MSc Thesis

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MSc Thesis

Smart and Secure Trade Lanes

Assessing how a maritime supply chain security initiative affects

manufacturing companies

Julienne Mercedes Mittag

(s2643022/B3059550)

Dual MSc Operations Management

Faculty of Economics and Business at University of Groningen

Final Version: 17/12/2014

Supervisors:

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Abstract

Purpose: To investigate how a maritime supply chain security initiative, the Smart and Secure

Trade Lane (SSTL) Pilot Project, affects manufacturing companies in their approach towards supply chain security and related benefits from such efforts.

Method: Secondary data analysis and case research was combined to collect data.

Semi-structured interviews were conducted with seven manufacturing companies engaged in international maritime trade. The resulting data was coded and within- and cross-case analysed.

Findings: From the case research it is concluded that the SSTL pilot project has no significant

impact on a company’s approach towards supply chain security and thus comparable low effort is required to participate. Nevertheless, due to the positive influence of the project on how customs authorities and companies communicate with each other, participants receive distinctive benefits in terms of decreased customs clearance time at the Chinese border as well as improvements of the company’s image.

Research Limitations: Due to the fact that the pilot project is still in an early stage, only a limited

numbers of companies could be included in the case research. Consequently, further research is necessary to validate the findings and research propositions.

Practical implications: The main deliverable of this paper is a set of recommendations, the SSTL

pilot project leaders can use to better promote the project to traders and thus acquire more companies to participate. Manufacturing companies engaged in maritime trade will gain a better insight in how they can benefit from trade security initiatives and thus may be encouraged to invest further into the security of the global maritime supply chain.

Originality/value: Literature review showed that research with regard to the impact of

maritime security initiatives on companies implementing them is very limited, especially with respect to the relation between managerial action on security and potential benefits from security initiatives. This paper contributes to this gap as it investigates the impact of the SSTL pilot project on the company’s actions towards supply chain security and perceived benefits.

Keywords: Supply Chain Security, Maritime Transportation, Risk Management, Supply Chain

Management, Smart and Secure Trade Lane Pilot Project

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Acknowledgment

I want to express my gratitude to all those who gave me the possibility to complete this Thesis. I want to thank my supervisors Dr. Evrim Ursavas and Dr. Gu Pang for their great ideas and guidance through the last months. Especially Dr. Evrim Ursavas showed great support in accompany me to several meetings and discuss problems also cross-borders.

I’m much obliged to the SSTL project leaders Rob van Kuik, Erik Devilee, and Albert Imming for their insights and time they committed to support my research. Without their guidance this thesis would not have been possible. In addition, I own thanks to the companies which dedicated their resources and time to conduct the respective interviews. No qualitative research is possible without valuable data to support it.

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Table of Figures

Figure 1: Maritime Supply Chain... 11

Figure 2: SCSO framework ... 15

Figure 3: Conceptual Model... 19

Figure 4: Revised conceptual model ... 35

Tables

Table 1: Overview characteristics of sample firms ... 21

Table 2: Type of data collected per interview/case ... 23

Table 3: Cross-case findings on security preparation and planning ... 24

Table 4: Cross-case findings on security-related partnerships ... 25

Table 5: Cross-case findings on organisational adaption ... 26

Table 6: Cross-case findings on security-dedicated communication and technology ... 29

Table 7: Overview customs clearance time in China for all interviewed companies ... 30

Table 8: Cross-case findings on benefits and improvements ... 31

Table 9: Interview Overview ... 45

Table 10: Coding Table ... 49

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List of Abbreviations

AEO Authorised Economic Operator

APEC Asia Pacific Economic Cooperation

ATLAS Automatisiertes Tarif- und Lokales Zollabwicklungssystem BASC Business Alliance for Secure Commerce

CCTV Closed Circuit Television

CENComm Customs Enforcement Network Communication Platform C-TPAT Customs Trade Partnership Against Terrorism

OECD Organisation for Economic Co-operation and Development

RFID Radio Frequency Identification

SAGITTA Systeem voor Automatische Gegevensverwerking van Invoeraangiften met Toepassing van Terminals voor het doen van Aangifte

SC Supply Chain

SCS Supply Chain Security

SCSO Supply Chain Security Orientation

SOP Standard Operating Procedure

SSTL Smart and Secure Trade Lane Pilot Project

STAR-BEST Bangkok Laem Chabang Efficient and Secure Trade UNCTAD United Nations Conference on Trade and Development

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1. Introduction

With 90 percent of global trade being shipped via the sea (Burns, 2013), maritime logistics has an essential role in international trade. It is therefore unsurprising that after the 9/11 attacks, governments worldwide put numerous regulations into place to increase security for sea transportation and prevent terroristic attacks and piracy. More recently, however, governments start to realise that their efforts must go beyond securing only one node in the supply chain. Major incidents like the bombing of the MV Limburg (Parfomak and Frittelli, 2007), the US West Coast port lockout in 2002 (Closs and McGarrell, 2004), or natural catastrophes as Hurricane Sandy (Sturgis et al., 2014) in combination with trends in the maritime chain of increased dependency on trade partners or higher customer expectations of on-time deliveries, emphasise the need for companies to make their supply chains more resilient and secure. This need must be reflected in security initiatives focusing on end-to-end supply chain security (SCS) and facilitation of trade through cross-border collaboration, global data exchange, and multi-layered risk management. One recent initiative trying to pursue this goal is the “Smart and Secure Trade Lane” (SSTL) Pilot Project, a cooperative pilot project between the European Union and China. It differs from earlier initiatives that focus exclusively on security like the C-TPAT or BASC programme (Gutierrez and Hintsa, 2006), as it aims to minimise controls upon import by receiving relevant security information before the container enters the international supply chain.

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Page | 8 gap by investigating how security initiatives like the SSTL pilot project affect manufacturing companies in their efforts towards SCS and related benefits.

In order to do so, secondary data analysis and case research will be combined to collect data. Literature review is used to set-up a framework to assess a company’s SCS activities and measures based on the article by Autry & Bobbitt (2008) and to classify benefits, mainly supported by the framework of Peleg-Gillai et al. (2006), companies can gain from their SCS efforts. Both frameworks are validated and underpinned by additional literature. Case studies using semi-structured interviews with manufacturing companies will be used to explore the impact of the SSTL pilot project on these firms. Case research has proven to be especially helpful for practical problems where no or limited actual data is available (Voss et al., 2002).

