Found Money: Supply-Chain Security Pays Off In More Ways Than One

Spending on expensive measures to secure your supply chain may rank somewhere between having your teeth pulled and eating spinach on the list of things you want to do. But a new study from Stanford suggests it doesn't have to be that bad. In fact, it may help you grow your business.

WASHINGTON - A funny thing happened on the way to manufacturers implementing enhanced supply-chain security measures: they discovered increased efficiency, better inventory management, and reduced cycle and shipping time.

At least that’s the finding of a new study released earlier this week by Stanford University, in conjunction with The Manufacturing Institute, the research and education arm of the National Association of Manufacturers, and IBM.

It’s a slightly different take on the old adage, “You have to spend money to make money.” The study set out to quantify the benefits of investing in supply chain security measures, and the results suggest that while many companies might be reluctant to shell out the money in the first place, those that do find that the investment in security might actually pay off in collateral benefits many times over.

“The study shows that investments in security actually help with respect to other performance variables, such as efficiency, consumer responsiveness and global flexibility,” said Jerry Jasinowski, President of The Manufacturing Institute. “It’s a counter intuitive result that most people didn’t realize.”

While there have been some highly publicized supply chain disruptions recently – terrorist acts and Hurricane Katrina, for example – the breakdowns can come in many forms: strikes at ports, product contamination, border closings, and supply shortages, to name a few. Completely avoiding the impact of these kinds of major disruptions on the supply chain won’t always be the outcome, but minimizing the disruption can be, and indeed becomes even more important as global trade expands.

While governments around the world have implemented mandatory rules relating to the screening of containers and cargo data, the study noted that many businesses have been proactively looking for ways to minimize their supply-chain risk.
Benefits to inventory management and customer service. For larger chart, click here.

Efficiency benefits. For larger chart, click here.

Theo Fletcher, Vice President, Import Compliance and Supply Chain Security at IBM, said his company now regularly inspects empty containers to make sure there are no hidden compartments.

“We actually go in with something as simple as a tape measure and measure the inside and the outside to make sure they’re the same size,” Fletcher said. “You may think that’s a little archaic, but I will tell you that empty trailers have been delivered to IBM that have had hidden compartments.”

IBM also uses GPS systems for most of its shipments that travel over the roads, has security guards follow trailers, and can in some cases tell when doors on containers are being opened and closed, even while they’re in transit.

Arnold Allemang, a senior advisor and a board member at Dow Chemical Co., said Dow is increasingly scrutinizing the background of its truck drivers, and uses two drivers so cargo is never unattended. He also noted the increased use of Radio Frequency Identification at the giant chemical company, the largest bulk chemical shipper in North America by rail and truck.

“Over time, Dow expects RFID systems to help the company improve labor efficiencies, data quality, supply chain visibility and reliability, safety and security, as well as regulatory compliance,” Allemang said.

The Stanford study was based on input from 11 manufacturers and three logistics service providers. Among the findings that were tied to an investment in supply chain security:
- A 38 percent reduction theft/loss, and a 37 reduction in tampering;
- A 14 reduction in excess inventory, and a 12 percent increase in reported on-time delivery;
- A 50 percent increase in access to supply chain data, and a 30 percent increase in timeliness of shipping data;
- A 49 percent reduction in cargo delays, and a 48 percent reduction in cargo inspections; and
- A 29 percent reduction in transit time.

The study also suggested manufacturers benefited from a lower customer attrition rate, and also reported that the companies saw a 20 percent increase in new customers. Fletcher and others conceded, however, that it’s not possible to say that the steps the manufacturers took on the security front were directly responsible for the customer attrition data.
Customer relationship benefits. For larger chart, click here.

“Supply chain security is implementing a set of consistent processes,” Fletcher said. “Some of the efficiencies that we highlight you cannot pinpoint to a particular program, but you can pinpoint it to the consistent processes that we’ve implemented across our supply chain.”

Fletcher said IBM about a year ago actually started requiring suppliers to take supply-chain-security initiatives, with about 95 percent currently under contractual obligation to do so.

“Our expectation is that we will do individual assessments of those suppliers to make sure they have implemented the contractual changes we have put in places and where they haven’t we’ll take corrective actions,” Fletcher said.

Of course, not every manufacturer has the resources of an IBM or a Dow Chemical. While the names of each of the 11 manufacturers involved in the study weren’t disclosed, all of the companies were large, perhaps calling into question the value of such findings to the smaller and even medium-sized manufacturer.

Allemang said medium-sized players in the industry can benefit from the study, but agreed that what works for Dow Chemical might not work for the 25-person manufacturer.

“If you’ve got 50,000 employees, they can all have ID cards that will tell you where they are,” he said. “If you’ve got 25 employees, you probably don’t need that.”
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