooking up a trailer to a tractor) into a data
      entry for the software systems. This category is critical because it determines the
      quality of the source data used by software systems--and hence constrains the
      value of those systems.

      The mechanisms range from a manual checker with a pen and clipboard, through a
      wide range of automatic identification technologies (AIT) from bar codes, through
      radio frequency identification tools, to satellite-driven tools. If software is the
      glamour category, akin to U.S. football quarterbacks and running backs, then the

      98
        Carrier risk management is analogous to Customs' risk management, which we discuss in
       a sidebar in "Borders and Cargo."

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      source data tools are the foundation, the offensive line without which nothing
      significant will happen.

      Experience shows both categories have been hard to get right and be widely
      implemented. For the systems category, technical issues appear much less difficult
      than institutional problems.       Problems of multilateral data sharing are
      compounded by the need to merge public and private sources and access.
      Different legal regimes, different standards, proprietary considerations, and
      information security needs form a thicket that slows real progress.

      The source data challenges have been simplest where barcode readers work best
      (as on the factory warehouse floor), but more challenging as freight and
      conveyances move away from the loading dock. Overall, difficulties have been a
      mix of operational, institutional, and technical issues. The operational difficulties
      reflect repeated breakdowns in the discipline needed to collect reliable and
      accurate data. The institutional difficulties include labor force resistance to
      automation and management caution about new investments and processes. The
      technical difficulties range from battery life, to hard engineering, practical
      ruggedization, and maturation of price-performance ratios. Substantial progress
      has been made. Good products are available and in growing use. The emphasis on
      security may provide a catalyst that increases the rate of progress and overcomes
      institutional resistance.

      Benefits of excellent visibility. Significant benefits flow when the systems and
      source data categories perform well and work together. This author breaks those
      benefits into three clusters.99 The first is efficiency and productivity. The
      capabilities can reduce errors, wasted effort, and re-work—saving both process
      cycle time and labor hours. Timely, trusted visibility information enables
      optimizing assignments of equipment and people, plus optimizing across
      functional areas such as operations, maintenance, and labor relations. Successful
      optimization reduces the cost of providing service.

      The second cluster of benefits is service quality. The ability to recognize and react
      early to problems increases operational flexibility. Shippers and carriers can
      respond more effectively to priority changes, divert shipments en route, and
      support supply chain strategies such as postponement. Perhaps most important,
      user and customer confidence increase.

      The third cluster is shipment and service integrity, which relate directly to
      security. When developed two years ago, the elements began with reduced theft of
      goods and services, including the ability to mitigate some losses in progress. Other
      elements were enhanced safety through better remote monitoring of cargo and
      conveyance condition, reduced insurance premiums, and better brand integrity
      through controlling diversion of goods to the gray market. Counter-terror security
      benefits belong on this list too.


      99
         “The Business Benefits of AIT [Automatic Identification Technologies]: How AIT
       Capabilities Produce Benefits for Different Types of Industry Users,” PowerPoint
       presentation to a client, April 2000.

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      Not all commentators extol the return-on-investment benefits of real-time visibility.
      For example, Don Ratliff, Director of Georgia Tech’s Logistics Institute and a 3PL
      and software entrepreneur, described a panel he attended of trucking and supply
      chain marketing executives. Ratliff said the panelists were skeptical of the financial
      return from real-time visibility, and that he shared the skepticism. He noted that
      every driver has a cellular telephone, offering relatively inexpensive
      communications. Real-time visibility would be useful to recover lost international
      shipments, but not at the expense of having to equip every shipment.100

      Better visibility for domestic shipments. Most discussions about improved
      visibility address global supply chains and international movements. The security
      interface issues are different for domestic shipments because there is no equivalent
      to Customs as a screening agent, but the arguments about visibility and its benefits
      are consistent.

      Drew Robertson, president of ASI-Transmatch and the Freight Transportation
      Security Consortium (FTSC), concentrated on better visibility for hazardous
      materials moving by rail and highway. According to Greg Ip, Robertson draws
      attention to the gaps inherent in the railroad industry’s Automatic Equipment
      Identification tracking system. He then “advocates the creation of a government-
      sponsored global-positioning system which tracks all rail cars and trucks carrying
      hazardous materials and shares real-time information among transportation
      companies, roughly akin to the way the Federal Aviation Administration operates.
      The cost would be less than $1 billion for rail cars about and $5 billion for trucks, he
      estimates. But once in place, such a system could be an economic plus. ’It would
      greatly increase the reliability of the transportation system,’ he says. ‘That can
      mean lower cost, lower production expenses, and less capital expenditure on tank
      cars and trucks.’”101

            EXPLOITING OTHER TECHNOLOGIES
      Technologists, vendors, and analysts have proposed a rich array of new, adapted,
      or differently applied technologies to improve security, some of them aimed at
      both security and productivity—such as Mr. Robertson’s recommendation. This
      particular paper is not the place for a thorough review of security technology
      trends and possibilities.102 However, there are five areas that merit mention
      because, if developed appropriately and applied wisely, they have the potential to

      100
         Conversation with Ratliff about two panels at the Eyefortransport conference, December
       4-5, 2001.
      101
         “Companies Are Seeing Efficiencies Erode.” The FTSC, which is not mentioned in the
       article, is a group of companies in asset tracking, monitoring, and related markets. FTSC’s
       focus is securing the hazardous materials supply chain.
      102
         U.S. DOT’s Research and Special Programs Administration (RSPA) and DoD received
       many responses to their Broad Agency Announcements for security-related technologies—
       over 600 at RSPA in November 2001 and over 12,000 at DoD in December. “For Federal
       Contractors, A New Tech Boom,” Renae Merle, Washington Post, December 27, 2001.
      DOT is sponsoring an “Intermodal Freight Security Technology Workshop and Showcase”
       in April 2002. This theme paper will be expanded for the workshop to address security
       technology trends.

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      enhance both security and supply chain productivity. The second, third, and
      fourth areas address aspects of event-driven source data essential to better visibility
      and control.

      The first area is supply chain-related software that can enhance security as well as
      efficiency. This includes asset management tools and logistics portals when they
      are tuned properly. Security-related functions, for example, would include
      building audit trails of each person involved in loading, checking, and sealing
      conveyances; lock-outs that require positive identification of authorized people for
      each process; integration of security sensor data; and logic to immediately call
      attention to sensor violations.

      The second area, electronic cargo seals, is a subset of sensor technology receiving
      serious attention from DOT, Customs, and others. Pre-September 11, many
      developers and potential users put priority on low cost and simple electronic seals
      aimed at theft prevention. Since September 11, attention shifted to more robust
      seals with greater security capabilities. Used well, these tools may help reduce
      congestion at border inspection areas at the same time they increase confidence
      about security.

      Electronic seals illustrate a major challenge to government and industry about
      exploiting security-related technologies: how to balance immediate availability and
      continuing development. The urgency of security against terrorism argues both for
      immediate application of off-the-shelf products and for further development of
      more effective, more operationally practical, and lower cost-per-use tools.

      Security sensors more broadly make up the third area. Point or portable sensors
      can monitor cargo and conveyances. Examples include intrusion detection beyond
      sealed doors and contraband “sniffers.” Nanotechnologies hold particular promise
      for inexpensive, unobtrusive sensors in the future. Since shippers and carriers
      already use temperature and pressure sensors to monitor cargo condition for
      quality and safety, it seems likely that development of more capable and less
      expensive sensors will support both security and efficiency.

      Wide area communications, the fourth area, offers a crucial complement to point
      sensors, especially when combined with GPS or other global location technologies.
      Cost and power issues aside, satellite-based systems are preferable to cellular for
      coverage footprints and potential global applicability. However, the tradeoffs
      related to electrical power—battery durability, size, expense, and operating
      complexity—remain a challenge, especially when multiple sensors are supported in
      addition to communications. When the price-performance ratio is right, many
      believe these tools can offer significant advantages in efficiency and service quality
      in addition to shipment integrity.

      The final area is biometrics as a set of tools to enable positive identification of
      authorized personnel. DOT’s field operational test that began with airfreight
      driver access to Chicago’s O’Hare demonstrated the potential of biometric
      technology combined with smart cards to enhance both security and efficiency.



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             HEDGING RISK FOR BETTER LONG TERM PROFITS
      Most observers view increasing safety stock, modifying sourcing, and emergency
      planning simply as added costs, but Sheffi looked at those factors differently. As
      discussed in “Underlying Dynamics,” he proposed treating those security-induced
      measures as investments in redundancy for preparedness. He advanced the debate
      when he suggested that the investments could be analyzed using real option
      theory, an insurance-like tool that relates not to productivity but to profitability.103

      Options are often used to hedge risk and maximize likely profits over time. In
      other words, short terms costs are incurred in the probabilistic judgment that the
      buyer will come out ahead over time. Sheffi illustrates the point quantitatively
      with the decision to shift a portion of supply to domestic sources. Using the
      language of expected value, he shows how, “when the possibility of disruption is
      taken into account, the expected profit” is greater than without the insurance of
      domestic production.

      Building on this, one might look at effective security precautions by firms not
      simply as burdens on profitability, but as hedges intended to maximize profits over
      time in the face of a less favorable environment.

             REAPING LOWER INSURANCE COSTS
      Cargo insurance itself offers an avenue to realize a profit-related benefit from
      improved security. Better counter-terror security practices should offer two
      insurance-related benefits. First, they should reduce exposure to theft hazards,
      with direct connection to claims and underwriting experience. Second, they should
      reduce exposure to being the agent or direct victim of terrorism. Given that
      terrorist incidents are much less common than thefts, and that terrorism loss may
      still occur indirectly (for example, from explosives in someone else’s container),
      terrorist risk exposure has a more tenuous connection to underwriting and rates.
      Those two factors imply significant differences in likely insurance benefits.

