Assignment (Individual)

Course: Diploma in Logistics Management
Batch: DLM 12/42
Lecturer: Eddie Tan
Module: International Shipping Management
Submission Date: 20th May 2013
Name of Student: Teh Jin Hock

Assignment Question:
What risks and perils are present in global transportation? Discuss how exporters and importers can manage these risks.

Table of Contents
1. Introduction
2. Potential Threats and Risks of Global Transportation
3. Manage the Risks
4. Conclusion
5. Reference

Introduction

Thanks to globalization, lean processes, and the geographical concentration of production, among other factors, supply chain and transport networks are more efficient than ever before. This increasing sophistication and complexity, however, is accompanied by increasing risk.
Major disruptions in the past five years—including the global financial crisis, the Yemen parcel bomb scare, flooding in Thailand, and the Japanese earthquake and tsunami—have illustrated the vulnerabilities of finely tuned, closely interconnected supply chain and transport networks.
Although risks have increased, there are concerns about the ability of organizations to address this new risk profile. As the recent , New Models for Addressing Supply Chain and Transport Risk, points out, most enterprises have logistics and transportation risk management protocols that can address localized disruptions. Greater supply chain risks outside the control of individual organizations, however, can have cascading and unintended consequences that no one organization can mitigate.
While it’s important to be able to anticipate specific disruptions, it’s even more important to build in dynamic systems and processes that can quickly and effectively respond to changing logistics and transportation circumstances. The goal is not to predict what will happen, or when, but to be prepared and able to respond in an informed, planned manner.
The report identified a number of recent supply chain and transport concerns that have increased organizations’ risk profile, creating the need for more dynamic supply chains.

Potential Threats and Risks of Global Transportation

Natural disasters
Extreme weather events. Many climate events such as storms and blizzards occur regularly and tend to have minimal impacts on transport systems with delays, partial closures or diversions. Others, such as floods, hurricanes, tornadoes and droughts can be of disastrous proportions.
A disaster involves extensive damage to people and physical infrastructure that is unforeseen in nature, scale and extent. It often implies that their risk of occurrence has not been properly assessed and a large share of the damage is the outcome of a lack of preparedness.

Environmental Risks
Given high-profile events such as the Eyjafjallajökull volcano eruptions in 2010, the 2011 earthquake and tsunami in Japan and the 2011 floods in Thailand, an unsurprising 60% of experts surveyed indicated that natural disasters are mostly likely to cause systemic supply chain or transport disruptions.7 Weather, a related risk, is also ranked highly, with 27% of respondents identifying it as a key concern. Similarly, the 2011 Global Risks Perception survey identified environmental risks such as meteorological and hydrological catastrophes as two of the most likely risks to occur. According to a Swiss Re study, worldwide economic losses from natural disasters in 2010 totaled US$ 194 billion.9 Such disasters can damage infrastructure, interrupt production and significantly impact private sector financial performance: an analysis of 15 publicly listed multinational companies indicated that operating profits fell by up to 33% in the financial quarter following the 2011 earthquake and tsunami in Japan as a result of supply chain disruptions.10 The public sector can also face significant costs, with the Japanese government allocating a ¥ 12.1 trillion (US$ 239.3 billion) budget for the reconstruction of areas devastated by the 2011 earthquake and tsunami. As natural disasters are hard to predict or prevent, the focus must be on making the right investments before the event to reduce supply chain and transport network system vulnerability and improve recovery capability.

The second class of disasters concern those that are man-made and they can be intentional or unintentional such as:
Accident
The outcome of technical failures or human errors and where modes, infrastructure or terminals can be damaged, even destroyed, which includes injuries and the loss of life. Small scale accidents occur very frequently, particularly over road transportation.

Conflicts, terrorism and piracy
Due to the importance of global trade and the structure of maritime shipping networks, bottlenecks (strategic passages) are subject to risk of partial or complete closure.
Shipping lines are forced to pass through constrained areas, chokepoints, namely straits such as Malacca and Bab el Mandab along the heavily used Asia-Europe maritime routes, which make the interception of ships more feasible within a delimited area.