To conclude the main aim of this research is to answer the question: “How do maritime SCS

initiatives, like the SSTL pilot project, affect manufacturing companies in their efforts towards SCS and related benefits?”

To answer this question, the following research steps will be taken:

(1) Define the context of the SSTL project within the overall concept of maritime SCS. (2) Create a framework to assess a company’s SCS efforts.

(3) Classify benefits that companies can gain from their SCS efforts.

(4) Explore by using case studies how the SSTL pilot project impacts manufacturing companies based on the frameworks established in (2) and (3).

(5) Provide recommendations to the SSTL project team how to better promote the project to companies in order to increase participation.

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2. Theoretical Framework

This section aims to give the reader an understanding of theories and concepts relevant to the topic of this research. Section 2.1 defines the context of security and trade facilitation initiatives like the SSTL pilot project within the overall concept of maritime SCS. Section 2.2 provides an overview of the most important maritime security regulations while primarily focusing on the SSTL pilot project. Both sections combined attain research step (1). Section 2.3 establishes the framework to assess a company’s SCS and thus accomplishes step (2) of this paper. Section 2.4 covers step (3) by classifying possible benefits that companies can gain from their SCS efforts.

2.1 Maritime Supply Chain Security

90 percent of the world trade is shipped through 72 million containers in circulation with over 50,000 oceangoing ships capable of carrying them, passing through over 9,400 ports and terminals all over the world transporting over 8,000 million tons of cargo every year (Burns, 2013; Allen, 2006). These numbers make clear, that maritime transportation is a key enabler for global trade and the backbone of economies worldwide. International trade relies on a functioning maritime supply chain (SC), which requires that goods can be shipped efficient and secure via global trade lanes.

Over the past years, major events like 9/11, the bombing of the USS Cole and MV Limburg in 2002 (Parfomak and Frittelli, 2007), or the hijacked US-flagged MV Maersk Alabama in 2009 (Sanders and Barnes, 2009), made clear how vulnerable the global SC is and put pressure on governments worldwide to increase security amongst it. For the maritime sector, literature in general differentiates between two types of threats: piracy, an illegal act with financial intent; and terrorism, the undertaking of terroristic acts and activities aiming to create fear usually driven by political, religious, or dogmatic motives. (Burns, 2013; Marlow, 2010). Marlow (2010) states that piracy attacks almost doubled from 2006 to 2009, reaching a peak in 2011 with 445 actual and attempted attacks, while in 2012 and 2013 numbers are declining mainly due to the use of privately employed security teams and the stabilisation of the Somalian government (ICC IMB, 2013). However, costs for the global economy still lie between 5.7 and 6.1 billion US dollar in 2012 (Oceans Beyond Piracy, 2013).

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2.1.1 Supply Chain Security

SCS in general can be defined as “the application of policies, procedures, and technology to protect

supply chain assets (product, facilities, equipment, information, and personnel) from theft, damage, or terrorism and to prevent the introduction or unauthorized contraband, people or weapons of mass destruction into the supply chain” (p. 8, Closs and McGarrell, 2004). More specifically,

Hawkes (p. 9, 1989) determines maritime security to be “those measures employed by owner,

operators, and administrators of vessels, port facilities, offshore installations, and other marine organizations or establishments to protect against seizure, sabotage, piracy, pilferage, annoyance, or surprise.”

The previous section emphasised the importance of security along the whole SC, thus it is not surprising that significant research has been conducted in the field of SCS. Acciaro and Serra (2013), Williams et al. (2008), Gould et al. (2010), and Colicchia and Strozzi (2012) provide extensive, systematic reviews about the emergency of SCS in literature. This paper follows Acciaro and Serra (2013), who name four streams of SCS literature. The first stream focuses on SC vulnerability and sets SCS in the overall context of SC risk management. The second stream covers the topic areas of SCS initiatives, policies, best practises and technology. Hintsa et al. (2009) provide an overview of voluntary and mandatory security initiatives, while a detailed list of initiatives can be found in UNCTAD (2004) and OECD (2004). This research will concentrate on the SAFE Framework of Standards to Secure and Facilitate Global Trade developed by the World Customs Organisation (WCO). More details in regard to the SAFE programme will be discussed in the next section of this paper. The third stream of literature investigates organisational and managerial aspects relevant to maritime SCS, which will be covered by section 2.3. Finally, research in stream four pays attention to the implications of SCS initiatives and measures on companies applying them, trying to quantify costs and benefits. However, relatively few research exit in regard to this topic area. Section 2.4 will deal with these aspects.

2.1.2 Maritime Supply Chain

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Page | 11 Figure 1: Maritime Supply Chain, adjusted from Barnes & Oloruntoba (p531, 2005)

Most international supply chains start with an order. Such an order usually comes from the client or buyer and goes to the seller often a producer or manufacturer, who issues a purchase order for the buyer which serves as a proof of the order (McNicholas, 2008). The seller is often titled consignor, as he is the one who consigns by contract the shipment with the carrier (WCO, 2005). The seller is responsible for stuffing the container, the accurate description of the cargo and affixing the cargo security seal immediately upon conclusion of the stuffing process. Usually, the consignor also issues the unique consignment reference (UCR) as well as the customs declaration and transfers it to the export customs authority (WCO, 2005). Sometimes so-called intermediaries are involved in the step from producer to the port. Intermediaries could be consolidators or freight forwarders who, in charge of the seller, transport the stuffed container to the port via road, rail, or canal (OECD, 2003).

The customs authority has a particularly import role in the maritime SC. The customs authority does not only make sure that the trade of goods in done in accordance with customs law, they also have the authority to inspect cargo and determine the amount of security applied (WCO, 1999). They are responsible, on both ex- and import side, to check the shipment data for correctness and identify high-risk cargo. High-risk containers are those for which there is inadequate information to deem shipments as low-risk (WCO, 2007). Upon arrival of the cargo at the port side, the transport operator transfers custody of the container to the terminal operator by issuing the bill of lading (McNicholas, 2008). The terminal operator receives the documentation and inspects the condition of the seal. Either the port operator or the carrier loads the container onto the vessel.

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Page | 12 The author wants to note that this is a very simplified view of a maritime SC. According to OECD report (2003), a door-to-door journey can include up to 25 actors and generate between 30-40 documents. However, for this study, the first two steps regarding the container stuffing and export process are of primary interest, which will be further explained in chapter 2.2.