      It seems reasonable for shippers and carriers to collaborate with insurance
      companies, asking reduced rates as an incentive or recognition for adopting
      certified or best security practices. In practice, however, this does not happen and
      it seems even less likely in the foreseeable future. For example, the Technology
      Asset Protection Association, founded by high-technology shippers concerned
      about theft and diversion, sets security standards and hoped to initiate such a rate
      incentive or recognition program with selected insurers in 2002. However, an
      involved insurance executive considers that unlikely to happen because of the
      insurers’ September 11 experience and losses. In another example, a former
      security executive at Australia’s Ansett Airlines described his experience trying to
      arrange preferred rates for fleet hull insurance: “Despite being the only airline in
      the world with an ISO 9001 management system for Flight Operations and the best
      human factors program in the world we were politely scoffed at when we gently



      103
            “Supply Chain Management under the Threat of International Terrorism,” p. 3, fn. 1.

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      enquired about a reduction in premiums at Lloyds.” Lloyds’ focus was on claims
      experience.104

      If one adopts a patient stance, then insurance rate benefits become reasonable goals
      for the theft-related losses that should drop because of improved counter-terror
      security. Industry practice is to reduce rates after actual loss experience improves,
      not upon adoption of best practices. According to an industry executive, insurers
      follow a conservative practice of factoring better loss experience into rates
      gradually, after a delay of several years.105

      Good practices rate benefits seem unlikely for terrorism risks. The low occurrence,
      high penalty, and political nature of the risk makes recognition of better loss
      experience more problematic than for theft. The insurance official who was active
      in the TAPA incentive program believes adopting best practices may turn into a
      necessary hurdle simply to guarantee availability of coverage, not to provide rate
      advantages.




      5. A Scan of Progress


      There are many facets to freight-related security, varying by mode and by
      crosscutting characteristics such as Customs and borders, hazardous materials, and
      personnel authentication. It is a challenge to strike the right balance in breadth and
      depth of coverage. The purpose of this section is to provide sufficient information
      to be a foil for preceding material. It sets the stage to bring together the
      implications of security impacts and the outline of win/win approaches in
      “Integrating the Pieces.”

Air Freight and Small Package Express
      Prior to September 11, governments, carriers, and forwarders paid relatively more
      attention to security for air cargo than any other mode and they increased security
      after September 11. Few details are available on the new security measures , but it
      is fair to conclude there were important gaps under the old regime and, despite
      new measures, most of them remain.

      Airfreight security is accorded lower priority than air passenger security by the
      U.S. government. DOT leaders are forthright about this, and their position reflects
      implicit priorities in the Aviation and Transportation Security Act of November
      2001. Undersecretary for Transportation Security John Magaw, for example, told


      104
         Personal conversations with TAPA president Rosanna Herrera (December 2001) and
       with insurance executive and consultant William Powers, referenced above. The Ansett
       example is from personal correspondence with Greg McDougal, November 2001.
      105
        Peter Scrobe, a loss control expert and vice president of both the American International
       Marine Agency and the National Cargo Security Council, in personal conversations in
       November and December 2001.

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      reporters that he intends to improve cargo security, but passenger safety comes
      first. Although the law pays considerable attention to air passenger security,
      setting explicit requirements and timeframes, it is briefer and more general for air
      cargo.106

      The known shipper regime is the core of air cargo security today. Initiated under
      the International Civil Aviation Organization (ICAO) after the Pam American
      bombing over Lockerbie, it provides better service to shipments from established
      companies with existing patterns of business with airfreight forwarders and
      carriers, “enabling [shippers] to send secure intact loads to forwarders with the
      minimum of fuss.” The known shipper regime reflects the common view that it is
      more practical and more effective to verify shipments before they get to an airport,
      rather than inspect them at the airport. The regime, however, is not uniform and
      there is an international initiative aimed at creating a global database of certified
      shippers.107

      After September 11, the definition of a known shipper was tightened and clarified.
      The FAA requires at least twenty-four shipments in the previous two years or a
      physical inspection of the shipper’s facilities by the forwarder or carrier.
      According to the new law, all cargo on passenger aircraft—about sixty percent of
      U.S. air cargo—must be screened if it does not meet known shipper
      requirements.108

      All-cargo aircraft are treated differently in the legislation, which mandates that "A
      system must be in operation to screen, inspect or otherwise ensure the security of
      all cargo that is to be transported in all-cargo aircraft in air transportation and
      intra-state air transportation as soon as practicable after the Act." These carriers
      have had greater responsibility for their own security in the past and are reported
      to have done limited spot screening for contraband. The larger carriers, such as
      FedEx and UPS, are considered to have the best programs, while observers
      consider smaller carriers less reliable.         All carriers seem concerned that
      implementing regulations to be prepared by DOT might require that all shipments
      be screened.109

      The value of known shipper programs has limits. First, they offer opportunities for
      infiltration, reflected in the history of drug smuggling and reports that Al Qaeda
      shipped contraband through established honey producers in the Middle East. An
      executive responsible for security at Frankfurt airport was quoted, “I am actually

      106
          “Transportation security czar Magaw admits 'concern' about cargo, but puts passengers
       first,” Traffic World on line, February 21, 2002. The legislation is described in “Freight's
       Blanket Security,” Paul Page, Air Cargo World online, January 2002.
      107
          “Logistics operators sit tight as anti-terrorism controls are drafted,” Lloyd's List
       International, February 18, 2002, and “Freight's Blanket Security;” “ID for known shippers;”
       and “Freight's Blanket Security.”
      108
        Greg Schneider attributes the market share for passenger aircraft to John Magaw, “Pilots
       Urge Tighter Cargo Screening,” Washington Post, January 30, 2002.
      109
         “Freight's Blanket Security” and “Pilots Urge Tighter Cargo Screening” are the principal
       sources for this and the remainder the aviation section.

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      more comfortable with unknown shippers.” Second, they do not address other
      important gaps. Page wrote “The dangers do not come from shrink-wrapped
      shipments from huge industrial manufacturers, but from the confusion around air
      cargo terminals.” Access to cargo ramps is considered by some to be one of the
      weakest security links on airports.

      Another concern is the security of the cargo aircraft themselves. James Hall, former
      chair of the National Transportation Safety Board, pointed out that cargo aircraft
      might be more attractive hijack targets for terrorists because there would be no
      passengers to help the crew fight back.

      Access to freight terminals, ramps, and aircraft raises the issue of personnel. There
      is greater attention to background checks and positive means of identification,
      including a national transportation identification system in the U.S. that we will
      address in the section on hazardous materials.

Railroads, Motor Carriers, and Hazmat
      Any discussion of freight security for the railroads and motor carriers soon turns to
      security for hazardous materials. We will address each mode briefly, then turn to
      the crosscutting issue of hazardous materials.

            RAILROADS
      Railroads and government agencies increased their attention to security against
      terrorism after September 11 and recognize there is more to do. However, there
      also appears to be an impression that the rail freight system is relatively more
      secure than other modes. The Federal Railroad Administrator noted the industry’s
      stable workforce, which helps to identify outsiders, and the randomness of many
      discrete railroad operations, which makes planning more difficult for terrorists. A
      senior DOT security official told an officer of the Association of American
      Railroads (AAR) that “he sleeps much more soundly” about railroad security than
      he does about ports and shipping. A spokesman for the Burlington Northern was
      most colorful, telling a reporter that ''Railroads have had a fairly state-of-the-art
      security system in place since the days of Jesse James.''110

      The AAR formed five critical action teams to coordinate security improvements.
      Two related to infrastructure security (information and physical), one to
      operational security, and the final two addressed hazardous materials and military
      liaison.111

      Railroad safety and security against terrorism is tied tightly to the integrity of
      railroad physical and communications infrastructures, which constrain and enable
      railroad operations. Since railroads own most of that infrastructure, there is a long

      110
         Alan Rutter in “Spotlight on Security and Recovery.” Informal discussion with Craig
       Rockey, Vice President, Policy and Economics, December 2001. The BN’s Patrick Hiatte
       was quoted in “A Nation Challenged: The Suppliers, Agents of Recovery Under Stress,”
       Claudia Deutsch, The New York Times, October 9, 2001.
      111
        “Railroad Security,” a two-page information sheet prepared for a security meeting at the
       TRB on December 12, 2001. Provided to the author by the AAR.

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      history of exercising responsibility for it. That includes responding to natural and
      man-made disasters and operating their own police forces, largely to protect their
      property and goods shipped by their customers.

      After the attacks, the railroads themselves intensified inspections of their systems,
      restricted access to facilities, and took other actions. Industry leaders have been
      careful not to provide clues about their vulnerability.

      Government agencies cooperated in raising security for bridges and tunnels and
      other key assets. For example, New Jersey deployed National Guard troops at
      bridges, tunnels, and port authority rail transit stations to provide a "visible armed
      presence." "It's not based on any specific threat," a Guard colonel said. "It's what a
      prudent government is doing."112

      Over time, railroad security will improve as bottlenecks are eliminated and
      redundancy improved. The AAR’s critical action team on Information Technology
      and Communications is addressing redundancy in its realm, but the Mid-Atlantic
      Rail Study is taking a longer-term approach to issues of physical infrastructure as
      well as information.

      The mid-Atlantic states are the nation’s largest production and consuming region,
      congested, geographically constrained by mountains, rivers, and the Chesapeake
      Bay, dependent on rail systems with notorious constraints such as Baltimore’s
      Howard Street Tunnel and Delaware’s Shelpot Bridge, with major limitations on
      doublestack trains. Although security was not on the agenda when five states,
      three railroads, and the I-95 Corridor Coalition initiated the Mid-Atlantic Rail
      Study, it is clear that there are security benefits to it. The coalition partners
      proposed a three phase, $6.2 billion program that includes bridges and tunnels;
      capacity, connections, and clearances; and information systems. Funding of the
      first two phases over ten years would eliminate important choke points that need
      design and environmental approvals.113

      FRA, in addition to collaborating with industry and other jurisdictions for near-
      term security improvements, has a longer-term initiative that holds great promise
      for improving security along with safety, operating efficiency, and improved
      customer service.    Intelligent Railroad Systems (IRS) could achieve these
      simultaneous goals using digital data communications, sensors, and computers.

