Assignment – (Individual) Course: Diploma in Logistics Management Batch: DLM 12/41

Module: International Shipping Management
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Lecturer: Mr Eddie Tan Assignment On: What risks and perils are present in global transportation? Discuss how exporters and importers can manage these risks. Submission Date: 27th Feb 2013

Name(s) of Student: Norhazura Binti Zulkafly (Word count –1,882) Table of Content Chapter | Title | Page |
1 Introduction 3
2 Global trends and challenges in transport sector 4
3 Cargo Insurance 8
4 Transportation Perils 10
5 Managing Risks 11
6 Insurable interest 12
7 Summary 13
9 Bibliography 14

1. Introduction

The global economy is going through a highly volatile period as highlighted in the Transportation Profile. Diesel and bunker fuel prices have been largely unpredictable, thanks to the wild swings in crude oil prices (peaking at nearly $150 per barrel before plummeting to less than $40 per barrel in 2008). Demand for industrial and consumer products has contracted after years of unprecedented growth, due to rising prices and a global recession, and companies have struggled to secure needed financing because of the global credit crunch.
They create extreme challenges in the market for global transportation services. Just a few short years ago during the global trade boom, ports were testing the limits of their capacity, ocean carriers were placing orders for new ships, and freight customers were scrambling to find available containers and berths to move product to free-spending consumers. However, in a very short span of time, global trade has contracted and the transportation industry has scrambled to weather the lean times. Transportation rates have dropped and capacity is ample—good news for freight customers but not for the transportation service providers.
Despite the current economic conditions and cries for reducing import/export activity by protectionists, global trade remains a huge activity. Well over $14 trillion dollars in global merchandise export activity is anticipated for 2009, according to the World Trade Organization. This level of activity, while well below the $15.8 trillion merchandise export peak in 2008, drives an ongoing need for effective global transportation services. Global transportation companies and their customers must effectively plan and manage in the current cost control focused economy. They must also position their organizations for future growth opportunities in anticipation of a more healthy global economy.

Navigating the choppy waters of a global recession is no easy task for transportation managers. However, they should not lose sight of the fundamental issues and practices that generate effective, efficient freight flows. This chapter focuses on the need for proper planning before freight leaves the exporter’s shipping dock. We will discuss the global transportation industry in terms of its size, options, and critical flows. Specific planning issues related to trade terms and payment terms will be covered, followed by an overview of key transportation documents. Chapter 10 will wrap up with coverage of mode, carrier, and route selection.

2. Global trends and challenges in transport sector

3. Cargo Insurance
One of the issues addressed by Incoterms is responsibility for insuring the freight. The organization assuming this role faces one of the most complex issues in global transportation. Cargo insurance is challenging because of the unique terminology, centuries-old traditions, and confusing set of regulations that limit carrier liability. Regardless of the challenges, cargo insurance is critical. Importers and exporters are exposed to countless perils and financial risks when their freight moves through the global supply chain. They must determine their insurable interests and how to most effectively manage risk. Each of these insurance related issues is introduced below.
Financial Risks
Trying to recover financial losses from international carriers for freight damage or loss is difficult and time consuming. Thanks to regulations like the Carriage of Goods by Sea Act (COGSA), an ocean carrier’s liability is limited to $500 U.S. per customary shipping unit. However, COGSA regulations eliminate this liability in 17 defensible situations. The regulation states that neither the carrier nor the ship shall be responsible for loss or damage arising or resulting from fire, perils of the sea, acts of God, acts of war, labor stoppage, insufficient packaging, and nine other circumstances.

Similarly, an air carrier’s liability is minimal in comparison to the true value of the cargo as air cargo tends to consist of expensive products. Also, liability is limited in cases of inherent defect, cargo quality or vice, defective packaging, acts of war or armed conflict, or an act of public authority carried out in connection with the entry, exit, or transit of the cargo. Carrier liability, as determined by the Warsaw Convention of 1929, was limited to $9.07 per pound. Subsequent changes to the regulations, most recently the Montreal Protocol No. 4, changed the liability level to 17 Special Drawing Rights (SDR) per kilogram. This is approximately $25.45 per kilogram based on current rates of $1.497 = 1 SDR. Still, this amount will not adequately compensate an importer or exporter for the actual value of lost or damaged high value goods.
In both modes, the burden of proof is on the importer or exporter to prove that the carrier was at fault. With all the liability limitations provided in the regulations, substantiating carrier responsibility can be very difficult. If they cannot prove fault, importers and exporters have little legal recourse against international carriers.

