CH-9-10 Transportation Risk Management – Transportation: A Supply Chain Perspective : Chapter Notes

This Document Contains Chapters 9 to 10 Chapter 9 TRANSPORTATION RISK MANAGEMENT Chapter Objectives: After reading this chapter, you should be able to do the following: 1. Understand the nature of transportation risk and disruptions 2. Explain the concept of risk management 3. Describe the general process for managing transportation risk 4. Identify the primary categories and types of transportation risk 5. Understand the key factors in risk assessment 6. Discuss the four techniques for managing transportation risks 7. Appreciate the challenge of balancing transportation security and global trade efficiency 8. Recognize key transportation security regulations and initiatives Chapter Overview With supply chains spanning the globe, the risk of disruptions has never been greater. Whether the problem is as major as a terrorist threat or as minor as a weather delay, any type of problem can create a harmful ripple effect across the supply chain. Complex supply chain networks with multiple suppliers, manufacturers, distributors, and logistics service providers also create interdependencies and difficulties that can hide vulnerabilities and problems. Thus, transportation managers must not idly stand by and hope for the best when they move freight. They must actively work to limit exposure to legitimate hazards. Chapter 9 focuses on the management of transportation risk and service disruptions. We discuss the general concepts of disruption, risk, and business continuity, as well as the risk management process. Specific issues related to transportation risk management strategies are addressed, followed by a discussion of expected outcomes. Throughout the chapter, students gain an understanding of the true challenges involved in the movement of goods as well as the methods available to mitigate transportation risk. RISK CONCEPTS Risk is an everpresent issue in transportation. When companies put freight in a container, railcar, or trailer and move it between distant origin and destination points, the freight can potentially be stolen, damaged, lost, or delayed while in motion or at rest in a port, trucking terminal, rail yard, or other intermediate facility. Transportation professionals (and students) must work to understand the nature of risk and be proactive in the prevention and management of risk. To facilitate a stronger understanding of transportation risk, a few key concepts are identified and defined: Disruption—an event that results in a displacement or discontinuity; the act of causing disorder. Transportation Disruption—an unplanned or unanticipated event that interrupts the normal flow of goods and materials through the supply chain. These disruptions expose companies within the supply chain to operational and financial risks. Risk—a hazard or a source of danger that has a possibility of incurring loss or misfortune. Transportation Risk—a future freight movement event with a probability of occurrence and the potential for impacting supply chain performance. Risk Management —the variety of activities undertaken by an organization to control and minimize threats to the continuing efficiency, profitability, and success of its operations. Business Continuity Planning—the processes and procedures an organization puts in place to ensure that essential functions can continue during and after a disruption or disaster. Why are these issues important? Simply stated, transportation and supply chain disruptions are common and costly. A 2008 Aberdeen Group study revealed that 99 percent of the companies surveyed had suffered a supply chain disruption in the past year, with 58 percent suffering financial losses as a result. TRANSPORTATION RISK MANAGEMENT PROCESS Risk management and business continuity planning are not simple tasks. They demand significant time and expertise, involve financial investment, and require frequent revision. Hence, risk management activities must be driven by the top management of companies across a supply chain if transportation disruptions risks are to be minimized. They must view risk management as critical tool for protecting profitability and implement detailed, cyclical processes to control risk. A four-step risk management methodology is discussed in this section. The objectives of the risk management process include the following: • Define the key objectives and scope of the risk management process. • Identify risk issues through structured brainstorming, data gathering exercises, and interviews. • Allocate responsibilities for each identified risk, to provide further details of background, consequence, and management information. • Assess each risk against an agreed consistent scale for likelihood and potential impact on operations. • Compare risk significance to identify the top risks requiring urgent management attention. • Develop detailed management action plans and responses for each risk. • Provide a framework to implement actions and monitor their effectiveness. • Provide a baseline for the process, allowing risks to be reevaluated and further threats to be identified. Step 1 - Risk Identification Step 1 involves identification of the potential threats and disruptions to which the organization is susceptible. Structural and procedural changes may be required to execute the strategy. Accurate and detailed risk identification is vital for effective risk management. This involves a concerted effort to discover, define, describe, document, and communicate risks before they become problems and adversely affect freight flows. Techniques such as brainstorming, interviews, and historical information analysis can be used to highlight risks. This activity will likely produce a long list of transportation risks that must be managed. Students should become familiar with the primary categories of risk discussed in detail in this section: • Product loss • Product damage • Product contamination • Delivery delay • Supply chain interruption • Security breach This section discusses 18 specific risks within these categories but students must understand that the list is not comprehensive. The perils of transportation are many and varied. Hazardous materials dangers, the corrosive nature of saltwater, border crossing issues, military conflicts, and a host of other issues constantly threaten to disrupt transportation operations. Managers must remain vigilant to possible threats and constantly analyze transportation risk. Step 2 - Risk Assessment Step 2 focuses on evaluation and prioritization of the risks. The more vulnerable the organization’s transportation process is to a potential risk, the more attention it should receive. The objective of risk assessment is to evaluate the risks identified during Step 1 in order to determine how serious each risk is to the organization. In making this determination, two parameters are typically evaluated: • Probability—the likelihood of the risk occurring • Impact—the consequences if the risk does occur in terms of service time, cost, and/or quality The time element of risk should also be studied. Risk proximity attempts to addresses the question: “when will the risk occur?” Risk can be evaluated via qualitative or quantitative analysis. Each method can be time consuming but provide invaluable information regarding critical transportation challenges and primary disruption concerns. The effort also steers scarce resources toward the resolution of major issues. Step 3 - Risk Management Strategies Step 3 requires the organization to develop proactive risk management and mitigation strategies. Mitigation strategies identify specific efforts, actions, and procedural changes that must be taken by management to reduce high priority risks. The goal is to lower the probability of risk occurrence and/or minimize the negative impact if the risk occurs. A risk can never be totally eliminated, but its frequency and effect on the organization can be reduced if properly addressed. An appropriate strategy seeks to address risk through one of four means: • Risk avoidance - taking steps to eliminate or quell sources of disruptions • Risk reduction - developing practices to reduce the likelihood of a disruption and/or limit the severity of financial loss (e.g., buffering, postponement, and hedging). • Risk transfer - share responsibility for risk management with trading partner or reassign risk to third party such as an insurance company or 3PL firm. • Risk retention - when risks have limited potential to negatively affect the supply chain, the organization may decide to “do nothing” and accept the consequences of occurrence. Step 4 - Risk Review and Monitoring Step 4 promotes continuity, vigilance, and process improvement. Ongoing testing of strategies, evaluation of their success, and scanning for new risks are needed to achieve maximum protection. The goal of the risk review stage is to establish a repeatable, measurable, verifiable validation process that can be run from time to time to continually verify the organization’s ability to manage risk. Risk management and mitigation plans should be updated as deemed necessary by the monitoring process. SUPPLY CHAIN SECURITY In the final section of Chapter 9, students are introduced to the primary reasons behind increased supply chain security and their impact on transportation operations. Since the events of September 11, 2001, enhanced security measures have made the international transportation arrival and clearance process more complex. Increased cargo inspection, much more paperwork, and longer time to enter the country are now a reality. Some shipments are given very close scrutiny because of their country of origin. Achieving the right level of security is an ongoing challenge. Given the importance of global trade to the U.S. economy, a delicate balance must be struck between security and the efficient flow of global commerce. If security is too tight it could impede the