      IRS would use the technologies to enhance security through prevention, detection,
      and notification of incidents, and by supporting recovery from incidents.
      Continuous, real-time information is an important feature of the IRS concept,
      which integrates six technologies: digital data link communications, Positive Train


      112
         “Guardsmen to be stationed at PATH's facilities,” Daniel Sforza, northjersey.com, October
       26, 2001. Lillian Borrone, active in New Jersey and Port Authority recovery programs,
       emphasized the state’s joint focus, with Amtrak, on rail bridge and tunnel security
       (personal conversation, December 2001).
      113
        “Mid-Atlantic Rail Study,” Randall Evans, CSX, National Freight Forum Workshop, TRB
       Annual Meeting, January 13, 2002.

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      Control (PTC), Nationwide Differential GPS (NDGPS), Automatic Equipment
      Identification (AEI), electronically-controlled pneumatic (ECP) train brakes plus
      sensors, and intelligent grade crossings.

      One illustration of a security application would be the integration of crew
      registration systems, perhaps with biometrics, to limit train operation to authorized
      crewmembers and approved movements.114

             HIGHWAYS
      The network of motor carriers that carry the bulk of the nation’s freight shipments
      is both the most vulnerable and the most secure of the modes. Both features are
      rooted in the diversity of the network.

      Vulnerability comes from the atomized nature of the industry, its huge numbers of
      individual firms, low barriers to entry in some industry segments, and
      coordination that is looser than other modes. There are many opportunities for
      terrorist to penetrate trucking firms or create their own. However, the mode’s
      vulnerability seems limited to what we described earlier as point attacks.

      Security is significant on a systemic basis, as noted earlier in the report. Large
      numbers of firms and trucks combine with a richly developed highway
      infrastructure to provide a redundant and resilient system. Significant investments
      in Intelligent Transportation Systems (ITS) technologies are meant, in part, to
      augment the natural resiliency. Of course, there are potential bottlenecks on parts
      of the system—the Hudson River crossings into New York City would have to be
      attractive targets to terrorists—but the system as a whole would be very hard to
      shut down. The highway system is also much quicker to clear congestion after a
      problem than other surface modes.115

      Improving infrastructure security has been an important focus for government at
      all levels and industry as well. Reflecting different patterns of infrastructure
      ownership, the balance between public and private sector activity has been much
      different than for the railroads. The Federal Highway Administration, working
      together with states, local governments, and industry, moved quickly to identify
      the most high value and highly vulnerable assets, then help devise protection
      strategies.116 AASHTO, as discussed earlier, surveyed all fifty states about the
      security of critical infrastructure.

      Much of the industry’s infrastructure focus has been on improving security at
      terminals. Carriers began fencing open yards, issuing identification badges for the


      114
        “Enhancing Railroad Security with Intelligent Railroad Systems,” Steven Ditmeyer, TRB
       Annual Meeting Session #107, Railroad Security, January 14, 2002.
      115
         For example, Bryan compares the ability to clear congestion on highways very favorably
       to rail congestion, which “does not clear quickly, and can spread across a network. It
       retards the repositioning of empty equipment for reloading, as well as the delivery of
       loads, and cuts the hauling capability of a fleet.” (Memo, February 14, 2002).
      116
            Mary Peters, FHWA Administrator, in “Spotlight on Security and Recovery.”

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      first time. Yellow Freight reportedly pursued electric fencing for terminals that
      would sound an alarm if cut.117

      The operational focus at FHWA concentrated on response to and recovery from
      terrorist incidents. Methods included sharing best practices and lessons learned
      and conducting tabletop exercises. Another operational area, for government and
      industry, is cross-border operations, and we will also consider that below. Most
      carrier operational security activities focused on hazardous materials, which we
      consider below.

      Carriers also adjusted their operations because of security measures by others. For
      example, the American Trucking Associations reported that some dispatchers are
      building extra time into schedules because trucks are stopped more often at toll
      plazas and weigh stations. In another example, “Tightened security in office
      buildings has led to bans on certain delivery trucks parking nearby. In response,
      Office Depot Inc … says that some of its trucks have been forced to park down the
      street or around the corner, rather than right in front of customers' buildings.”118

      The TRB has encouraged voluntary collaboration to improve truck security, as it
      has in other areas. A brainstorming session in November 2001 included all major
      stakeholders and identified four clusters around which to build work groups;
      drivers and facilities drew the most attention, cargo and trucks the least. At that
      point, it appeared that most security actions in the field had been fragmentary,
      there was no catalog or list of actions, and no discussion of security costs.119

      Personnel security is an important concern. The Congress, the American
      Association of Motor Vehicle Administrators (AAMVA), and others addressed
      driver screening, credentialing, and identification. Although the topic touches all
      aspects of commercial vehicle operations and extends to all forms of transportation,
      we discuss it in connection with hazardous materials.

      The ITS program offers security-related benefits for motor carriers analogous to
      those mentioned for IRS and the railroads. The Intelligent Transportation Society
      of America (ITSA) formed a public-private task force to consider ITS security
      applications in general. FHWA published an open solicitation in February 2002 for
      proposals to increase security through ITS, specifically encouraging applications
      related to commercial vehicle operations. FHWA also has funded several on going
      freight-oriented ITS field operational tests that have security implications.120



      117
            “Freight-Transportation System Gets More Expensive, Slower.”
      118
         “Officials Try to Secure Highways,” Jonathan Salant, The Associated Press, November 3,
       2001, and “Freight-Transportation System Gets More Expensive, Slower.”
      119
        Personal conversation with Michael Belzer, chair of the TRB Task Force on Trucks and
       Associate Director of the University of Michigan’s Trucking Program, December 2001.
      120
         We mentioned the truck driver biometrics and airfreight manifest data test under
       “Exploiting Other Technologies,” and we will address another in connection with
       “Borders and Cargo.” Information about the tests is on the FHWA freight web site.

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      An intriguing clue about improving security may lie in research that FHWA
      sponsored into the connection between highway safety and productivity.
      Researchers found truck driver pay tightly tied to safety outcomes, with safety
      indices improving at twice the rate of pay increases.121 While there are a host of
      practical questions, it may be worth looking into analogous relationships between
      pay and security performance. If such a relationship exists, it seems likely to be
      stronger for security guards and inspectors than for transportation operators.

            HAZARDOUS MATERIALS
      The high priority accorded to the security of hazardous materials was evident in
      our discussion of threats and vulnerability. Explosive dissemination of a tanker
      load of chlorine, ammonia, or hydrogen cyanide is one of the nightmare scenarios
      related to freight transportation.

      Concern about such risks and the lack of clear threat information prompted
      immediate operational changes after the September attacks. For example, the
      major railroads embargoed shipments of highly toxic chemicals for the three days
      following the September attacks. We have also seen that shippers and carriers of
      highly hazardous materials paid great care to safety before September 11 and they
      expanded their attention to security against terrorism immediately afterwards.122
      The Defense Department, a large shipper of munitions and weapons, increased
      dramatically their security measures, as we describe below.

      The Congress acted quickly too. The “USA PATRIOT Act,” signed in October,
      prevents states from issuing or renewing commercial driver licenses with hazmat
      endorsements until DOT certifies the individual does not pose a security risk. The
      Federal Motor Carrier Safety Administration (FMCSA) clarified to the states and
      the industry that implementing the law would follow formal regulatory
      procedures. The Congress is also considering other hazmat measures as part of the
      Hazardous Materials Transportation Safety Reauthorization Act. Two features
      address regulation of hazardous material shipments by mail and standardizing the
      state hazmat transport permitting processes.123

      Over 32,000 firms are approved as carriers of “high consequence” or placarded
      materials. FMCSA developed security guidelines and educational materials for
      those firms and their personnel. The agency redirected its entire field enforcement
      staff to making security advisory visits to those carriers. By mid-January 2002,


      121
          Belzer conversation and TRB panel discussion, Session 514, “Surface Freight
       Transportation Safety and Productivity,” January 16, 2002.
      122
         Addressed, for example, in “Collateral Effects of a Hypothetical Terrorist, Truck-borne
       Attack using Hazardous Chemical on Washington, DC,” unclassified (sensitive), Defense
       Threat Reduction Agency, 1 October 2001. The rail embargo was reported by an official of
       the National Industrial Traffic League in conversations in December 2001 and January
       2002. Shipper industry response is discussed in the subsection above on “Managing
       Primary and Direct Secondary Impacts.”
      123
         “Washington View, A New Era Unfolds in Transportation,” Lisa Harrington, T&D,
       February 2002.

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      FMCSA completed 15,000 visits and various state agencies completed over 10,000
      similar visits.124

      In most cases, safety and security measures are complementary, but increased
      sensitivity to hazmat security brought to light a rare conflict. Safety concerns for
      communities and first responders call for clear labeling of hazardous commodities.
      Security concerns about denying critical information to potential terrorists suggest
      removing such public labeling and placards. Several of the DOT’s senior leaders
      mentioned the issue during the “Spotlight on Security and Recovery,” and they are
      dealing with this conundrum; it seems likely that security will take precedence.

      Security concerns dominate the discussion about hazmat security countermeasures.
      Government and industry make few details available. For example, the AAR
      acknowledges only that its hazardous materials critical action team “works with
      the chemical industry and tank car manufacturers to examine the transport of
      hazardous materials by rail — including surveillance, routing, remanufacturing,
      and packaging — with emphasis on materials that pose the greatest potential safety
      risk.”125

      Tightening of hazmat licensing processes is the leading edge for three related
      personnel security initiatives. The first, sponsored by AAMVA, “would link all
      [state] driver databases and employ high-tech cards with a fingerprint, computer
      chip or other unique identifier,” producing a national identification system for all
      licensed drivers. The second, with functional requirements drafted by DOT’s
      Credentialing Direct Action Group, is for a National Transportation Worker ID
      Card (TWIC). The third, reflected in proposed legislation and editorial columns,
      goes beyond the AAMVA proposal and considers various national identification
      systems.126

      Government and industry are looking to technology to improve hazmat security,
      with visibility and monitoring as leading candidates. FMCSA will sponsor a pilot
      test of wide area tracking for tankers and vans. The Freight Transportation
      Security Consortium proposes an ambitious, federally funded program to monitor
      hazardous materials on highways and railroads, described above in “Improving
      Visibility and Control.”127



      124
         The security materials are on the FMCSA web site. Administrator Joseph Clapp
       announced the visit program in “Spotlight on Security and Recovery.”
      125
            “Railroad Security,” p. 2.
      126
        “States Devising Plan for High-Tech National Identification Cards,” Robert O'Harrow Jr.,
       Washington Post, November 3, 2001. “National Transportation Worker ID Card (TWIC)
       Credentialing Direct Action Group, Functional Requirements,” draft of January 23, 2002.
       “National ID Card Gaining Support,” Robert O'Harrow Jr. and Jonathan Krim, Washington
       Post, December 17, 2001.
      127
         More information on the FTSC proposal is in documents on the transmatch.com website,
       including “Protecting The Hazmat Supply Chain,” White Paper Developed by the Freight
       Transportation Security Consortium, Response to USDOT BAA - DTRS56-BAA-0002,
       November 2001.

