The Financial Value of In-Transit Cargo Tracking Data

Over the last 40 years businesses have increased their use of information technology to collect, report, and analyze data that may be used to improve the future performance of the business process being studied.

The focus of most supply chain managers has been on the demand side of their businesses, especially through progressively more precise methods of collecting data about items being sold as they move through the chain. That information has included the tracking of inventory on hand, the management of purchase orders, the receipt of goods at distribution centers, and point of sale (POS) information about the demand for those goods.

Supply side managers have also collected information. Historically, however, that has been limited to information similar to the demand side of the supply chain, but in different units of measure. Rather than track individual salable units, supply side managers have tracked the case quantities received from production or suppliers, the quantities on hand, and the quantities shipped to customers in container, pallet, and case pack volumes.

The missing piece has been precise, real-time data about events that occur in-transit during the transportation process that can impact the eventual salability of goods once they reach their final destination. Once considered untraceable and unquantifiable, factors such as product tampering, theft, variation in temperature, the presence of moisture when a dry shipping conveyance is important, or the effects of being dropped or other shock damages have historically been considered a cost of doing business.

Because precise visibility into the root cause of these damages has not been available, the market created various imprecise mechanisms to cover these losses. Manufacturers often grant a standard “shipping damage” deduction, or the buyers may simply take involuntary deductions from payments to suppliers. These standard allowances are typically based on some averaged experience of damages. Buyers, sellers, and transportation providers alike purchase insurance coverage against potential loss or damage claims so that the owner of the product at the time of the damage or disappearance can receive financial compensation for the loss of salable product.

We believe that environment is ripe for change. The installation on or in shipping containers and other conveyances of standard technologies such as wireless communications, GPS location tracking, remote sensors, and AutoID solutions such as RFID make it possible for supply side managers to collect precise, real-time information about events as they occur during transportation, take proactive steps to mitigate those events, and quantify their impact on the Total Cost Of Goods Sold.

These technologies were first known as Container Security Devices (CSDs) because they were invented to protect against the use of loaded shipping containers as weapons of mass destruction.

With the realization that the commercial value comes from uses other than simply security, the term Container Monitoring Device (CMDs) became popular, and now the U.S. Department of Homeland Security is using the term “Reusable Electronic Conveyance Security Devices” (RECONS). Whatever they are called, these devices and their backroom systems provide solutions to collect and share data and information about the in-transit portion of normal supply chain operations that have until now been invisible to supply chain managers. The question most supply chain managers need to ask is whether this precise information can improve their operations and business in the same way that demand side information has improved inventory management, replenishment, and stocking decisions.

Simply stated, we believe the answer is yes. Studies conducted between 2005 and 2010 at IBM, Dow Chemical, Transmed, Royal Foods, Target Stores, and Alicorp as well as less rigorous analyses for JF Hillebrand, General Motors, and Marks & Spencer’s are the basis for the authors’ Cost of Goods Sold (CGS) conclusions. Although the exact results at each company are confidential, these results have been demonstrated in one form or another in nearly every analysis the authors have performed.

New Solutions, Real Results
A CMD solution consists of two components (Exhibit 1) The first is GPS/cellular tracking and sensing devices. They provide a system for the efficient collection of precise information about the physical operations of the in-transit supply chain.

When these systems are also combined with other AutoID technologies, extremely granular data can be collected about each pallet, case, and conveyance vehicle; each salable unit; every asset, key part, or component; and all personnel, including associates, drivers, operators, suppliers, distributors, and customers. This information is recordable, available, and accessible in real- or near real-time. Most importantly, this data provides information that is actionable in real-time to solve or mitigate a problem before it affects your customer service—and that is key in today’s customer oriented markets.

This type of available granular, precise information recorded directly in and during supply chain operations activities has been demonstrated to deliver an average supply chain operations cost savings of 3 percent to 5 percent and inventory investment savings of 7 percent and more. When combined, these savings have reduced the Unit Cost Of Goods Sold by an average of 0.5 percent for the products that were analyzed.

In the business context, these issues do not merit the commitment of time or financial investment until an enterprise has evidence of the potential delivered value and the costs of its own response to the value of precise information. Should this information provide value to businesses, and if regulators can derive regulatory value from the same information, the opportunity result is that regulatory agencies can tap into this same information for which the businesses first have their own internal value proposition.

These types of beneficial results have been achieved in a number of independent trials by several different organizations, including several globally executed research and testing projects. Two were sponsored by the European Union’s FP7 Research grants: Project SMART_CM Container Management and Project Integrity. Both of these projects were based on the collaboration of commercial, academic, and regulatory organizations.

In each of the EU-sponsored projects, a substantial number (75 to 100 or more) of international container shipments were monitored by CMD’s/CSD’s from the time the container was loaded and sealed until the time that the container was unsealed and unloaded—“from Stuffing to Stripping” in industry jargon.

Throughout the journey, the device reported to its home monitoring system on a regularly scheduled basis, as well as in real-time if there was an alert of any kind that indicated a change in the status of a shipment being tracked.  The home system then parsed the data into the message format required by the collaborative data pool, known as “the Neutral Layer” in SMART_CM and as SICIS in Project INTEGRITY. These data pools were accessed by the participating Customs Agencies, which could download and analyze the security data that had been collected.

