Cost of Security for Sea Cargo Transport

Alan Erera*
Keng-Huat Kwek†
Nandini Goswami†
Chip White*
Huiwen Zhang†

The Logistics Institute ─ Asia Pacific

Singapore
A collaboration between the National University of Singapore and
the Georgia Institute of Technology

†TLI-AP
National University of Singapore
Singapore

*School of Industrial and Systems Engineering

Georgia Institute of Technology
Atlanta, Georgia USA

Abstract

We will identify the costs that may be incurred as a result of new

security measures for many of the users and providers of the
international freight transportation system. A quantification of these
costs is supply chain specific and would be the next step leading to
an analysis of the impact of security concerns on the productivity of
a specific supply chain.
Cost of Security for Sea Cargo Transport Date: 26 May 2003

1. Introduction
The intent of this document is to contribute to a better understanding of the impact of
security concerns on the productivity of the international freight transportation system.
More specifically, this report provides a stakeholder-focused taxonomy of security-
related costs associated with the transport of sea cargo. This report is companion to (Ref.
1, 2003), which contributes to a description of the flow of freight and information in the
international movement of freight by sea. The two reports together form steps necessary
for quantitatively analyzing the impact of security concerns on the productivity of the
international freight transportation system.

The events of 11 September 2001 in New York City and Washington, D.C., abruptly
changed the focus of U.S. maritime security. What was a focus on theft, drug trafficking,
and illegal immigration immediately shifted to a focus on terrorism. A seaport is
inherently vulnerable to, and a prime target for, terrorist attacks due to its geographic
size, economic importance, generally open accessibility by water and land, location in
areas of dense population, and its proximity to transportation links to other locations.
Containers moving through ports can be used by terrorists to deliver weapons of mass
destruction, which can lead to the destruction of major aspects of the transportation
system, high loss of life, and severe economic consequences.

Efforts have been made by the U.S. government and other stakeholders in the
port/terminal and shipping industry to insure the security of the international freight
transportation system. In January 2002, U.S. Customs initiated the Container Security
Initiative (CSI). CSI is aimed at securing the maritime link by identifying high-risk
containers through pre-screening exercises at the world’s twenty largest ports. Another
U.S. Customs initiative to enhance sea cargo security is C-TPAT (or Customs-Trade
Partnership Against Terrorism). C-TPAT was formed as a joint government-business
partnership in which businesses play an active role to enhance the security measures in
the parts of supply chain that they represent. The International Maritime Organization
(IMO) of the United Nations has also updated its ship and port security legislation to
respond to the need for securing the port and shipping supply chain.

New security improvements will require expensive new or retrofitted infrastructure and
technology and re-trained personnel. New security measures will also have impacts on
operations of the shipping supply chain. For example, additional inspection time at a port
is likely to lead to a delivery delay, which will tend to increase safety inventories and
inventory costs and hence reduce supply chain productivity. The challenge is to balance
security and productivity.

In this report, we will identify the costs that may be incurred as a result of new security
measures for many of the users and providers of the international freight transportation
system. A quantification of these costs is supply chain specific and would be the next
step leading to an analysis of the impact of security concerns on the productivity of a
specific supply chain.

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2. Cost and Security

We now present and discuss three different perspectives of cost in the context of security.

2.1. Risk Management

A risk management approach to security focuses on awareness, prevention, response,

and consequence management. Related costs include:

! Awareness: The cost of creating and maintaining security awareness. Cost

generating activities include worker education and training.
! Prevention: The cost of inserting and monitoring procedures for prevention of
terrorist activity. For example, the insertion, use, and maintenance of sensors,
data fusion, and decision support systems to continually assess all threats and
suggest appropriate actions.
! Protection: The cost of protecting assets, including workers, fixed physical
infrastructure (e.g., terminals, warehouses, cross-docks), vehicles (tractors,
ships), containers, chassis, information technology, etc. Concomitant costs
include employing security staff, weapons, barriers, etc.
! Response: The cost of responding to a terrorist event. Costs include the
needed command, control, communication, and information from a central or
distributed systems infrastructure.
! Consequence management: The cost of managing the recovery from the
terrorist attack, including recovering from interrupted operations and repairing
and/or re-constructing damaged assets.

We remark that an action taken may affect more than one of the above. For example,
hiring security personnel may affect both prevention and response.

