Risk assessment: the power of knowledge


Evaluating your company's supply chain performance must be done by building a matrix of risk assessment. This matrix that can mathematically expressed using probability theory which allows to calculate costs based on collected information. But when assembling the formula in assessing the risks of your company's global supply chain one variable usually stays unsolved. That variable is also probably the longest in terms of time but the one you have the less control over; shipping your cargo.

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We call that the Blind Spot Paradox. Let us explain. You spend time and capital to build a product and nurturing it to finally put it on the market. You spend a lot of resources on ensuring that your plant, warehouses and storage are safe with highest security levels, you make sure that the conditions of the shipping container answer your needs and demand of sanitation and sterility and then you ship it. From that moment you’re blind and out of control. Until it gets to destination, you have no clue of the status and conditions of your product. You don’t know exactly where your container is, if it has been hit or shaken and if it has stayed in the sun for days on a port deck. You also don’t know if it has been plugged to the electricity correctly and on time and what temperature it is inside the container at all time and maybe your container has turned into a green house but you won’t know that. And that part of your business often takes the weeks meaning that you will be in the dark for weeks until you can find out the condition of your shipment.

When assessing the risks of your supply chain you must first understand what assets are involved in your supply chain and then understand and analyze the treats involved. When you have these variables in hands you can assess the risks and translate them into value to be able to build and develop cost effective counter measures. Counter measures are the preventive actions you will take over your global supply chain and that includes cargo monitoring services like Contguard’s. Counter measures also include planning how your company will react to certain unexpected events and when your cargo is duly monitored by a system that oversees breakage, temperature, exact location and alerts you when an event occurs you can quickly activate plan B.

Let’s take an example: I am a meat producer in Argentina and I have to ship my products to customers in France. Obviously, the nature of my product is sensitive and temperature control is crucial for my industry and that is why I must monitor my shipments because if something happens I want to know first, fast and I want to know why and where. During transit, which takes in average 25 days for that route, Contguard alerted me that my container’s temperature has raised to over 30 0C (80 0F+) during transit for X amount of days and then it adjusted back to desirable temperature at some point. The receiver will get the container at required temperature but I know that one ton of meat has gone to waste. I also know that I must address this quickly by taking required measures to deal with the situation. I must alert my importer before he gets the goods so that he can take necessary actions to cover for that loss. I also understand that I have to increase production to replace that stock. Finally and very important, I have to activate the wheels of filing for a claim.

When a break-in occurs for instance and your cargo goods is stolen it is a very painful situation, however the average person not directly involve will assume that the company’s insurance will pay for the damage and despite this unfortunate event the company will get its money back. Sure, the value of the cargo may be reimbursed but the indirect costs related to the theft may overcome that payment. What we mean is that there is a series of second-wave incidents that may not be taken into account in that situation and they are very costly down the road. First and foremost, like a domino effect, the end customer will be hurt and in which way will depend on many factors but it could imply missing pieces of global assembly line that slows down the supply chain of that company or end products that the market is waiting for and could cause serious shortage on the market. Likewise, the reputation of the exporter or the importer may be significantly harmed by such an event and although it is harder to turn this into value it must be calculated as a loss of revenue.

It is well known that the investigations of insurance companies take months and reimbursement occurs much later. If your company doesn’t take into account the costs of risks engaged when cargo shipping, your insurance company on the other hand has the most sophisticated matrix of risk assessment and management on the matter of cargo shipping. Whether the cargo is stolen, damaged or lost will obviously mean for your company that your policy premium will rise the subsequent year by a certain percentage calculated in the risk assessment matrix of your insurance company.

In our example, my cargo was monitored and Contguard could analyze the data signals received and conclude that the container was not properly plugged-in the electricity after it boarded the ship. I am taking that valuable information, supported by a technical report by Contguard with temperature analysis and maps and our company can now integrate all these findings into our risk evaluation matrix to take the necessary measures for prevention. In addition, having all that information in hands and the fact that we can finger point exactly where the incident occurred and who is responsible puts us in a good strategic position when facing our insurance company and THAT translates into real value! As Alvin Toffler puts it in his book Powershift (1990), “If you don’t have a strategy, you’re part of someone else’s strategy”.

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