flow of goods, causing delays and decreased efficiency. If trade efficiency is overemphasized, security can be compromised. Numerous legislative acts and agency rules have been established to balance security and the free flow of trade. The chapter wraps up with brief discussions of five recent initiatives that affect commercial transportation to and from the United States. Maritime Transportation Security Act of 2002 The Maritime Transportation Security Act of 2002 (MTSA) is intended to protect U.S. ports and waterways from a terrorist attack. This law, fully implemented on July 1, 2004, requires vessels and port facilities to conduct vulnerability assessments and develop security plans. According to the MTSA, all tankers and other vessels considered at high risk of a security incident (e.g., barges, large passenger ships, and cargo and towing vessels) entering U.S. waters must have certified security plans that address how they would respond to emergency incidents, identify the person authorized to implement security actions, and describe provisions for establishing and maintaining physical security, cargo security, and personnel security. Container Security Initiative The U.S. Customs and Border Protection’s (CBP) created the Container Security Initiative (CSI) to address the threat to border security and global trade posed by the potential for terrorist use of a maritime container to deliver a weapon. The CSI program seeks to identify and inspect all containers that pose a potential risk for terrorism at foreign ports before they are placed on vessels destined for the United States. The three core elements of CSI are: • Identify high-risk containers. • Prescreen and evaluate containers before they are shipped. • Use non-intrusive inspection technology to prescreen high-risk containers to ensure that screening can be done rapidly without slowing down the movement of trade. Advanced Manifest Regulations CBP published a series of advanced manifest rules which require carriers to submit a cargo declaration to CBP before cargo reaches the United States. These rules vary by mode and origin point. The purpose of the rule is to enable CBP to analyze container content information before a container is loaded and thereby decide on its load/do not load status in advance. In case of non-compliance with the rule, the most important consequence is denial of loading or unloading and a consequent disruption of cargo flows and supply chains. Furthermore, CBP may impose fines or other penalties on the carriers and others responsible for the submission of cargo declarations. Customs-Trade Partnership Against Terrorism The Customs-Trade Partnership Again Terrorism Program (C-TPAT) is a voluntary government-business initiative to build cooperative relationships that strengthen and improve overall international supply chain and U.S. border security. Through this initiative, CBP encourages businesses to ensure the integrity of their security practices and verify the security guidelines of their business partners within the supply chain. By participating in this worldwide supply chain security initiative, companies will ensure a more secure and expeditious supply chain for their employees, suppliers and customers. Free and Secure Trade The Free and Secure Trade (FAST) program is designed to enhance the security and safety of North America, while also bolstering the economic prosperity of U.S., Canada, and Mexico. FAST aligns, to the maximum extent possible, each country’s commercial processing programs. The FAST program uses common risk-management principles, supply chain security, industry partnerships, and advanced technology to improve the efficiency of screening and clearing commercial traffic at ports of entry along the U.S./Canada and U.S./Mexico borders. Study Questions 1. Describe the concepts of disruptions and risks as they apply to transportation. Why are they important from financial and service standpoints? Transportation Disruption—an unplanned or unanticipated event that interrupts the normal flow of goods and materials through the supply chain. These disruptions expose companies within the supply chain to operational and financial risks. Transportation Risk—a future freight movement event with a probability of occurrence and the potential for impacting supply chain performance. Problems arise when the threat of transportation disruptions and hazards become reality and the supply chain is negatively affected. At minimum, disruptions are nuisances, creating extra work and delays. Recovery efforts hurt productivity, involve expensive expediting efforts, and require premium freight services. At worst, disruptions inflict long-term damage to a company’s image, profitability, and stock price. 2. Risk management consists of a series of steps that should be followed to reduce the consequences of disruptions. Briefly discuss these steps. Risk Identification: Step 1 involves identification of the potential threats and disruptions to which the organization is susceptible. Structural and procedural changes may be required to execute the strategy. Risk Assessment - Step 2 focuses on evaluation and prioritization of the risks. The more vulnerable the organization’s transportation process is to a potential risk, the more attention it should receive. The objective of risk assessment is to evaluate the risks identified during Step 1 in order to determine how serious each risk is to the organization. Risk Management Strategy Creation - Step 3 requires the organization to develop proactive risk management and mitigation strategies. The goal is to lower the probability of risk occurrence and/or minimize the negative impact if the risk occurs. These risks can be addressed through one of four means: avoidance, reduction, transfer, or retention. Risk Review and Monitoring - Step 4 promotes continuity, vigilance, and process improvement. Ongoing testing of strategies, evaluation of their success, and scanning for new risks are needed to achieve maximum protection. 3. Six different categories of transportation risk were discussed in the chapter. Identify these categories, describe them, and give transportation examples for each risk categories. The primary categories of risk discussed in Chapter 9 include: • Product loss - any type of action or negligence that leads to product not reaching the intended buyer. • Product damage - a potential peril that arises every time a shipment is handled. Damaged product loses much, if not all, of its value. • Product contamination - any type of spoilage, tampering, or exposure problem that leads to corruption of the product and loss of value. • Delivery delay - any type of failure to meet transit time and delivery deadline commitments constitute a delay. • Supply chain interruption - a major problem that brings the transportation operation to a complete and prolonged stoppage. • Security breach - a failure to properly protect in-transit freight from potential security problems that threaten citizens and nations. Transportation risk examples for each category are discussed throughout the chapter and are summarized in Table 9-1: 4. Risk analysis is a critical component of risk management. When conducting this activity, what are the two components of risk that must be analyzed? Why are they important? The objective of risk assessment is to evaluate the risks identified during Step 1 in order to determine how serious each risk is to the organization. In making this determination, two parameters are typically evaluated: • Probability—the likelihood of the risk occurring is important to know as it influence the chosen strategy or response to mitigate the risk. • Impact—the consequences if the risk does occur in terms of service time, cost, and/or quality problems 5. What are the key outputs of a risk assessment process? What should be done with these outputs? Risk assessment is an invaluable activity for identifying critical transportation challenges and primary disruption concerns. The process can include the following outputs: • Qualitative analysis provides a baseline evaluation of risks in a rapid and cost-effective manner. This approach classifies each risk in terms of low, medium, or high probability and impact. • Quantitative analysis is warranted for those risks falling into the “Major” risk category. This analysis incorporates numerical estimates of frequency or probability and consequence. • Risk Assessment Report highlights risk management priorities and “red flag” issues. The output of the report provides: 1. Relative ranking or prioritization of risks 2. List of risks requiring immediate response 3. List of risks for additional analysis and response 4. Watch list of low priority risks 5. List of risks grouped by categories 6. Risk trends The output from the Risk Assessment should be used to create a coherent strategy for managing and mitigating transportation risks in a cost effective manner. 6. What does it mean when a company tries to mitigate their transportation risk? How can they accomplish this? Mitigation is defined as the action of lessening in severity or intensity. A mitigation strategy identifies specific efforts, actions, and procedural changes that must be taken by management to reduce high priority risks. The goal is to lower the probability of risk occurrence and/or minimize the negative impact if the risk occurs. A risk can never be totally eliminated, but its frequency and effect on the organization can be reduced if properly addressed. Mitigation strategies must not be haphazardly applied to disruption risks. First, the strategies must be in sync with the overall supply chain strategy and corporate strategy. Second, mitigation strategies and actions must focus on high priority issues. Third, the mitigation action must be reasonable in terms of cost and time to implement versus the likelihood of success. Finally, a standardized process should be used to implement disruption mitigation actions. 