The Supply Chain & Transportation: Managing Your Transportation Risk
By Stuart Rosenberg, Guest Blogger
Many companies, whether they be manufacturers, distributors, wholesalers or service providers, are continually failing to grasp an important aspect of their supply chain – transportation and the liabilities / risks involved. It no longer matters if you are shipping domestically or internationally; one should not ignore the risk of not managing the transportation aspect of your organization. To paraphrase an old football adage; “the defensive opponent may know what’s coming, but with correct offensive execution they can’t stop the play”. Proper due diligence on all carriers involved is the correct offensive weapon. In enacting the due diligence companies must understand and acknowledge where the risk are:
- What is my exposure to liability in the event of a catastrophic accident?
- What is my loss exposure in the event of theft or damage?
- How am I liable when a third party contracts with an unreliable and unqualified carrier for me?
- What happens if my carrier becomes insolvent or bankrupt?
Once these questions are satisfactorily researched and answered then select the carrier or carriers.
To assist firms in their quest to find qualified carriers, the Federal Motor Carrier Safety Administration (FMCSA) established the Comprehensive Safety and Accountability procedure or scorekeeping on carriers. As all things government issued there ensued debate between all parties involved – companies, the carriers, and attorney. Failure to check CSA scores might subject a company to litigation if a particular carrier did not meet the score thresholds. Of course, there are those that argue that the CSA program is deeply flawed and thus the scores are suspect.
Regardless of where you stand on the CSA debate is that checking the CSA scores is just a starting point. Many corporate executives manage risks with suppliers and within their business processes well but do not apply the same level of importance to their transportation partners. When contracting with shippers and brokers far too much emphasis is put on cost and service as opposed to the need to protect their firms with investigation of carriers and brokers.
Contractual Assumption Cases: From 1984 through 2008, 21 cases have been brought against a shipper/broker. One case in 2001 yielded a $55M judgment.
30% of the 21 cases were found in favor of the shipper/broker defendant
70% of the 21 cases were found in favor of the plaintiff.
To help alleviate the debate on the scoring threshold, the CSA implemented the Safety Measurement System or SMS. This was meant to quantify the safety performance of individual carriers:
- Identify entities for intercessions
- Determine the specific safety problems a company shows
- Monitor safety problems throughout the intercession process
- Support FMCSA’s proposed Safety Fitness Determination process
The SMS results are listed demonstrating the worst safety performance of carriers involved in this process. That being said, it is a volunteer process. The SMS only is measuring about 17% of active carriers. While this system is a useful measurement it is not sufficient unto itself. In fact, on the SMS website there is a full disclaimer stating in detail what I have posted in a short statement.
To those that believe this disclaimer helps protect them from litigation, need to re-think your process. Most carriers are only required to carry at least $750,000 in insurance. If there is an accident that causes fatalities the $750,000 will not cover.
The Safety Fitness Determination (SFD) ratings will red-flag those carriers your firm should not engage. The Safety Measurement System (SMS) scores will highlight issues that need follow up. With all of your transportation partners, should develop a discovery and validation process; communicate with those partners when an unfavorable score appears. Included in this validation process there should be an internal procedure to determine cancellation or continuation of service with this carrier. A sampling of the criteria is the following:
- Is the issue real
- Is the issue being addressed
- Is there immediate corrective action that needs to be taken
- What are the interim steps that need to be implemented while corrective action is being taken
In some instances the carrier may have implemented corrective actions based upon a report issued to them by the SFD. But your own investigation must determine whether or not to continue the relationship with this particular carrier. However, day-to-day operations ought not to be the only time to employ the SFD/SMS data – use data for pre-evaluation on a bid from a carrier.
To protect your organization and manage the risk effectively must adopt a complete “snapshot” program. A firm needs to evaluate the carrier contracts, your carrier’s operating authority, insurance coverage, financial stability, understand how liability attaches to your firm (firm’s reputation at stake) and potential product damage. The following two examples focus in on the impact of ignoring this aspect of your company’s business:
- A $5 million product loss resulting from a stolen trailer of pharmaceuticals turned into a $26 million loss for the shipper when the FDA forced a recall of all outstanding inventory of that particular product.
- We all remember the bankruptcy of Consolidated Freightways and the ensuing disruptions it caused those who had freight-in-transit when they closed their doors. Consolidated stopped paying claims 60 days prior to closure and those who were paying on time and not netting claims against payments lost the entire value of outstanding claims.
If your carrier is a trusted partner, then don’t immediately punish the score or measurement. Instead, with a policy of collaboration investigate, take corrective action and continue the business ties. However, if a carrier poses a significant threat to your business then ties must be dissolved. The organization must include everyone whom risk is important to ensure transportation operations do not ignore these risks while managing other tasks.