A shipper that treats cargo transit risks proactively is one that benefits from low cargo insurance premiums, and more importantly, benefits from less disruption to their supply chain, and that of their trading partners.
When evaluating the true cost of your cargo insurance, it is important to consider both your rate as well as the premium-to-loss ratio on your policy. As claim frequency and loss amounts have gone up, claims that were once considered insignificant can be costly. Underwriters love clean accounts, but penalize those with losses. In fact, a single loss can drive a premium increase. The bottom line is that the premium that would normally cover the normal claims in a given year is eroding, and the losses have a bigger impact on the premium-to-loss ratio.
Now, more than ever, it is important for all stakeholders in the shipping industry to collaborate on an effective risk management plan to combat supply chain losses. Those losses come in many forms, from full-scale cargo thefts all the way down to delayed shipments. Once a claim is made we obviously know the dollar value attributed to the lost or damaged product. What we don’t know are the intangible losses, such as the costs associated with handling the claim itself, or lost sales because product never made it to the store shelf. These costs are high and the later, lost sales, could potentially lead to a lost customer for good. How do we quantify that?
Many shippers sell to retailers that have onerous contracts that include chargebacks for merchandise that is not only damaged, but incomplete, or even delayed by just a few days. Even though cargo insurance will pay the claim, a cargo claim can be disruptive to the supply chain and, for many shippers, these chargebacks are not recoverable under a cargo policy. The fact that the chargeback is not recoverable is probably not the shipper’s biggest problem. It is when the customer chooses to source from a different company, that the true losses start piling on. The ever-shrinking “just-in-time” supply chain no longer allows for some of the intangible delays of the past. The mere perception of inadequacy will force the buyers elsewhere. A shipper that treats cargo transit risks proactively is one that benefits from low cargo insurance premiums, and more importantly, benefits from less disruption to its supply chain, and that of its trading partners.
I have had the pleasure of working with many proactive members of the insurance industry who partner with their shippers to build best-in-class supply chains. I took away that there are some very simple processes shippers can integrate into their sourcing and supply chain strategies to minimize cargo loss. Some of them are:
- Packing standards. Many shippers are great about outlining product specs, but often they don’t demand packing specs. A shipper should provide details including specs on cardboard boxes, pallet configurations, moisture content of packaging and the cargo, desiccants, and minimum condition specs for ocean containers to all suppliers.
- If your cargo is manipulated in transit at the piece count level, then transportation providers should maintain piece counts throughout the transit. These piece counts should be documented and saved so that if a loss is detected you can eliminate several different vendors from an investigation.
- Create simple KPIs (key performance indicators) to measure your transportation provider’s performance and share this data with those suppliers and your own management. This can also help you defend a position of carrier selection based on service levels and not just price.
- Once a cargo claim is paid, the insurer will try to seek compensation by any parties liable for the loss or damage. Clearly this minimizes the overall loss to the insurance company, but it also works to reduce your loss ratio. Ask your cargo insurance provider how you as a shipper can help improve subrogation results with the leverage that you have with your transportation providers.
- Bring together all stakeholders in your company to discuss supply chain risks and their impacts. C-level executives, sales, and vendor management are some groups that are often left out of these meetings, but should be a big part.
I have worked closely with my insurers in the past, inviting them to review my supply chain and the policies and procedures associated with it. Having an objective third party reviewing my operation led to the discovery of numerous areas of concern that went unnoticed during the normal course of business. The discovery of these areas and the changes associated with them ultimately led to a more secure supply chain that reduced exposure and increased profit due to a reduction in premiums.
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.
This column was published in the May 2015 issue of American Shipper.