4. Transportation Perils
International cargo is subject to a wider array of loss and damage risks than domestic freight. This is due to the extended origin-to-destination distance, number of transfers between carriers, and varying climatic conditions. In particular, ocean freight faces considerable obstacles to loss- and damage-free delivery:
• Cargo movement—ocean freight is subject to a harsh ride with the ship moving in six different directions (heave, pitch, roll, surge, sway, and yaw) during a voyage
• Water damage—water from storms and waves can infiltrate cargo
• Overboard losses—cargo containers can be lost overboard during storms
• Jettison—cargo may be purposely dumped overboard to save the ship or prevent further cargo losses
• Fire—most dangerous cargo (chemicals, ammunition, and so forth) moves via ocean transport, creating fire and explosion risk
• Sinking—catastrophic storms and waves can overwhelm ships and cause them to sink along with the cargo
• Stranding—mechanical breakdowns, storms, groundings, and other problems can lead to damaged or delayed freight
• General average—loss or damage to another customer’s freight is shared by all parties involved in the voyage
• Theft—cargo theft, particularly during dwell time at ports and overland transport, adds up to billions of dollars yearly
• Hijacking—pirate attacks on ocean ships is prevalent, with freight being delayed for ransom or stolen
• Other risks—freight contamination, vessel collision, government delays, and port strikes can cause freight loss
International freight moving via air or rail face perils, though they are minimal compared to ocean freight. Air cargo is a very safe mode with limited risk of loss due to crashes or accidents. Movement risk exists as cargo can shift during takeoff or landing and turbulence can occur during transit. Cold temperatures can also be a problem for sensitive freight. Also, theft is an ongoing challenge, particularly when freight sits idle at air forwarder and freight terminal facilities.

5. Managing Risks
The financial threats and transportation perils for international cargo should not be ignored. Exporters and importers must actively manage these risks. They have three options at their disposal: risk retention, risk transfer, or take a mixed approach.
Retaining the risk is essentially a strategy of self-insurance. A company may determine that it is more economical to forego cargo insurance for the anticipated risks. The company is taking a calculated gamble that the potential loss or damage would be less expensive than the cost of insurance. The risk retention strategy can make sense for very large exporters and importers that can absorb occasional losses, ship low value goods or goods that are not susceptible to damage, or have extensive experience and extreme confidence in their carriers. Unfortunately, some companies retain risk through ignorance because they do not understand the scope of risks involved in international transportation or the limits of carrier liability.
Risk transfer means that a company shifts its potential problems to an insurance company through the purchase of a cargo insurance policy. There are a wide variety of policies available to the customer to cover both freight loss and General Average liability in ocean shipping. Insurance can be obtained through carriers, freight forwarders, or directly from an insurance company. Insurance makes sense when a company’s operations would be severely impacted by a loss; the goods are valuable, susceptible to damage, or a theft target; or the perceived risk is too high.
The mixed approach is a combination of self-insurance and risk transfer to an insurance company. Just as an individual may reduce their insurance policy costs through a higher deductible in the event of a loss, exporters and importers can use deductibles to reduce insurance costs. The company must take the time to identify and analyze its risks, determine if they are significant enough to transfer, and negotiate a customized contract with an insurance provider for the amount above the maximum financial exposure that it is willing to risk

6. Insurable Interests A company has an insurable interest in cargo when loss or damage to it would cause the company to suffer a financial loss or certain other kinds of losses. The owner of goods in transit has a financial stake in the safe arrival of the goods. This may be the importer or exporter, depending on the Incoterm used. However, even if the importer doesn’t own the goods during main transit (under DES, for instance), it still has an interest in making sure the goods arrive safely to the destination. Should the exporter not provide adequate insurance coverage of the goods, the importer can obtain supplemental coverage to protect itself against loss.
An insurance contract is legally binding only if the purchaser has an insurable interest and the interest is insurable. Without it, the carrier is not obligated to pay loss and damage claims.

7. Summary
• Moving goods globally adds layers of complexity to transportation decision making.
Extensive planning efforts must be made to prepare for these extended cargo movements.
• The global flow of goods must be supported by effective information flows between the exporter and importer, as well as the timely flow of payments to complete the transaction.
• Global transportation creates a variety of significant cargo challenges: longer and more variable transit time, risk of in-transit product damage or loss, higher delivery expenses, and greater in-transit inventory carrying costs.
• Importers and exporters are exposed to unique financial risks and countless perils when their freight moves through the global supply chain. Hence, cargo insurance is a critical risk mitigation tool.
• Global mode selection involves the analysis of accessibility, capacity, transit time, reliability, safety, and cost. Often, only one or two of the five modes are realistic options given the product and shipment characteristics.
• Carrier selection is based on a variety of shipment criteria and carrier capabilities: geographic coverage, transit time average and reliability, equipment availability and capacity, product protection, and freight rates.
• Route planning for global shipments is important as it affects transportation cost, product availability, and cargo security

8. Bibliography

http://ebooks.narotama.ac.id/files/Transportation;%20A%20Supply%20Chain%20Perspective%20(7th%20Edition)/Chapter%2010%20%20Global%20Transportation%20Planning.pdf (Viewed on 10th Feb 2013)

http://www.comcec.org/UserFiles/File/ulastirma/COMCEC-drwalid-present-final.pdf (Viewed on 10th Feb 2013)

http://www.adjustersinternational.com/AdjustingToday/images/atsite/issueimages/3042/3042img10page2.png (Viewed on 10th Feb 2013)

http://ehis.fullerton.edu/_documents/graphics/insurance%20file.jpg (Viewed on 10th Feb 2013)