Why the Weak Links?
UPGRADING THE SECURITY OF COMMERCIAL SHIPMENTS imported into the United States by enhancing the security practices of the whole supply chain involved is the goal of the U.S. Customs-Trade Partnership Against Terrorism (C-TPAT) program. As a part of that program, the Bureau of Customs and Border Protection (CBP) has developed a series of security recommendations for foreign manufacturers who wish to join C-TPAT. But participation is voluntary, and the program can never succeed unless all members of the supply chain comply with its requirements. A necessary first step is to spread awareness of the program to overseas manufacturers and logistics companies.
In the Hong Kong region, specifically the Pearl River Delta Region (which includes leading economic regions of China), we wanted to determine the general level of awareness with regard to C-TPAT as well as how the program was perceived and whether many businesses were likely to participate. The results showed why C-TPAT has not made major headway in that region.
Following are the highlights of the concerns voiced by respondents and of some possible solutions to the problems of low awareness and slow adoption. First it will help to put in context the economic significance of this region, how its businesses operate, and why what its businesses do halfway across the globe matters to U.S. homeland security.
The Greater Pearl River Delta (PRD) Region is one of the busiest manufacturing and logistic centers in the world. It includes a number of major industrial and commercial cities in 11 jurisdictions: Hong Kong, Macao, Zhaoqing, Foshan, Guangzhou, Huizhou, Dongguan, Shenzhen, Zhongshan, Zhuhai, and Jiangmen, all located in the southern part of China.
This region has been one of the fastest growing economies of the past 20 years. In fact, it accounts for an astonishing amount of China’s exports: 98 percent of the watches, 90 percent of telephone sets, 87 percent of radio sets, 73 percent of toys, 82 percent of footwear, and one-third of China’s clothing exports, originate in this region.
SMEs. Many manufacturers located in the Greater PRD Region are established by Hong Kong-based small and medium-sized enterprises (SMEs). SMEs are an important sector in the Hong Kong economy. According to data from the Hong Kong Special Administrative Region Support and Consultation Center for SMEs published in 2004, there were about 290,000 SMEs in Hong Kong in September 2003. SMEs accounted for more than 98 percent of the total establishments and provided jobs for about 60 percent of the total non-civil employee base.
U.S. connections. The U.S. is the biggest market for Hong Kong’s exports and it is also the second largest market (the largest is mainland China) for Hong Kong’s re-export market (where goods made elsewhere are imported and then exported without further value added, such as through a distributor).
In 2004, the U.S. share in total domestic exports was 30.6 percent with a value of nearly US$5 billion. The U.S. share of reexports was 16 percent with a value of about US$39 billion. More than US$5 billion of goods were exported to the U.S. through the port of Shenzhen, according to data from Shenzhen Statistics.
As much as 50 percent of Hong Kong’s gross domestic product is tied to the transport and logistics industry, meaning that any expenses arising from C-TPAT compliance efforts could have an enormous impact on the region’s economy. The benefit would be that, with so many shipments destined for the United States, any increase in C-TPAT compliance would help to reduce the risk of dangerous cargo arriving at U.S. ports.
Questionnaires were sent to 200 SMEs (these were limited to organizations with 100 or fewer employees) in the Greater PRD Region. Data was collected from the 33 respondents (16 manufacturers, nine firms working with transportation or logistics, and eight trading companies). Participants were asked about their knowledge of C-TPAT issues, what they need that would make applying to and implementing C-TPAT easier, any problems they face, and their attitudes towards the program.
According to the survey results, 79 percent of respondents said that they have considered joining C-TPAT. While this shows a positive willingness of the SMEs to join the C-TPAT, the survey found that only 8 percent of the respondents understood the program’s application procedures and many were concerned about costs.
The respondents indicated that they would like (in order of importance) financial support, professional advice, training, and sources for additional information (such as a guidebook and a Web site).
Costs. Complying with the C-TPAT recommendations is not cheap, and some SMEs said that they were concerned about the costs involved in joining the program. We estimated how much it would cost SMEs based on a scenario of a manufacturing SME in Hong Kong with a work force of about 50. According to this estimate, the first year cost was about HK$109,000 (about US$14,000).
Here’s how it breaks down. CCTV costs were estimated at HK$15,000; consultant fees at HK$10,000; locks at HK$1,000; documentation at HK$2,000; salary for an in-house security officer (12 hours per day multiplied by five days per week) at HK$72,000; training for that officer at HK$4,000; and an awareness program for all staff at HK$5,000.
We further estimated the cost of running the program to be about HK$78,000 (US$10,000) per year. However, that does not include costs involved in improving information systems and any additional labor costs required to keep the company in compliance.
It is clear that the cost is not high for large enterprises such as the airlines and the container terminals that already have procedures in place to deal with supplychain security and may be ready to join or may have already joined. But it is quite a significant expense for SMEs, which, as noted previously, account for more than 98 percent of all companies in the region.
Other hurdles. In addition to financial concerns, there are other difficulties involved with getting SMEs to join the program. The first is that these entities do not have the procedures in place or a pool of trained security officers from which to draw to meet C-TPAT requirements for employing a security officer and implementing an inspection program.
For example, security inspection is still a new topic for most of the SMEs in the region. Operators are familiar with how to detect missing inventory but not what is added. There is still no professional association in existence to provide the requisite training or certification for security officers.
