Economic Investigation of Food Supply Chain Homeland Security Issues' AAEA Symposium 2005

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Economic Investigation of Food Supply Chain
(Homeland) Security Issues. AAEA Symposium -
2005     

• Jean Kinsey, Co-director, The Food Industry
  Center
• Tom Stinson, State (of MN) Economist
• Professors, Applied Economics
• University of Minnesota

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National Center for Food Protection and
Defense A Department of Homeland Security
Center of Excellence       
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National Center for Food Protection and Defense
Leadership

• Frank F. Busta, PhD, Director
• Michael T. Osterholm, PhD, MPH, Associate
  Director
• Shaun P. Kennedy, Associate Director

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Part of a Growing Integrated National Centers
Network

• National Center for Food Protection and Defense
  (UMN-TC) NCFPD
• National Center for Foreign Animal Zoonotic
  Disease Defense (TAMU) NCFAZDD
• Center for Risk Economic Analysis of Terrorism
  Events (USC) CREATE
• National Center for the Study of Terrorism and
  Responses to Terrorism (UMD-CP) START
• Coming Emergency Preparedness and Response
• Coming Border Security

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NCFPD Vision
Defending the safety of the food system
through research and education
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• For the life of me, I cannot understand why the
  terrorist have not attacked our food supply,
  because it is so easy to do.
• Former Secretary Tommy Thompson
• Health and Human Services
• I don't want to get up in public and say the sky
  is falling if
• it's not falling. I'm going to try to be very
  realistic an
• sensible and serious about the kinds of tradeoffs
  that we
• have to consider when we're making decisions
  about
• protecting ourselves." Secretary
  Michael Chertoff
• Homeland Security

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Goal Oriented

• Reduce the potential for catastrophic food
  system events by
• Rendering targets unattractive
• Rapidly and accurately detecting attacks
• Responding effectively to minimize consequences
• Rapid delivery of effective recovery efforts
• Training new scientists and professionals to deal
  
• with threats to the food system

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Leveraging Unique Advantages

• Neutral convener for food system issues
• Covers the whole food system pre-farm inputs
  through consumption.
• Focused on catastrophic threats (public health or
  economic).
• Learn from the past

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Previous intentional attacks

• Canada 1970- A postgraduate student contaminated
  his room mate's food with Ascaris suun, four
  persons became seriously ill and two suffered
  respiratory failure.
• Holland and Germany 1978- A dozen children
  hospitalized after citrus fruit from Israel was
  intentional contaminated with mercury
• Oregon 1984 - Rajneeshee cult contaminated salad
  bars

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Previous intentional attacks

• Texas 1996- A disgruntled lab worker
• China 2001- 120 people became ill when owners of
  noodle factory laced their food with rat poison
• Starting in the fall of 2001 and continuing into
  spring of 2002, bulk milk tanks on dairy farms
  (14 total) were contaminated with antibiotics.
  This event may have been a test of the
  feasibility of an attack using the milk system as
  a delivery vehicle.

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National Center for Food Protection and
Defense A Department of Homeland Security
Center of Excellence       

• Who are we?

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Broad Academic Collaboration
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Diverse Industry and Association Collaboration
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Collaborating Across Agencies
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Real Key Investigator Teams Programs
Education and Risk Communication
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Current Members Research Evaluation Advisory
Panel
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NCFPD Teams
Economic Analysis
Economic Analysis

• Estimate impact Micro Macro
• Evaluate options Optimum Investments in Food
  Defense
• Investigators Jean Kinsey, Tom Stinson, Hamid
  Mohtadi, Wm. Nangjie

Public Health Epidemiology
Detection Diagnostics
Security in Processing
Supply Chain Information
Disposal Decontamination
Education
Risk Communication
Critical Response Team
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The Efficient Allocation of Resources to Prevent
Food Terrorism

• Thomas F. Stinson
• NCFPD, U of Minn
• AAEA Annual Meeting
• July 25, 2005

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Key Resource Allocation Decisions

• How much should we spend to protect Americas
  food supply from terrorism?
• Should the spending come from the private or the
  public sector?
• What is the optimal distribution of spending
  among various approaches to limiting damages from
  terrorism

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How Much Should Be Spent?