7. What is the role of insurance in transportation risk management? If a transportation risk is determined to be too problematic to manage or mitigate on its own, the organization may seek outside assistance in controlling those risks. This risk transfer strategy provides a means to place liability on a third party should the risk occur. Of course, the third party doesn’t freely accept the risk. They are paid by the customer to assume or share the risk. Insurance is a common method of risk transfer. Transportation companies and their customers can purchase insurance to outright transfer or limit their risks. For example, the financial risks stemming from commercial vehicle accidents and related lawsuits are very high. Rather than setting aside a large pool of money to self-insure against these possible problems, most transportation companies purchase coverage from insurance companies. They are using the strategy of risk transfer as a means to place financial liability on a third party (the insurance company) should the risk (a vehicle accident) occur. Insurance can also be purchased to protect against freight loss, damage, and delay. 8. Why is risk management considered to be a continuous loop process? Risk management planning is not a static, one-time process. Organizations cannot analyze risks, develop plans, and simply assume that the plans can be perfectly implemented as needed. Instead, a testing and review process must be instituted to ensure that existing risk mitigation efforts and disruption recovery processes work as intended. Thus, risk management requires ongoing effort by the organization. 9. Describe the challenges that governments and organizations face when addressing transportation security risks? The number, nature, and origin of threats are on the rise. As trade becomes more global, the challenge is to monitor and control flows from problematic areas. Some of the risks are purely physical in nature. Longer distances, greater product handling, multiple border crossings, and more intermediaries each make the supply chain more susceptible to loss, damage, and delay problems. Other challenges are man-made, motivated by political, ideological, or criminal intent. A delicate balance must be struck between security and the efficient flow of global commerce. If security is too tight it could impede the flow of goods, causing delays and decreased efficiency. If trade efficiency is over-emphasized, security can be compromised. 10. What steps is the U.S. government taking to reduce transportation security risks related to global trade? From a U.S. perspective the most effective supply chain security measures are those that involve assessing risks and identifying threats presented by cargo shipments as early as possible. This may be before shipments are loaded on U.S. bound carriers or at minimum, before the goods reach our borders. The current cargo security strategy is a multi-layered, unified approach. Numerous legislative acts and government programs have been developed. Transportation risk-related efforts include passage of the Maritime Transportation Security Act of 2002, creation of the Container Security Initiative, and initiation of Advanced Manifest Rules. 11. What roles can business and industry play in the creation of globally secure transportation networks? Individual companies can take a proactive approach to security by working with known suppliers, using reputable ports and carriers, and maintaining shipment visibility throughout the supply chain. They can also take an active role in government programs that promote safe trading practices such as the Customs-Trade Partnership Against Terrorism and the Free and Secure Trade Program. Case Questions CASE 9-1 Young Again Pharmaceuticals 1. Assess the transportation risks identified in the brainstorming session using a table similar to the one found in Figure 9-2. This assessment requires some judgment by the students, so there is no single correct answer. However, they should develop a matrix that looks something like this: Note: Probability and severity are rated on a scale from Low, Medium, to High. Risk Level is assessed based on the combination of probability and severity, ranging from Low, Medium, to High. Based on the assessment above, it's evident that Young Again Pharmaceuticals faces several transportation risks that have varying degrees of impact and likelihood. These risks pose significant challenges to the company's supply chain operations and require proactive risk management strategies to mitigate their potential adverse effects. 2. Based on your answer to Q1, what do you consider to be the three primary risks that the company must address? Why? Again, there is no single correct answer but the students should focus on the risks that are categorized in the black boxes. Each of these represents a problematic combination of probability of occurrence and negative impact on the organization. Combining the company’s stated concern about the value, fragility, and theft potential of the goods with the need for intermodal transport yields the major risks of product damage, pilferage, and diversion of goods to unauthorized channels. Based on the context of Young Again Pharmaceuticals, the three primary risks that the company must address in transportation risk management are likely to include: 1. Supply Chain Disruptions: Young Again Pharmaceuticals relies heavily on a global network of suppliers and distributors to deliver raw materials and finished products. Any disruptions in transportation, such as delays in shipments, port closures, or natural disasters, could disrupt the entire supply chain, leading to production delays and inventory shortages. Addressing this risk involves implementing contingency plans, diversifying transportation routes, and fostering closer relationships with key suppliers and logistics partners to ensure alternative options are readily available in case of emergencies. 2. Regulatory Compliance and Safety Concerns: Pharmaceuticals are subject to strict regulations and safety standards, especially during transportation. Failure to comply with regulations such as Good Distribution Practices (GDP) or international shipping standards can result in fines, product recalls, or even legal consequences. Additionally, the risk of theft, tampering, or damage during transit poses significant safety concerns. To mitigate this risk, Young Again Pharmaceuticals must invest in robust quality control measures, employee training programs, and secure transportation methods to ensure compliance with regulatory requirements and safeguard product integrity throughout the supply chain. 3. Cost Fluctuations and Financial Risks: Fluctuations in fuel prices, currency exchange rates, and transportation costs can significantly impact Young Again Pharmaceuticals' bottom line. Unexpected spikes in transportation costs can erode profit margins and disrupt budget planning. Furthermore, economic downturns or geopolitical events may exacerbate financial risks associated with international trade and currency fluctuations. To manage these risks effectively, the company should implement strategic pricing strategies, hedging mechanisms, and contractual agreements with transportation providers to mitigate the impact of cost fluctuations and ensure financial stability. By addressing these three primary risks through proactive risk management strategies, Young Again Pharmaceuticals can enhance resilience, optimize operational efficiency, and maintain a competitive edge in the pharmaceutical industry. 3. What do you recommend that the company do to mitigate each of the three risks identified in Q2? Student responses should be logical, cost efficient, and effective in terms of addressing their perceived major risks. For example: Potential damage due to wet packaging or excessive movement - the appropriate solution may be to use an integrated air cargo company to move the goods from Puerto Rico to major U.S. and Canadian distribution points. This would eliminate the major risks of ocean transport as well as the problems of working with different carriers for the international and domestic moves (i.e., product sitting idle and visibility being limited during transfer from one carrier to another). Similar responses should be developed for each of the other key risks. To mitigate the three primary transportation risks identified for Young Again Pharmaceuticals—weather-related delays, theft of pharmaceuticals, and regulatory compliance issues—the following strategies are recommended: 1. Weather-Related Delays Mitigation Strategies: Implement Real-Time Weather Tracking Systems: Utilize advanced weather forecasting tools to monitor real-time weather conditions along transportation routes. Integrate these systems with the company's transportation management system (TMS) to allow for dynamic route adjustments based on weather predictions. Develop Alternative Routes and Contingency Plans: Map out alternative routes for critical shipments in case primary routes are impacted by severe weather. Establish contingency plans that include predefined actions and communication protocols for drivers, logistics partners, and customers. Establish Communication Protocols: Set up clear communication channels to provide timely weather updates to all stakeholders involved in the transportation process. Train drivers and logistics personnel on how to respond to weather-related emergencies to ensure safety and minimize delays. 2. Theft of Pharmaceuticals Mitigation Strategies: Implement GPS Tracking: Equip all transportation vehicles with GPS tracking devices to monitor the location of shipments in real-time. Use geofencing technology to receive alerts if a vehicle deviates from its planned route or enters high-risk areas. Use Tamper-Evident Packaging: Employ tamper-evident seals and packaging for all pharmaceutical shipments to deter theft and ensure product integrity. Train logistics and security staff to recognize and respond to signs of tampering immediately. Partner with Reputable Security Companies: Engage with specialized security firms to provide escort services for high-value shipments. Conduct regular security audits and risk assessments to identify vulnerabilities and enhance overall security measures. 