In these trials, only the security data about the “door opening” status was collected and analyzed, but the devices were also monitored for other cargo condition indicators, such as temperature changes, shocks and vibrations, or the presence of light inside the conveyance.

Additional trials conducted purely by commercial shippers in collaboration with several different CMD device and system providers produced results similar to the financial results already mentioned. At this time, while the service providers are experiencing some industry consolidation, there remain more than 50 commercial enterprises that have developed supply chain and asset monitoring capabilities based on this technology and solution architecture—autonomous CMD sensor data collection, GPS location, cell network communications, and application business intelligence—as described earlier.

In only the past eight years the industry has executed tens of thousands of monitoring transactions on thousands of shipments. The authors have personally participated in many of these transactions, including these representative trials:

• Monitoring 40 foot ISO container ocean shipment of produce from Morocco to the U.S., identifying carrier route deviations, delays, and Customs interventions.
• Monitoring intermodal shipments (truck, rail, and ocean) of beverage producers from Scotland to the U.S., when an alert from the CMD notified the owners that the container was opened in route and the cargo stolen, allowing immediate law enforcement intervention and rapid replenishment of the cargo, saving time and cost and providing route security planning data, with the net result of improved customer service.
• Monitoring the intermodal shipment of consumer products from a U.S. source to an Ecuadorian buyer, where the logistics service provider (LSP) deviated from planned transit routing, transit mode, and planned fees by diverting the container from vessel to rail while charging canal transit fee’s to the buyer when no canal passage actually occurred.
• Identifying in-transit damage to cargo due to improper handling through real time tracking and analysis of incidents, spotlighting the incidence site, date, and custodian of the cargo, and resolving the claim as well as optimizing future cargo handling to mitigate the risk.
• Analyzing asset utilization through monitoring location and use, allowing the fleet owner to reduce fleet size, increase asset utilization, and optimize asset “positioning.”
• Identification of route delays that impeded fulfillment of ‘just-in-time’ inventory delivery and enabled the customer to optimize routing to alleviate delay incidence.
• Deployment of a CMD solution that monitored product integrity, allowing the shipper to secure contracts for supplying certified safe products.

The observed benefits are explained below.

Virtualization of Physical Product
GPS-based CMDs, RFID, and sequential bar codes make it possible through virtualization to uniquely identify and represent electronically each object—items, assets, and conveyances—that must be handled in business operations. This process of virtualization had already occurred for information (EDI) and for cash (EFT); now the entire set of supply chain flows—goods, cash, and data—can be tracked, the actual history recorded, and the entire operation modeled at any level of detail found to be useful by the enterprise (Exhibit 2.). This brings a new level of precision to real-time operations and operations planning that was not formerly possible.

The various forms of Auto-Identification Technology (AIT) extend the object information vector through the transportation process and allow total information availability about items as well as their location and their condition at all stages in their shipping cycle, no matter what the mode of shipment and transportation.

The various AutoID technologies each have particular strengths. For example, Real Time Locating Services (RTLS) or RFID are most effective within closed spaces, such as inside a facility or a container yard. GPS-enabled CMD’s are best utilized for either unconstrained geographies or when real-time or near real-time alerts are required.

The logic is rather straightforward. The Container Monitoring Devices provide data and information about the portion of normal corporate operations that until now has provided very little information about its actual activities. This lack of real-time visibility and monitoring (supervision) has hidden real everyday costs from commercial enterprises.

According to some authorities, fully 85 percent of the shrinkage that occurs in the overall supply chain occurs while materials, components, or finished goods are in-transit from one location to another. Some of that is the result of the occasional theft. However, there are also various environmental operational damages, such as the damage that occurs through handling errors and changes in temperature.

Insurance can cover the financial loss—but not the customer service damage from missing product. Most businesses would simply rather have good product arrive as ordered and as promised, rather than go through the process and expense of explaining an issue to a customer, filing a claim, and then wrestling with the shipper, the transportation companies, or insurance company,

Methodology
Based on experience and lessons learned, the authors conducted multiple cost-benefit analyses of customers’ supply chain processes and operations. We identified critical cost drivers, such as labor, time, process fees by LSP’s, interest expense, and safety stock holding costs; the customers identified probable savings of deploying a CMD solution, codified in the following six steps in Exhibit 3.

In close collaboration with the clients’ supply chain staff and vendors, the authors developed a financial model of all of the costs associated with a single supply chain transaction, from order placement to receipt at the destination distribution center, including internal and vendor fee costs. These external costs of Supply Chain Shipping Operations are only 60 percent of the total incurred expenses due to operating a supply chain capability.

The key to fully costing the transaction was to determine the internal corporate activity costs (labor, facilities, materials, interest) of an importer or buyer. Often overlooked in previous analyses, these internal costs constituted approximately 40 percent of the actual total landed costs of a trade transaction and were the key to identifying savings. Recognizing that LSP, insurance, terminal, and other “vendor” costs were market driven, the authors identified many hidden, overlooked, or unacknowledged costs that added 30 percent to 40 percent to the actual cash expenses of a trade. These become subject to process refinement based on deploying a CMD solution that provided physical and logical visibility into the process and actions of a trade.

