Homeland Security Watch

News and analysis of critical issues in homeland security

January 26, 2012

Global Supply Chain Strategy

Filed under: Catastrophes,Cybersecurity,Port and Maritime Security,Private Sector,Strategy — by Philip J. Palin on January 26, 2012

Yesterday at the World Economic Forum in Davos, Switzerland Secretary Napolitano unveiled the new National Strategy for Global Supply Chain Security (1.5 megabyte PDF).  The President signed-out the document on Monday.

The strategy offers two goals:

Goal 1: Promote the Efficient and Secure Movement of Goods – The first goal of the Strategy is topromote the timely, efficient flow of legitimate commerce while protecting and securing the supply chain from exploitation, and reducing its vulnerability to disruption. To achieve this goal we will enhance the integrity of goods as they move through the global supply chain. We will also understand and resolve threats early in the process, and strengthen the security of physical infrastructures, conveyances and information assets, while seeking to maximize trade through modernizing supply chain infrastructures and processes.

Goal 2: Foster a Resilient Supply Chain – The second goal of the Strategy is to foster a global supply chain system that is prepared for, and can withstand, evolving threats and hazards and can recover rapidly from disruptions. To achieve this we will prioritize efforts to mitigate systemic vulnerabilities and refine plans to reconstitute the flow of commerce after disruptions.

In my judgment we are much closer to achieving “efficient and secure movement” than we are to a “resilient supply chain”.  The new strategy could help with each, but the tougher task will be the effort “to mitigate systemic vulnerabilities.”

On January 11 the Wall Street Journal reported,

After a decade of streamlining their supply chains to make them less costly, the natural disasters and political upheavals that marked 2011 showed many multinational companies just how vulnerable those links have become.

A senior supply chain executive recently told me (clearly depending on me to protect his name and the name of his firm), “We have several known choke-points. I’m sure there are many more we don’t know about.  It won’t take a major disaster to disrupt supply, just a couple of unusual, probably simultaneous accidents.  I think — hope — there would be a similar impact on our competitors.  But that doesn’t help our consumers.”

“There are ways to mitigate our risk, but they’re all expensive,” another executive explains.  ”And for the last decade and the foreseeable future the lower cost of US supply chain management has been our principal economic advantage.  We’re much better than the Europeans, tons more efficient than the Chinese.  Increase supply chain costs and we lose just about the only advantage the US has left on most commodity trading and even a broad range of high-end specialty goods.”

Again from the Wall Street Journal:

Justifying redundancies is one of the toughest aspects of managing a supply chain, because backstopping doesn’t pay off unless there is a disaster. When CFOs ask about the return on such investments, the answer is, “If we’re lucky, absolutely zero return,” says Sean Cumbie, vice president in charge of global supply-chain management at genetics-testing company Qiagen NV, based in Germany.

The new strategy makes a glancing reference to “appropriate redundancy” which, for most supply chain executives, is like discussing the practical difference between manslaughter and murder.   Whatever you call it, the outcome ain’t pretty.

The senior supply chain guys (and a few gals) are the pioneers of the field.  In the last twenty years they have transformed the known world.  Not just the supply chain world, but the everyday world of billions of consumers.  Today the supply chain is faster, cheaper,  delivers much higher quality with much more assurance and transparency than a quarter century ago.

On most days the supply chain is also stronger, more flexible, and better at handling a range of emergencies and disasters.

But what we saw in Northeast Japan and Thailand has exposed a parallel reality.  Like all networked systems, risk tends to pool in unexpected ways and often unexpected places.  What if the earthquake-and-tsunami had hit the economic heartland of Tokyo and Osaka, instead of the Tohoku periphery?  What’s would the outcome be if  instead of Thai flooding it was an earthquake in San Francisco and down the east side of Santa Clara County?  What happens if the Port of Long Beach is seriously disrupted for an extended period?  What if cyber-vandals — or economic or national or terrorist adversaries –seriously target the digital systems on which the modern supply chain absolutely depends?

In a report — “New Models Addressing Supply Chain and Transport Risk” (7 megabyte PDF) —  released Tuesday, the World Economic Forum found:

Supply chain and transport networks have continuously evolved to deliver capacity, speed, efficiency and customer service through organizational trends such as globalization, specialization, volume consolidation and information availability. The focus on cost optimization has highlighted the tension between cost elimination and network robustness – with the removal of traditional buffers such as safety stock and excess capacity. These developments have shifted risk distributions…(while) their effects have often included sharing risk more broadly around the world, reducing high-frequency risks and focusing risk within sectors, common technologies or nodes. Another common feature has been to disassociate risk from responsibility, misaligning incentives and creating moral hazards – the notion that a party that is insulated from risk will behave differently from how it would behave if it had full exposure to risk.