2.2. Direct vs. Indirect Costs

Costs can be classified as either direct or indirect. Examples of direct costs include
the costs of purchasing new security equipment, hiring new security staff, and
training the current work force for new security procedures. Examples of indirect
costs include the cost resulting from an increased number of operations, increased
supply chain lead time average and variability, and increased management
complexity.

2.3. Setup vs. Recurring Costs

A one time, or setup cost is accrued when a new security system or process is inserted
into an operation. Examples of setup costs include the cost of updating a legacy
system, purchasing new equipment, and recruiting and training new security
personnel. Some of these costs may also be viewed as recurring costs. For example,
initial training for new security personnel may result in a one time cost associated
with the individual undergoing training; however, such training may be viewed as

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recurring by an organization that is constantly hiring new security personnel. Other

examples of recurring costs are the increase in the number of man-hours per day due
to an increase in the percentage of containers inspected and the maintenance cost for
new security equipment and information systems.

3. Cost Incurred at Ports

In order to address the funding needs for improved port security, the U.S. Congress
appropriated $93.3 million for port security grants in December 2001. We remark that the
concomitant requests for funding totaled almost $700 million, highlighting to some extent
the need for significant security investments. We further remark that ports had already
invested millions for security related enhancements prompted by the September 11
attacks and are now planning to invest hundreds of millions more for security
enhancements such as additional security personnel, gate and entry controls, surveillance
systems, lighting, X-ray equipment, fencing, and radiation detection equipment. In this
section, we list possible security costs that are incurred at ports. Since ports vary in size
and types of cargo processed, security enhancement needs at ports will also vary. Thus,
not all of the listed costs will necessarily be incurred at every port.

! Cost of conducting a Port Vulnerability Assessment (PVA) and developing a

Port Security Plan. Before making any decision about security improvement, it
is vital to evaluate the current security situation, which would form the basis for a
detailed plan for improvement. According to International Maritime Organization
requirements, each port should develop and maintain an appropriate security plan
that identifies the processes and equipment needed to prevent weapons, dangerous
devices, and potential terrorist events.

! Cost of establishing restricted areas and security barriers. The establishment

of restricted areas helps control and channel access, improves security, and
increases efficiency by providing a degree of security compatibility with the port
facility’s operational requirements. Following the establishment of the restricted
areas, barriers, e.g., security fences, need to be erected in order to delineate the
areas and create physical deterrents to persons attempting unauthorized entry.
Security barriers also perform the functions of delaying intrusion, which would
enable operating personnel and security guards to detect, and if necessary,
apprehend intruders.

! Cost of protecting the waterfront. To enhance waterfront security, use of roving

boat patrols, CCTV, motion sensors, dock patrols, etc., may be required to
adequately safeguard the port from intruder invasion by sea.

! Cost of security lighting. Adequate security lighting with uninterrupted power

supply is an important port security element.

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! Cost of security alarm and surveillance systems. Intrusion detection systems

and alarm devices complement security guards and a means for detection and
prevention. Such systems can detect a variety of different potentially invasive
events, such as a circuit or light beam break or interruption, as well as sound,
vibration, light, or motion. Surveillance systems include night vision and closed
circuit TV.

! Cost of inspection technology. Non-invasive container inspection technologies

exist that can identify chemical, biological, and radiation.

! Cost of port employee background checks and credentialing. The new U.S.
port security rules require that all personnel entering ports be checked with regard
to previous employment history and criminal record and identifiable through us of
a badge system.

! Cost of personnel and material access control and identification.

! Cost of hiring additional security and inspection personnel and the

concomitant cost of personnel training.

! Cost of changing operational procedures due to new security processes and

new technology insertions. Changes in operational procedures due to new
processes and new technology insertions often require a period of organizational
adjustment, producing a transition period typically associated with reduced
productivity and a steep organizational learning curve.

! Cost of increased communication among ports, relevant government agencies

and other business parties.

! Cost of new security system maintenance.

! Cost of technology for consequence mitigation. Technologies that mitigate the

consequences of terrorist acts include sensor networks to predict the dispersion of
radiological, chemical, or biological agents intentionally or accidentally released.

