Securing the digital supply chain

14th February 2016
By James Canham and Alexander de Voet, Accenture Global Customs Practice

The digital supply chain is where the world of trade is being transformed, as consumers and businesses switch to digital media, digital goods and e-commerce in place of physical goods traded at bricks-and-mortar stores. New platforms for trading goods online as well as on the ‘dark net,’ new driverless modes of transport (such as drones), and new digital design and manufacturing techniques (such as 3D printing) are disrupting international trade supply chains that are based on the movement of physical goods.

This evolution poses significant challenges for Customs agencies and border protection. To stay relevant and effective, Customs agencies must adapt to this new reality. They must plan, scope and build networks with an entirely new set of stakeholders and partners to successfully continue protecting their nations and citizens from the harmful effects of illicit goods.

This is the new supply chain reality:

  • the combination of new manufacturing techniques based on digital designs and the exponential growth of e-commerce are forcing a shift towards small distributed, or even personalized, manufacturing;
  • servers, digital warehouses and Internet service providers (ISPs) are taking the place of ports, warehouses and carriers as digitization of goods and driverless modes of transport become increasingly mainstream;
  • payment service providers and online marketplaces are taking over from trade finance specialists and banks.

This reality will require Customs agencies to adapt, in order to fulfil their mission to protect the border, or risk being left behind with the exponential growth of the digital supply chain.

Disrupting the traditional supply chain

In a traditional supply chain, agencies follow a ‘paper trail’ and assess risk as goods pass from manufacturer to warehouse to store. In digital supply chains, fewer links exist. To protect borders and secure revenue, modern Customs agencies must establish new ‘anchor points.’ Digital goods require the identification of the person uploading a file or the digital marketplace involved, as well as the buyer downloading the file. In the case of digital transport, agencies must identify the person operating, or responsible for, the unmanned mode(s) of transport.

Failure risks substantial losses. It is estimated that 3D printing alone could lead to a 100 billion US dollars (USD) intellectual property loss annually.* It stands to reason then that the loss of revenue to Customs and revenue agencies is also likely to be substantial, reflecting the proportion of trade that will bypass traditional borders as buyers trade and print digital designs locally.

Established manufacturers, such as Ford Motor Company, are turning to 3D printing technologies to cut development time, reduce costs and improve quality. The use of such technologies will only grow, according to Ford: “One day, millions of car parts could be printed as quickly as newspapers and as easily as pushing a button on the office copy machine, saving months of development time and millions of dollars.”*

The use of unmanned and so far barely regulated modes of transport, such as drones, brings another unique set of challenges in the battle to secure border crossings, as they are operated wirelessly and any information relating to departure, destination, and who owns and operates the mode of transport is not necessarily or readily available.

While unmanned trucks are already in use at off-road locations, such as mines, military locations and container terminals, manufacturers such as Mercedes-Benz, Volvo and Peterbilt are developing road-worthy versions that are already being tested in both the Unites States (US) and Europe.* In addition, companies in the packets and parcels industry, such as Amazon* and Deutsche Post-DHL*, are working on delivery programmes that will allow online purchases to be delivered by drones.

Agencies must act now and develop strategies to limit illicit trade, guard against revenue loss, maintain quality standards, prevent the manufacture of illegal weapons, and protect intellectual property. By anticipating supply chain shifts, monitoring Internet activity – for example, by analysing social media to identify illicit trade risks, using cellular networks to monitor the whereabouts of unmanned vehicles, and cooperating with ISPs and security agencies within data privacy limits, agencies can plan for digital supply chains with confidence.

From DHL to AT&T

As digital files replace physical freight, and drones replace planes, the transport of goods is evolving into the transmission of data, removing the role of shippers and the logistical aspects of trade. Instead, ISPs can be considered as the operators of these new digital trade lanes.

3D printers are now delivering more complex parts and products, advancing beyond basic prototypes. For example, a medical device company has filed a patent infringement complaint to the International Trade Commission (ITC) over a competitor’s importation and sale of digital models, data, and treatment plans.* The complainant alleges that its competitor created a 3D data file in Pakistan and uploaded it to a server in Texas, from where it created dental appliances using the file.