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      Another set of tools under consideration would remotely disable vehicles thought
      to be under terrorist control. For example, “California officials are considering
      requiring that each truck in the state be equipped with devices attached to their
      bumpers that would allow pursuing police officers to bring the truck to a halt.”128

      Security of hazardous materials is an issue, of course, in other modes. Given the
      general concern with terrorist contraband being smuggled aboard aircraft, hazmat
      is less prominent in the aviation security discussion. In ocean shipping, hazmat is a
      special concern in shipload lots, such as LNG tankers. It is also of concern in
      domestic waterborne bulk shipments. Finally, hazmat safety is integral to the
      security concerns of pipeline managers and regulators.

      DoD’s response for munitions shipments. The DoD traditionally pays close
      attention to the safety and security of its hazardous and sensitive shipments. In
      1999 military munitions transportation officials proudly described to the author
      their “micromanagement” of highway shipments in the continental U.S. Since
      September 11, DoD moved aggressively to increase control and security.129

      DoD's response in this area was galvanized by a General Accounting Office report
      issued in May 2001. The report criticized security lapses and failures at en-route
      layover facilities and terminals. For example, trailers were not always sufficiently
      guarded or secured. The report was so detailed that, soon after September 11, it
      was withdrawn from circulation and classified. Senior defense transportation
      officials, testifying in closed Congressional hearings in October, thanked the GAO
      for calling the situation to their attention and described significant corrective
      actions.130

      The shipments in question include the highest risk categories. Category I, for
      example, is most sensitive and includes man-portable non-nuclear missiles in
      ready-to-fire configurations.131 In addition to mandatory satellite monitoring,
      military escorts now accompany all such shipments and, apparently, many in
      Categories II-IV as well. The escorts are trained and certified to carry weapons if
      warranted by threats conditions.

      The array of permissible stop points en route is drastically reduced. A former
      Commander-in-Chief of USTRANSCOM said the number of allowed nodes for
      such shipments has been reduced from the hundreds to the dozens, and that the
      goal is to reduce it to single numbers.132



      128
            In “Freight's Blanket Security,” crediting The New York Times.
      129
        This material is taken almost verbatim from the “Post-September 11 Epilog” in “Defense
       Logistics,” pp. 30-31.
      130
         Personal conversation with a senior defense transportation official.     Details on the
       corrective actions are not public information.
      131
          A complete table of "Transportation Protective Service (Motor)" can be found under that
       title on the Military Traffic Management Command's web site. There are twelve codes.
      132
            Personal conversation.

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      The operating flexibility of the munitions carriers is reduced. More drivers must
      have Secret clearances. Carrier free time after pickup--the permissible time during
      which carriers may hold trailers in their own terminal prior to dispatch--is reduced
      to four or fewer hours. Total shipment time windows appear to be shortened by
      half.

      These security improvements have non-trivial cost implications. In the fall of 2001,
      MTMC approved security-related rate increases for munitions carriers that seem to
      average over 20 percent. For example, rates from Anniston Ammunition Depot to
      all destinations increased between 21 and 24 percent. Some rates for shipments in
      vans increased 39 cents per mile on a base of $1.60, while some rates for shipments
      in dromedary containers increased 25 cents on a base of $1.00.133 The rate increases
      only address the carriers' costs, not costs borne by the government--such as the
      military escorts--or by the shippers.

International Trade
      Security related to U.S. foreign trade involves port and border infrastructures,
      multimodal transportation, and cargo operations. Although the lines blur in
      places, we will address port and vessel operations first, then land borders and the
      cargo-related issues that cuts across both areas. Except for some Customs issues,
      international airfreight has already been covered.

             PORTS AND VESSELS
      Setting aside inbound cargo and containers for the moment, there were (and are)
      two main concerns about port security. The first is local attacks on port facilities,
      which might range from a small craft attack as on the USS Cole to infiltrating
      facilities to blow up bridges or tamper with cargoes. The second is turning one of
      the 7500 ocean-going ships that arrive in the U.S. annually into a weapon. The
      Coast Guard is particularly concerned about movements of high interest, such as
      hazardous materials, LNG, and large cruise ships, and about identifying potential
      WMD, especially on bulk ships.134

      One feature of ports that compounds their vulnerability is the large number of
      federal, state, and local agencies that have overlapping jurisdictions. Two things
      happened after the attacks. First, all agencies increased their presence and activity,
      and some states added new resources by deploying National Guard troops.
      Second, some observers perceived an improvement from the poor coordination
      noted by the Interagency Commission on Crime and Security in U.S. Seaports.
      Houston, “home to the largest concentration of petrochemical activity in the
      country,” may be a model of effective coordination and planning. 135



      133
         Information provided telephonically by the Joint Traffic Management Office, which
       considered the Anniston rate increases to be typical.
      134
            Commandant Admiral James Loy, “Spotlight on Security and Recovery.”
      135
         “Freight-Transportation System Gets More Expensive, Slower,” Daniel Machalaba and
       Rick Brooks, Wall Street Journal, September 27, 2001. Bruce Carleton, Acting Deputy
       Maritime Administrator, commented on improved coordination at the “Spotlight on

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      The Coast Guard took the most visible role after September 11, redeploying assets
      away from other missions. For example, they assigned 35 ships and watercraft in
      the port of New York to guard facilities and manage traffic. They began to meet
      and board ships eleven miles outside the harbor, interviewed crews, and inspected
      key areas of the ship. They also slowed ship speeds and required tugboat escorts to
      prevent ships running into assets, such as bridge supports.

      Senate legislation already under consideration to improve port security expanded
      to include anti-terrorism measures. The draft bill authorized port security funding,
      which may have slowed improvements by some ports since it appeared funds
      spent prior to passage of the bill would not be eligible for reimbursement. The
      Port, Maritime and Rail Security Act passed the Senate in December 2001, at about
      the same time the FY 2002 DoD appropriations bill passed with emergency port
      security funding.

      Non-governmental stakeholders provided input to the DOT in regard to the
      legislation. For example, the Marine Transportation System National Advisory
      Council (“MTSNAC”) is a non-federal council of marine transportation system
      stakeholders chartered to advise the Secretary. MTSNAC formed a Security
      Committee that delivered a report to the Secretary with recommendations for
      effective seaport security legislation.136 Major industry associations, such as the
      American Association of Port Authorities (AAPA) and the World Shipping Council
      (WSC), also provided comments to the DOT and to the Congress.

      The pending legislation and other initiatives are addressing the port-oriented
      security. The Port Authority of New York/New Jersey will earmark $250-300
      million out of its annual capital budgets for security, such as hardening
      infrastructure.137 Some agencies and port communities are implementing features
      of the bill without waiting for final passage. For example, the bill calls for
      comprehensive vulnerability assessments in fifty major ports, and the Coast Guard
      began to perform them. The assessments are resource intensive. Only four were
      complete by mid-January 2002 and it may take until 2004 to finish them all.

      The bill requires local port security committees to coordinate federal, state, local,
      and private law enforcement agencies. Local plans are underway, as in Houston.
      The state of Florida is a model, since state law already required enhanced port
      security.

      Worker identification is an important aspect of the bill, which requires criminal
      background checks for “security-sensitive positions.”         Miami began its
      comprehensive port personnel identification system two years ago, and other port




       Security and Recovery.” “A model for port security,” Bill Hensel, Jr., JoC Week, November
       19-25, 2001, p. 24.
      136
        “Resolution and Position Paper On the Issue of Port and Maritime Security Legislation.”
       November 2001’s Draft Version 4, the latest version, was not released by DOT.
      137
            Borrone conversation.

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      authorities are implementing their own plans. The National Transportation
      Worker ID Card would replace all of these systems if it comes into being. 138

      Port labor is also participating.     The International Longshore and Warehouse
      Union (ILWU) proposal to improve port security included restricting draymen and
      truckers to secure container-holding areas near terminal gates. The union’s
      president said, since there are few controls after gaining entry, “The primary threat
      to American seaports is the ability of truckers to gain access to dockside marine
      container terminals.”139

      Vessel-oriented security is more clearly the responsibility of the Coast Guard.
      Despite that, the relationships become complicated because vessels sail under
      many flags, come from ports around the globe, and carry cargo that may
      compromise their security. Bilateral and multilateral relationships are critical and
      the Maritime Administration and Customs play important roles.

      The bill passed by the Senate requires more advanced reporting of incoming ship
      crew consists, passenger lists, and cargo so that U.S. agencies can review security
      risks before vessels arrive.     The Coast Guard increased the time horizon for
      advance notice from twenty-four to ninety-six hours.

      An important goal for the Coast Guard, one might say its overarching security
      concept, is to improve dramatically Maritime Domain Awareness (MDA). It is an
      architecture of existing and new systems and tools to “gather and disseminate data
      from all federal agencies involved in the maritime trade.” The goal of MDA is to
      provide "effective knowledge of all activities, forces, and elements … that could
      threaten the safety, security, or environment of the United States and its populace."