3. Regulatory Compliance Issues Mitigation Strategies: Stay Updated with Regulatory Changes: Subscribe to regulatory news services and maintain memberships in relevant industry associations to stay informed about changes in regulations. Assign a dedicated compliance officer to monitor and communicate regulatory updates to all relevant departments. Train Staff on Compliance Requirements: Conduct regular training sessions for employees on current regulations and best practices in regulatory compliance. Develop and distribute comprehensive compliance manuals and resources to ensure all staff members are knowledgeable about regulatory expectations. Conduct Regular Audits and Inspections: Perform internal audits and inspections regularly to ensure adherence to regulatory standards. Use third-party auditors to provide an objective assessment of the company's compliance status and identify areas for improvement. Conclusion By implementing these targeted mitigation strategies, Young Again Pharmaceuticals can effectively address the risks of weather-related delays, theft of pharmaceuticals, and regulatory compliance issues. These actions will enhance the resilience of their transportation operations, ensure the safe and timely delivery of products, and maintain compliance with industry regulations. 4. What should the company focus on after attempting to mitigate these transportation risks? YAP should participate in Step 4 of the risk management process. They must understand that their risk management and mitigation plans will not be perfect. Testing, experience, and actual disruptions will necessitate action plan changes and improvements to better deal with the being faced. The goal of the risk review stage is to establish a repeatable, measurable, verifiable validation process that can be run from time to time to continually verify the organization’s ability to manage risk. CASE 9-2 Tiger Golf 1. What issues should Magness evaluate in his assessment of transportation risks? Given the locations of the suppliers and their stated transportation issues, one must consider the potential for delivery delays that Himmer ranted about. Additional risk concerns would revolve around product damage during transit and product loss (particularly if the retail value of the clubs is high. In evaluating transportation risks for Tiger Golf, Magness should consider several key issues to ensure effective risk assessment and management: 1. Supplier Reliability: Magness should assess the reliability of Tiger Golf's transportation suppliers. This involves evaluating factors such as delivery timeliness, consistency, and responsiveness to changes or disruptions in the supply chain. Unreliable suppliers can introduce delays and inconsistencies in product delivery, affecting Tiger Golf's ability to meet customer demand and maintain a competitive edge. 2. Transportation Infrastructure: Magness should analyze the condition and capacity of transportation infrastructure relevant to Tiger Golf's supply chain, including roads, ports, railways, and airports. Issues such as congestion, poor road conditions, or inadequate transportation facilities can lead to delays and inefficiencies in product transportation. Understanding the strengths and weaknesses of transportation infrastructure enables Magness to proactively address potential bottlenecks and seek alternative routes or modes of transportation to mitigate risks. 3. Risk of Damage or Loss: Magness needs to evaluate the risk of product damage or loss during transportation. This includes assessing the suitability of packaging materials, handling procedures, and transportation methods to minimize the likelihood of damage or loss. Factors such as weather conditions, rough handling, and inadequate security measures can increase the risk of damage or theft during transit. Implementing robust quality control measures, proper packaging techniques, and monitoring systems can help mitigate these risks and ensure product integrity throughout the transportation process. 4. Regulatory Compliance and Documentation: Magness must ensure compliance with relevant transportation regulations and documentation requirements. This includes adhering to customs regulations, obtaining necessary permits and licenses, and accurately completing shipping documents. Failure to comply with regulatory requirements can result in delays, fines, or legal consequences, disrupting Tiger Golf's supply chain operations. Magness should stay informed about evolving regulations and implement procedures to ensure compliance at every stage of the transportation process. 5. Cost Management: Magness should evaluate transportation costs and identify opportunities to optimize transportation spend without compromising service quality. This involves analyzing freight rates, fuel costs, transportation modes, and route efficiency to identify cost-saving opportunities. Implementing cost-effective transportation strategies, such as consolidation, modal shift, or outsourcing transportation services, can help Tiger Golf mitigate the financial impact of transportation risks and maintain profitability. By considering these key issues in his assessment of transportation risks, Magness can develop a comprehensive risk management strategy to safeguard Tiger Golf's supply chain operations and enhance overall resilience and competitiveness. 2. Analyze each supplier option that Magness is considering. What specific risks does each supplier option present? In evaluating each supplier, it is important to evaluate the risks related to product quality, cost, capacity to meet production requirements, intellectual property rights protection, and delivery. Supplier 1 Product quality - risk is low, given their golf industry experience. Cost - 670 MYR converts to $190 USD as of August 2009. There is moderate risk due to relative currency exchange changes and inflation. Capacity - risk is low because they currently have excess capacity. IP Rights - risk is moderate as they currently make knock-off clubs and Malaysian enforcement of IP regulations may be lax. Delivery - risk is high as Tiger Golf has responsibility to get the product from Kelang to the U.S. They must deal with choosing an ocean carrier, insuring the goods, and compliance with transportation regulations to ensure that product is not delayed at the U.S. border. Supplier 2 Product quality - risk is high because the supplier has limited experience with golf equipment. Cost - risk is low due to price being quoted in USD. The $149 price is very good but must be weighed against quality and delivery risks. Capacity - risk is unknown because there is no mention of capacity. IP Rights - risk is potentially high as Chinese enforcement of IP regulations tends to be lax. Delivery - risk is very high as Tiger Golf has full responsibility for moving goods from the factory to the U.S. They must deal with moving the goods from a remote location across a long and unknown transportation system, choosing an ocean carrier, insuring the goods, and complying with transportation regulations to ensure that product is not delayed at the U.S. border. The potential for significant delays is very high. Supplier 3 Product quality - risk is very low as the supplier has vast experience with golf equipment. Cost - 165 GBP converts to $268 USD as of August 2009. The risk is moderate due to possible exchange rate fluctuation. While the cost includes delivery to the U.S., the overall cost is significantly higher than the other options. Capacity - risk is high as the company is already stretching their capacity. IP Rights - risk is fairly low. The other major manufacturers’ use of this supplier indicates a solid level of trust and a reputation for protecting IP rights. Delivery - risk is lowest among the three suppliers. Tiger Golf will only need to deal with delivery from Charleston to U.S. customers. They still need to consider potential problems and delays but the supplier is clearly experienced in global logistics. 3. Which supplier would you recommend that Magness choose to best balance company goals with supply chain risk? This assessment requires some judgment by the students, so there is no single correct answer. It is possible to use a ranking system for the risk factors identified in Q3 to determine which supplier is the best option for Tiger Golf. The key here is to consider all factors in light of the company’s need for a highly successful product. Given the experience questions surrounding Supplier 2 and the high delivery risks, the discussion should revolve around the merits of Supplier 1 vs. Supplier 3. To recommend a supplier for Tiger Golf that best balances company goals with supply chain risk, Magness should consider several key factors including reliability, cost, flexibility, and risk mitigation capabilities. Here's a structured approach to evaluating and choosing the most suitable supplier: 1. Supplier Evaluation Criteria 1. Reliability and Performance History: On-Time Delivery: Evaluate suppliers based on their track record of delivering shipments on time. Consistent on-time delivery reduces the risk of stockouts and helps maintain smooth operations. Service Quality: Assess the quality of service, including how well the supplier handles goods, the condition of goods upon arrival, and overall customer service. 2. Cost Efficiency: Competitive Pricing: Compare the costs associated with each supplier, including base rates, fuel surcharges, and additional fees. The chosen supplier should offer competitive pricing that aligns with Tiger Golf’s budget constraints. Cost Predictability: Consider suppliers that provide transparent and predictable pricing models to avoid unexpected costs that could impact financial planning. 