Securing a shipping sea change: U.S. security radically alters global transportation of goods. (Logistics Special).

Four armed Cuban coast guardsmen parked their patrol boat not far from a U.S. Coast Guard station in Key West, Florida. The officials, dressed in military uniforms, came ashore at the Hyatt Marina Resort at 4 a.m. and walked the streets--until they finally found a policeman and told him that they wanted to defect.

The security breach, the latest in a series of high-profile incidents, highlights the challenge facing U.S. authorities as they seek to secure the country's borders. The new Department of Homeland Security must monitor more than 150,000 kilometers of coastline, more than a million international visitors a day and 7.8 million loaded containers entering U.S. seaports annually--an average of more than 21,000 a day. To do so effectively in a country where trade represents more than a quarter of the economy, U.S. officials are seeking to change the way the entire world works, in the name of security.

"To our enemies: We do not cower. We are coming after you:' Tom Ridge, head of Homeland Security, said during a recent visit to the Port of Miami. "Whether your threats come via a suitcase or on a suicide bomber, pathogens in the air or armed passengers on an airplane, no matter the weapon of choice, we will use every tool at our disposal to stop you."

At its founding on March 1, Homeland Security had more than 170,000 employees and a proposed US$41.3 billion annual budget. It combines the U.S. Coast Guard, Animal and Plant Health Inspection Service, Customs, Transportation Security Administration, Immigration and Naturalization Service, Secret Service, Federal Protective Services, Federal Emergency Management and other U.S. agencies under one roof. The new U.S. institution is reorganizing border business with major initiatives, sending shockwaves through the supply chain around the world.

"The U.S. government is attempting to get control of its borders:' says Thomas Cash, executive managing director for Latin America at security company Kroll. "If people wish to do business with the United States, it is either going to be the U.S. way or the highway There will be no exceptions.

Changing customs. To avoid cargo congestion, the U.S. Customs Service is working with companies to implement a regulatory blueprint for global supply-chain security. The Container Security Initiative "pushes back the border" for imported U.S. cargo, requiring electronic filing of detailed cargo manifests 24 hours in advance of ship loading at international ports bound for the United States. Another strategy, called the Customs-Trade Partnership Against Terrorism, is a voluntary program that rewards secure facilities, procedures and personnel in the supply chain with speedy cargo clearance at U.S. customs.

As of Feb. 2, 2003, manifests with 14 data elements must be sent 24 hours ahead of time for review in the United States. The system looks for unusual information such as shirts that weigh too much or a type of cargo coming from a non-traditional place. It initially focuses on the 20 largest international ports--all of which are located in Europe and Asia--that currently serve as origin and transshipment points for 68% of all container shipments to the United States. In this way, the Container Security Initiative seeks to push back the border to the spot where cargo is loaded.

Maritime transportation represents the single biggest challenge for change. The bulk of the world's freight travels by sea. A typical modern container ship sailing 80% full might carry 3,000 containers and generate more than 100,000 documents. Shipping lines are scrambling to upgrade electronic systems to transmit container contents to customs authorities prior to loading.

"This information system will be a defining moment for some transportation companies," says Luis Perez, managing director for Latin America at APL Logistics. "If a shipping line can't get it together, it won't be able to service the United States."

Shipping lines are one focus of attention, but the entire supply chain is under scrutiny U.S. Customs is seeking to swap so-far voluntary compliance with rigorous security systems from shippers, freight forwarders, ports and logistics providers for expedited processing of cargo. The goal is for each link in the supply chain to monitor its interactions with the other components. To date, more than 3,000 companies have complied with the U.S. Customs guidelines to become part of the voluntary trade partnership against terrorism.

Nonetheless, container transport is a commodity business. Shippers and consignees don't necessarily know each other and they may not know suppliers, subcontractors and customers. Apparel company Phillips-Van Heusen, for example, hired Kroll to review security at its overseas operations. The maker of shirts and shoes buys products from four assembly plants or maquilas in San Pedro Solo, Honduras and pays Crowley American Transport to move the goods from the plant to the United States.

Kevin O'Brien, a director at Kroll who worked on the inspection, found that the operation's crime prevention measures helped the plants comply with U.S. security concerns. Employees are frisked at the beginning and end of the workday Because of frequent hijackings, trucks travel in convoys of four and five from San Pedro Sula to the port of Puerto Cortes with a private security escort trailing behind. Containers have locks on them. "Overall, the same measures aimed at reducing crime help security:' O'Brien says.

U.S. port concern. Nevertheless, O'Brien can quickly tick off a number of areas that could pose problems. Most workers lack identification and many don't have birth certificates, so it would be easy for a terrorist to get a job with an assumed identity No cameras watch the final packing area.

These potential pitfalls multiply along the supply chain. Cargo often sits unattended at docks. Containers can be tampered with at sea. Fewer than 2% of arriving containers to the United States are subjected to full inspections, usually only when documentation questions arise or the shipment matches a high-risk profile, such as coming from the Middle East.

