Logistics Outsourcing Amplifies Supply Chain Risk: Self-Defense Tips – Wall Street Journal (blog)

Logistics outsourcing, global supply chains and cost-cutting measures are exposing companies to higher levels of supply chain and business interruption risk, say insurers and risk managers.

The cargo container ship OOCL London, sits idle close to the shoreline in Elliott Bay, Seattle, Washington, along with a growing number of vessels, due to a slowdown in port operations because of an ongoing dispute between the local government and port employers.

To address such risks, experts say shippers should seek as much transparency as possible and pay closer attention to their cargo arrangements than outsourcing has left them in the habit of paying.

“They tend in many cases to give it to third party logistics providers and say, ‘let me know when it shows up,” said Captain Andrew Kinsey, senior marine risk consultant at Allianz. “They don’t understand who’s carrying it, how many times it’s being moved, transshipped, put into feeder vessels or on barges, etc.”

Wm. Morrison Supermarkets PLC in the U.K. addresses this through using one main shipping company and embedding a person from that company in its offices. said Martyn Jones, group corporate services director at the company. “We have absolute transparency around where containers are once they leave the factory, all the way through to portside, onto a vessel and then across the water,” he said.

The cost of not understanding the chain of custody on cargo can potentially amount to as much as 10 times the direct value of lost merchandise, once business interruption and other costs are factored in, said Linda Conrad, director of strategic business risk, Zurich Global, Corporate in North America. She noted that marine insurance usually doesn’t cover the cost of shipment delays, and companies are more vulnerable in the context of just-in-time inventory management, especially when the procurement and risk management functions don’t coordinate. “If you are running just in time, what happens just in case?” she asked.

Companies’ own cost-cutting efforts aren’t the only source of exposure. Shipping lines, hard-hit by the recession, have been taking steps to achieve greater efficiencies through economies of scale and fuel conservation, but these measures can also expose cargo to higher risks.

Slow-steaming, for example, or travelling at slower speeds, cuts fuel costs but increases the time in transit. “Fueling costs have gone up so all the major carriers operating mega container ships are cutting back on speed to save fuel. Everything down the supply chain is impacted by these longer transit times,” said Sherman Drew, assistant vice president for marine advisory services at ACE Group. For example, perishable cargoes may indeed perish if the batteries powering refrigerated containers lose power during a slow-steaming voyage.

Shipping companies have also been pursuing greater economies of scale by using ships capable of carrying unprecedented numbers of containers, a measure that Captain Kinsey warns merits attention from companies whose goods may be on such ships. “Even with the expansion of the Panama Canal, these new mega container ships, as they are being referred to, are a Suez-only option. They will not fit in even the upgraded locks,” he explained, noting that the bigger ships also present “complex” operating challenges at a time when skilled ship officers are in short supply.

Wm. Morrison is aware of the risk of concentrating cargo in such larger shipments. “What’s changing is more and more value is being added in the Far East to container loads,” said Mr. Jones. “They are not just single containers of one item, they can be multiple items that are pre-packed down to a store level, so the potential impact is greater if one goes down.” Doing that pre-packing abroad means cost savings of 20%-30%, he said, but the loss of containers could leave stores with empty shelves intended to hold an entire seasonal merchandise collection.

The risk does not end even when a ship comes safely into harbor and the container moves from a ship to a truck. There, cargo theft threatens.

“These days we see very few thefts at port. It’s where the rubber meets the road outside of ports,” explained Peter Scrobe, vice president of loss control services with Starr Indemnity & Liability Co. Outsourcing has been helpful to thieves, he said, by putting more layers between the shipper and the parties actually carrying the goods. He noted that most third-party logistics contractors don’t own their own equipment, but rather engage carriers, who in turn may further subcontract to yet other carriers, a practice known as “double brokering”. In a recent presentation, Mr. Scrobe said, “There are no benefits to double-brokering – only risks.” He recommended a clip from the reality television series “Shipping Wars” that illustrates how the bidding process sometimes works.

Technology has made it relatively easy for thieves to print realistic licenses and other credentials, deliver the low bid in online load-posting sites, and haul away valuable, easily salable cargoes. In order to prevent that, Mr. Scrobe advises, “Know your trucking companies. Make sure if they are going to use a subcontractor you know who they are going to use, and that your primary is responsible for everything.”

That means staying close to the logistics arrangements – and perhaps suggests a limit to how far outsourcing can prudently go.

(Gregory J. Millman is a senior columnist with Risk & Compliance Journal. He is the author of The Vandals’ Crown: How Rebel Currency Traders Overthrew the World’s Central Banks, and several other books. He can be reached at +1 (212) 416-2352 or by email at gregory.millman@wsj.com Follow on Twitter @GregoryJMillman)

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