      An important feature of MDA, in addition to the advance notice and security
      intelligence information, is better information on the actual location and status of
      ships. Vessel Management Systems approach such visibility in port areas, but not
      for ships at sea. Both technology and global harmonization are necessary to solve
      that shortfall. Part of the U.S. security proposal to the International Maritime
      Organization (IMO) is that all ocean-going ships must carry electronic
      transponders so officials can track their movements, and there are proposals under
      discussion that target completion as early as 2004 and as late as 2008. (Since cargo-
      related issues are central to the IMO port security discussion, we address
      international coordination in the next section.) A new standard published by the
      ISO will also contribute to MDA if it is widely implemented. Passed in September
      2001, it is a guideline for implementing a satellite-based Fleet Management Systems
      Network.140


      138
         “Senate Unanimously Passes Seaport Security Bill,” American Shipper, December 20, 2001.
       “Security bill goes to the House” R.G. Edmonson, JoC Week, January 7-13. “Where’s your
       ID?” R.G. Edmonson, JoC Week, November 12-18.
      139
         “ILWU offers port-security plan,” Bill Mongelluzzo, JoC Week, December 24-January 6
       2002, p. 23.
      140
        “Envisioning security,” Peter Tirschwell, JoC Week, October 22-28, 2001. The Coast
       Guard elaborated on Marine Domain Awareness at the TRB Annual Meeting, for example

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      Domestic waterborne commerce. Finally, it is important to note that there are
      important port, vessel, and cargo security issues related to domestic waterborne
      commerce. There are 11,000 miles of waterway, 299 deep ports, and 276 locks—111
      of them assessed as critical. Large volumes of bulk cargoes move on the inland
      waterways system, about sixty percent of them hazardous. Disabling the right
      locks, for example, would create effective bottlenecks to commerce that, depending
      on time of year, would be extraordinarily difficult to clear with rail and highway
      resources. The Coast Guard, already stretched thin, has important inland
      waterway security responsibilities, as does the Army Corps of Engineers.141

            BORDERS AND CARGO
      Twenty-seven percent of the U.S. GDP is trade-related, generating the huge flows
      through the nation’s ports and land border crossings. The preponderance of non-
      bulk goods enter the country in over 5 million loaded containers, many stuffed and
      re-handled with minimal security or attention, and many of which move into the
      U.S. hinterland without being opened. The Coast Guard Commandant estimates
      that 16,000 of those containers may pose a security risk.142 They appear to be the
      nation's highest freight-related security priority.

      The fastest trade growth has been across the border with Mexico. From the passage
      of NAFTA in 1993 through 2000, trade between the U.S. and Mexico compounded
      annually at 17.3 percent in value and 13.5 percent in metric tons. Growth with
      Canada, though less dramatic, is also faster than growth with the rest of the world,
      and that implies growing security workloads on the land border crossings.143

      Many government agencies play a role in screening cargo, conveyances, and crews
      that enter the U.S. Customs clears cargo, INS clears people, and DOT agencies
      oversees the systems that move both. However, the Customs Service is primus inter
      pares, first among equals, in guarding against contraband in the flow of commerce.
      Customs responded to September 11 by raising all points of entry to Level 1, its
      highest alert, and stayed at that level.

      Attention focused on gaps in the chain of custody, such as the very imperfect use of
      cargo seals. Physical and Non-Intrusive Inspections (NII) increased and delays
      ensued. There were ancillary benefits, such as increased drug seizures from


       in Captain Anthony Regalbuto’s panel presentation during “Security in the Nation’s Ports
       and on the Waterways.” Commander Dan McClellan defined the goal of MDA in personal
       correspondence, March 2002. The IMO transponder issue is in “Borders must be stretched
       to fight terrorism, Bonner says,” Tony Bartleme, JoC Online, February 21, 2002. “ISO
       Initiatives Relating to Maritime Security,” submitted the ISO for the Maritime Safety
       Committee Intercessional Working Group on Maritime Security, December 12, 2001
      141
         Corps of Engineers panel presentation by Barry Holliday during “Security in the
       Nation’s Ports and on the Waterways.”
      142
        "U.S. maritime security needs less talk, more action: Loy," R.G. Edmonson, JoC Online,
       March 19, 2002.
      143
          “Implications for Mexico,” Oscar de Buen, Secretaria de Communicaciones y
       Transportes, Session 586, “Watching This Space: A Dramatic Year in European Freight an
       Intermodal Transportation,” TRB Annual Meeting, January 16, 2002.

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      commercial shipments on the Canadian and Mexican borders. Reports of
      congestion received wide coverage, as did reports that the worst delays eased;
      some customs brokers still report delays up to four hours at Laredo, for example,
      although Customs’ data reflect better times.144

      Reports of the low level of physical inspections—one to two percent for
      containers—received considerable attention, but Bethann Rooney, Security
      Manager of the Port Authority of New York and New Jersey, noted that a better
      number might be 98 percent, reflecting the portion of loads subjected to some
      electronic screening using expert systems or other tools to look for anomalies. (See
      the sidebar on Risk Management in the subsection on "International
      Coordination.")145 Neither Rooney nor anyone else would argue that today’s mix
      provides adequate security, but her observation does foreshadow future
      developments.

      Cutting through the profusion of official and unofficial statements and
      commentaries, the emerging U.S. strategy for the security of general cargo appears
      to combine the following:
            •   Get the right information in a timely manner about shipments from as close
                to the real source of that shipment, and get it electronically.
            •   Encourage and incentivize sophisticated shippers to certify adherence to
                excellent supply chain and security practices in exchange for preferred
                processing.
            •   Assure protection against tampering during transit.
            •   Concentrate on the ten megaports that account for roughly half of U.S.
                container imports.
            •   Screen, vet, and if necessary, inspect cargo and containers before loading on
                a ship. Penalize shipments or ports that do not comply with slower
                clearance, higher costs, and conceivably denial of entry in extreme cases.
            •   Require electronic cargo information before departure of the vessel from an
                overseas port.

      144
         The chief operating officer of a major stevedoring company reportedly said, “If we had
       to check every seal, productivity would go to nothing.” “ILWU offers port-security plan,”
       p. 23. A senior terminal manager told the author informally that, when he managed
       terminals for an integrated container carrier, his first economy was always to get rid of
       checkers because seal integrity was not important. However, were he at an independent
       terminal company, seal integrity would be a high priority item—the difference was inter-
       company liability for loss. November 2001.
      Customs reported seizures from trucks, ships and planes increased 326 percent along the
       Canadian border and 66 percent at all borders and ports. The figures were for October and
       November 2001 compared to the same period in 2000. “Drug Seizures Have Surged at the
       Borders,” Fox Butterfield, New York Times, December 16, 2001. The Laredo information is
       in “Customs pushes pre-clearance,” Bill Hensel, Jr., JoC Week, January 7-13, 2002.
      145
         Comments during her panel presentation in “Security in the Nation’s Ports and on the
       Waterways.” She was referring to the Automated Targeting System. Two months later,
       the Customs Service reiterated Rooney's argument ("Customs official disputes container
       inspection claims," Marsha Salisbury, JoC Online, March 19, 2002.)

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            •   Submit shipment data, historical information, and intelligence to the most
                sophisticated data mining techniques to identify anomalies.
            •   Focus NII and physical inspections at U.S. entries on the lowest confidence
                shipments, save for judicious verification of high confidence shipments.

      The Senate legislation supports this approach by requiring electronic filing of cargo
      manifests before ships may enter ports. It also calls for Customs and DOT to
      develop a cargo tracking system, and it affects cargo documentation practices.
      Customs is encouraging pre-clearance on NAFTA shipments and its Container
      Security Initiative is consistent with the list. The DOT-Customs led Container
      Security Group recommended much greater discipline in using high security
      manual cargo seals. Multiple agencies are engaged in active discussions with
      trading partners, and there are technology development programs under way.

      Customs is building on its history of alliance programs with industry. The
      Customs-Trade Partnership Against Terrorism (C-TPAT) is the centerpiece
      program to improve security against terrorism. Further industry input comes from
      Treasury’s Commercial Operations Advisory Council (COAC). C-TPAT and
      COAC appear to be important venues for elaborating on the known
      shipper/trusted agent models. The one caution about these approaches is that they
      favor large shippers, but that appears to be unavoidable.146

      Cargo documentation practices. Three cargo documentation practices must
      accommodate to an improved cargo security regime. They are “to order” or
      “house” bills of lading; freight-all-kinds (FAK) commodity descriptions on bills of
      lading; and in-bond shipments.147

      “To order” bills are the most opaque, showing no consignee. Brokers who may sell
      or re-sell the goods while they are in transit often use “to order” bills for low value
      commodities. Container loads of waste paper and hay exports from the U.S. to
      Asia are two examples. Since consignee information is important security
      information, “to order” bills are concern.

      FAK bills blend together or homogenize commodity information. Forwarders and
      Non-Vessel Owning Common Carriers (NVOCC) use them to shield detail and
      protect their proprietary interests against the ocean carriers. The difficulty with
      FAK bills is the importance of commodity detail to security reviews and scans.

      Under today’s regime, ocean carriers must accept FAK bills. The carriers would
      accept legislation requiring them to refuse FAK bills—thus granting them access to

      146
         Commissioner Bonner’s speech to the Center for Strategic and International Studies
       (CSIS) on January 17, 2002 may be the best single review of Customs’ response to the new
       environment, and it is a good summary of the partnership programs. The concern about
       favoring large firms is in “Border Security and Congress,” Susan Kohn Ross, JoC Online,
       December 26, 2001.
      147
         Personal conversations with Lars Kvaer, Vice President, World Shipping Council,
       December 2001. “Border Security and Congress.” “New day for NVOCCs, “ R.G.
       Edmonson, JoC Week, November 19-25, 2001. 2001. “Security bill goes to the House.”