3. Flexibility and Scalability: Capacity to Scale: Choose a supplier that can scale operations according to Tiger Golf’s needs, especially during peak seasons or promotional events. Flexibility in Service: Suppliers should offer flexible solutions, such as expedited shipping options, route adjustments, and multimodal transport capabilities to adapt to changing demands and unforeseen disruptions. 4. Risk Mitigation: Contingency Planning: Evaluate the supplier's ability to handle disruptions through effective contingency plans, such as alternative routes, backup transportation modes, and quick response strategies. Compliance and Security: Ensure the supplier adheres to relevant regulations and has robust security measures to protect goods from theft, damage, and regulatory breaches. 2. Supplier Recommendations Based on these criteria, the following hypothetical suppliers could be considered: Supplier A: Known for high reliability with a strong track record of on-time deliveries and excellent service quality. They offer moderate pricing but lack flexibility in scaling up quickly during peak times. Supplier B: Offers competitive and predictable pricing with flexible service options, including expedited shipping and multimodal transport. They have a solid contingency plan for disruptions but have a slightly higher rate of delivery issues compared to Supplier A. Supplier C: Provides excellent flexibility and scalability with advanced technological solutions for tracking and risk management. They are slightly more expensive but offer comprehensive risk mitigation strategies and strong compliance with regulations. 3. Recommendation Supplier B is recommended as the best choice to balance Tiger Golf’s company goals with supply chain risk. While they may not have the highest reliability score like Supplier A, their competitive pricing, flexibility, and robust contingency planning make them a well-rounded option. Supplier B’s ability to adapt to changing demands and effectively manage risks ensures that Tiger Golf can maintain operational efficiency and mitigate potential disruptions, aligning with the company’s strategic objectives. By choosing Supplier B, Magness can achieve a balanced approach that supports cost efficiency, operational flexibility, and effective risk management, thereby safeguarding Tiger Golf’s supply chain and contributing to the company’s overall success. 4. What types of security issues and requirements will confront TGU if they off-shore manufacturing? Tiger Golf will be the importer of record and needs to comply with all security related regulations of the U.S. government. They must work with their suppliers, carriers, and third party logistics service providers to understand and abide by the regulations to avoid the risk of delay and fines, as well as protect their products against security breaches. These key regulations include the Container Security Initiative and the Advanced Manifest Rules. Tiger Golf could also take a proactive approach to security risk mitigation by working with known suppliers, using reputable ports and carriers, and maintaining shipment visibility throughout the supply chain. They can also participate in government programs that promote safe trading practices such as the Customs-Trade Partnership Against Terrorism and the Free and Secure Trade Program. SUGGESTED INTERNET PROJECT Develop a list of product/country of origin pairs and assign each one to a different student. Ask the student to identify potential risks and threats related to moving the product to North American destinations. Each student should be required to create a table similar to Table 9-1 that is specific to the assigned product/country of origin pair. Students should address current events, emerging issue, and ongoing considerations (e.g., geographic factors, political relationships). Some helpful websites include: American Shipper www.americanshipper.com CIA World Fact Book www.cia.gov/library/publications/the-world-factbook Logistics Management www.logisticsmgmt.com The Economist www.economist.com Transport Topics www.ttnews.com U.S. Customs and Border Protection www.cbp.gov U.S. Department of Transportation www.dot.gov Wall Street Journal online.wsj.com Chapter 10 GLOBAL TRANSPORTATION PLANNING Chapter Objectives: After reading this chapter, you should be able to do the following: 1. Discuss the relationship between international trade and global transportation 2. Identify the three critical flows in global supply chains 3. Recognize the importance of proper global transportation planning 4. Understand the role of Incoterms in determining transportation responsibilities, risks, and costs 5. Describe the payment term options available to exporters and importers 6. Appreciate the value of timely, accurate global freight documentation 7. Analyze the key issues in effective international transportation mode and carrier selection 8. Evaluate the critical factors in route design for international shipments Chapter Overview The unprecedented growth of the global economy over the past decade makes global transportation a key area of study. Companies around the world require efficient and effective transportation service to support their manufacturing, distribution, and retail operations. It is a huge cost for companies - more than $750 billion spent on global transportation services in 2007 to facilitate merchandise flows - that must be well managed. The distance factor also creates potential disruptions that must be assessed and protected against. Given the importance, scope, and challenges of global transportation, the topic has been split into two chapters. Chapter 10 focuses on the planning activities needed to successfully prepare for the movement of goods between nations. Before freight leaves the country of origin, the exporter must address a number of transportation related issues - trade terms, payment terms, documentation, mode selection, carrier selection, and freight routing. Chapter 10 covers these preparation activities at a level of detail appropriate for a transportation management textbook. OVERVIEW OF GLOBAL TRANSPORTATION The first major section of the chapter provides students with perspective on the importance of global trade and transportation. Information regarding the volume and spend are highlighted as well as modal activity levels. Major U.S. trading partners are identified to help students understand the two way flow of products and the direction of the flows. Global Trade Agreements Stimulate Transportation Activity The growth of international trade and transportation activity is bolstered by the creation of global trade agreements. A discussion of bi-lateral and regional trade agreements is provided with a particular focus on the North American Free Trade Agreement (NAFTA). Details regarding NAFTA are provided to demonstrate its impact on transportation processes, regulation, and network structure. While NAFTA transportation provisions were scheduled to be operational by 1995, some issues remain unresolved today that impact carrier operations, particularly between the United States and Mexico. Logistics Channel Issues in Global Transportation To help students understand the supply chain impacts of global trade and the scope of transportation planning, three aspects of freight flows are covered. The Wood et. al. (2002) conceptualization and integration of the transaction channel, the communication channel, and the distribution channel are used to emphasize the critical need to manage the flow of money and information, as well as the physical flow of goods. • Transaction Channel - addresses the importance of negotiating transaction details, including the transfer of ownership, to protect financial interests and control risk. • Communication Channel - focuses on timely information sharing and proper documentation to improve visibility and facilitate the uninterrupted flow of goods • Distribution Channel - highlights the value of mode, carrier, and route planning to overcome the inherent challenges of distance, complexity, and multiple intermediaries involved in global transport. Global Transportation Challenges The section wraps up with a discussion of the widespread challenges that impact the flow and cost of global freight movement. Current issues related to trade fluctuation, carrier consolidation, security risks, and regional sourcing pattern shifts are highlighted. Other issues mentioned in this section - government regulation, volatile fuel prices, global warming, etc. - present potentially negative implications for global transportation and warrant additional classroom attention. EXPORT PREPARATION ACTIVITIES Prior to loading freight and transporting it to global destination, key decisions must be made and requirements completed. Four primary export preparation activities are choosing the terms of trade, securing freight insurance, agreeing upon the terms of payment, and completing the required freight documentation. These pre-shipment steps help to clarify responsibilities of the exporter and importer, protect each party’s financial interests, improve freight control and visibility, and facilitate problem-free transport. Terms of Trade The terms of trade specified in contracts determine the respective responsibilities of the exporter and the importer. Terms of trade are extremely important because they show precisely where the exporter’s responsibilities end and where the importer’s responsibilities begin. The chapter focuses on the role and meaning of International Commerce Terms (Incoterms) in global trade and transportation. General information on all 13 Incoterms is provided in the chapter. However, the discussion focuses on the four primary groups. The E term is used when the importer takes full responsibility from point of departure, F terms are used when the main carriage is not paid by the exporter, C terms are used when the main carrier is paid by the exporter, and the D term is employed when the exporter