2.2 Maritime Security Initiatives

Having established the context of SCS and maritime SC concept, this sub-section will now continue with giving a brief overview of the most important security programmes, while primarily focusing on the SSTL pilot project.

2.2.1 Container Security Initiative

Launched in 2002 the US Container Security Initiative (CSI) was seen as a revolutionising security programme and served as basis for several other national regulations, for instance in the European Union. The main aim of the mandatory programme is that the US customs authorities control container in foreign ports before they arrive at the US border. In that way risk factors should be eliminated at the source - the export side. One critical success factor of the CSI is that information is provided timely and accurately to the customs authority. Accordingly, the US government introduced the 24 hour rule advance manifest, which requires carriers to submit the cargo manifest 24 hours in advance before the cargo is loaded onto the vessel. (Banomyong, 2005). In addition, the US customs authorities initiated in 2001 the voluntary SCS programme Customs-Trade Partnership Against Terrorism (C-TPAT). Companies can attain C-TPAT certification if they fulfil certain risk criteria and receive certain benefits in exchange, e.g. reduced customs inspections. C-TPAT served as a model for similar programmes in other countries like the European AEO status. (US CBP, 2014).

2.2.2 EU Customs Code

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2.2.3 SAFE Framework of Standards

Beside national regulations, on international level organisations like the World Customs Organisation (WCO) or International Air Transport Association (IATA) develop frameworks of standards or initiatives for voluntary adaption of their members. An exception of the voluntary aspect is the International Ship and Port Facility Security Code (ISPS-Code), which was developed by the International Maritime Organisation (IMO) in 2004. The Code is an amendment to the Safety of Life at Sea (SOLAS) Convention (1974/1988) and prescribes responsibilities to all actors in the maritime SC to "detect security threats and take preventative measures against security

incidents affecting ships or port facilities used in international trade” (IMO, 1974, Annex I, Part A,

1.2.1). Realising that the globalisation of trade requires common international standards for the entire customs and trade network, 166 members of the WCO adopted the SAFE Framework of Standard in 2005. The framework builds a consolidated platform aiming to enhance world trade, ensure better security, and strengthen co-operation between customs administrations to improve their capability to detect high-risk consignments. It is based on two-pillars. The ‘‘customs-to- customs’’- pillar to promote seamless movement of goods through secure international trade lanes and the ‘‘customs-to-business partnership’’- pillar to ensure faster processing of goods in order to save time and costs for businesses. (WCO, 2007). Meanwhile, 179 members signed the agreement, which makes it the most widely accepted joint customs and trade framework in the maritime industry.

2.2.4 Smart and Secure Trade Lane Pilot Project

The SSTL pilot project constitutes a unique instrument set up by the EU and the People`s Republic of China (PRC) to test both pillars of the WCO's SAFE Framework of Standards. Trade between the EU and China has increased enormously in recent years. China is now the EU's biggest source of imports by far, which drives the importance to facilitate and secure trade between them (Taxation and Customs Union, 2012). Launched in 2006, the objective of SSTL is to strengthen end-to-end SCS (from the point of stuffing through the entire container movement to the point of final destination) based on multi-layered risk management. The EU defines risk management in regulation 648/2005 (p.15) as “systematic identification of risk and implementation of all

measures necessary for limiting exposure to risk. This includes activities such as collecting data and information, analysing and assessing risk, prescribing and taking action and regular monitoring and review of the process and its outcomes.” Multi-layered in this sense means assessing the risk

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Page | 14 the container is allowed to enter the international SC, e.g. before arrival at the port. This approach makes the project unique as it ‘pushes’ the customs control to the most convenient point in time – when stuffing the container. Other initiatives, like the CSI, perform those control much later namely when the container arrives at the port.

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Page | 15 enhance data exchange and communication. One key enabler is to further increase trader participation in the SSTL by developing tangible facilitation benefits.

2.3. Supply Chain Security Orientation

Besides government and customs authority activities to increase SCS, companies are proactively using different approaches and measures to mitigate SC risks. For most companies, SCS is a daily trade-off between operational efficiency and secure operation. They try to comply with security initiatives, use additional measures or strategies to decrease SC risk, and at the same time have to stay competitive and minimise costs. Though, as has been established before, a literature stream exist focusing on managerial aspects relevant to SCS, papers specially focusing on companies engaged in maritime SCS are rather limited (Acciaro and Serra, 2013).

Companies usually classify SCS in the wider context of SC risk management as means or strategy to reduce risk (Williams et al., 2008). Jüttner el al. (p. 201, 2003) define SC risk management as “the identification and management of risks for the supply chain, through a co-ordinated approach

amongst supply chain members, to reduce vulnerability as a whole.” In their article, Williams et al.,

further explain that those activities a company conducts to secure the SC, and thus reduce risk, are interorganisational SCS actions. Autry and Bobbitt (2008) classify those actions, which they define as approaches towards mitigation of SC risk, under the concept of supply chain security orientation (SCSO). Using structured interviews, they derived at the framework illustrated by figure 2.

Figure 2: SCSO framework adjusted from Autry & Bobbitt (p. 49, 2008)

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Page | 16 security manager would be an example for organisational adaption. The fourth dimension relates to the communication of security along the SC and the use of technology to increase, for instance, data security. This dimension also includes activities to transmit relevant security data to the authorities. This framework will be used in the case studies to determine the degree of SCSO the interviewed companies have established. Additionally, it will allow the author to explore differences in SCSO for companies participating in the SSTL project and those that do not. The reason for choosing this particular framework is two-folded: (1) the framework is validated through structured interviews, (2) several supporting articles can be found that derived at similar aspects in regard to organisational and managerial aspects relevant to SCS.

