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The Real Cost of Cargo Loss

It’s critical for supply chain professionals to be aware of the risks their cargo faces during transport.

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

Second in a Six-Part Series. Click here to read part one. 

J. Paul Dittmann, Ph.D.

It’s critical for supply chain professionals to be aware of the risks their cargo faces during transport. As we discussed in my previous post, the real cost of cargo loss may be much larger than expected.

There are three types of cargo risk to consider: complete loss, damage and delay. For complete loss and damage, many assume that the cost simply equals the invoice (for inbound goods) or perhaps retail value (for outbound goods). But there are other factors to consider.

Goods lost or damaged in transit inevitably result in a reduction of inventory available to serve customers. This causes additional negative factors to come into play, such as lost sales, lost market share and the adverse impact to the brand image.

A major delay in the arrival of goods can severely damage brand equity over time and dwarf the loss due to the basic invoice or retail value of the cargo.

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Setting aside brand image, some firms even fail to anticipate the revenue impact of cargo loss.

Setting aside brand image, some firms even fail to anticipate the revenue impact of cargo loss.

Even if there is no long-term impact on market share or brand equity, a surprising amount of product needs to be sold to offset the loss and write-off and that could very easily amount to a 15:1 ratio.

For example, let’s assume a company makes a 6% profit margin on its goods and lost $233,000 in a recent cargo theft. It would take $3,833,333 in new sales to recover the cost of those goods.

In such cases, insurance provides peace of mind that allows business professionals to sleep a little easier at night. Needless to say, it’s hard to put a monetary value on that. Insurance also makes financial results more predictable, immunizing businesses from random extreme spikes that could have a huge negative financial impact.

Carrier liability: What you don’t know can hurt you

Click to download whitepaper

Click to download whitepaper

When we speak with supply chain professionals, most mistakenly believe that standard carrier liability is insurance. As one supply chain professional for a large retailer said, “I assume the carrier is responsible for any loss and damage while they’re in possession of my cargo.”

More often than not, busy supply chain professionals make that assumption and move on to the next challenge. More sophisticated supply chain professionals know better.

One executive we talked to stated it well, “Carrier liability is not really insurance. It basically protects the carrier (from uncapped losses). Essentially you have to prove negligence on the part of the carrier to collect on a claim; and that’s hard to do.”

[Also on Longitudes: Keeping Your Healthcare Supply Chain Healthy]

Statutes limiting carrier liability

Governing statutes allow carriers to set their own limits and the statutes are specific to carrier type and mode of transport. Governing statutes by mode include:

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The statutes vary in their requirements for the carriers, and they allow a carrier to limit their exposure as they see fit, including claim and lawsuit filing limitations and total claims exposure. They also provide the transportation carrier with defenses against claims including but not limited to:

  1. Act of God-force majeure
  2. Act of war
  3. Fault of shipper, e.g. inadequate packaging
  4. Defect in goods
  5. Government actions
50% of claims for both domestic and international shipments are denied.

50% of claims for both domestic and international shipments are denied.

Numbers 3 and 4 can be interpreted widely, and are the source of a high percentage of claim denials (more than 50%) for both domestic and international shipments.

Force majeure events occur more often than most people think and include a wide range of events like earthquakes, hurricanes, floods, tornados, fires, wars, riots or other major upheavals.

A similar situation exists for global shipments. Under the statutes, burden of proof falls to the shipper to prove that the loss or damage occurred while the goods were under the control of the carrier.

[Also on Longitudes: Managing Cost in the Healthcare Supply Chain]

Carrier liability coverage is often inadequate

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Insurance provides peace of mind that allows business professionals to sleep a little easier at night.

Generally, an ocean carrier is only responsible for up to $500 per container. International air carriers generally have a minimal limit (e.g. $0.50 per pound). Trucking company carrier liability is also at very low rates per pound, sometimes as low as $5 per pound, but often up to $25 per pound, as specified in the bill of lading and their tariff rules

These weight-based limits can be detrimental to companies shipping high-value goods. For example, suppose a truck carrying a pallet of smartphones is hijacked. Each phone is worth $300 and each of the eight boxes weighs 50 pounds. That’s 400 pounds of smartphones valued at $480,000.

With standard carrier liability, the shipper would be reimbursed only $10,000, leaving the shipper on the hook for the other $470,000. (It is unlikely that the value of cargo is a function of weight, yet weight is one of the main variables used.)

Carriers often offer the ability to purchase additional declared value coverage. However, it is important to understand what is covered and how you are compensated in the event of a claim.

In general, most carriers don’t pay for consequential damages or up to the full invoice value of the sold goods.

As you can see, carrier liability has some major pitfalls. In my next post, I’ll introduce some insurance options that provide a better alternative for your company’s supply chain. goldbrown2

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

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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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