LISP: Logistics Information-Space Paradigm
By Jim Giermanski, Daniel B. Hastings Jr., and Miguel Pedraza -- Supply Chain Management Review, 4/24/2009
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| Jim Giermanski |
Performance in any supply chain, particularly an international supply chain, is determined by the activities and conditions in three distinct but interdependent “spaces” embodied in the Logistics Information-Space Paradigm (LISP). The actions in the Physical, Financial, and Information spaces interrelate to make shipments and cargo deliveries efficient, value-added and secure. The following analysis and explanation of this supply chain model will include its manifestation in, or linkage to, the recently introduced Chain-of-Custody platform technology for global supply chains. Two real world scenarios of commercial motor carrier crossings on the
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| Daniel B. Hastings Jr. |
U.S./Mexican border, one inefficient and one efficient, will be used to demonstrate the paradigm’s application.
LISP COMPONENTS
1. Physical Space
The physical space component involves container load (CL) or less-than-container load (LCL) and truck load (TL) and less-than-truck load (LTL) transportation and handling of goods from origin to destination. It begins at origin and includes the handling (picking, labeling, palletizing, etc) by intermediaries at different points within the supply chain. The contract for carriage or Bill of Lading (B/L), in addition to shipper and consignee data, contains all the information which describes what is physically transported by the carrier. For instance, number of pallets/bundles, volume, weight, hazardous, perishable, and other physical descriptions and characteristics of the cargo under the legal control of the carrier until it arrives at a point where the carrier’s obligation and liability end.
Finally, the physical-space component requires the physical security of the container or trailer from origin to destination, including its monitoring, its breach detecting and alerting and reporting capacity, and the integrity of its contents. All these elements should and can be reported in real-time or close to real-time, allowing the consignee to make more accurate and profitable decisions. Ultimately, physical space encompasses everything that is connected to the control of goods in transit.
2. Financial Space
Unlike the physical control of goods, the financial space component involves the financial flow of funds and costs, such as those connected to the cost of logistics service providers. For instance, a carrier’s release rate (the agreement of the carrier to pay a certain cost if the goods are lost or damaged while under its control) is a financial consideration linked to the carrier’s dependability, reliability, and other operational service standards. It also includes the payment of duties and taxes to government agencies, and invoices generated by intermediaries.
Examples of other costs are: travel time, government pre-validation, validation costs associated with a Mexico-to-United States shipment, duties, inspections/examination (possibly intensive), Customs Brokers (U.S. and Mexico), drayage (transfer/cartage) costs, and freight forwarder’s costs. Successful performance requires astute negotiation of rates (preferably flat rates), payment terms, and conditions. Non-Customs authorities also play a role. International treaties like the UN Convention on the International Sale of Goods (CISG) and international trade terms contained in Incoterms 2000 also play an important role in the financial space, particularly with respect to title transfer and ownership considerations as involved with the sale of a product in transit, and delivery and risk costs depending on which Incoterm is used.
Information Space
With respect to the United States, the information space component involves all the electronic flow of data elements and instructions that allow the entry into and exit from Customs facilities (both seaport and land ports-of-entry), and other controlled facilities like Foreign Trade Zones and segregated areas used by the U.S. Department of Agriculture and the Food and Drug Administration. It also involves communication and authorization processes for business-to-business, business-to-government and government-to-business relationships. The activities in the information-space also link the physical and financial spaces.
The performance of this information-space component depends on the accuracy of data transmitted, and the integration and communication protocols between shippers, carriers, brokers and government. U.S. Customs and Border Protection (CBP) programs like the 10+2 Program, E-manifests, Automated Export System(AES), and other pre-arrival filings require electronic supply chain data. The information- space component is a critical condition for moving through the logistics process and allows for the answering of questions that are relevant in and among the other spaces. Some even claim that the owners of the information are the real controllers of the supply chain.
Component Elements and their Interactions
The integration, interactions, and linkages of the three spaces begin and end in the information-space. If the process starts with inefficient information and protocols, supply chain visibility, logistics data accuracy, and supply chain security can be impaired, and the shipment could be delayed or even not arrive at destination. A very short list of examples of component elements follows.
1. Physical Elements
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Is the identity of the person supervising stuffing and arming the security units known and recorded?
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Is the container or trailer using smart container technology?
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Is there knowledge of cargo location throughout the supply chain in real-time or close to real-time?
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Is the selected carrier a C-TPAT (Customs Trade Partnership Against Terrorism) certified carrier?
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Is drayage required, and who will perform it (especially for Mexico/U.S. cross-border operations)?
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What hard documents, if any, are required?
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Will unauthorized access to the container/trailer be detected and reported?
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Who had access to and custody, care, and control of the container/trailer at the port of entry?
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Do control and visibility facilitate the fastest movement through a given channel?
