By Dave Zamsky
Supply chain professionals face more challenges now than ever before. As companies seek to develop a foothold in new markets or source from lower-cost countries, supply chains must deal with tighter demands on cost, transit time and quality. There are a number of challenges, including multiple modes of transportation, customs, different currencies, several languages, laws, carriers and more importantly, longer supply chains. And, the longer goods remain in the supply chain, the more risk is introduced — risk of theft, damage, natural disasters and other challenges.
Due to its global nature and systemic impact on a firm’s financial health, there is more possibility for risk in a business’s supply chain than any other area of the company. Risk can come in all shapes and sizes, including quality and safety challenges, supply shortages, legal issues, security problems, regulatory and environmental compliance, weather and natural disasters, theft, damage or product loss.
Unfortunately, bad things can happen to good cargo. In fact, 52 containers are lost at sea each week, according to the World Shipping Council. While you might think, “that will never happen to me,” I can assure you, it can. As an example, we provided a German company a quote for cargo insurance, costing US$7,000 annually, which they rejected. Less than two weeks later, the Mol Comfort, a container ship, broke into two pieces off the coast of Yemen on its way to Rotterdam, Netherlands and then ports in Germany and France.
Approximately 2,000 containers took on water, and 1,700 containers were found floating. And, unfortunately, our potential customer lost nearly $150,000 in goods. This event damaged the company’s business, leaving dissatisfied customers, lost sales and financial strain. Soon after this event the potential customer came back asking us for the cargo policy. Sadly, this is not an isolated incident, as more than $50 billion is associated with global cargo loss each year.
Truck, ship and air cargo are the most vulnerable for losses, accounting for 84 percent of incidents. Actually, cargo moving by truck accounts for 43 percent of those incidents with the three most likely causes of damage including theft, rough handling and environmental conditions. In the United States alone, there are 2.2 reported cargo thefts each day with an average value of $232,924. And, the threat continues to rise, given the ongoing sophistication of criminal groups and the relatively limited penalties associated with cargo crime.
The supply chain is the lifeblood of a business; yet, companies often don’t take steps to identify or mitigate supply chain risks. And, the impacts from a major supply chain disruption can be daunting:
●Decrease in sales of 93 percent
●Reduction in shareholder returns of 33 percent to 40 percent over a three-year period
●Share price volatility increase of 13.5 percent
●Decline of 107 percent and 114 percent in operating income and return on assets (ROA), respectively.
Overcoming a large loss can be discouraging. For example, if a truck with $232,000 in goods is hijacked, and the company had profit margins of 6 percent, it would need to sell almost $3.9 million in new goods to offset that loss.
Not every risk is controllable, but many can be identified with proper planning. Companies should work with supply chain risk and business continuity professionals to help identify, prioritize and mitigate risks. Mapping the supply chain is an initial step, which includes noting the modes and carriers currently used; looking at values of goods transported; identifying the concentration of values within a particular conveyance; and reviewing the routes traveled. You may find that a particular node of your supply chain has too much risk and requires tactics to mitigate it.
Sadly, bad things can happen to good cargo. Avoid becoming a statistic by reaching out to supply chain risk partners to help you make the first step. They can help identify your risks, and help establish processes and procedures to protect your business.
Dave Zamsky is vice president of Marketing at UPS Capital. For more information, email firstname.lastname@example.org.