takes full responsibility to the point of arrival. The selection of and limitations of Incoterms is also addressed in the chapter. Proper choice of Incoterms will go a long way toward the effective balancing of responsibilities for international transportation between the exporter and the importer. Key determinants of Incoterm selection include the relative expertise of each firm as well as their willingness to perform the required tasks. Cargo Insurance Importers and exporters are exposed to countless hazards when their freight moves through the global supply chain. They must determine their insurable interests and how to most effectively manage risk. Insurance is a critical, but complex, aspect of global trade preparation. This section identifies the financial risks associated with global freight flows as well as a long list of potential perils that must be considered. Also discussed are the options for managing risk, the use of insurance to transfer that risk, and the relevance of insurable interest when making risk management decisions. Terms of Payment Terms of payment is another relevant topic that is discussed in the planning section of the chapter. Exporters are concerned about the creditworthiness of new customers and non-payment for goods that are sold internationally. Importers may be apprehensive about payment timing and methods. Balancing the relative risks of the two parties is the goal. This section identifies various payment terms, ranging from cash in advance to open terms, and discusses their realtive abilities to facilitate trade while balancing risks. Freight Documentation The preparation section wraps up with an extensive discussion of freight documentation. The importance of timely and accurate paperwork is often underappreciated by students. Freight documents control the cargo on its journey from origin point in the country of export to its final destination in the country of import. Missing or incorrect paperwork can cause delays and additional costs, particularly with the expanded security-related regulation and attention being paid to freight documentation today. International cargo travels with four types of documents: invoices, export documents, import documents, and transportation documents. Each group is discussed in detail, with particular attention paid to the following fundamental documents: • Commercial invoice • Country of origin • Bill of lading The growing use of information technology for completing and transfering freight related documents concludes the section. The role of electronic data interchange is discussed, as well as the specific systems being implemented in Canada (Pre-Arrival Review Process) and the United States (Automated Commercial Environment). These systems are intended to enhance border security while expediting legitimate global trade. TRANSPORTATION PLANNING The final phase of global transportation preparation focuses on the selection of the modes, carriers, and routes. While trade terms and documentation issues are fairly technical and their execution is methodical, global transportation managers have the opportunity to be strategic and innovative when choosing transportation providers and routes. These decisions must align with corporate strategies, control risk, and provide the required level of customer service. Also, the transportation costs generated by these planning decisions must not push the total landed cost for products beyond a competitive level in the marketplace. Mode Selection The mode selection decision involves the exporter and/or the importer, depending upon the Incoterm used for the transaction. Each party will choose the mode for the portion of the delivery for which they are responsible. The important concept to convey to students is that the general strategy regarding mode selection for global freight focuses is similar to domestic freight. Transportation managers must determine which mode or combination of modes best suits the requirements of the customer. This long range decision requires an analysis of the best fit and balance between modal capabilities, product characteristics, supply chain requirements for speed and service, and transportation cost. However, the geographic distances and barriers involved in global trade may limit modal options to just a few types of service providers. The flexible option of intermodal transportation should be stressed to students. Carrier Selection Carrier selection is another key planning activity. Selecting individual service providers from within a mode is based on a variety of shipment criteria and carrier capabilities: geographic coverage, transit time average and reliability, equipment availability and capacity, product protection, and freight rates. Carrier selection requires active and frequent engagement of the transportation buyer, consideration of multiple service providers and service types, and management of each carrier’s service level and freight rates on an ongoing basis. The strategy of concentrating the transportation buy with a limited number of carriers is also discussed. Using a small group of carriers helps the organization leverage their purchasing dollars for lower overall rates, build relationships with service providers who gain a better understanding of freight flows and requirements over time, and allows the organization to effectively monitor performance of the carrier base. Route Planning
The transportation planning section wraps up with coverage of route planning. Students (particularly those who lack of geography skills) often do not realize the challenges and importance of this topic. Route selection affects transportation costs, impact transit time, and can cause major headaches if not properly managed. Route planning can be particularly challenging, given the long distances, multiple paths available, and regional issues present. Study Questions 1. Why is global transportation such an important issue? Global transportation is a huge business with more than $750 billion was spent on transportation services in 2007 to facilitate merchandise flows. That year, more than 8 billion tons of product moved in the international seaborne trade. This level of activity is needed to support the efficient and effective global fulfillment of demand. An efficient transportation system increases the competitiveness of products in more markets while an effective system improves access to the markets and timely delivery to customers. Simply stated: it’s possible to source high quality, low cost goods from distant countries but if they can’t be delivered when needed at a reasonable landed cost, then the gloval opportunity is lost. 2. Why is transportation planning an important aspect of global freight movement? What types of planning must be done? Efficient and effective freight flows don’t happen on their own, especially when it comes to moving products around the globe. Global transportation managers cannot rely on luck or fate to move freight in a timely, safe, and economical manner. Instead, they need to properly plan all aspects of the fulfillment process. First, orders must be properly selected, packed and prepared for shipment. Next, shipments must be prepared for export - appropriate trade terms selected, insurance obtained, payment terms specified, and documents accurately completed. Finally, suitable plans and choices regarding modes, carriers, and routes must be made. Only then should the freight owner begin to execute the global movement of goods. 3. Identify and describe the three “channels” involved in global transportation. • Transaction Channel - addresses the importance of negotiating transaction details, including the transfer of ownership, to protect financial interests and control risk. Managers must focus on the ownership transfer, freight control, and payment issues in the transaction channel. • Communication Channel - focuses on timely information sharing and proper documentation to improve visibility and facilitate the uninterrupted flow of goods. Managers must understand documentation requirements and the need to interact with multiple governments, sometimes unfamiliar sellers, and a variety of transportation service providers in the communication channel. • Distribution Channel - highlights the value of mode, carrier, and route planning to overcome the inherent challenges of distance, complexity, and multiple intermediaries involved in global transport. Managers must address the extended distances, longer transit times, and multiple carriers involved in the distribution channel. 4. What types of transportation challenges must organizations take into account when considering global sourcing? Moving freight across oceans and country borders is not a simple task. Compared to domestic freight movement, global transportation of goods over long distances creates a variety of significant challenges: longer and more variable transit time, risk of in-transit product damage or loss, higher delivery and accessorial service expenses, and greater in-transit inventory carrying costs. These challenges must be accurately weighed against the obvious labor cost benefits of sourcing goods globally or moving production offshore. Transportation managers must also be aware of broader issues that impact the availability and cost of global transportation services. Proper long-range planning of the transportation function requires that managers take the time to monitor business trends, government intervention, and consumer demand. Failure to respond to changes in these macro-level issues will produce unnecessary risk, capacity challenges, and a competitive disadvantage. 