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Where are the goods spending the dead times?
2. Financial Elements
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How is the inventory cost affected?
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What supply chain service providers provide the best service at the best and most competitive price?
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Are the duties and taxes already paid?
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Why pay “purported” urgent and valuable shipments?
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Can hidden costs and back office costs be detected and removed?
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What hidden expenses are generated and can they be reduced or totally eliminated?
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How are the invoices and other documents related? For instance, does the Purchase Order (P.O.) number, costs, and quantities relate to the commercial invoice number, costs and quantities as they relate to duties and taxes and transportation charges to predict better a landed cost?
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How does knowledge of location, estimated times of arrival, and unauthorized diversions or use of an unauthorized intermediary impact costs?
3. Information Elements
Information elements compose the totality of what is known about the movement of cargo through its supply chain. All known elements compose the information-space of the model and contribute to a visible and secure global supply chain. The knowledge and control of information within the integrated LISP is the key to improve overall logistics performance by increasing efficiencies and finding and removing inefficiencies. One way to describe the interaction of the spaces, their elements, and the relevance of their interactions can be demonstrated in two simple scenarios, one inefficient, and one efficient. Each scenario will involve the international movement of cargo from Mexico to the United States and will include physical, financial, and information space as they are interrelated within an international supply chain LISP paradigm.
Scenario-1, Results of LISP Information-Space Inefficiencies
A Mexican manufacturer loads a container with auto parts for the U.S. manufacturing plant. A Mexican long hauler picks up the sealed container, prepares its own B/L, and hands a copy of that B/L to the manufacturer. The cargo listed on the B/L issued by the Mexican long-haul motor carrier is what the Mexican shipper claimed is in the sealed container. In this scenario, however, what the container is said to contain and what was actually loaded are different. The container contents and the B/L contents are inconsistent. The B/L is documentary-only. The shipment is dispatched from the Mexican plant, but the shipper does not send or delays sending the auto parts commercial invoice to the Mexican Customs Broker who is responsible for releasing the cargo for entry into the United States. The shipment arrives at the truck yard or drop lot on the Mexico side of the border, and the Mexican Broker is notified. However, the Mexican Custom Broker cannot start working on his “Pedimento de Exportacion” (documentary outbound release and declaration form) because he does not yet have the required information. Therefore, the shipment is left in the drop lot or terminal yard where it is subject to theft, pilferage, the insertion of contraband, or worse.
Finally, the Mexican Customs Broker receives the B/L and commercial invoice data elements or hard copy which we know, in this scenario, does not match the actual contents of the container. The Broker with incorrect information prepares his documentation for Mexican Customs for release of the goods for entry into the United States. He has unknowingly prepared and transmitted a false declaration to Mexican Customs authorities with subsequent Mexican Customs duties and/or fees based on incorrect or insufficient information.
After the Mexican broker secures the release of the container /trailer for entry to the United States, a drayage or transfer trucker picks it up from the drop lot or truck terminal yard and files an electronic manifest entry into CBP’s Automated Commercial Environment (ACE) system, and proceeds to the Mexican Customs Export Control Booth . Of course, in this scenario, the manifest data are also incorrect. The U.S.-inbound shipment is randomly checked by CBP inspectors who discover more cargo than what is stated on the documentation. They seize the overage, duty is increased, and the cost of inspection is passed on to the importer. The discrepancy may very well trigger CBP’s mainframe computer to target the importer for future inspections with resulting costs and delays.
Eventually, the cargo arrives at the U.S. Customs Broker’s facility that provides the service for the importer, but, in this scenario, the Bill of Lading does not identify the importer (consignee). It identifies only the “ship to” addressee, the U.S. Customs Broker. The cargo, therefore, remains at the Broker’s facility until the U.S. importer calls to check if the cargo has arrived. Days or weeks may have passed. The importer has to pay for storage/demurrage on the container, and the U.S. Broker has reduced space for other inbound cargo on the way to its facility. The importer’s in-transit inventory cost has increased, and the manufacturing production line for which the auto parts were intended could temporarily shut down because of the delays caused by either a Mexican Customs or U.S. Customs inspection. Other expensive express carriage may even be necessary to get the auto parts to the U.S. manufacturer’s production line. Freight and production costs increase. At the end of the month or accounting cycle, the financial staff of the importer will likely request an investigation regarding the extra expenses for the specific shipment.
This scenario shows how physical, financial, and information spaces are essentially interrelated. Poor physical information like load count, incorrect B/L, slow or incorrect commercial invoice and freight delays have financial impacts of increased costs on production and freight movement resulting in potential shutdowns, each related to the other increasing supply chain inefficiencies and ultimate costs.