• Currently very little is spent to protect the
  food supply chain from terrorism
• Economic theory says spend until the expected
  value of the reduction in damages from the last
  dollar spent is equal to 1
• Requires measures of the damages and the
  probability a terrorist event occurs

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Estimating Losses from a Terrorist Attack on the
Food Supply Chain

• Value of lives lost
• Costs to the affected firm and industry
• Export sales of commodities
• National economic impacts
• Short-term macroeconomic impacts
• Longer term macroeconomic consequences due to
  reduced productivity

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Macroeconomic Impacts Likely to Dwarf Other
Impacts

• Combination of slower short term growth and lower
  productivity reduces economic output into the
  future
• Economic activity lost due to terrorist action
  will not be regained
• Unlike natural disasters food terrorism does not
  carry with it the forces which automatically
  stimulate the economy

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Is There Market Failure in the Protection of the
Food Supply Chain?

• Intuitive arguments
• Low probability event, protection adds to costs
  without differentiating product
• Low probability event, large number of possible
  targets, impact of firms own protection activity
  is small
• Full cost of failure cannot be imposed on firms
  due to bankruptcy protection

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Is There Market Failure in the Protection of the
Food Supply Chain?

• More formal arguments (Trajtenberg, NBER, 2003)
• Private protection activities simply shift
  terrorists target to another firm
• Free rider problem makes it unlikely that there
  will be private contributions to public sector
  sponsored anti-terrorist activity
• Economic efficiency requires public sector
  spending at a level that drives individual
  protection expenditures to zero

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Where Should Investments in Protection Be Made?

• Key intervention points
• Protection
• Detection
• Diagnosis
• Disposal
• Food supply chain information

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A Non-Intuitive Finding

• Assume 5 alternative terrorist activities
• All equally damaging with expected value of loss
  from any one of the 5 alternatives equal to 10
  million
• Terrorists indifferent to which activity they
  undertake
• Damages from each terrorist activity can be
  completely eliminated with an investment of K

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A Non-Intuitive Finding (cont)

• Alternative1
• Cost (K) of completely eliminating possibility
  of loss is 1.5 million per alternative
• Total cost 7.5 million
• Expected value of losses prevented 10 million
• Net gain to society from investment in
  anti-terrorism 2.5 million
• Decision invest in deterrence

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A Non-Intuitive Finding (cont)

• Alternative 2
• Cost (K) of completely eliminating possibility
  of loss is 3 million per alternative
• Total cost 15 million
• Expected value of losses prevented 10 million
• Net loss to society from investment in
  anti-terrorism 5 million
• Decision --- do not invest in deterrence for any
  of the alternatives

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A Non-Intuitive Finding (cont)

• Does not mean terrorism should go unchallenged
• Two other possibilities for intervention
• Identification of terrorists before event
• Improved tracking information about food supply
  chain

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Economic Analysis
Supply Chain Information
Supply Chain Information

• Evaluate best practices of food companies in the
  U.S.
• Develop standards/performance measures
• Deliver a self evaluation tool
• Lead Investigators David Closs (MSU), Jean
  Kinsey (UMN), Chop White (GA Tech)

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Supply Chain Complexity
Retailers
Logistics Distribution
Supplier
Manufacture
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The Problem Global Food Systems
Grains
Oils
Cheese
Juices
Vegetables
Bananas
Cocoa
Seafood
Processed Meat
Spices
Fresh Meat
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Research Goals

• Reduce the potential for catastrophic food system
  events by
• Determining the state of readiness of food
  companies to deter, detect, and respond to
  potential terrorist attacks on food or the food
  system.
• Share findings with food companies (with
  anonymity)
• Suggesting processes and technologies to enhance
  food supply chain security by
• Rapidly detecting potential attacks
• Responding effectively to minimize damage

