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Accidents Happen. Are You Prepared?

It is important for businesses to better understand the true impact of cargo loss.

J. Paul Dittmann, Ph.D. | University of Tennessee

First in a Six-Part Series

J. Paul Dittmann, Ph.D.

J. Paul Dittmann, Ph.D.

Transportation risk can come from a myriad of sources and can be very hard, if not impossible, to predict. These events run the gamut and include weather extremes, theft, hijacked trailers, global crises, cargo lost at sea (maritime law allows a captain to jettison some containers to save the rest), catastrophic truck or rail accidents, truck fires, etc.

In fact, there’s an estimated $50 billion in annual global financial impact from cargo loss.

At the University of Tennessee, we work with hundreds of companies through our supply chain audits and Supply Chain Forum. These companies range from very large (over $400 billion in revenue) to smaller firms, and include retailers, manufacturers and logistics service providers.

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Companies value supply chain professionals that can look for ways to mitigate risks, rather than those that deal with consequences as they happen.

Most of the companies in our database (at least 80%) have experienced a supply chain disruption that caused a major spike in cost and/or a major loss in revenue and profit.

Small businesses are especially at risk from a large loss event.

More and more companies value supply chain professionals that can anticipate and look for ways to mitigate risks, rather than those that deal with consequences as they happen. But if something does happen, the company’s financial health must be protected, and that’s where insurance comes in.

In 2014, the University of Tennessee Global Supply Chain Institute published a white paper titled Managing Risk in the Global Supply Chain.

The most surprising finding in the research was that even though 100% of supply chain executives acknowledged insurance as a highly effective risk mitigation tool, it was simply not on their radar screen, nor in their purview.

The survey research in the data and graphics below show the range of risk mitigation techniques used by supply chain professionals.

Using insurance as a risk mitigation tool is ranked last! Given the amount of supply chain risk exposure, this is perplexing. Most of the supply chain professionals we talk to assume that insurance is the responsibility of other specialists in the corporation. In doing so, they miss a great opportunity to selectively use moderately-priced insurance to mitigate key risks.

dittmann transportation 2Even after all other risk mitigation strategies have been considered, risk will still exist in critical areas of the supply chain, and those are prime candidates for selective use of insurance.

An inexpensive insurance solution can mitigate a wide range of problems, from damaged to stolen to jettisoned cargo. Insurance providers offer solutions to circumvent, protect and ultimately help companies financially recover from many of these risks.

We strongly believe that supply chain professionals need to educate themselves on insurance as a means to minimize financial exposure. It’s a mistake to assume others in the company are handling this critical area for the supply chain.

That’s why we published Will You Be Ready When Loss Happens to You?, a white paper sponsored by UPS Capital that details the key components that make up a successful supply chain insurance strategy.

In this series, I will focus on loss of or damage to goods in transit, understanding key myths and often-overlooked opportunities.

[Also on Longitudes: An Up-to-Date Twist on Supply Chain Risk: The Survey Says…]

Sometimes bad things happen to good cargo

52 containers are lost or damaged at sea each week.

52 containers are lost or damaged at sea each week.

We often hear businesses say they don’t worry much about risk in their supply chain; nothing bad has ever happened to them. While that may be true today, supply chains are becoming longer and increasingly complex.

Companies rely on suppliers and buyers across the globe, most of whom they have never met. There are multiple modes of transport across multiple borders, with different currencies, laws, languages and carriers.

And sometimes, bad things happen to good cargo. Fifty-two containers are lost or damaged at sea each week. Not bad…until one of them is your container.

As ships increase in size, the risk of more costly incidents increases as well. Many importers and exporters are not familiar with the rule that governs coverage for cargo that is jettisoned to save the ship.

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76% of companies reported at least one supply chain disruption in the past 12 months.

The law of General Average (GA) is a legal principle of maritime law in which all parties in a sea venture proportionally share any losses resulting from a voluntary sacrifice of part of the ship or cargo to save the whole in an emergency.

All the merchants whose cargo lands safely are called on to contribute, based upon a share or percentage, to the party whose goods are lost. In one event, a shipper had $7,000 of merchandise in a container, and thought the amount was low enough to avoid getting cargo insurance.

But, some containers on the ship had to be jettisoned in extreme weather; the law of General Average was declared; and the company was hit with a $45,000 bill. Their container was held for a week until they were able to figure out how to post a GA bond.

According to Lee Meyrick, the Global Marine Chief Underwriting Officer for Zurich Financial Services, “General average is the main driver of marine insurance claims.”

Click here to download the white paper.

Click here to download the white paper.

A cargo policy can cover this loss, and also prevent the container from being impounded to guarantee payment.

Truck, ship and air cargo are the most vulnerable to disruptions while in the supply chain and 84% of incidents involve these modes of transportation. Cargo moving by truck accounts for 43% of that.4 In the U.S. alone, there are 2.2 reported cargo thefts each day; the average value of each is $232,924.

And, the threat of cargo theft continues to rise largely due to the sophistication of criminal groups and the relatively limited penalties associated with cargo crime.

[Also on Longitudes: Hidden Risks in Your Supply Chain]

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The supply chain is the lifeblood of a business and there can be devastating consequences if risk is not properly assessed and mitigated.

These challenges don’t even take into account natural disasters. Consider the recent floods in the Midwest, the devastating storms in the northeast and prior hurricanes like Sandy.

But again, professionals say, “That won’t happen to me.” Yet, we find that 76% of companies reported at least one supply chain disruption in the past 12 months.

The supply chain is the lifeblood of a business and there can be devastating consequences if risk is not properly assessed and mitigated. As many as 20% of companies who experience a supply chain disruption go out of business within 18 months.

With these risks at stake, it is important for businesses to better understand the true impact of cargo loss. In my next post I will discuss where liability begins and ends and how businesses can mitigate some risks through insurance designed for supply chains. Stay tuned. goldbrown2

Dittman’s white paper, Will you be ready when a loss happens to you? can be downloaded here.

JPD3
J. Paul Dittmann, Ph.D. is the Executive Director of the Global Supply Chain Institute at the University of Tennessee. Dittmann comes to the University of Tennessee after a 30-year career in industry. He has held positions such as vice president, logistics for North America; vice president global logistics systems; and most recently served as vice president, supply chain strategy, projects, and systems for the Whirlpool Corporation.

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Reprinted with permission of Longitudes, the UPS blog devoted to the trends shaping the global economy.

1 Comment

  1. Pingback: Supply Chain Management at Michigan State University – Site Title

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