Williams et al. (2008) classify SCS efforts into three types: intraorganisational, inter-organisational, or a combination of both. Intraorganisational efforts concern the use of preventive measures to reduce SCS risk as well as (crisis) responds planning, which is reflect in the ‘security preparation and planning’ block from Autry and Bobbitt (2008). The aspect of SC risk and continuity management has developed to an own research stream and is discussed extensively in literature (among others Sheffi, 2001; Helferich and Cook, 2002; Martha and Subbakrishna, 2002). Interorganisational efforts expand security management beyond the four walls of the company to collaborate amongst the SC to increase security. Autry & Bobbitt (2008) sort this aspect under the title ‘security-related partnerships’. Several articles support the importance of collaborating with suppliers in regard to SCS (Meixell and Norbis, 2012; Rinehart et al., 2004; Yang and Wei, 2013). Williams et al. (2009) establish that SCS culture is an important means to create awareness among employees in regard to security. This aspect is partly related to Autry and Bobbitt’s (2008) ‘organisational adaptation’ theme. Sheffi & Rice (2005) likewise emphasise that, for improved SCS, initiatives should become strategic priorities that fundamentally change the operating structure of the firm. Finally, it is possible to determine evidence in literature that security-dedicated communication/technology is of relevance (Rizzo et al., 2011; Whipple et al, 2009; Closs and McGarrell, 2004).

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2.4. Classification of Benefits

Section 2.3 showed that companies engaged in international trade realise the importance of high security standards and implement measures to reduced risks among the SC. However, many companies are still reluctant to participate into voluntary security initiatives or to invest into additional security measures that go beyond the required minimum. Peleg-Gillai et al. (2006) state that the main reason for this reluctance is that companies find it difficult to justify security investments as potential collateral benefits are hard to identify and even harder to quantify. Surprisingly, several authors stress that little empirical evidence exist in regard to the link between SCS and organisational performance (Williams et al, 2008; Acciaro and Serra, 2013; Peleg-Gillai et al., 2006; Hintsa et al., 2009). To the author’s best knowledge, only four studies attempt to classify potential collateral benefits from maritime SCS initiatives for companies implementing them.

One of them is a white paper from the consulting firm BearingPoint (2003). They set-up a cost-benefit analysis for the APEC STAR-BEST project, which aims to facilitate and secure trade between the US and Thailand. They found that the project will realise significant financial benefits primarily resulting from more transparency, reduction of transit time variations, and inventory safety stocks. However, the white paper is not fully complete and limited by several assumptions made by the authors to conduct the analysis.

The second paper was written by Sheu et al. (2006) about the impact of the US C-TPAT certification on the international trade community especially focusing on SC collaboration. By using multiple case studies, they found that the certification affects many aspects of the company’s business and requires top management support. Further, their results showed that the interviewed companies perceived faster inspections at the border, reduced costs, and increased customer satisfaction as benefits from the C-TPAT initiative. The focus of the paper is primarily on SC collaboration, while collateral benefits from the certification is only partly addressed. The authors state that international SCS is still in its infancy and further research is required to understand the impact of SCS on traders.

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Page | 18 • Inventory Management and Customer Service

• Supply Chain Visibility • Supply Chain Efficiency • Supply Chain Resilience

• Customer Relationships/Company Image

In each performance area, certain benefits can be obtained. In Inventory Management, for example, such benefits could be reduction in theft or damage to the goods. Similar improvement categories are supported by Gutiérrez et al. (2007). They interviewed BASC (Business Alliance for Secure Commerce) members and classified benefits from voluntary SCS initiatives into three categories: (1) direct security benefits like reduction in theft, (2) efficiency benefits under normal operation such as reduced vulnerability, and (3) efficiency benefits under disaster conditions like a faster recovery. BASC is a programme active in several Latin American countries to fight smuggling and exploiting the SC.

The four papers discussed, either investigated into benefits resulting exclusively from participation in SCS initiatives, like BearingPoint (2003) into STAR-BEST, Gutiérrez et al. (2007) into BASC or Sheu et al. (2006) into C-TPAT, or into improvements coming solely from internal SCS activities like Peleg-Gillai et al. (2006). This study takes a different approach by researching companies that implement a SCS initiative as well as companies that do not. In this way, the author can take a more completive view on all efforts companies take towards SCS and add to the defined research gap. Nevertheless, information obtained from the four papers, especially from Peleg-Gillai et al. (2006), is essential for this study and will serve as a framework to conduct the case studies.

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3. Research Methodology

Case Research has proven to be a powerful tool in operations research and both builds on theory and is an excellent means for development of theory (Voss et al, 2002). Additionally, Yin (2003) established that case research is especially suitable for examining ‘how’ and ‘why’ questions investigating into practical problems where no or limited actual data is available and the context of the problem is very complex. As research step (4) points out, this thesis aims to explore by using case studies, how the SSTL pilot project affects manufacturing companies in terms of their SCS and related benefits. Since this relation has not been addressed in prior research nor is sufficient literature in this field present, the exploratory theory-building nature of case research is appropriate. Case research is advantageous when “variables are still unknown and the

phenomenon not at all understood” (p. 444, Meredith, 1998), while survey research usually

requires detailed information on the relevant variables (Karlsson, 2009). Additionally, case research compared to surveys is likely to increase data richness and rigor of the analysis which can lead to more accurate answers to the research question (Eisenhardt, 1989). This thesis therefore uses multiple case studies to contribute to the gap in literature defined in the previous sections. This chapter is divided into three parts, starting with case selection (3.1), followed by data collection (3.2), and ending with data analysis (3.3).

3.1 Case Selection and Theoretical Sample

Deduced from the research question, the unit of analysis are manufacturing companies. Each interview with one company is treated as individual case. Accordingly, the research design of this paper is a multiple case study involving seven manufacturing firms engaged in maritime trade. Compared to single-case studies, multiple case research usually leads to more generalizable results, broader exploration of the research question, and also to better grounded theory (Graebner and Eisenhardt, 2004).

According to Karlsson (2009) the traditional way of sampling, for instance in surveys, is to identify the population and then to select a random or stratified sample from this population. In case research, however, the theoretical sample is built by selecting cases according to different criteria. Especially in multiple case research, cases are selected by using replication logic rather than sampling logic, in which cases are treated as a series of experiments, each serving to confirm or disconfirm interferences drawn from the others (Yin, 2003).

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Page | 21 and provide relevant data to the customs authority. The manufacturing companies were sampled in the following industries: food, waste, chemicals, pharmaceuticals, and electronics. These industrial areas were identified during meetings with the SSTL pilot project leaders prior to data collection as industries with considerable amount of export to China and other Asian countries. Additionally, these industries produce products with different risk levels (e.g. low value, high quantity, medium risk; high value, low quantity, high risk, etc.), which allows to study SCS structures for different risk levels enabling a diverse sample. Geographically, the focus is on companies located in the Netherlands and Germany. This focus was selected for simplification reasons as the SSTL headquarter is situated in the Netherlands. The size of the selected firms is approximately the same in order to not include too many varying factors. An overview of the characteristics of the sample companies are displayed in table 1, while a detailed interview overview can be found in appendix A.