4. Costs Incurred by Shippers

Port security is clearly critical; however, another daunting challenge is freight security,
particularly freight shipped by container. New standards have been established to insure
secure container movement. The International Maritime Organization’s new security
measures and the U.S. Customs’ 24-hour rule, part of the Container Security Initiative
(CSI), are examples of new security standards. The 24-hour rule requires shippers and
ocean carriers bringing goods into the U.S. to electronically submit complete container
manifest information to U.S. Customs through the Automated Manifest System (AMS)
24 hours before the container is loaded on to a U.S.-bound vessel. The resulting impact
on operations of most parties in the shipping supply chain can be substantial. For

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example, many shippers and ocean carriers still conduct business via fax and phone.
Shippers and freight forwarders typically used to fax their manifests to carriers any time
between 3 days before a vessel sailed to seven days after it departed a foreign port
destined for a U.S. port. However, under the 24-hour rule, shippers may be required to
forward the pertinent information to carriers at least 12 hours before the carriers have to
submit this information to U.S. Customs, which means 36 hours before the container is
loaded on a U.S.-bound vessel.

Costs to shippers include the following:

! Cost of portal enhancement for timely document transactions. To enable

electronic document transactions, shippers need to register with portals, such as
GTN platform, INTTRA, Cargo Smart. Although such portals will incur
additional costs, they can support rapid and timely transmission of the information
over the AMS network to U.S. Customs. As an example, the portal INTTRA
automates and standardizes transactions, thus supporting registered participants to
streamline documentation-related business processes across its network for
shippers, forwarders, and carriers. Workflow message and reports also alert
designated individuals regarding instructions and timing for CSI submission.

! Cost of information system revision and increased communication. A

shipper’s existing communication system will likely require updating in order to
satisfy the new security requirements. As the system is connected with other
systems, new standards may be required. Also, as shippers connect their back-end
systems to the Portal to transfer data through a web-accessible platform, system
security will need to be enhanced. In addition, more frequent communication is
expected between shippers and other parties, such as carriers, U.S. Customs, and
ports. Thus, the daily communication cost is expected to increase in the short run.

! Cost of reduced flexibility in business operations. Under the 24-hour rule, it

will be very difficult for shippers to change their manifest after it is submitted to
the carriers. This lack of flexibility may reduce a shippers’ productivity. However,
the associated loss revenue may be quite difficult to quantify.

! Cost of personnel training. Personnel need to be trained to comply with the new
operational requirements and use of the revised information system.

5. Costs Incurred by Freight Forwarders

Costs to freight forwarders include the following:

! Cost of portal enhancement for timely document transactions. This is a similar

cost to the one mentioned earlier for shippers.

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! Cost of information system adjustment and increased communication. This is

a similar cost to the one mentioned earlier for shippers.

! Cost of personnel training. This is a similar cost to the one mentioned earlier for
shippers.

6. Costs Incurred by the Trucker and the Trucking Company

Costs to truckers and trucking companies include the following:

! Cost of communication system adjustment and increased communication.

This is a similar cost to the one mentioned earlier for shippers.

! Cost of driver background checks and credentialing. Drivers and other

workers from land transporters who are going to enter a port or port facility
require background checks, with an ancillary need for a badge identification
system.

! Cost of inspection time delay at port terminals. Drivers and other personnel of
trucking companies, before being permitted to proceed beyond a port access point,
will be subjected to comprehensive inspections. Trucks and all items on them will
also be screened and inspected at large ports. Therefore, drivers need to wait for a
longer time at port access points before they are allowed to enter the container
terminal.

7. Costs Incurred by Ocean Carriers

Costs to ocean carriers include the following:

! Cost of portal enhancement for timely document transactions. This is a similar

cost to the one mentioned earlier for shippers.

! Cost of increased communication. This is a similar cost to the one mentioned

earlier for shippers.

! Cost of personnel training. This is a similar cost to the one mentioned earlier for
shippers.

! Cost of increased labor. Security measures increase the amount of labor needed
to load, unload, and inspect cargo, and to operate specialized equipment. For
example, the International Maritime Organization international code for ship
security has a requirement for a ship security officer (SSO) on each vessel.

! Cost of using standard devices and security-related technology. To be

traceable, vessels are required to be equipped with an Automatic Identification
System (AIS). Ocean carriers also require tracking software, which can monitor

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containers and address the most common security problems associated with
containers, including theft, tampering, and temperature control. Technologies,
such as Global Positioning System (GPS), Radio Frequency Identification (RFID)
and e-seals will all be used for real-time tracking and recording of containers’
logistical journey. Moreover, ocean carriers may have to upgrade their
transportation equipment such as to use Smart Container in the future because of
the security requirement. Installation of security equipments on vessels is another
cost that needs to be considered.