To supplement survey responses, the authors interviewed the executive director of the Hong Kong Shippers’ Council, Sunny Ho. He was asked to describe the attitudes of both large enterprises and SMEs toward C-TPAT. These are outlined in Table 1, which compares the awareness, readiness, knowledge, resource availability, average cost, and the overall level of difficulty in joining C-TPAT between large enterprises and SMEs in the region.
Ho’s conclusions matched those from our survey: It is difficult for SMEs to join C-TPAT because the cost is high and there is little support from other relevant parties, such as local government and industrial associations.
Whether progress can be made may depend on whether the program is seen as complicating the business process. Efficiency and flexibility are major competitive advantages of logistics operators in Hong Kong and the PRD region. Although cargo-handling expenses are not low, Hong Kong’s “free port” status has allowed logistics operators to react to last-minute changes in product demand and vessel scheduling, all with a minimum of Customs red tape and interference from government officers. Anything that interferes with these competitive advantages will have difficulty in becoming widely accepted in the region, so local businesses need to know that C-TPAT is not going to create hindrances to business. This sort of understanding can only come through deeper knowledge of the program.
In order to overcome the problem of low awareness of C-TPAT requirements and the other concerns, we developed a series of assistance tools. One is an informational Web site on C-TPAT that was run by the University of Hong Kong (the site is no longer up).
The authors also created a C-TPAT Awareness Leaflet to raise companies’ awareness of the program, its benefits, and its requirements. These leaflets were sent to companies in the region with the help of the two associations that assisted with the survey: the Sea Transport and Logistics Association and the Hong Kong Association of Freight Forwarding and Logistics Limited.
E-SAT. Another project was the Electronic-Security Assessment Tool (E-SAT), an evaluation tool that was distributed along with the C-TPAT Awareness Leaflet. E-SAT is an Excel spreadsheet template that can help companies evaluate their current security level, a step that is required in C-TPAT.
It covers the five sections—physical security, access control, procedural security, personnel security, education and training awareness, and threat awareness—required by the Security Recommendations for Foreign Manufacturers provided by the CBP and available through its Web site.
Users can key in comments through the tool and calculate scores, and an average score of each section can be calculated automatically. The tool serves as “strength and weakness radar” that can help the company identify areas for improvement.
Guidebook. The C-TPAT Guide Book was created for SMEs in the Greater PRD Region. It contains all the necessary information on how to apply to C-TPAT, including the required documents, a flowchart of application procedures, the security recommendations, and useful contact information. Like the leaflets, these were also circulated via the involved associations.
Goals. There is much more that could be done to help speed adoption of C-TPAT by SMEs. The authors have made the following proposals.
To further assist the SMEs in applying to and implementing C-TPAT, we proposed a pilot project to local government and industry associations that would be a collaboration between the government, trade associations, SMEs, and the academic sector. Under the proposed pilot, one or more example SMEs would receive training on the requirements of C-TPAT and would work toward fulfilling those as a way of demonstrating to other companies all of the program’s requirements and benefits.
Additionally, we proposed a specific training program that would be tailored to the unique environment in the Greater PRD Region. The program would include basic training for new security managers and more advanced training for proprietary security officers to conduct internal assessments.
Based on the experience of one of the authors, who went on a weeklong logistics study mission to the United States, we also proposed to arrange study missions to the U.S. for selected team members and practitioners, to give them the opportunity for hands-on experience.
The original mission that the author attended was organized by the Hong Kong Trade Development Council and supported by the Hong Kong Logistics Development Council. It included a series of conferences on C-TPAT as well as company visits.
In the proposed missions, the group should have the opportunity to visit companies that have successfully applied to and implemented C-TPAT. We also proposed that training workshops be developed with the collaboration of some American organizations.
In addition to a training package, we also proposed the development of a generic process map and a set of sample procedures, illustrating the new security measures and steps, with the support of relevant associations in the U.S. and the Greater PRD Region.
Finally, we proposed that relevant SMEs adopt a five-step methodology in implementing the C-TPAT requirements, with the goal of applying for C-TPAT membership. The first step is a baseline assessment using the E-SAT. After identifying strengths and weaknesses by using this tool, SMEs can address infrastructure improvement per the needs identified in the assessment. The third step is documentation preparation; SMEs can develop their own security manual and procedures with reference to the sample manual.
The fourth step is for SMEs to arrange training for the appropriate staff members. The final step is for SMEs to file their applications to join C-TPAT.
All of these proposals were made to local government and industry associations, but no action has been taken.
We strongly believe that with these tools, SME awareness of C-TPAT in the region can be improved significantly, a critical first step toward ensuring participation. And that’s an important step toward a more secure supply chain.
Victor H. Y. Lo is a lecturer in the department of industrial and manufacturing systems engineering at the University of Hong Kong.
Matthew Szeto is a graduate of the University of Hong Kong, where he majored in logistics engineering and supply chain management. He is currently working in a Hong Kong bank as a project management professional.
William S. K. Wong is a research assistant at the University of Hong Kong and the principal consultant of the Knowledge Workshop, a management consulting firm, in Hong Kong.
Mohan Kumaraswamy teaches and conducts research in construction engineering and management at the University of Hong Kong.