While the exporting community is not a monolithic entity, many exporters of bulk or industrial commodities have similar characteristics. They typically buy from and sell to an unrelated party; look for the most efficient, economical routing; and ship large quantities per shipment using a vast array of logistics service providers. Trades on these low-value commodities are done on thin margins, so shippers cannot absorb any “deadweight” costs associated with claims, delays and/or poor execution.
The following are 10 ways to avoid such operational risks.
1. Know Your Cargo Flow.
Even if buy terms are f.o.b. load port, make sure all trading partners are on the same page with their accountabilities. Efficient routings require a smooth, steady flow of cargo but that sometimes doesn’t match with a particular supplier who may need to ship large parcels at once that make it difficult for downstream providers to “digest” and process in an efficient manner with no accompanying penalty costs.
2. Know Risks at Key Nodes.
Much cargo is railed or trucked to a local transload facility at the U.S. load port. Knowing the issues facing the different logistics service providers will help eliminate unwelcome surprises. Learn not only the capabilities but also the capacity constraints of your suppliers and understand the current situation. Congestion, equipment shortages and service changes all work to confound the best-laid plans.
3. Know Your Port Authorities.
Port Authorities are great resources in helping shippers navigate the choke points of terminals. They can act as an unbiased source of information about service providers in the local area.
4. Know Your Marine/Transit Insurance Policy.
Make sure your policy covers all relevant perils. Because most policies are loss sensitive, claiming against insurance is the last option to resolve a dispute.
5. Establish Standards of Care.
Establish clear criteria for accept/reject conditions for cargo among trading partners so nodes along the supply chain are receiving and handling cargo. The ultimate consignee has the final say, but chain-of-custody links are important for culpability and claim subrogation. Claims can be the most contentious, emotionally draining aspect of vendor relationships, so prevention eliminates potential acrimony.
6. Know Your Incoterms.
Unexpected costs arise from disputes as to whom is responsible. Incoterms are often misunderstood, so the actual transaction is different than the Incoterm being used. The most widely misused Incoterm is f.o.b. when the transaction actually is f.c.a. f.a.s. This might not matter in good times, but when things go wrong, you will want to have the terms covered to match responsibility.
7. Get Coverage for Gaps in Terms and Insurance Policy.
Make sure you have back-to-back coverage and that the risk of loss is well-understood. Where you don’t have back-to-back coverage, obtain insurance to cover these gaps. This could include additional warehouse insurance coverage for cargoes sitting in transit or contingency insurance where the shipper may have an insurable interest that he wants protected on top of the primary interest.
8. Anticipate Supply Chain Shocks.
It is difficult to predict the unpredictable, but supply chain shocks are a frequent occurrence. It is safe to predict there will be storms and natural disasters just like there will be port strikes, port congestion, and acts of war and piracy. Build resiliency for those events most likely to disrupt your particular supply chain. Keep abreast of events through news outlets such as The Journal of Commerce.
9. Know Regulatory Risk.
As countries become more protective and support economic nationalism, trade barriers increase. And remember, for every action a country’s customs, regulatory and other governmental agencies take, there is likely to be an equal reaction from trading partners. Compliance requirements grow more exacting by the day.
10. Build Relationships
Build relationships when the market is in your favor and it will be remembered when the market turns. There is much cyclicality in international trade ,and negotiating leverage flips depending where in the cycle markets are currently heading. While market forces impact cargo flows, good trading partners will help out when in a particular jam. Even in this era of global e-commerce, relationships matter.
A whole other JoC TENs topic would be the financial controls and risk management practices to deal with the financial aspects of international trade such as credit and foreign currency risk, but I’ll leave that to my CFO.