Scenario-2, Results of LISP Information-Space Efficiencies
The same scenario above can be avoided or repaired by the use of smart container chain-of-custody technology. The chain’s first link is at the “stuffing” or loading of the container at origin. Consistent with the demands of the technology, the Mexico manufacturing plant or shipper must have an authorized, identified person supervising the stuffing and verifying the contents of the container. That person enters the contents electronically through the use of an electronic key or card or other electronic instrument into the smart container hardware, activates the hardware, and seals the container. Shortly, thereafter, a satellite signal is sent automatically from the sealed container with the content information to those entities that need this information, including the coded identity of the authorized person supervising the stuffing and activating the unit. The information can go to the Mexican long haul motor carrier for accurate B/L information, the U.S. importer, the importer’s Customs Broker in the United States, to the Mexican Customs Broker who completes the “Pedimento,” or directly to Mexican Customs, perhaps avoiding the use of a Mexican Customs Broker completely.
Even with the use of a Mexican Customs Broker, his costs can be reduced by information that allows some forecasting capabilities and enhancements brought about by electronic communications as opposed to traditional documentary communications. In other words, if the Customs Broker had advanced, accurate, complete and precise instructions, and electronic data on the cargo and its integrity since leaving origin, he could begin to plan for its timely dispatch to the U.S. importer.
However, in this scenario, when this shipment arrives at the drop lot or terminal, it is surreptitiously breached and drugs added. In this case the breach is detected by the smart container hardware. A satellite signal is instantly sent with the time and location of the breach. The signal goes again to those who would need to know, for instance, the U.S. importer, his U.S. Customs Broker, CBP and Aduana (Mexican Customs). The importer, knowing that it was breached, can give instructions not to even cross the cargo into the United States, thus avoiding the possibility, if discovered by CBP, that all his other shipments would be stopped and inspected by CBP at the U.S. port of entry. In fact, costs don’t increase by using a smart container chain-of-custody system. They actually decrease.
The LISP is enhanced and improved. More accurate information on the details of the shipment from origin can reduce or remove the number of intermediaries or improve their performance. Movement is faster, smoother, and safer. The shipment can move more quickly through both Mexican and U.S. Customs. It can provide to the importer current information on the location and integrity of the shipment through real-time satellite monitoring and communications. It affords a traceability capability not available without the use of smart container technology. It also allows more accurate production schedules, precludes added delays and transportation costs, and provides to government officials accurate information through ACE, intelligence mapping with respect to criminal or terrorist breaches into the smart container, and even the possibility of apprehensions of those stealing from the shipment or adding contraband to it. The chain-of-custody technology also identifies authorized opening of the container to include the identity of the authorized person allowed to open the container at destination.
THE BENEFITS OF LISP AND THE CHAIN-OF-CUSTODY
The LISP Chain-of-Custody business concept has already been realized and is available today. The concept provides a smart container, chain-of-custody technological platform that optimizes LISP by improving the information space for all the involved entities in the international supply chain process. The platform manages and enriches the information captured. Then the information is distributed (imported and exported) to the involved parties to perform their assigned activities. In some instances the platform fully automates filing processes preparing documents ready for digital signing. The LISP-Chain-of-Custody platform has two characteristic features. The first is Ubiquity: information available, useful, and timely. However, ubiquity must mean that the information is available in real-time or close to real-time by all methods of transfer, e-mail, fax, and telephone, especially in the case of emergencies within the supply chain. The second is Quality: information homogeneous, complete, and reliable. The creation of value is derived from the reduction of the cost components of the inventories:
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Cost component |
Features |
Result |
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Level of inventories (in-plant or in transit) |
LISP provides Improved predictability and certainty about times of delivery. |
There is a reduced need to have back-up inventory that prevent stock-out situations. |
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Compliance with special customs treatment programs |
LISP provides improved communication between business and government, matching data records at the time of the event. |
Lower labor hours spent in filing and auditing activities. Lower specialized consultancy fees paid |
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Freight rate |
LISP provides improved carrier selection according to service standards and levels of occupation. |
Lower per ton cost for goods located in final destination. |
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Customs clearance |
LISP provides improved documentation processes and enables consolidation capabilities. |
Lower costs derived from the reduction of customs clearance events. |
There is no reason today for a global supply chain to function without the benefits and efficiencies of LISP. The smart container chain-of-custody model embodies LISP and optimizes the supply chain by making it visible. It also secures shipments by being compliant with CBP’s security program C-TPAT and the European Union’s program AEO (Authorized Economic Operator). LIPS’s chain-of-custody application already exists and is available off the shelf. It deters the inclusion of drugs, human cargo, bombs, dangerous chemicals, and pathogenic micro-organisms, both at origin and during its movement to destination. It is especially valuable for sea shipments that may be scanned at origin but move through a transshipment port where it is accessible by those who would use it for contraband insertion or worse.
While the system is only as good as the human element within it, its bottom line benefits of reduced costs and increased profits cannot be denied.
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