5. What is the role of trade terms in global transportation? Briefly describe the four groups of Incoterms. The terms of trade facilitate international trade by streamlining the process for determining responsibilities and risks related to the international transport of goods. Trade terms specified in the contract determine which of these responsibilities are handled by the exporter and which are managed by the importer. Key areas of responsibility include: • Clearing the goods for export • Organizing the transport of goods from origin to destination, often involving multiple moves and modes • Clearing customs in the country of import • Arranging payment for transportation, insurance, and duties International Commercial Terms (Incoterms) make international trade easier and facilitate the flow of goods between different countries. These international rules are accepted by governments, legal authorities and practitioners worldwide for the interpretation of the most commonly used terms in international trade. They either reduce or remove altogether uncertainties arising from differing interpretations of such terms in different countries. The four groups of Incoterms are: E Terms This departure term gives the importer total responsibility for the shipment. The exporter’s responsibility is to make the shipment available at its facility. The importer agrees to take possession of the shipment at the point of origin and to bear all of the cost and risk of transporting the goods to the destination. F Terms The three F terms obligate the exporter to incur the cost of delivering the shipment cleared for export to the carrier designated by the importer. The importer selects and incurs the cost of main transportation, insurance, and customs clearance. C Terms The four C terms are shipment contracts that obligate the exporter to obtain and pay for the main carriage and/or cargo insurance. D Terms The five D terms obligate the exporter to incur all costs related to delivery of the shipment to the foreign destination. The exporter incurs all risks of damage up to the destination port and may be responsible for clearing the goods for import and paying customs duties. 6. What risks and perils are present in global transportation? Discuss how exporters and importers can manage these risks. There are numerous risks and perils that arise when goods are moved long distances and across borders. Financial risk occurs as the result of freight theft, damage, or loss. International cargo is subject to a wide array of freight loss and damage risks due to extended origin to destination distance, number of transfers between carriers, and varying climatic conditions. The primary perils include: • Cargo movement • Water damage • Overboard losses • Jettison • Fire and explosion • Sinking • Stranding • General average • Theft • Hijacking • Freight contamination • Vessel collision • Government delays • Labor strikes and slowdowns The burden of proof is on the freight owner to prove that the carrier was at fault for the loss. Given the liability limitations provided in transportation regulations, substantiating carrier responsibility can be very difficult. If they cannot prove fault, importers and exporters have little legal recourse against international carriers. The best way for freight owners to protect their interests is to transfer the risk. Risk transfer means that a company shifts its potential problems to an insurance company through the purchase of a cargo insurance policy. Insurance makes sense when a company’s operations would be severely impacted by a loss, the goods are valuable, susceptible to damage, or a theft target, or the perceived risk is too high. 7. What payment options are available for international transactions? How does each option protect the interests of the exporter and the importer? There is an entire spectrum of payment options that range from placing the buyer 100% at risk (payment in advance) to putting the seller completely at risk (open account). The five options are identified and protection capabilities of each are described in Table 10-3. 8. Why is documentation important to global transportation? Briefly describe the primary documents used to facilitate global cargo flows. Freight documents control the cargo on its journey from origin point in the country of export to its final destination in the country of import. Under current U.S. regulations, a failure to provide complete cargo information 24 hours prior to loading at an international seaport can lead to denial of loading, fines, and penalties. Paperwork errors can also lead to Customs clearance delays, additional inspection, and improper application of duty rates. Hence, proper and accurate documentation is critical to the timely and cost efficient flow of international cargo. There are four types of documents: invoices, export documents, import documents, and transportation documents. Primary documents include: Commercial Invoice - this document is used by Customs to determine true value of the imported goods for assessment of duties and taxes. It must clearly indicate the (1) date and terms of sale, (2) quantity, weight and/or volume of the shipment, (3) type of packaging, (4) complete description of goods, (5) unit value and total value, and (6) insurance, shipping and other charges (as applicable). Pro-forma Invoice - this document is a sales quote in an invoice format that may be required by the buyer to apply for an import license, contract for pre-shipment inspection, open a letter of credit or arrange for transfer of hard currency. This document is used by the importer to better understand the total landed costs for a potential order and provides information for price quote comparisons. Shippers Export Declaration - this document is required by the U.S. Department of Commerce for exports of certain controlled items, and/or shipments to certain countries, and/or shipments anywhere that exceed certain dollar amounts. This document is used to monitor shipments of controlled goods. Certificate of Origin - this document is a statement that the goods were shipped from the country in which the exporter is located. Bill of Lading - this document acts as a contract of carriage between the transportation company and the cargo owner, either the exporter or importer, depending on the Incoterm used. Packing List - this document provides a detailed inventory of the contents of a shipment. It itemizes the material in each individual package and indicates the type of package, such as a box, crate, drum, or carton. It also shows the individual net, legal, tare, and gross weights and measurements for each package. 9. How do governments use the information contained in global freight documents? There are multiple government uses of global freight documents. One primary use is for the assessment of Customs duties. Documents are used to determine the origin of the goods, the type of goods, and the true value of goods, all of which are needed to assess Customs duties. Governments can also use freight documents to track the origin and quantity of goods coming into the country for import control and quota purposes. Another use is security. Documents can help government agencies track the flow of goods and monitor shipments from questionable or unknown origins. These goods are targeted for detailed inspection or may be denied entry. Finally, many countries require companies selling product abroad to keep track of the type of goods being exported. Much of this requirement is focused on maintaining accurate trade statistics but the information may also be used to control the flow of strategic materials (e.g., military items, telecommunications equipment, computer technology, etc.) and national treasures. 10. What factors impact mode selection for global transportation? Mode selection is impacted by both the characteristics of the freight and the capabilities of the mode. The nature of a product – size, durability, and value – may eliminate some modes from consideration as they cannot physically, legally, and/or safely handle the goods. Also, shipment characteristics – size, route, and required speed – are important considerations. Modal capacities must be matched to the total weight and dimensions of shipments, while modal capabilities must be matched to customer service requirements. Combined, these considerations tend to limit modal selection to two or three realistic options, one of which is intermodal transportation. Key modal capabilities considered in the selection process include: accessibility, capacity, transit time, reliability, and product safety. Of course, cost is another critical consideration that must be balanced against service capabilities. 11. How does global carrier selection differ from mode selection? In many respects, the two selection decisions are similar. Both consider shipment criteria as well as key carrier capabilities: geographic coverage, transit time average and reliability, equipment availability and capacity, product protection, and freight rates. The differences arise from the greater number of carrier options available to the transportation manager. Numerous trucking companies provide short distance cross-border transportation while multiple ocean and air carriers serve major trade routes for intercontinental cargo movement. Carrier selection also requires more active and frequent engagement of the transportation buyer than does the more long-range modal selection decision. Within a mode, most carriers have the capabilities to provide a similar level of service, but these service levels can and do vary greatly from one transportation company to another. Hence, it is critical to monitor each carrier’s service level and freight rates on an ongoing basis. Should carrier performance deteriorate, it may be necessary to revisit the carrier selection decision but not necessarily the mode selection decision. 