In addition, a thriving ‘dark net’ is allowing physical goods, often dangerous and illicit, to be traded outside of any public supervision. The ‘dark net’ is a marketplace on the ‘dark web’: thousands of websites and communities which utilize the public Internet, but are not accessible without specific configurations. Most ‘dark net’ marketplaces exist because the types of goods that are trafficked are often illegal or stolen. According to a study by researchers at Carnegie Mellon University (US), criminals earn an estimated 100 million USD a year by selling drugs and other contraband via these hidden websites.

Where such goods are transported using drones or other unmanned modes of transport, this only increases the anonymity of such trading transactions. Criminal organizations are increasingly making use of this technology to transport shipments of contraband more quickly, and with less risk of being caught. Last year, the US Drug Enforcement Agency (DEA) reported that “drug-carrying drones made an average of 150 trips between Mexico and the US.”* Similarly, Russian news agency TASS reported that “A Lithuanian self-made drone detained in Russia…was used for smuggling cigarettes into Russia”.*

These new digital threats burden ISPs with unexpected demands and responsibilities. The Institute for Homeland Security Solutions in the US has noted that they “may be in a good position to cost-effectively prevent certain types of malicious cyber behavior”.* More recently, the Court of Justice of the European Union (EU) ruled that ISPs might be ordered to block access to websites containing material that infringes intellectual property.

In their quest to identify and intercept illicit digital goods or digitally traded physical goods, Customs agencies must build partnerships with these new infrastructure stakeholders. Agencies should seek to gain digital intelligence by working with ISPs, the ITC and intellectual property authorities, to develop a regulatory framework around these issues.

Practically, agencies should seek details of the origin, destination IP addresses, and size and type of data transferred – within data privacy limits. They should also build connections to the data centres that harbour this information, and employ ‘big data’ analytics to assist in identifying and capturing illicit trade. In addition, agencies must undertake an overview of trade, assessing online trade activity as well as individual transactions, in order to identify risks.

From banks to PayPal

Short-term trade finance, such as letters of credit facilitated by banks, enable and support traditional supply chains. The World Trade Organization (WTO) estimates that 80 to 90% of world trade relies on such tools, including trade credit and insurance/guarantees.* However, as supply chains evolve new forms of finance are taking their place. Customs agencies seeking to monitor illicit trade must work with payment networks, such as PayPal and digital marketplaces, as these networks start to replace traditional bank intermediaries.

In the trade in digital goods, traded files reach their destination in a matter of seconds. The processing of Customs duties can be formalized at the point and time of sale through a credit card company or online payment service, such as PayPal – making letters of credit and guarantees a thing of the past. Customs agencies must also reimagine the border. For example, agencies must decide whether the physical location where a designer uploads a digital file or where a drone picks up its load should count as its country of export.

Securing the digital future

Although some Customs agencies are exploring their role in the digital era, not all agencies have grasped the threat posed by the digital supply chain. The range and sophistication of goods created and shipped with digital technology will only grow. With the digital supply chain, one also sees a whole new cast of entities who will be involved in this evolution, such as ISPs, 3D printer and driverless technology manufacturers, digital file designers, trade finance facilitators, and virtual storefronts.

As the digital supply chain grows, traditional supply chains are being disrupted. Now, Customs agencies must build links with a new set of stakeholders if they are to secure trade successfully. They will need to work with national and international regulators in relation to trading and transportation policies, and intelligence-sharing and privacy issues, to put in place a comprehensive framework that regulates the digital supply chain. Then, Customs agencies can drive the development of collaborative processes and technology with their new digital stakeholders: ISPs; online marketplaces; and payment platforms.

By taking urgent action, Customs agencies can set the agenda, and take a leading role in how the new digital supply chain can be secured.

*The authors will be happy to provide all necessary references.

More information

About the authors
James Canham is a Managing Director who leads Accenture’s Global Customs Practice. Alexander de Voet is a Consultant who is a thought leader at Accenture on supply chain trends and their impact on the Customs industry.