The diagram, Exhibit 4, illustrates the sources and basis of the costs analyzed.

By fully acknowledging both the external and the internal operational costs of operating a supply chain, and by using the newly available data that CMD Systems provide while cargo is “in-transit,” commercial clients achieved surprisingly robust financial results.  In actual field trials with commercial clients, the availability of precise information directly from supply chain operations activities was demonstrated to deliver an average supply chain operations cost savings of 3 percent to 5 percent and inventory investment savings of 7 percent and more.

When combined, these savings reduced the Unit Cost Of Goods Sold by an average of 0.5 percent for the products that were analyzed, without affecting physical materials, production, or marketing costs.

Expense reductions were also directly observed in the following:

1. Reduced labor costs, derived by automating the actual tracking function, allowing the analysts to manage by exception, reducing the number of FTE’s involved in monitoring each shipment.
2. Reduced safety stock costs derived from improved physical and logical visibility mitigation of “stock-outs,” hence reduced unexplained variances.
3. Reduced shipment financing costs (interest expense) derived from reducing the duration of individual shipments (an example of typical “low-hanging fruit” types of savings).
4. Reduced vessel operations costs and incidence of “supplemental charges” and demurrage fees (due to the newly available precise information on routing and location).
5. Reduced shrinkage of all forms including theft, damage, and delay.
6. Additional savings that were indicated in these studies as potential for the future, but which were not observed directly:
   a. reduced insurance claims costs, and
   b. reduced transaction processing costs.

Observed inventory management cost savings were derived from the impact of using data and information to improve the consistency and measurability of actual in-transit supply chain operational performance. This enables lowering the statistical variances in actual performance, which previously have been tolerated as reality because there was no observable real-time in-transit measurement of the actual events, delays, routings, and cargo environmental conditions. The combined impact has been higher safety stock, higher cycle stock, and “just-in-case” stock.

The detailed data provided by the CMDs has been observed to enable:

1. Reduced on-hand inventory, attributed to increased physical and logical visibility, which reduces the risks of shipping and the associated costs of:
   a. product,
   b. financing, and
   c. handling.
2. Reduced warehousing costs (less stock = less space required).
3. Reduced inventory financing costs (visibility enables better management enables faster turns, lower holding times, and their associated costs).

Unquantified savings (savings not yet quantified by real world data) that should be cited are:

1. Brand Protection and the incidence adverse cost impacts of recalls and “sourcing” identification, such as recent spinach, pepper, and lead-paint incidents.
2. Supply chain process improvements attributable to visibility and the elimination of supply chain constraints that are in place without in-transit visibility.
3. Improved supplier performance by product sources and logistics service providers that a shipper will receive by leveraging in-transit physical and logical visibility, including the in-transit real-time shipment data that a CMD (CSD) senses and reports.
4. Reduced product damage costs derived from using the physical and logical data of shipments to identify both the causes and the occurrence locations of damages.

Expanding the Deployment of Cargo Tracking Technologies
Commercial enterprises will become convinced over time that filling the current supply chain in-transit information void with real-time monitoring data can lower their costs, in the same way that detailed demand side data from point-of-sale (POS) terminals has vastly expanded the knowledge of demand patterns.

This newly available, precise information about the conditions and events that are unseen by the stakeholders at either end of the shipment represents fertile ground for many operational and relational improvements in business, while also providing a few crucial pieces of data to regulators that are responsible for the security of all.

Exhibit 5 illustrates our forecast of the progression of value that will be derived from this newly available in-transit supply chain data and the potential applications, first to supply chain operations management, and over the longer term to corporate supply chain strategies.

As the technologies of CMDs, remote sensors, and wireless communications continuously improve in functionality and decrease in both cost and physical size, the commercial value will be proven by an increasing number of trading partners. The commercial value of the granular data will mature in a manner parallel to the maturation of POS terminals as they replaced cash registers.

Forty years ago, some retailers actually declared that POS terminals were too expensive and the data was not worth the cost. Many of these retailers no longer exist. That is a lesson that should be heeded by supply side managers today.

Acknowledgement:
Portions of this article were originally published as: “Real Financial Incentives Delivered: ‘RFID Yields ‘Precise Information,’ Paving Way for Cost Elimination Opportunities”, J. McKinney, RFID News & Solutions, August 3, 2005
An earlier version of this article was published in The CIP Report, George Mason University, July, 2011

About the Authors
Joe McKinney, an independent management consultant, is the Managing Director of S.C.V. Solutions. He served as the Chairman of the CEN (Comité Européen de Normalisation) Workshop creating the first international standards for “Container Security & Tracking Devices” in support of the European Union FP7 Project SMART-CM. He can be reached by email at [email protected].
Arthur Radford has advised QinetiQ NA on the development of its asset management solution and is currently working on with the EU and US-based asset management and tracking service providers on asset management solutions. He can be reached by email at [email protected].