If logistics is the delivery of the right goods to the right place at the right time, it is economic forces that determine the type of freight that is delivered, as well as the time and place of delivery.
A factor that sometimes goes overlooked in freight transportation negotiations and discussions is the risk of loss of freight shipments. With regard to both the shipper-consignee and shipper-carrier relationships, the party who bears the risk of loss has a special burden that, when balanced, would be reflected in other aspects of the exchange. It is therefore incumbent upon the company responsible for the value of lost shipments to either minimize the risk of loss or gain other concessions.
Many of us in the industry have encountered shippers who force their transportation groups to get full trailer loads off their property at month’s end for closing the books and managing inventory. Many of these trailer loads will sit unattended anywhere from three to 10 days until the delivery appointment has been set. If this were 20 or 30 years ago, this sort of circumstance might not create significant problems for carriers.
Considering the rise in cargo theft, though, carriers now are often compelled to choose between bad options; they can either take big risks in terms of cargo security and liability by doing the loads the way their customer wants them to, or they can take risks in terms of customer satisfaction by doing something else. It seems that the most effective way for a carrier to deal with this problem might be to anticipate it before it happens, at the time the agreement controlling cargo liability is done. If the carrier is able to effectively communicate its concerns at the very beginning of the relationship, it becomes much more likely that the shipper will either see the inventory situation as an issue to address or become agreeable to an arrangement whereby the carrier’s liability for freight loss is limited.
Now, imagine the common scenario where the agreement between shipper and consignee is such that the shipper assumes the risk of loss; that is to say, should the freight go missing, the shipper would not be owed the invoice value of the lost shipment. In this scenario, the shipper might take a risk management-oriented approach and make efforts to ensure that the likelihood of the load being stolen is minimized. To really accomplish this, it would be necessary to set a shipping schedule that does not require the trailer to sit motionless for any extended period of time. The conundrum for the shipper here is that the setting of a risk-minimized shipping schedule may conflict with what is convenient for its customer, the consignee. In the event that there is a truckload of a frequently stolen commodity that the shipper’s customer wants delivered on a Monday at 9 a.m. and the distance between the shipping and receiving facilities is, say, 500 miles, the shipper would face a difficult choice. It could either resign itself to having the load travel over the weekend, meaning that the trailer would sit somewhere for an extended period, or it could inconvenience its customer by suggesting a different schedule. In other words, the shipper seems to be left with a tradeoff between customer service and freight security.
Some shippers left in this kind of situation will hedge their bets by setting up delivery networks to safe harbor the freight, even as it moves across the entire country. A shipper who understands the risks of leaving freight unattended while drivers stop at numerous places to get food, use restrooms, and sleep can design a network that enables drivers to drop trailers temporarily at various facilities that the shipper operates. When these facilities have lighting, fencing, guards, and cameras, the risk of loss is not so great.
Although it is vital to realize that there are always risk mitigation efforts which can be undertaken and are often effective, this should come with an understanding that regardless of such efforts, there will in this arena be tradeoffs between things that we all see as desirable. As is often the case, more of one good thing means less of another. An effective risk manager will resist succumbing to frustration when confronted with this truism, but will instead recognize when a particular circumstance presents a risk/reward calculation as well as be able to do the calculation sensibly. In other words, appreciation of those instances where getting the risk to an acceptable place requires a sacrifice in customer satisfaction level—or the converse, where satisfying your customer means increasing your risk tolerance— is as important as knowing how to keep freight secure.
Adept risk management groups will be able to devise ways of mitigating risks, and these ought to be implemented when the mitigated risk is worth the potential reward. Whether a company is a shipper, receiver, or carrier of over-the-road freight, it ought to be cognizant of the inevitable effects on the interrelations of supply chain participants of the circumstance that is the risk of loss and the agreements that control that risk.
Tabor is a 25-year loss prevention expert and vice president of supply chain support for AFN, a freight brokerage, third party logistics, and transportation management services provider. He can be reached by email at [email protected].
On Second Thought: Mitigating the risk of loss