The chosen design of ‘contrasting cases’ allows for literal and theoretical replication logic (Yin 2003). Having three SSTL participants, three non-participants, and one former participant allows for literal replication, i.e. to verify whether similar results occur for companies of the same context. Further, having companies representing both sides allows for theoretical replication, i.e. to verify whether contrasting results occur across contexts. The chosen number of cases is in line with Eisenhardt’s (1989) guideline that a number between 4 and 10 usually works well. Time and cost constraints as well as a limited number of SSTL participants posed difficulties to include more companies in the sample.

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3.2 Data Collection

For every case, several different data sources have been used to accomplish data triangulation, which according to Voss et al. (2002) enhances both reliability and validity in case research. First, seven semi-structured interviews, varying between 25-60 minutes, were conducted with seven companies between July and November 2014. In semi-structured interviews, the interviewer usually uses pre-determined questions guided by specific themes, however, contrasting to structured interviews where a rigorous set of questions has to be asked, semi-structured interviews are open and tolerate deviation from the pre-defined questions. This type of interview style allows to direct the conversation towards themes to be researched while it still gives certain flexibility to vary if important or even unexpected facts emerge (Qu and Dumay, 2011). Appendix B outlines the question guideline used for this paper, which is based on the theoretical frameworks discussed in chapter 2.3 and 2.4.

Second, the author used observations, records, and documentation to collect additional data during all stages of the interviews. Due to the sensibility of the research topic, all companies are treated anonymously and one company denied to record the meeting. All other meetings were recorded, which allowed the author to focus on the interview and make notes during the meeting. A transcript of the records was combined with the notes shortly after the meeting. Observations included on-side visits at the factory or plant side of the companies.

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Page | 23 Table 2: Type of data collected per interview/case

3.3 Data Analysis

The first step in data analysis was a detailed write-up of the cases, which took place immediately after the data was collected. To decrease the amount of data collected and filter out the valuable information, coding has been used. This coding is mainly based on the theoretical frameworks discussed in chapter 2.3 and 2.4 and partly on theory. Keywords have been identified related to each category of the frameworks, such as when the term “crisis management” has been used it was coded and sorted to the category security preparation and planning. The coding table is displayed in appendix C. The within-case analysis allowed the author to become familiar with each case as independent entity and identify similarities or differences in the criteria investigated per case. The patterns found in the within-case analysis accelerated the cross-case analysis. In the cross-case analysis, the cases of SSTL participants are compared to the cases of the non-participants to see similarities and differences between them. In this way, the author could search for patterns regarding the relationship between the variables as defined in the conceptual model. The main points identified in the cross-case analysis will be discussed in chapter 4 while the full cases can be assessed from the author.

4. Main Findings

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4.1 Security Preparation and Planning

Interview answers in this SCSO dimension were very consistent among the cases. Cross-case analysis showed that there is little variation between SSTL pilot project participants and other companies in terms of how they prepare their SC for possible disruptions and what SCS means to them. All interviewed firms reported to either have an internal SCS policy or standard operating procedures (SOPs) defined with extensive regulations on areas like asset security, physical security, personnel security, or data security. In most cases, such standards also include training for employees on security. Especially personnel, who is working in security areas like (un-)loading places, is strictly trained and only certified employees have access to those areas. In addition, all firms besides company G own the AEO status and consequently fulfil all requirements set in the respective EU regulation. Company G reasoned that an AEO certification for their company side is not necessary as the majority of the production and transportation is handled by suppliers and they do not own any facilities or warehouses. What should also be noted is that only two out of the seven participants own the AA status, which is the Chinese counterpart to the AEO status. Beside these risk prevention measures, similarities among the cases could also be reported for risk mitigation activities. All participants pointed out to have crisis or recovery management processes in place including back-up plans and alternative sourcing strategies. However, such procedures are usually only detailed for more frequent occurrences, e.g. if a supplier is not able to deliver the required parts, while major disruptions are mostly managed on an ad-hoc basis. The main reason reported is that such disruptions happen too infrequently, for instance company G stated “we didn’t had any case of major disruption like theft or loss of a

container in the past three years”. Similar, company F answered “we never have major disruptions.”

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4.2 Security-related Partnerships

One emergent theme in this SCSO category is the monitoring of key suppliers’ security processes, which is done by most participants through regular inspections or audits. Such audits are physical checks if the supplier or service provider complies with the standards and security requirements detailed in the contracts or service level agreements. These requirements usually include specific instructions for the supplier or service provider. Company G, for example, explained they con-tractually specify that their suppliers have to provide pictures of the container when it is open, when it is closed, and when it is sealed. These pictures serve as a proof that the container was appropriately stuffed and sealed. Company F stated that their suppliers need to check the con-tainers “based on a list mostly about quality of the container, hygiene, smell, grief, rust, etc.” Another example is company D, whose contracts include a requirement profile detailing processes and actions in terms of lost or damaged goods, third party access, temperature requirements, relia-bility, and many more. In all other cases, similar specification are detailed in the contracts. Only firm B does not conduct any security inspections. The interviewee outlined that they exclusively work with providers who are certified themselves, thus inspections from their side are not nec-essary. Company E and F also require from their suppliers to be certified, however, they still per-form regular audits. Beyond the security requirements for key suppliers, findings showed that security-related partnerships to other participants in the SC like vessel operators, carriers, for-warder, or brokers are also of importance to both SSTL participants and non-participants. Most interviewees regulate these partnerships through SOPs or process descriptions. Company G con-stitutes an exception in this regard as their contracts with the shippers are “all very standard and

they are certified themselves, so what that concerns we don’t need to bother that much.”