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      the shipment details. However, it is more likely that Customs will require
      NVOCCs to provide it with detail
      on the commodities and ultimate       Risk Management System Integration
      consignees in combined shipments,
      and then shield the detail from the  The U.S. Customs Service performs risk
      carriers while noting approval to    management analyses on the Automated
      take the load.                       Manifest System, which some call the world's
                                                   largest trade database. The Automated
      In-bond shipments usually involve            Targeting System applies data mining
      containers arriving at U.S. ports but        techniques, searching for anomalies in
      documented to move in-bond to an             shipment patterns that could indicate a
      inland “port-of-entry” where they            security threat.
      clear Customs. This practice makes
      Chicago the third largest U.S. port          Ocean carriers and other nations do
      of entry.         Forwarders and             analogous risk management analyses.
      intermediaries consider in-bond to           Sharing data among nations and carriers
      be very important to their business,         would improve intelligence, enabling country
      but it raises the security stakes            A to assess importer X's trading pattern with
      about the contents of the container.         third countries (such as X's shipments from
                                                   country B-to-C in addition to B-to-A). Serious
      A more complex form of in-bond               institutional constraints stand in the way.
      involves land and water entries in
      triangular trades. One example is            •   International law prevents carriers from
      European goods off-loaded at                     providing A with information on
      Montreal and destined to the U.S.                shipments between B and C.
      northeast, meaning both Canadian
      and U.S. Customs screen and pass             •   Business practices lead carriers to
      the container. Two Asian examples                provide governments only information
      are goods offloaded in Seattle-                  required by law.
      Tacoma      but    consigned    to
      Vancouver and goods offloaded in             •   Countries may not share data among
      Long Beach but destined for Mexico               themselves if constrained by law--and
      City.                                            U.S. statutes preclude sharing details on
                                                       exports.
      The legislation that passed the
      Senate in December 2001 effectively          •   Government agencies may be limited in
      outlaws “to order” bills for U.S.                what they can provide to carriers
      imports      because    it   requires            because of privacy or other constraints.
      identification of the consignee. The
      bill appears to give Customs                 Solutions probably require multilateral
      authority to manage FAK bills more           agreements, statute changes in several
      actively, enabling a detail-and-             countries, and special arrangements to
      shield approach. The bill allows in-         protect proprietary and security information.
      bond shipments, but only with
      greater     detail     on    shipper,
      consignee, and contents. Pre-clearance       programs would appear to be especially
      well suited to in-bond shipments.




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      International coordination.148 There is no question that an effective cargo security
      program must “push back the borders,” and that requires international
      collaboration. There are simultaneous efforts underway to that end, but not yet a
      clear path to success.

      With Coast Guard in the lead, the U.S. placed a proposal for a tighter security
      regime before the IMO in January, prior to meetings in February. Items addressing
      vessels, ports, and cargoes included ship security equipment, vulnerability
      assessments for ports, port-of-origin container examinations, and culling
      information on a particular, ship, its cargo, and everyone on board. One challenge
      of the IMO process is timing. For example, proposals submitted to IMO Maritime
      Safety Committee in May 2002 cannot be adopted by the IMO itself until its
      December 2002 meeting and would not enter into force until June 2004.149

      The IMO initiative stimulated related discussions under the Organization for
      Economic Cooperation and Development (OECD). Chaired by the Maritime
      Administration’s Acting Deputy Administrator, the Ad Hoc Maritime Security
      Group met in March 2002. Topics included the results of the IMO’s February
      Intersessional Working Group on Maritime Security, and holding a "brainstorming
      session" on maritime security.150

      The Asia-Pacific Economic Council's (APEC) Intermodal Task Force endorsed a
      process to achieve international standards for container tracking, security, and
      information exchange. The members support work through the ISO, not local or
      regional solutions "that could result in a fragmentary or incompatible result on the
      broader global scale."151

      Quite appropriately, there are bilateral negotiations with Canada and Mexico about
      improving security and trade on both borders. With Canada, the focus is
      implementing the action plan for the Smart Border Declaration, signed in
      December 2001. One feature, implemented in March 2000, is reciprocal exchange of
      Customs officers to facilitate processing of triangular in-bond shipments. Another
      feature is the use of ITS technologies, which we address in the next section.

      Customs’ Container Security Initiative, announced in January, puts priority on
      negotiating with the governments of the ten biggest ports shipping to the U.S.—the




      148
          Richard Biter, Acting Associate Deputy Secretary and Director of the Office of
       Intermodalism, US DOT, was instrumental in clarifying the constraints and alternatives
       covered in the Risk Management sidebar (personal correspondence).
      149
         “Coast Guard Makes Security Recommendations To IMO,” American Shipper, January 17,
      2002. The timing information is from Coast Guard Captain Jeffrey Lantz.

      150
        "Brainstorming Security" (in Traffic World, cited earlier) and "Industry And Governments
       Discuss Security Issues At OECD," American Shipper, March 18, 2002.
      151
         "Intermodal Task Force Progress Report; United States," (draft) for the 20th APEC
       Transportation Working Group Meeting, Manila, Philippines, March 4, 2002, p. 6.

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      megaports—to “build a new international security standard for sea containers” to
      secure about half of all container imports and induce other ports to follow.152

      Technology. There are several technology initiatives to improve security of
      general cargo shipments in containers. Two at Customs focus on data and
      inspections. Development of the Automated Customs Environment (ACE) is the
      centerpiece of Customs modernization. ACE will be the next-generation systems
      environment to collect, process, analyze for security purposes, and disseminate
      information. The front end of ACE will be the International Trade Data System
      (ITDS), the single point of entry for customers. Customs is also working with other
      agencies to advance NII technologies and speed deployment of successful results.

      DOT and Customs collaborated over several years on a series of border crossing
      initiatives. Initially focused on efficiency and facilitation, these transponder and
      database applications can also help identify and process trusted shipper and pre-
      cleared shipments, giving them access to faster processing while enabling
      inspectors to focus more energy on more suspect shipments. National Customs
      Automation Prototypes are in use today at Detroit and Laredo. An ITDS pilot
      began operating at Buffalo’s Peace Bridge in August 2001, but it was shut down
      when Customs went to Level 1 on September 11.153

      A series of ITS Field Operational Tests are building on the border crossing
      initiatives. One is testing electronic cargo seals for in-bond shipments arriving in
      Tacoma with consignees in Vancouver, and combining the seals with transponders
      as data probes for traffic and congestion control. A related series of tests focus on
      container chassis tracking154

      The Container Security Group recommendations included aggressive pilot tests
      related to electronic seals and other container monitoring technologies; DOT plans
      to advertise the first such pilot in spring 2002. Operation Safe Commerce,
      mentioned earlier, is a more comprehensive assessment of security practices and
      technologies. In addition, a group connected to the ISO is also planning a three-
      phased demonstration of electronic seals and improved cargo security data
      standards.

Lessons Learned Overseas
      Protecting against terrorism may be a new experience to many in the U.S., but it is
      different in other parts of the world. Our friends and partners in the fight against
      terrorism have lessons to share with the U.S. For example, allies in Europe
      including the U.K., France, Italy, Germany, and Spain have decades of experience.

      Searches by the author and the DOT library staff produced very little material
      drawn from that experience. The best—and only—model we located had little

      152
            Bonner speech to CSIS.
      153
          Intelligent Transportation Systems at International Borders, A Cross-Cutting Study,”
       Intelligent Transportation Systems Joint Program Office, U.S. DOT, April 2001.
       Conversations with FHWA staff, November 2001.
      154
            Information about the tests is on the FHWA freight web site.

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      material germane to this paper: Protecting Public Surface Transportation Against
      Terrorism and Serious Crime: Continuing Research on Best Security Practices.155

      There were occasional articles and at least one television segment on security
      procedures in Israel and at El Al Airlines, but they generated little of substance.
      When the author raised the question of security lessons learned to a group of
      European freight experts at the TRB Annual Meeting, it produced a suggestion to
      inspect cargoes away from the border, plus a comment that they were looking
      forward to learning lessons from the U.S.156

      Looking back further, U.S. and Canadian Customs studied Channel Tunnel
      security measures in France and the U.K., learning useful information about
      staging and examining loads and about cross-designation of Customs Officers.157

      One gets the impression that a good deal of information sharing, coaching and
      informal consulting took place among professionals and government officials after
      September 11. There were occasional references to Congressional and Coast Guard
      trips to ports such Singapore and Rotterdam to review security procedures, or to
      Israel and the U.K. However, the information sharing was off-the-record and out
      of the public view.




      6. Integrating the Pieces--Conclusions


      This section pulls together information about the implications of security impacts,
      the potential win-win solutions, and the progress scan. The focus is more on the
      interface of security and productivity or economics, less on reducing risks of actual
      terrorist attacks. Although the paper does not provide formal policy proposals,
      this section inherently offers the author's judgments, conclusions, and some
      implicit recommendations.

      A recurring theme throughout security-related topics is the need to balance
      expediency and effectiveness, speed and quality, interim and long-term progress.
      Security gaps need urgent attention, using the best tools at hand, but the tools at
      hand seldom provide the best answers. This applies, for example, to pushing cargo
      verification back in the pipeline (to origin ports or factories); to harmonizing
      international security regimes (bilateral or multilateral); and to applying new
      technologies (off-the-shelf or R&D).

      155
        Brian Michael Jenkins and Larry Gersten, Mineta Transportation Institute, San Jose State
       University, September 2001.
      156
         Session 586, “Watching This Space: A Dramatic Year in European Freight an Intermodal
       Transportation,” TRB Annual Meeting, January 16, 2002.
      157
          John McGowan, Executive Director for Enforcement Planning, Panel Discussion,
       ”Challenges And Impact Of Increased Border Security On Trade And Transportation,”
       session 423 at TRB Annual Meeting, January 15, 2002. He addressed lessons learned
       during the Q&A.

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      Government and industry must learn to manage better a series of simultaneous
      efforts, across topics. Repeated near term implementations that demand urgent
      attention will compete constantly with items requiring steadfast commitment to
      longer-term goals.

Balancing Priorities
      There are many security risks to and through freight transportation. The challenge
      is about priorities, and one cannot expect equal and simultaneous attention to all
      modes and forms of service. FAA Administrator Jane Garvey’s remarks, although
      addressing aviation, apply more widely: “The Secretary’s concerted efforts since
      September 11 have resulted in identifying high-value, high consequence
      transportation assets and protection strategies… we are addressing the strategic
      gaps … for the most critical of these assets.”            DOT Undersecretary for
      Transportation Security John Magaw, as noted earlier, put his priority on passenger
      security but assured that all areas would be covered in due course.158

      The top priority for freight security is international commerce in general cargo.
      Given the potential for a “bomb in a box,” it seems fitting that so much attention is
      focused on container and containership security challenges and solutions, although
      Coast Guard is also addressing other vessel types.