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Research Goals

• Reduce the potential for catastrophic food system
  events by
• Identifying supply chain vulnerabilities to
  terrorist activities
• Training new scientists and professionals to deal
  with threats to the food system.
• Build a practical evaluation tool for food
  companies to use to benchmark themselves

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Supply Chain Information Management the team

• Summary and Assessment of Supply Chain Best
  Practices
• Suppliers (Michigan State)
• Manufacturers (Michigan State)
• Distributors (Michigan State/Minnesota)
• Retailers (Minnesota)
• Transportation/Service providers (Georgia Tech)
• Development of New Supply Chain Best Practices
  Recommendations, Including Formal Standards
• Online Incident Management System Development

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Supply Chain Security Practices What have we
done so far and where are we going?

• Interviewed about 20 companies
• Interview questions
• Received back written questionnaires from most of
  these companies
• Short written questionnaire
• Tested this with a group of executives in person-
  Program Leadership Board of The food Industry
  center

• Analyzing the results and using them to write a
• comprehensive questionnaire to mail out to many
• companies
• Set a meeting to share preliminary results with
  interview
• participants

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Practice Assessment

• What can and should firms do?
• Relationships with suppliers and customers
• Internal processes - use of electronic real
  time communications
• Incident and security management stages
• Practice rating
• Likert scaled behavioral scores
• Security performance characteristics (Incidents,
  cost, asset utilization, resiliency)
• Design Larger Survey around 10 core competecies

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Competency Performance Structure for
Comprehensive Questionnaire
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Competency Definition

• Process Strategy Enterprise philosophy
  regarding the importance of food supply chain
  security.
• Process Management How people do things,
  procedures for dealing with internal operations
  (shipping, receiving, handling, etc.)
• Infrastructure Management Presence of gates,
  guards, fences, seals on containers/trailers/rail
  cars. Security checks on employees.

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Competency Definition(Continued)

• Communication Management Training, education,
  and internal communications.
• Management Technology Information technology at
  the collaboration and company level. Designed to
  facilitate collaboration and information sharing
  regarding security breaches.
• Process Technology Diagnostics, tracking
  systems to monitor processes. Quality Control of
  food itself.

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Competency Definition(Continued)

• Metrics/Measurement Guidelines regarding how
  security is measured
• Relationship Management Relationships with
  suppliers and customers.
• Public Interface Management Relationships with
  government and public.
• Service Provider Management Relationship with
  carriers, warehouses, and other service
  providers.

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Phase I. Interview Model

• Contact company and provide project description
• Obtain agreement for participation
• Send functional questionnaire
• Security
• Supply chain
• Security
• Arrange for on-site interviews with general
  questions
• Some conducted by phone

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Preliminary Findings from

• Success requires a cultural sensitivity to
  security.
• Increased security by hiring consultants to point
  out vulnerabilities
• Formed business continuity task forces
• Stronger focus on security with domestic than
  international

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Preliminary Findings

• Crises handled by a small committee with quality
  control person in charge well oiled recall
  systems in place
• Larger companies tend to have more security
  measures in place some keep data banks on
  violations/week
• Back up generators and redundant computer
  facilities
• Reluctance to spend money on deterrence looking
  for government mandates

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Challenges

• Obtaining company participation for interviews
  and questionnaires.
• Differentiating NCFPD research from other
  security supply chain security research
• Cross-functional
• Multi-university
• Supported by DHS
• Providing appropriate secrecy regarding responses.

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Summary

• Defending the food system is a complex challenge
• Significant continued research needed
• Communication and cooperation are essential
• Need analysts for supply chain COST analysis
  mapping - See J. Kinsey

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National Center for Food Protection and
Defense A Department of Homeland Security
Center of Excellence       

• Francis (Frank) F. Busta, Director
• Shaun P. Kennedy, Associate Director
• University of Minnesota - Twin Cities Campus
  Office 200 Dinnaken Office Building925
  Delaware Avenue S.E., Minneapolis, MN 55455 
  USAPhone [phone] Fax [phone]
• http//www.ncfpd.umn.edu