Most supply chain managers I know tend to discount low frequency, high consequence risks (see related post).  They discount this kind of risk because over the last twenty years they have become true masters of risk management.   They also discount high impact risks because their CEO’s, Boards of Directors, and shareholders reward them for squeezing every possible penny out of supply chain costs.  They discount catastrophic risk because their creation — the modern supply chain — has never experienced a fundamental systemic failure.

Yet.

Many supply chain executives have become what economists sometimes call “risk preferers”, they have learned to maximize their return by skating with great style, grace, and confidence along the edge of chaos.   Each day they become more adept at mastering the chaos.   Is the experienced supply chain executive a sorcerer or  sorcerer’s apprentice?

The new National Strategy is the starting point for a collaborative process of discussion, analysis, and policy development.  It seeks to “develop a culture of mutual interest and shared responsibility” across government and the private sector.  It’s the right goal.  It’s the right way to pursue the goal.

It is a very ambitious goal.

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9 Comments »

Comment by Alan Wolfe

January 26, 2012 @ 11:54 am

The major problem with this (and other) national strategies continues to be the lack of any (clear) guidance on ways and means. Who’s doing this? Why is DHS presenting this strategy instead of Commerce or State or Treasury? What’s the DoD role? There seems to be an implied defense role but not clear at all. Is this currently budgeted or are new resources and new policy guidance required? More questions emerge than clear guidance.

Comment by Philip J. Palin

January 26, 2012 @ 12:52 pm

Alan:

What I read in a range of Presidential Policy Directives — some of which I support, others that I don’t — is strategic guidance: Here’s what we want to accomplish and why.

Then the White House delegates it out for staff work to develop the operational guidance needed to achieve the policy/strategy. In this particular strategy a one year process of private-public engagement is explicit.

I prefer this approach to some prior efforts that tended to result in National Security Council staff (or the dearly departed HSC staff) drilling waaay deeper than their individual or institutional competence.

I absolutely agree the National Strategy for Global Supply Chain Security is a product of — and needs the continued involvement of — several agencies. I hope that Secretary Napolitano’s role in making the announcement was meant to highlight the potential brokering role of DHS. But I also hope there will be meaningful National Security Staff involvement to guarantee the key players are open to brokering.

Comment by William R. Cumming

January 26, 2012 @ 5:29 pm

I would argue that the over 50 national strategies have become largely meaningless. Why? Few are coordinated or even reference the other strategies and there are some direct conflicts.

Waiting for the National Stragtegy to protect the 1st Amendment, privacy, civil liberties, and civil rights.

Not holding my breath!
American voters are being given a hobson choice in their candidates. The least worst gets the votes not the best. There is a fundamental difference in both the short and long run.

Now looking like an unregistered Washington lobbyist, or an asset stripper who never looks at the long term vis a vis a CON law prof who looks for the lowest common denominator in legal reasoning just as some of his predecessor. And the one lawyer running appears to never have had a single client. What and how is a successful career measured these days?

Comment by Philip J. Palin

January 26, 2012 @ 6:42 pm

Bill:

Regarding the efficacy of policy and strategy documents, I perceive much depends on who runs the traps and how they run the traps. A policy/strategy needs at least one well-positioned champion who is committed to its purposes. Then its half-life and influence depends on how well that champion — and his/her minions — cultivate a community of champions. Words on paper is not logos (In the beginning was the logos…), not even on White House stationary. But well-considered words combined with well-considered action can still have an impact.

Paul Wilson has written a wonderful remembrance of Vaclav Havel, a particular hero of mine. In the piece Wilson reminds us of a Havel aphorism:

“Hope is not the conviction that something will turn out well, but the certainty that something makes sense, regardless of how it turns out.”

A ringing statement, but it was not quite in focus. What Havel meant by “something”—as his other formulations of the same belief make clear—was action. All his life, Havel lived by the belief that if you wanted something to happen, you had to do something to make it happen, and damn the consequences, including arrest and prison, and possibly even death. Speaking about the early days of the post-Stalin thaw, he once said: “The more we did, the more we were able to do, and the more we were able to do, the more we did.” It is a fine summary of his attitude, and, in a sense, his legacy. Havel was continually pushing the boundaries of the possible, and in doing so, he was able to create space for others to follow.

A strategy and its champion(s) create a space for others to follow… or not. I don’t think it is always the fault of the strategy or its champion if most others choose to ignore the opportunity.

Comment by Vaclav Havel

January 27, 2012 @ 8:24 am

Thanks for the introduction to Havel! Interesting….

Christopher Tingus
chris.tingus@gmail.com

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