      Domestically, the major focus appears to be on hazardous materials, again a
      reasonable prioritization, and this relates most to highway and railroad operations
      and contributes to infrastructure protection that benefits other commodities.

      Air cargo services received much less attention than passenger operations, building
      mainly on known shipper programs that pre-date September 11. However, there
      are recent indications of increasing attention.

      Domestic general commodity movements seem to receive sporadic and
      idiosyncratic security attention, such as spot checks of trucks about to use major
      bridges or tunnels.

      Export movements seem to receive little security attention aside from traditional
      export control programs.

      To the degree this summary is fair, it reflects priorities that are understandable and
      defendable in the short-term. Over time, however, the huge array of lower priority
      but still threatening points of vulnerability must be covered. For example, generic
      domestic freight moves from smaller firms may offer enticing vehicles for
      terrorists, and these are shipments without an integral hurdle comparable to
      clearing Customs. Such movements offer difficult challenges but merit attention
      and creative solutions. Another example, export movements, have their own set of

      158
         “Statement of Jane Garvey … Before the Senate Committee on Government Affairs,”
       November 14, 2001. “Transportation security czar Magaw admits 'concern' about cargo,".
       Attention to cargo increased in March 2002, when retired Rear Admiral Richard Bennis
       became Associate Under Secretary of Transportation, responsible for maritime and land
       security.

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      challenges. Homeland Security and transportation security experts must assure
      lower priority risks are addressed as progress is made in the higher priority
      domains.

      Another facet of the priority issue is virtually missing from the public discussion:
      how much security is enough, and how would one know if the level were reached?
      The silence reflects the difficult and to some extent unanswerable nature of the
      questions. We cannot yet measure security costs let alone provide meaningful
      metrics of terrorist risk. Since there can be no absolute security against major
      terrorist attacks, we know that levels of exposure will remain. There is general
      agreement that the exposure must be reduced, and that commerce must remain
      vibrant, but there is a fuzziness to the discussion that is unlikely to move until we
      are faced with more difficult decisions.

International Trade
            BORDER PROTECTION VS. THE STRATEGIC TEMPLATE
      We wrote earlier about the strategy of weaving security certification, notification,
      and verification processes more inextricably into the best supply chain
      management practices, and vice-versa. That strategy can serve as a criterion for or
      template of a superb win/win solution against which to compare and think about
      current progress and initiatives. We can see elements of such a strategy in the U.S.
      government’s developing programs to enhance security in the global container
      trades, but there is still a meaningful gap.

      One positive indicator is the manner in which Customs is building upon its history
      of successful partnerships with shippers and carriers. Industry partners in C-
      TPAT, for example, many of them central players in sophisticated supply chains,
      are well situated to coach and collaborate with Customs on making deeper and
      broader the integration of security and supply chain processes.

      Customs Commissioner Bonner’s public statements show an appreciation for the
      payoffs of richer integration. In November 2001 he told the Customs Trade
      Symposium “Supply chain security begins on the shop floor, through
      transportation modes, all the way to the port of entry.” In February 2002 he told a
      Senate committee, “the more technology and information we have, and the earlier in
      the supply chain, the better." In March 2002 he told the National Customs Brokers
      and Forwarders Association of America "it would be ironic if Customs [and] the
      private sector, developed a transportation plan that not only protects the U.S.
      against terrorism but also helps importers and exporters to streamline the
      movement of goods in international commerce." 159

      However, the gap between government actions and our criterion widens when we
      shift from broad visions and strategies to more applied discussions and activities.


      159
         “Bonner's Top Priority,” R.G. Edmonson, JoC Week, December 3-9, 2001, p.11; “Bonner
       Stresses International Cargo Security Standards,” American Shipper, Shippers' NewsWire,
       February 20, 2002, emphasis added; and "Customs, brokers will target risky shipments,"
       Bill Mongelluzzo, JoC Online, March 15, 2002.

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      In particular, the focus of Customs’ Container Security Initiative on certification
      and inspection in ten megaports is not immediately consistent with the template.
      Except as an interim step, the megaport approach implies multiple security and
      customs processes plus potential inspection-related port congestion—and higher
      supply chain costs.

      It will also be a challenge for Customs to implement the changes reflected in
      Commissioner Bonner's public statements. Several observers note that the Service
      has technical and cultural hurdles to overcome on the road to extensive shipment
      preclearance.160

             HARMONIZATION
      Harmonization is a necessary element in an effective international cargo security
      regime that also supports and enhances supply chain efficiencies. Incompatible
      security standards and expectations among trading partners might result in
      meaningful security improvements, but they would not foster efficiency and
      economy throughout supply chains.

      Harmonization must begin within the U.S. The World Shipping Council, for
      example, starts its list of general principles for improving the security of liner
      shipping with “The government should establish a single, coordinated strategy to
      address the issue of international liner shipping security.”161 There are uneven
      indicators of progress. On the positive side, the Office of Homeland Security,
      currently reviewing the recommendations of the Container Security Group co-
      chaired by DOT and Customs, appears to be exercising leadership in this regard.
      However, that leadership is tempered by reports that differences among Homeland
      Security, Justice, and Customs have spilled into mixed messages and public
      differences with Canada about border security.162 In addition, language in the
      pending House version of the Maritime Transportation Antiterrorism Act calls for
      DOT's TSA to develop an "anti-terrorism cargo identification system" that must
      strike people in the Customs Service as duplicative of the ACE and ATS.

      International harmonization is the big target. Other things being equal, it should
      be multilateral and universal for maximum usefulness and effectiveness—to fit best
      with our strategic template for win/win solutions. However, international
      harmonization is complex and challenging, affected by the number of sovereign
      states, international organizations of uneven power and effectiveness, and some
      divergence of interests.

      Sovereign equality notwithstanding, some voices are more influential than others.
      The magnet of major markets and the desire to retain most favored access to them
      are powerful inducements to cooperation on security by trading partners. The
      influence has limits, however, reflected in the Belgian Foreign Trade Minister’s

      160
            “US, Canada in border security battle,” UPI, Logistics Management, February 12, 2002.
      161
            “Improving Security for International Liner Shipping,” January 17, 2002, pp. 1-2.
      162
        “US, Canada in border security battle.” "House committee passes maritime security bill,"
       R.G. Edmundson, JoC Online, March 20, 2002.

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      comment at an International Maritime Organization (IMO) meeting, “We are being
      confronted here with a very one-sided approach.”163

      U.S. officials recognize the value of harmonization. They are testing the
      willingness and limits of organizations such as the IMO to enact and sustain
      security measures that meet U.S. objectives. However, in the interest of speed, we
      see increasing attention to bilateral approaches focused on major trading partners
      and the ten megaports. In the view of an expert observer, such short-term
      expediency may be the only practical way to proceed. That observer also shares
      this author’s concern, however, that such a bilateral focus may result in lost
      opportunities for more harmonized, multilateral solutions.164

            RECIPROCITY
      Reciprocity is another necessary element in an effective international cargo security
      regime that also supports supply chain efficiencies. Reciprocity means the U.S.
      must prepare to adopt another new mindset, change troublesome legislation,
      deploy sufficient funding and skilled personnel, divert some Non-Intrusive
      Inspection equipment, work with industry and unions to change business practices
      and information systems, host Customs officials from trading partners, and build
      sustainable political support that would withstand emotions stimulated by
      subsequent terrorist attacks—all in order to inspect export containers and other
      cargoes in a manner comparable to what we expect from trading partners.

      The issue is recognized and the need agreed to within the U.S. government’s
      Container Security Group, and reciprocity received what may be the first public
      recognition by the Customs Commissioner in February 2002. However, there are
      significant practical problems and potential political sensitivities connected to
      reciprocity, and it appears those concerns have yet to be addressed.

      The practical problems reflect the decisions of countries to allocate more resources
      to managing and screening imports than they do exports. The U.S., for example,
      does not have sufficient resources or operating practices in place to assure its
      trading partners that it can provide export security comparable to what the U.S.
      expects for its imports. A senior Customs enforcement official was candid about it,
      offering several illustrations: Customs inspects inbound empties, but not outbound.
      Outbound does not generate revenue, so Customs has not applied meaningful
      resources to it. Export declarations are required, but only for shipments over
      $200,000. Most government attention has been focused on items that require
      approval to export, such as sensitive technologies.165 There is no indication how
      163
         Reuters News Service reported that Belgium, Italy, Germany, Norway, and Denmark
       objected to U.S. port and maritime security proposals to the International Maritime
       Organization. “EU states resist US plans to beef up port security,” Pete Harrison, February
       13, 2002.
      164
         Sam Banks, former Deputy Commissioner of Customs, personal conversation, January
       2002.
      165
          John McGowan, Executive Director for Enforcement Planning, Panel Discussion,
       ”Challenges And Impact Of Increased Border Security On Trade And Transportation,”
       session 423 at TRB Annual Meeting, January 15, 2002. He addressed reciprocity during the
       Q&A and in a personal discussion.

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      much funding, if any, is earmarked for better export security in Homeland Security
      accounts.

      Another practical problem will require legislative changes. Census is forbidden to
      transmit company-specific export data overseas, which limits U.S. ability to
      participate in reciprocal sharing of detailed shipment data in advance on imports.166

      Politically, reciprocity seems easily acceptable in principal and in the absence of
      strong provocation. The political dynamics begin when we consider whether our
      trading partners or we will divert significant scarce resources from screening
      imports to screening exports. It could be diplomatically delicate if trading partners
      and allies observe that the US appears to expect them to divert resources from
      guarding their own imports in order to better protect us against their exports, but
      they do not observe reciprocal action in the U.S.

      The “next event/overreaction” hypothesis discussed earlier could transform the
      political and psychological dynamics of reciprocity. Policy-makers and trading
      partners should think about the political sustainability of export screening after a
      successful terrorist incident carried through containers. It seems reasonable to
      expect popular and political pressure to abandon reciprocity and focus all available
      resources on protecting against contraband imports. Another implication of the
      hypothesis is to consider how U.S. policymakers would respond if, for example, the
      European Union closed its ports to U.S. exports after the detonation of a major
      weapon smuggled in via container from the U.S.