12. When developing transportation routes for global freight, what considerations should influence the decision maker? Effective routing impacts customer satisfaction, supply chain performance, and organizational success. Freight owners must spend time choosing efficient routes, coordinating delivery schedules, and sequencing stops to improve transit time and on-time delivery performance. Intelligent freight planners avoid routes that cross or come near unfriendly countries and unstable regions (e.g., the Gulf of Aden), poorly equipped ports, and congested border crossing points. All three issues create potential freight risks and disruptions that may drastically delay cargo flows and impact value. Also, costs can be reduce by using high volume routes where carrier competition exists, as well as routes that minimize tolls, port costs, and other service surcharges. Case Questions CASE 10.1 Music Explosion - Developing a “Sound” Global Transport Plan 1. Given the information in the case, which Incoterms group (E, F, C, or D) should ME pursue as the exporter? Why? ME’s lack of experience in global freight should clearly discourage them from considering any of the D terms and the C terms as well. The company has little understanding of the factors involved in mode selection (Jagr’s penchant for airfreight is misguided), has no experience in choosing carriers, and has not dealt with issues of documentation, insurance, or trade terms. Since Jagr wants to play some role in the delivery process, the logical choice would be one of the F terms which place most responsibilities on the shoulders of the customer. It could also be argued that the intelligent option would be ex works (EXW). 2. Based on your response to Question 1, what responsibilities and risks will ME assume? Under the F terms, ME would be responsible for preparing the shipment for export with proper packing, marking, and labeling. ME would also deliver the goods to the port of export and gaining export clearance. At that point, ME’s role would end unless they sold the goods FOB and had responsibility for the goods until they were safely loaded on the ship. The F terms largely limit ME’s risks to freight preparation and domestic freight movement. The primary risks related to international carrier selection and payment, proper completion of import documents, insuring the goods, and moving the goods through customs would fall to the buyers. 3. Which mode of transportation should ME use to move Blasters to their new markets? What benefits does it bring? Although Jagr states a preference for airfreight, the characteristics of the freight are not amenable to this premium mode. As stated in the case, the goods are bulky and would be charged on their dimensional weight vs. actual weight for airfreight which would be very expensive. They are also relatively low value and not “perishable.” The proper choice in this situation is intermodal transportation that combines truck movement to/from the ports and ocean transportation for the linehaul move. It makes sense to load the Blasters in 20 ft or 40 ft containers at the factory for the entire move. This will reduce the potential for theft and handling related damage. The goods are also reportedly sturdy and not susceptible to damage, making them suitable for ocean transport. 4. Why should ME worry about something as mundane as paperwork? What documents must they prepare? Freight documents control the cargo on its journey from origin point in the country of export to its final destination in the country of import. Accurate paperwork can help ME avoid Customs clearance delays, prolonged inspections, and improper application of duty rates. Thus, proper and accurate documentation is critical to the timely and cost efficient flow of international cargo. Paperwork requirements will be a function of the countries involved in the transaction. Most likely, ME will need to prepare a pro-forma invoice for its customers, commercial invoices, a shippers export declaration for the U.S. Department of Commerce, certificates of origin for the countries of import, and freight documents such as a through bill of lading and packing slips. The buyer will need to obtain insurance documents. 5. Identify and describe other global transportation issues that Jagr may be overlooking? Jagr should also consider payment terms and negotiate them when developing contracts with customers. Depending on these terms, ME may have an insurable interest in the goods in transit and will need to ensure that the buyers are working with reputable carriers and adequately protecting the freight. ME will also need to learn about any special regulations in Japan, Taiwan, and Australia regarding product marking such as country of origin labels, packaging requirements, and any unique rules that must be met. CASE 10.2 A Megapixel Opportunity 1. What is the current price per camera in $ USD for the Shinko Electric offer? What costs, responsibilities, and risks does MegaShop (the buyer) assume under CPT, Port of Long Beach? Megashop would pay the supplier $197.43 per camera under the stated exchange rates. Under CPT (carriage paid to Port of Long Beach), Megashop would be responsible for paying the cost of unloading the freight from the ship at the Port of Long Beach, arranging and paying for cargo insurance during the voyage, clearing the goods through U.S. Customs and paying any duties and taxes, and arranging for and paying for the cost of transporting the goods to the final destination. Risks would include in-transit freight damage and loss, port delays, and any additional costs that are incurred after the goods leave the origin port. 2. What is the current price per camera in $ USD for the Deep Impex offer? What costs, responsibilities, and risks does MegaShop (the buyer) assume under FAS, Port of Mumbai? MegaShop would pay the supplier $188.64 per camera under the stated exchange rates. Under FAS (free alongside ship at the Port of Mumbai), Megashop would be responsible for selecting and paying the ocean carriers, getting the freight loaded onto the ship, paying the cost of unloading the freight from the ship at the Port of Long Beach, arranging and paying for cargo insurance during the voyage, clearing the goods through U.S. Customs and paying any duties and taxes, and arranging for and paying for the cost of transporting the goods to the final destination. Risks would rise versus the first option as MegaShop would have to deal with any damage that occurs during the ship loading process. Other risks include in-transit freight damage and loss, port delays, and any additional costs that are incurred after the goods leave the origin port. 3. What is the current price per camera in $ USD for the Foto Technika offer? What costs, responsibilities, and risks does MegaShop (the buyer) assume under EXW, Odessa Distribution Center? MegaShop would pay the supplier $200 per camera under the stated exchange rates. Under EXW (ex works Odessa), Megashop would be responsible for all transportation activity and costs from the time of pick up at the seller’s distribution center. This includes moving the freight to the port, export clearance, documentation, selecting and paying the ocean carriers, getting the freight loaded onto the ship, paying the cost of unloading the freight from the ship at the Port of Long Beach, arranging and paying for cargo insurance during the voyage, clearing the goods through U.S. Customs and paying any duties and taxes, and arranging for and paying for the cost of transporting the goods to the final destination. Risks would be maximized as MegaShop would have to deal with all in-transit loss, damage, or problems. Resolving issues such as insurance claims, port delays, and any additional costs that are incurred after the goods leave the origin point. 4. What other transportation costs and issues must Alex consider to make an effective supplier selection? Average transit time, transit time consistency, freight loss and damage rates, potential delays, and service quality must all be considered when selecting a supplier. If the supplier is responsible for carrier selection, MegaShop must promote the use of cost efficient, quality carriers. Another logistics issue that MegaShop should consider (though outside the general scope of this book) is inventory carrying cost. The Japanese supplier wants to ship in quantities of 9,000 each quarter, forcing MegaShop to purchase and store the goods in well advance of demand. This will drive costs up versus the Indian offer of smaller, monthly deliveries that also better match the overall demand forecast. 5. Which of the three recommendations would you recommend? Why? There really is no single correct answer here other than the offer from Foto Technika in Odessa, Ukraine is not competitive. Choosing between Shinko Electric and Deep Impex depends on a number of issues that are not revealed in the case. One consideration must be the expertise of MegaShop in planning and managing global transportation. The more experience they have, the more it is feasible for them to consider the Deep Impex offer with FAS terms. If MegaShop has experience and can handle the additional responsibilities of FAS versus CPT for less than $8.79 (everything else being equal), then it is reasonable to consider the Deep Impex offer. Otherwise, sticking with the known supplier and lower risk of Shinko may be the most prudent course of action. SUGGESTED INTERNET PROJECT Give students a product with an international origin and a North American destination (e.g., hiking boots made in Ho Chi Mihn, Viet Nam that will be sold to a Dallas, Texas based retailer). Ask them to outline the planning process for moving the goods from the origin to the destination. They should investigate and report on the following issues: • Appropriate modes of transportation • Available service providers • General estimates of transport costs • Routing options and anticipated transit times • Documentation requirements • Insurance needs Some helpful websites include: APL www.apl.com/routes/ Business.gov www.business.gov/expand/import-export/ Freight world www.freightworld.com LogLink www.loglink.com One Entry www.oneentry.com Sea Rates www.searates.com UPS www.ups-scs.com/transportation/intl_air_freight.html Instructor Manual for Transportation: A Supply Chain Perspective John J. Coyle, Robert A. Novak, Brian Gibson, Edward J. Bardi 9780324789195