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4.3 Organisational Adaption

This SCSO dimension primarily measure how companies have organisationally and physically adapted towards SCS. Due to the fact, that all seven attendees employ comprehensive activities and measures to prevent and mitigate risk as well as to include security aspects in their SC partnerships, organisational adaption towards security is very distinct. SCS as means to protect the company’s brand and image is a consistent motive in all cases. Company A and C used the formulation ‘they don’t want something bad associated with their image’. The majority of the attendees declared that SCS is seen as a necessary cost of doing business and stated that without security-related measures they would have much more disruptions in the SC. Company G, however, conceded that they rather call it quality management than SCS though they understand the same measures belonging to it. As mentioned beforehand, all interviewees explained to train their workforce in terms of SCS and thus employ a security-dedicated workforce. For most participants such a training is done via electronic learning programmes or self-assessments. Upon request from the author, all seven companies confirmed to have dedicated positions as SCS or quality manager. Consequently, security is addressed on a corporate level. Further, all firms stated to employ measures to physically adapt to SCS like safety fences, CCTV, ID cards for personnel, or guardians. Company G, again, is an exception to this pattern as they stated “we as a

company don’t have any warehouse or facilities, so we are really depend on our suppliers to make sure they deliver the right quality.” Two interviewees, company A and G, specifically pointed out

to see SCS as competitive advantage.

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4.4 Security-dedicated Communication and Technology

The fourth pillar of the SCSO framework investigates how companies communicate security-relevant information and data to the responsible authorities and what technologies and tools they use to secure their SC and more specific for this research to secure the container stuffing process. While for the latter one, a significant overlap in the interview answers was found, variation between SSTL participants and non-participants could be observed with regard to the customs process and how data is transmitted to the customs authority.

In order to increase container security, company A, B, C, and F reported to use the 7-point container checklist to inspect containers as detailed by the C-TPAT regulation (US CBP, 2014). Before the container is approved for stuffing, the following seven points must be checked for condition and quality: (1) Outside/Undercarriage (before entering facility), (2) Inside/Outside Doors, (3) Right Side, (4) Left Side, (5) Front Wall, (6) Ceiling/Roof, and (7) Floor (inside). If the container is approved, it enters the secured loading area and the container is stuffed. As mention beforehand, some companies required from their employees or suppliers to take pictures of the container at this stage as proof. Immediately after the conclusion of the stuffing process, the cargo security seal has to be affixed. All seven interviewees stated that they do not use electronic seals. Company C gave the following reason: “I did look into electronic seals three years ago when we

started with the pilot, but they were too expensive. Because our product is high volume and low prices, it doesn’t make any sense to have an RFID-tag or an electronic seal of hundreds of dollar on the container. This is too much of a cost.” Company D, E, and G were not sure if they use the 7-point

checklist, but affirmed to have similar criteria defined to inspect the container for cleanness, material quality, proper weighing, damage, etc.

The SAFE frameworks details the following with regard to submission of the export goods declaration (p. 15, WCO, 2007): “The exporter or his or her agent has to submit an advance

electronic export goods declaration to the Customs at export prior to the goods being loaded onto the means of transport or into the container being used for their exportation.” In all seven cases,

the interviewed companies outlined such a procedure with minor alterations. Company A explained as soon as their goods are ready in the warehouse, the transport order and invoice to the customer are issued. Once the invoice is ready, the relevant data is submitted via an electronic message to the customs authority. On average after 20 minutes, the company receives the approval of the export declaration and the goods loading process can start. In comparison, company D answered: “Once the container is sealed we do get all the required information like bill

of consignment and we issue automatically the export declaration which goes electronically to the customs authority via ATLAS.” ATLAS is an automated tariff and local customs processing system

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Page | 28 2014). The container is then delivered at least 24 hours beforehand to the departure location. The third non-participant, company F, stated to receive a list of containers to be loaded from their service providers two working days in advance. Based on that list they send out a message giving basic information for export declaration through their internal application Expodocs to the Dutch customs system SAGITTA (Systeem voor Automatische Gegevensverwerking van Invoeraangiften met Toepassing van Terminals voor het doen van Aangifte). Once the customs authority accepts the initial declaration, the warehouse takes over and provides the authorities, through the same application, with further details (starting time loading, ending time loading, and exact location of loading).Once the entire flow of messages between the service provider and the customs authority has been done, company F takes over again. They monitor whether all customs activities are handled appropriately and make sure final closures of the entire customs process is done as per requirements. While for case A and D, the companies file the declaration themselves, company G reported to use a local customs office to handle these procedures. They stated “we

basically get the documents form the supplier and then we make the customs declaration. But for that we use the local customs office in Rotterdam.”

Although SSTL pilot project participants B, C, and E described to transmit their normal export declaration in the same way as the other companies, an additional communication channel is set-up exclusively for the project. The participants submit a data spreadsheet to the SSTL project leaders via mail or electronically. An example of such a spreadsheet can be found in appendix D. Company C emphasised: “The pilot project works that way: We share the required customs data

via a spreadsheet directly with the SSTL project team. In this spreadsheet it is listed the container number, weight, value, destination, product type, customs certification number, etc. It is send mostly the same day of stuffing, but always after filing the export declaration, or – depending on the workload – 1 or 2 days later. As far as I know the data from the spreadsheet is then via some manual tricks uploaded onto the CENComm system of WCO by the pilot project team. To fill out this spreadsheet is no big deal for us, we automatically extract it from our system and it goes alongside with the normal export declaration and that works fine.” The Customs Enforcement Network

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Page | 29 import process that when a shipment comes in from Germany, their office in China receives, prior to the arrival of the vessel, an official SSTL pilot project identification number. This number is included in the import customs declaration, so the customs authority at the Chinese border can recognise the SSTL shipment.

Table 6: Cross-case findings on security-dedicated communication and technology

4.5 Benefits and Improvements

Even though all companies felt that SCS is very important to protect the company’s image and the majority considered security investments as necessary cost of doing business, for most companies it was difficult to sort their benefits from security-related measures into categories and even harder to quantify any of them. Only two firms were able to state a percentage share of improvements coming from security related tools and measures. Company A estimated a 5 percent share of benefits from security while the SSTL participant C stated “it is more or less in

the area of 10-20 percent of improvements coming from SCS”. To adapt to these circumstanced, the

interview questions related to the benefits were adjusted towards more general questions. The firms were ask to elaborate on perceived improvements from their SCS investments or from SSTL participation. Afterwards, the answers were coded and sorted to the relevant improvement areas. Answers from two companies could be sorted to the improvement area of inventory management. Company A stated an increase of on-time deliveries and reductions in theft or damage through better security practices like the inspection of goods upon arrival. The interviewee also associated cost savings with these benefits, mainly coming from less inventory stock and financing costs. However, they were not able to quantify any of these. Company B reported “reduction in incorrect quantities received, increase in order fulfilment, and increase in

on-time deliveries and related to that cost savings, but I can’t quantify. It has rather been a continuous process of improvements.” The other five firms explained to almost never have major disruptions

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Page | 30 visibility, 43 percent of the companies noted to record better transparency in the chain due to requirements towards their suppliers to take pictures of the container at different stages, which serve as a proof for other parties involved in the SC. Company F, for example, uses a shared IT tool with their service providers that allows them to assess and update relevant data in real time. This further increased transparency and timeliness of information.