According to a white paper prepared by transportation companies APL Logistics and APL, stopping a container in transit, processing the necessary paperwork and inspecting it by hand takes five customs officers three hours. An inspection station using state-of-the-art mobile scanners requires fewer people and can process up to 11 containers an hour. Either way U.S. ports represent a key concern.

"In the past. shippers did not need to provide great deal of information about the cargo:' says Earl Agron, director of security for shipping line APL. Documentation lagged shipments and most freight was labeled "all kinds." Now, U.S. Customs officials are paying close attention to manifest information and want to vet cargo before it is shipped.

"The same companies in the same places trade 90% of the same cargo:' says Charles Winwood, a former U.S. Customs official and now a senior vice president at Sandier & Travis Trade Advisory Services. "The idea is to identify the unknown shippers.

Caribbean wild card. In the measure that Latin American ports are not included in the U.S. Customs' list of megaports for expedited cargo, some analysts fear that the region may lose one of its competitive advantages compared to emerging markets in Asia: proximity Central America and the Caribbean is less than a week away compared to three weeks for China, but the time advantage could be erased if lax security means major delays.

"There will be no special treatment for Central America and the Caribbean," says APL Logistics' Perez, who notes that the proliferation of transshipment ports in the region will make the 24-hour manifest rule hard to apply. "How do you know what is supposed to be where? That's a big wild card."

Another big strike against the Caribbean, in particular, is an ample flow of smuggled people and goods. "In the case of the Caribbean, you don't know who's trading and what they are trading," says Kroll's Cash, a former U.S. Drug Enforcement Administration official. "Drugs are less of a concern than illegal aliens."

Hotspots like Colombia and international airports already receive plenty of attention from authorities. Airlines and airports have aggressively tightened security. Everything is being x-rayed. Air cargo carriers, meanwhile, say increased information requirements are just more of the same for them. Express cargo shipping companies, for example, already know who is shipping what and where and to whom. In this year's hectic Valentine's Day crush, United Parcel Service moved an estimated 7 million pounds flowers through its system from Colombia and Ecuador FedEx moved 4 million pounds in just three days. Neither experienced major delays.

"I wouldn't be surprised to see drug seizures at airports drop to zero," says Cash. "You'd have to be an idiot to try to smuggle drugs through an airport these days."

The U.S.-Mexico border is another area where increased security concerns will not necessarily mean big change for shippers. Trade patterns are known and well developed, so it's easier to spot out-of-the-ordinary cargo. "So much is already going on between the United States and Mexico because of the drug situation," says Sandra Scott, an international trade and customs advocate for Roadway Express. "Cargo is already subject to X rays and other measures."

Still, there are problems. Presidents Vicente Fox and George Bush announced a 22-point action plan to boost cooperation and integration of customs and other areas in March 2002, but bilateral bickering has meant little has been done in practice. For example, truckers cannot provide service beyond border areas in both countries, so a single trailer has multiple shipping companies and destinations. "At an important city pair like Nuevo LaredoLaredo, you lose complete control in the little stretch of border," says Scott. "Shorthaul drivers come to pick up goods and you don't always know who they are."

Roadway Express, like many other carriers, has gone to great lengths to harmonize its systems in North America. The company uses a single bill of lading and invoice to simplify cross-border operations. Its information systems backbone means complying with the U.S. Customs requirements about cargo contents is not an ordeal.

Shippers absorb costs. As the U.S. security initiatives are expanded, manufacturers and shippers will bear increasing responsibility for container contents and security. Similar to the banking industry's challenge of knowing its customers to prevent money laundering, companies will be called on to know customers, suppliers and vendors, as well as secure containers with tamper-proof packaging.

To meet new anti-terrorism rules from the U.S. Customs Service, most global shippers are simply allowing for additional transportation time rather than risk delays or fines, according to a worldwide on-line survey by logistics company BDP International (BDP) and its consulting unit Centrx. Remarkably, half of the 115 surveyed companies indicated that it remains unclear how they will pay for costs related to extended shipping times. Another 43% expected to absorb the added security costs.

Overall, increased supply-chain security will cost billions. In the United States alone, the Brookings Institution in Washington, D.C. estimates that its proposed anti-terrorist recommendations for U.S. coastal protection, seaport security, and cargo security would total $5.3 billion. Additionally, Brookings points to another $10 billion or more that Customs could spend for additional, comprehensive programs related to road, rail, air and sea transportation.

Technology, already a key component of logistics, will grow in importance. Tracking and tracing and other systems implemented by express carriers will be extended to maritime operations and business practices at every level. However, not all manufacturers and shippers, or indeed, countries, have the infrastructure and the tools to carry out this transition.

Whether through gadgets or improved inspections, the U.S. government can't improve security alone. "It has to be done with cooperation from other governments and companies," says Myles Ambrose, a creator of the U.S. Drug Enforcement Administration and now senior advisor with Sandier & Travis. "Homeland Security will take some time but, make no mistake, it will happen."