Unlucky 7: the exposures that could impact your supply chain;
Speed, efficiency and cost-effectiveness are big supply chain priorities these days, especially for just-in-time products. But the leaner you make a supply chain, the riskier it gets – especially when it comes to the moving parts, like cargo.
As your goods wind their way across continents and oceans, the problems can get catastrophic. Consider ocean liners, which ship more than US$4 trillion worth of goods per year.
In 2013, the MOL Comfort, a container ship sailing off the coast of Yemen, split in two with more than 4,000 containers aboard. Both halves eventually sank. A year earlier, the MSC Flaminia caught fire on the Atlantic Ocean while steaming from the United States to Belgium with more than 2,800 containers aboard. The fire claimed three lives, and months passed before the vessel was unloaded. Vessels are getting bigger, making worst-case scenarios even worse.
Sometimes finances are what sinks a shipping operation, as was the case with South Korea’s Hanjin Shipping, once the seventh-largest container line. It declared bankruptcy in August, leaving billions of dollars of cargo stranded at sea. Sinking ships and sinking companies are only the most dramatic of the many and varied risks to global product flows. Theft, for example, claimed nearly US$23 billion of cargo in 2015, according to BSI Supply Chain Services and Solutions.
As these stories suggest, careful management of cargo-related risks is worth the effort. While it’s nice to cut supply chain costs, false economies around logistics are dangerous. They can devastate businesses, including revenue, customer relationships, market share, shareholder value and reputation. So it’s not enough to simply choose the lowest bidder for shipping without consideration of other factors. It’s probably wise to go with the most reliable bidder.
Break down your risks
The problem is, many supply chain managers are so busy just keeping dots connected that they aren’t able to satisfactorily appraise the reliability of liner shipping, rail and trucking fleets around the world.
Nevertheless, every dot and connection represents a new risk. So as a CFO, you should consider a thorough risk assessment of your supply chain, whether your company is assembling a factory overseas or shipping toys to U.S. stores for the holidays.
Here are some risks to consider:
- Vehicle accidents: Say you’re a global company building a power plant in the third world. The destination country has a horrible infrastructure, which is why it needs a power plant in the first place. The roads are terrible. A truck hits a hole, and your US$30 million turbine falls off and breaks. The project – and your revenue – is delayed for months, and your misfortune is big news.
- Weather: Storms can capsize ships, derail trains and wash out roads. You need someone inside or outside your company actively monitoring these risks, rescheduling and rerouting as necessary.
- Fire: Fire is a major threat to business property, and that includes cargo. Companies need to confirm that their transportation partners have a loss prevention mind-set and have taken steps to manage any potential fire risk.
- Heat: Food, chemicals and pharmaceuticals can be sensitive to modest shifts in temperature. Companies shipping these products need carriers that are vigilant about keeping sensitive goods in the proper heat range.
- Cyber: Another day, a new cyber vector. The latest: Sophisticated thieves have begun finding ways to hack into carriers’ documentation systems, stealing truckers’ identities in order to drive off with high-value trailer loads that don’t belong to them.
- Piracy: There are many reasons a pirate might try to hijack a ship, train or truck, including money, politics, religion or a general inclination toward mayhem. Physical security is a must, as is possessing the data to avoid, or be prepared for, the most dangerous geographies and routes.
- Coveted cargo: If you’re carrying a load of coveted consumer product, e.g. smartphones, big-screen TVs, wildly popular holiday items – you’re a target.
What you should do
There’s only one way to manage these risks: meticulous preparation and planning. If you really want to sleep at night, find a trusted employee or partner who will dive deeply into your exposures, then come up with a comprehensive loss control program with on-the-ground monitoring.
A responsible partner will assess all aspects of the risk before shipping – including the route, time of year, type of transportation equipment and the sensitivities of the project – and whether the goods are fragile, oversized (i.e., requiring special equipment to move) or sensitive to heat. A trusted partner will handle carrier agreements, packing methods, security, storage, tracking and more.
Organizing all this takes more than a conference call and an online presentation. A dependable partner will want to meet with your key logistics and risk management personnel face-to-face to discuss your supply chain in depth.
This meeting should take place at one of your main cargo distribution centers to facilitate the exchange of hands-on knowledge of product, component, and raw material shipping and receiving operations. This review and analysis should include a look at prior loss experience.
It’s a lot of work, but well worth the effort. Given that I believe the majority of loss is preventable, we never want our clients to experience a loss. Disruptions can have far-reaching effects on a business beyond the inventory that can be insured.
So be safe, beware of false economies and keep your business afloat.
This article was written by Kevin Ingram, the incoming chief financial officer of FM Global, and first appeared in Reason magazine Issue 2, 2016, which you can read here.