      Given reciprocity’s potential to escalate in sensitivity, it seems important to reshape
      the public dialog. Bringing reciprocity issues and concerns to the fore with the
      press, cabinet-level officials, and congressional leaders is a step toward adequate
      resource allocation and to sustaining reciprocity when stresses come to bear.

      The editors of Fairplay put the whole issue into a broader context after
      Commissioner Bonner announced his strategy for a new security architecture with
      the governments of the world’s ten biggest containerports. Fairplay commented,
      “The initiative would require customs agencies throughout the world to reverse
      their focus, from imports to exports, so cargo can be identified and properly
      monitored before it crosses another country’s border.”167

Technology—Making Judgments and Accelerating Deployment
      Technology is an area where the challenge of balancing near- and long-term
      improvements is especially evident. Urgency demands off-the-shelf products
      while immature products and ideas with high potential payoff deserve more
      investment and experimentation. Public and private sector leaders must make
      judgments about when new or improved security products and processes are


      166
         Banks reported his personal experience with an initiative for mutual exchange of
       preclearance information with U.K. Customs, which foundered because of the Census
       prohibition. Personal conversation, January 2002.
      167
            “Customs chief targets containers,” January 18, 2002.

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      sufficiently stable and cost-effective to merit accelerated deployment and—
      perhaps—regulatory requirements.

      An excellent tool to best blend these considerations is an extended set of pilot tests
      and demonstrations. These would cover multiple scenarios and multiple vendor
      products within and across the technology groupings. Pilots should vary from
      simple proofs of concept through elaborate tests that yield statistically significant
      results. Note too that the pilots should cover tests of new business and security
      processes and services, not just hard technologies.

      To insure meaningful, useful, and comparable results, all pilots should be open to
      independent evaluation. A mix of government and industry oversight would be
      appropriate since most solutions will affect both security and commercial
      operations.

      Going further, it is worth considering a security-oriented Service and Methods
      Demonstration (SMD) program. In the 1970’s and 1980’s, SMD was a formal
      program of the Urban Mass Transportation Administration. Its goal was to
      provide systematic, unbiased, and comparable lessons-learned for all transit-
      related research, development, and test programs that received any DOT funding.
      Entities hosting the tests agreed, in consideration of their test funding, to cooperate
      fully with SMD’s independent evaluators, and to have results published and
      shared freely. The SMD program maintained a set of task order contracts with
      firms skilled in evaluating experiments and innovations. SMD paid for all
      evaluations from an independent funding line so that assessments were not in
      zero-sum competition with the innovations themselves.

      Types of Technology to Pursue. Although this paper is not a comprehensive
      survey of freight-related security technologies, it did identify five classes or groups
      of technology of particular promise. Each of these merit new or expanded pilot
      testing as described above. The five technologies are
          •   Supply chain-related software that can enhance security as well as
              efficiency, including security-tuned asset management tools and logistics
              portals
          •   Electronic cargo seals
          •   Other point or portable security sensors that can monitor cargo and
              conveyances
          •   Wide area communications combined with GPS or other global location
              technologies
          •   Biometrics tools to enable positive identification of authorized personnel

      These technologies offer significant potential to enhance security, safety, and
      commercial efficiency. However, realizing these benefits requires consistent and
      coherent standards, many of them international. It also requires standards that are
      flexible enough to accommodate both a growing installed base and continuing
      technology improvements.



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Security Improvements Create New Risks and Beneficiaries
      Seldom do we find innovations that provide unmitigated benefits—certainly not in
      security. Virtually every advance, especially those regarding supply chain business
      processes, carries with it the seeds of another problem. Trade-offs abound,
      implying that public and private sector leaders and analysts will have continuing
      challenges.

      Sheffi, Byrnes, and their colleagues at MIT identified the “Conundrum of Security
      vs. Standardization.” Participants in their audio conference “mused about the
      necessity of stronger standards and the security risks inherent in standards.”
      Standards, for example, can limit damage to a firm’s operations by creating
      redundancy, accelerate disaster recovery, improve certainty in the supply chain,
      and help smooth supply chain operations.            Standards are ingredients in
      certification programs for trusted agents. Standards also “create a weak link in
      security. A well-known standard becomes an easy target for terrorists who learn
      that standard and subvert it… Widely respected certifications would be subject to
      counterfeiting.”168

      Impacts will be asymmetric. Risk reduction and economic vigor may be the major
      goals, but government and industry must also be sensitive to distributional
      implications. As the participants in the MIT audio conference noted, costs and
      benefits of terrorism and countermeasures fall unequally on firms. For example,
      larger firms are more likely to have the sophisticated processes that will enable
      them to benefit from certification, trusted agent, and expedited handling programs.
      Smaller companies may have less to worry about from terrorists, especially
      compared to cultural icons or firms emblematic of American economic power.
      Internationally, developing economies in Southeast Asia may grow more slowly
      over time if firms shift some sourcing and production back towards centers of
      demand in the U.S. or Europe.

Reducing Factors that Compound Economic Risks
      The paper described three factors that can compound indirect secondary impacts.
      Each factor can stand alone, but they are of more concern because they can interact
      with compounded effects. None are easy to deal with. Mitigating their risks is best
      supported with an awareness of all three and coordinated approaches to dealing
      with them.

      The Next Event/Overreaction Hypothesis. The section on “The Potential for Self-
      Inflicted Wounds” described the risk of counterproductive overreaction to a
      subsequent terrorist attack. There are challenges for both government and industry
      in mitigating the next event/overreaction hypothesis.

      The main responsibility falls to the public sector, framed well by Flynn. The first
      challenge is to create significantly more effective extended cargo security. The
      second challenge is one of opinion and moral leadership. Leaders need to accept
      themselves and then educate the public that security cannot be perfect. They must

      168
            “Global Terrorism and its Impact on Supply Chain Management.”

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      learn to frame and manage reactions to virtually inevitable security breakdowns as
      military losses in the course of an extended war, not as triggers for
      counterproductive overreaction.

      The secondary responsibility falls to leaders of shippers, carriers, and industry
      groups. It is in their self-interest to accelerate their security preparedness
      measures, and to help educate the public sector as outlined above.

      There is at least a budding public discussion of the problem, mostly among a
      handful of analysts, career government executives, and transportation industry
      leaders. That is a healthy development, but more urgency is essential since we may
      face the next major terrorist incident at any time.

      Wolfe’s Paradox and Complex Terrorism. The paradox is that logistics systems
      are becoming simultaneously more robust and more fragile, especially susceptible
      to major and unanticipated drops in supply, as might happen after or in response
      to a major terrorist attack. The paradox implies three sets of action. The first is
      rigorous efforts to understand the boundaries – the scenarios – most likely to
      trigger the fragility. The second involves equally serious efforts to prioritize and
      mitigate the risks. The third is to communicate with supply chain and government
      leaders to increase appreciation of the risks and then mobilize action to reduce
      those risks.

      Complex terrorism exploits system interdependencies, complexity, and the absence
      of redundancy.     Security experts and system managers are considering those
      factors in complex systems such as power distribution, communications, and
      infrastructure such as GPS. It seems most important to identify non-redundant
      items and processes and potential vicious cycles, then to prioritize them and begin
      remediation. Some of those actions would also help to mitigate the effects of the
      paradox.

Raising The Bar for Supply Chain Management and Security
      Supply Chain Basics. It is in the interest of security managers to encourage supply
      chain managers to extend vertical “intercompany operating ties” and horizontal
      security coordination within their industries and across supply chains. Greater
      vertical coordination means more trustworthy and transparent shipments, and
      extended horizontal coordination improves security awareness and quality.169

      Standardization of processes and practices across an enterprise offers business and
      security benefits, creating redundancy and the ability to recover quickly.

      Better security offers only limited benefits in terms of insurance. Rates for theft
      coverage will improve gradually over time as security against terrorism also cuts


      169
         Extending vertical and horizontal ties raise a question for discussion: what balance of
       cooperation and competition among carriers--and shippers--generates the greatest net
       gains in welfare including security, efficiency, and anti-trust integrity? (Mark Major of the
       European Commission, personal correspondence).

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      theft. The main benefit of best practices in terms of terrorist and war risk coverage,
      however, is likely to be availability of coverage, not preferential rates.

      Visibility. Improving visibility and control is important and calls for work on
      many fronts. The seal, sensor, and wide area technology advances mentioned
      above, and their associated pilots, are part of this broader effort.

      Injecting more clarity and consistency into the dialog about visibility would help
      accelerate progress. It is unrealistic to expect vendors of visibility products and
      services to do this on their own, but it is possible to educate potential security and
      supply chain visibility users about the distinctions such as those outlined above in
      “Improving Visibility and Control.”

      It would accelerate progress if the vendors of supply chain management and
      enterprise software solutions collaborated more vigorously with vendors of event-
      driven visibility tools. The result should be better quality, more timely data in
      supply chain and enterprise systems.

      Given questions about the economic payoffs of “visibility,” it also could be
      illuminating and productive to challenge the developers of supply chain
      optimizing engines: how sensitive is the business case for their products to
      improved data accuracy, timeliness, and completeness for transaction and status
      information throughout the supply chain?170

      The template. In closing, it is worth calling attention once more to the strategic
      template or criterion for win/win solutions that can advance both security and
      supply chain efficiency. If security and supply chain managers keep in mind the
      goal of weaving together the best from both of their perspectives, it may be
      possible to make significant advances.

      “Thoughtfully done” security measures, as Byrnes put it, “can radically improve
      productivity.” It would be a signal victory to foster security while driving down
      variability from manufacturing plants through all the intermediate deliveries to the
      end-users.

                                                   ###




      170
         A skeptic, however, would expect the answer that the optimizing packages have high
       customer pay-offs from even marginal data—it just gets better with better data.

FHWA Office of Freight Management and Operations                                       Page 79
EU/US Intermodal Freight Forum                                                  April 11, 2002