Six interviewees reported efficiency-related improvements from their SCS activities. Company D outlined “of course we can say, direct benefits from the AEO status are that we have this facilitated

customs process, so less physical controls. This means we have a decrease in lead time and less delays for sure. If you look at efficiency, of course if we wouldn’t have the training for our drivers, the inspection of the containers, etc. then there would be much more problems.” Company G took a

similar view and explained that if they do a good job on quality through security, it means potential reduction of risk and problems which is necessary to ensure smooth operations. Further, company A emphasised that the greatest cost savings are coming from efficiency improvements and that most other benefits, like higher customer satisfaction, are related to them. They explained that SCS investments guarantee the fulfilment of certification and “if you lose

certification, it means that our import lead time will increase, for instance by two weeks, and that in turn means we have two weeks more stock and two weeks more cost.”

Although all interviewees reported efficiency-related benefits, significant variation between participants and non-participants could be detected with regard to customs clearance time at the Chinese border. Table 7 shows an overview of the average clearance time at the Chinese border for all seven companies. SSTL participants require on average less than halve of the time that non-participants need to get their containers cleared for delivery. Company B is an interesting case. Their customs clearance time in China is, compared to the other cases, relatively long due to health and food inspections delaying the clearance process. However, since their participation in the SSTL pilot, customs clearance time could be reduced by over 65 percent from 30 to 10 days.

Table 7: Overview customs clearance time in China for all interviewed companies

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Page | 31 of advantages from their back-up plans. Quite recently a part of their factory burned down and due to quick corrective actions, they recovered much faster from such a disruption. Company C stated that due to pre-defined scenarios, they were able to reduce response time to events like the shutdown of the Sues Canal where they could quickly reroute their vessels.

Finally, the majority of SSTL participants reported improvements in the area of customer relationship and company image, while from the non-participants only company A elucidated that an increase in on-time deliveries consequently affects customer satisfaction. Though, at the time of the interview, company B participated only several weeks in the pilot project, they underlined to feel responsible to do every possible step towards a more secure SC and that it is part of the company’s culture and image to participate in such a project. Company C, one of the first pilot project participants, affirmed “my interest [in the project] is that in the future we need to go for fast

lanes, and one-shop-stop and centralised clearances. And with this in mind, which will come in the near future, I want to make as much as possible advantage from free initiatives like SSTL with less energy and costs to work together with these regions like China or Asia. We will definitely continue. There is no reason to stop.” Another interesting finding could be reported from the interview with

company G. This firm is a former SSTL pilot project participant, but didn’t took part in the initiative after the first phase. They explained “we positively started working out in 2010 and we

were starting to see some benefits at the customer side, but we never said we don’t want to participate anymore but customs was just not following up any longer. So there were no active approach or feedback from the customs side, which is why I felt the pilot basically never continued.”

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5. Discussion and Propositions

This thesis aims to assess how the SSTL pilot project affects manufacturing companies in terms of their SCS approach and the related benefits. Based on the findings this aim can be fulfilled and research propositions can be proposed for further research. The first proposition relates to the SCSO of manufacturing companies. The author claims that participation in SCS initiatives, like the SSTL pilot project, do not affect the way companies prepare and manage SC disruptions, define their security-related partnerships, adapt internally towards SCS, or load and transport their containers via sea. Further, it can be assumed that the risk level of the products being shipped has no influence on the SCSO. For all interviewees SCS is equally important and similar measures with regard to risk mitigation and crisis management are employed. Regardless if a company was SSTL participant or not, the companies adopted physically and organisationally towards SCS. Those firms, which operate own warehouses installed fences, surveillances, security areas, and ID checks for personnel. Company F and G, which mostly use dedicated warehouses, did not employ such measure but formulated these within supplier or warehouse operator contracts. All firms train their employees, communicate SCS from a corporate level, and see SCS as important for brand and image protection. Besides company G, all participants are AEO certified. Consequently, security and maritime transportation standards are very high within these companies, which further supported little variation between SSTL participants and non-participants.

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Page | 33 of companies to invest into SCS and participate in voluntary initiatives. The following proposition has been developed to provide an incentive for further investigation.

Proposition 1 (P1):

Participation in the SSTL pilot project does neither affect a company’s orientation towards SCS nor the measures used to ensure it.

The most significant difference in the organisation’s behaviour was found in the way they communicate with the customs authorities or more precisely transfer customs data. While all cases were consistent in the normal customs process by submitting their export declaration electronically at least 24-hours before commencement of loading of the vessel, SSTL pilot project participants communicate via an additional channel with the customs authorities. They provide the pilot project leaders in Rotterdam with extra data filled in a spreadsheet. This process is executed in addition to the normal export declaration process. The data is extracted from the internal IT system of the companies. The participants reported that no significant effort is required to both produce and submit the information to the SSTL pilot project team. Once the project leaders receive the required information they upload it to the CENComm platform from the WCO. As outline in the theoretical section 2.2 up to now the uploading process to CENComm is done manually by the SSTL pilot project leader. The shipments which go via a smart and secure trade lane receive a dedicated identification number, which company E called SSTL number. This number is then entered into the import declaration. Once the vessel arrives in China, the Chinese customs authorities recognise the SSTL shipment through the identification number.

According to Acciaro and Serra (2013), a literature stream exists with regard to technology and communication in maritime security. However, very little information is available in this stream about cross-border collaboration between customs authorities and the way companies transmit security relevant data. The results of this research show that mutual recognition and collaboration through shared technology, like the CENComm system, between authorities can not only affect the way companies communicate with the customs authorities but also the way they are handled by them. Therefore, the author proposes the following thesis for future research:

Participation in the SSTL pilot project positively affects the way companies and customs authorities communicate with each other.