8. Costs Impacting the Entire Supply Chain

! Cost of throughput delays in the system. Time delays will result from increased
cargo security searches. Cost will be high during the early stage of supply chain
adjustments to new security measures. Delays in shipment can cause penalty
costs to parties involved in the shipment and lead to production delays, higher
costs, or loss of sales. In the case of perishable goods, delays or damage caused
by security procedures can drastically reduce the market value and profitability of
the material being shipped.

! Cost of providing more detailed manifest data. The requirement for detailed
manifest data may cost more than the timeliness requirement in the 24-hour rule.
In the past, the information about product descriptions contained in the container
has been deliberately vague in order to insure that the longshoremen or others
know what high-value goods were in the containers. As more detailed data is
required, the risk of theft may increase. The cost of higher risk of theft is not
likely to be borne by a single party in the supply chain but rather split among
various parties. Like cost of time delay, this cost is difficult to quantify.

! Cost of security tax. Increased terrorist threat has imposed a “security tax”. The
new terrorism tax described by congressional economists represents the extra
short- and long-term costs of securing buildings, transportation, infrastructure
and business. Most parties in the supply chain need to carry a higher cost because
of the tax increase.

! Cost of higher insurance costs. Although security at ports has been tightened,
ports and vessels remain likely terrorist targets. Insurance premiums on
containers and vessels have increased correspondingly. Higher cost of buying
insurance adds to already increased security costs in the supply chain.

9. Conclusions
In this paper, we have identified a number of possible security-related costs that can be
incurred at ports or other parts of the shipping system. We focused on summarizing these
costs and tried to develop a checklist that parties concerned can refer to when security
costs are under consideration. Some costs are more important than others and worthy of

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further research efforts. Quantifying costs is not discussed in the paper. However, we
believe that quantifying certain overriding costs will be highly valuable.

10. References

1. Comparison of Singapore and U.S.A. Sea Cargo Container Export Processes,

The Logistics Institute – Asia Pacific, Georgia Institute of Technology and the
National University of Singapore, May, 2003.

2. Container shipment security and tracking system, Blair LaCorte, International

Maritime and Port Security Conference, January 2003.

3. Development strategy and policy for small states in the context of global
change, Victor Jordan, The Fourth Annual SALISES Conference, January 2003.

4. GAO Testimony on Port Security – Nation faces formidable challenges in

making new initiatives successful, JayEtta Z. Hecker, August 2002.

5. Integrating coastal maritime surveillance system technologies for safety and

security in the ports, Stephen L. Ladd, International Maritime and Port Security
Conference, January 2003.

6. INTTRA Supports U.S. Customs Container Security Initiative, February, 2003,

http://quickstart.clari.net

7. ITS applications for providing International Freight Movement Security

(Session ES 10), October 17, 2002, http://www.itsa.org/ITSNEWS.NSF

8. New challenges in port security – operators’ perspective, Vincent Lim,

International Maritime and Port Security Conference, January 2003.

9. Partnerships and resources key to ports in the post-9/11 environment, Kurt J.

Nagle, Ports and Harbors, September 2002.

10. Security/Coast Guard offers guidelines for port security, David Cruz, American
City & County, June 2002.

11. Shippers, ocean carriers scramble to meet customs deadline, Linda

Rosencrance, Computerworld January 23, 2003.
http://www.computerworld.com

12. Squall brewing over the cost of tighter maritime security, Toby Shelley,
Financial Times, December 6, 2002.

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13. Strong Links – Adding security and value to the supply chain, APL paper,
http://www.apllogistics.com

14. The Virtual Box – Electronic business tools for container shipping, Digital Ship
October 2002 page 30-33.

15. U.S. Port container security and tracking, Brian Creighton, David Poppe, Heidi
Tsun, Ben Van’t Hul, 2002. http://www.bus.iastate.edu

16. U.S. Tests cargo security system, RFID Journal News, December 18, 2002.
http://www.rfidjournal.com/article/view/167/1/1/

17. Where have we been? Where are we going? How are we going to get there?
Bethann Rooney, Ports and Harbors, September 2002.

18. http://www.aapa-ports.org

19. http://www.gtnexus.com/pdf/arc_security_sept2002.pdf

20. http://www.hph.com.hk/news/news_room/hph-2dec02.htm

21. http://www.imo.org

22. http://www.savi.com

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