Economic and political shocks
They are likely to play a growing role in the future, particularly financial issues as most developed nations have accumulated a staggering amount of debt that is likely to be defaulted on. Such an event would be associated with a lack of capital available for infrastructure construction, maintenance and oversight, rendering elements of the transport system more prone to risks, such as accidents.
Reliance on oil
The WEF expert group identified reliance on oil as the single greatest vulnerability to supply chain and transportation networks. An immediate change in oil availability as the result of external disruptions such as civil unrest or terrorist attacks (or closure of the Straits of Hormuz) could have an extensive global impact on transport networks in particular. This vulnerability is itself a subset of a broader, long-term challenge of addressing oil reliance. A more dynamic supply chain might respond by varying sourcing options based on a reassessment of a company’s global manufacturing footprint that moves production closer to target markets and reduces shipping costs.

Legislation and regulation
When the Icelandic volcano erupted in 2010, the reactive response of European transport ministries and civil aviation authorities resulted in uncertainty and delays in restarting air traffic. There was a failure to recognize in advance the potential threat presented by such ash clouds, along with inflexible aviation protocols and the absence of any pre-existing agreement on safe ash levels. Similarly, well-intentioned government initiatives such as air cargo screening can impede the efficient flow of transport networks.

Manage the Risks
The financial threats and transportation perils for international cargo should not be ignored. Exporter and importer 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.
Risk transfer means that a company shifts its potential problem to an insurance company through the purchase a cargo insurance policy.
The mixed approach is a combination of self-insurance and risks transfer to an insurance company. Just an individual may reduce the insurance policy cost through a higher deductible in the event of loss, exporters and importer can use deductibles to reduce insurance cost.

Mitigation Risk in Transport Safety and Security
Dimensions. Particularly concern the integrity of the cargo, the route and the information systems managing the supply chain.
Measures. The set of procedures that can be implemented to maintain the integrity of the cargo, namely inspections, the security of facilities and personnel as well as of the data. The expected outcomes of these measures include:
Reduced risk of disruptions of trade in response to security threats.
Improved security against theft and diversion of cargo, with reductions in direct losses (cargo and sometime the vehicle) and indirect costs (e.g. higher insurance premiums).
Improved security against illegal transport of black market goods such counterfeits, narcotics and weapons, and of persons.
Reduced risk of evasion of duties and taxes.
Increased confidence in the international trading systems by current and potential shippers of goods.
Improved screening process (cost and time) and simplified procedures.

Conclusion:

Transportation in a Globalized Economy Globalization has been supported and expended by the development of modern transport systems. From large containerships to small delivery trucks, the whole distribution system has become closely integrated linking manufacturing activities with global markets. However, the beginning of the 21st century brings many challenges to the role of transportation in the global economy. The capacity of many segments of transport system has been stretched by additional demands tying up long distance transportation modes. Congestion in many international transport terminals such as ports often causes delays and unreliable deliveries and there is an acute need for improving inland transportation systems, notably those linked to the major gateways of the global economy. Last, but not least, the long trend of growing energy costs is likely to impose significant adjustments to international transport systems.

References

Jonathan.W and Daniella.D, “Most enterprises have logistics and transportation risk management protocols that can address localized disruptions. Global supply chain risks, however, can have cascading and unintended consequences that no one organization can mitigate. Here are recommendations for managing the vulnerabilities.” Logistics Management May, 2012. http:WWW.LOGISTICSMGMT.COM accessed on 19th May. 2013

Rodrigue, J-P, C. Comtois and B. Slack, The Geography of Transport Systems, Second Edition, New York Routledge, 2009

John J.C, Robert A.N, Brian J. G and Edward J. B, Management of Transportation, Seventh Edition, Canada Cengage Learning, 2011