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Page | 34 reported a 5 percent share while company C, one of the first SSTL participants, outlines a 10-20 percent share. If we compare these estimates, we could assume that participants of the SSTL initiative perceive a significantly higher share from SCS improvements than non-participants do. However, such a hypothesis has to be handled with care, as only a minority of the interviewed firms could state such a measure which reduces the validity of these findings. A distinctive impact of the SSTL pilot project on manufacturing companies can be reported with regard to customs clearance times. All four non-participants stated a customs clearance time of at least a couple of days, while company C and E decreased the time to two days. Though participant B outlined a longer clearance time due to comprehensive health inspections, they could decrease the clearance time from 30 to 10 days since their participation, which they called ‘a real success’. In addition, all three companies reported to be treated differently by the Chinese customs authorities, i.e. their shipments are granted priority over other shipments and the number of physical inspections is significantly reduced. These pattern can be correlated to proposition two and results discussed in section 4.4 on the communication with the customs authority. Due to this additional communication channel and the collaboration of the customs authorities in the participating countries, information about SSTL shipments is not only collected much earlier and more complete (due to the agreed 25 data elements in the spreadsheet), but also the joint risk criteria can be applied earlier which consequently leads to a reduced clearance time and less inspections. Accordingly, the author professes that the SSTL pilot project positively affects customs clearance time in China. One goal of the third phase of the pilot project is to include more trade lanes in Asia beyond China, like the port of Hong-Kong recently joined the project. Thus, the author expects that the customs clearance time reductions can also be achieved at other ports in Asia.

That the implementation of security initiatives and certifications leads to a facilitated customs process, less inspections, and thus to shorter clearance time is an outcome supported by several studies (BearingPoint, 2003; Gutiérrez et al., 2007; Peleg-Gillai et al.; 2006; Sheu et al., 2006). This paper enriches literatures by firstly providing a distinct number to the reduction in customs clearance time and secondly comparing the inspection rate and clearance time of initiative participants with those of non-participants, which is a unique approach.

Besides the tangible improvements, participant B and C underlined the positive impact of the project on the image of their company. Company C summarised their motivation towards the SSTL pilot in the following statement: “I want to make as much as possible advantage from free

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America and say we are on a good track working with China and it generates high level interest. And this again brings efficiency, so it’s a loop. And if the manager wants to give information to China, they can say hey we have SSTL.” Company B explained that it is in the culture of their company to

participate in such an innovative project and that they feel responsible to do every necessary step to make their SC more secure. Further, due to the nature of their business, freshness is very important and if only a few days of lead time can be saved through less time lost in the customs clearance process it is a great advantage for their business. The company confirmed that these are the two main reasons why they consider the pilot as a very valuable. Based on these results the third and final research proposition was formulated.

Participation in the SSTL pilot project positively affects a company’s SC efficiency in terms of customs clearance time as well as its image.

The three propositions provide the basis for the revised conceptual model illustrated by figure 4.

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6. Conclusion and Recommendations

6.1 Recommendations

Pertaining to the case research results as well as to discussions with the companies during and after the interviews, several recommendations for the SSTL pilot project leaders were developed as required by research step (5). The first set of recommendations concerns the goal of the third phase to scale up operations through increased participation. The author suggests to develop a short presentation and hand-outs detailing the (1) purpose, scope, and current state of the project, (2) requirements for potential participants, and (3) impact of the pilot on the companies. For the first two points already existing information from internal follow-up reports and press releases can be used. For the latter point, the findings of this paper can be consulted. Here, the project leaders can emphasise that no additional effort or investment is required by the participants, besides the spreadsheet which can be handed in in any format best suitable for the company. Further, the distinctive benefits in lead time reduction and increase of the company’s reputation can be outlined. Though this argument has already been used in discussion with organisations, the project leaders can now put a concrete number to the reduction and use this academic research as evidence. Once such a report or presentation is designed, potential participants can be informed more actively. To increase participation additional personnel, which can be in form of a working student or a Thesis student, should be consulted to manage small sales projects where companies are actively approached. In line with such efforts, it could be valuable to increase available information is the media. Besides very few official ministry articles, very little information is in circulation about the project. All of the interviewed companies, who are not part of the pilot project, stated they primarily confirmed to participate in this study because they were highly interested in the project and would like to receive further information as they had not heard of it before. If more material about the SSTL initiative would be available in the press, it could positively influence participation.

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Page | 37 In addition, to keep the presentations and hand-outs relevant, the project team should also ask for updates from the companies to record their development.

The data transfer could become an obstacle for future developments of the project. Once more companies are aboard, the data volume to be processed will increase exponentially. With this development in mind, the manual process of uploading the excel data into the CENComm system is no feasible solution. The author suggests to enhance cooperation of the respective IT departments and further research to put in place a sustainable data exchange mechanisms that can support increased SSTL volumes and provide the basis for sufficient data exchange and data quality. In addition, it is suggested to accelerate investigation into electronic seals. The interviewed companies seemed to be interested in this technology, however, so far high costs were a major drawback. A more cost-effective technology could facilitate communication and data transfer for the pilot project. While some literature is present with regard to the benefits of electronic seals based on RFID technology (Acciaro and Serra, 2013), very few point out if such benefits outweigh the costs of implementing these seals. Tsai and Huang (2012), for example, suggest ultra-high frequency passive RFID tags, which in contrast to seals using active RFID tags, have low cost. On the other hand, Rizzo et al. (2011) outline to combine capabilities of active and passive RFID tags to ensure greater security at low production costs. Though, the use of such technologies is at the company's discretion in the SSTL pilot, more work dedicated to this issue could be valuable for participation. Finally, extended co-operation and mutual recognition of standards between authorities is advised. Extended co-operation does not only concern geographic extension to include ports and authorities in other Asian countries, but also to extend cross-border management with other authorities like the port health authority. This study showed that facilitated communication and operation between authorities comprises valuable benefits not only for the authorities but also for the companies involved with these authorities. Consequently, cross-border management is an important topic and requires further attention by the project leaders.

6.2 Limitations and Further Research

MSc Thesis

MSc Thesis

Smart and Secure Trade Lanes

Assessing how a maritime supply chain security initiative affects

manufacturing companies

Julienne Mercedes Mittag

(s2643022/B3059550)

Dual MSc Operations Management

Faculty of Economics and Business at University of Groningen

Final Version: 17/12/2014

Supervisors:

Abstract

Acknowledgment

Table of Contents

Table of Figures

Tables

List of Abbreviations

1.

Introduction

2.

Theoretical Framework

3. Research Methodology

4. Main Findings

5. Discussion and Propositions

6. Conclusion and Recommendations