Entries tagged with “Transportation”.


It is confirmed that Grimsvotn volcano in Iceland has erupted sending a plume of smoke and ash several thousand feet into the air.

In the past, this has not been a major issue, and air traffic was routed around a 120 nautical mile no fly zone. However, you may recall the challenges that many fliers to and from Europe encountered last year when another Icelandic volcano belched smoke and ash that was pushed to many of the major air hubs in Europe, slowing or stopping many flights and disrupting the flow of goods through the supply chain.

Hopefully the last time served as a wake up call to develop contingency plans to assure the smooth operation of your business.

One of the benefits of hind site in unexpected natural disasters is the opportunity to create a “lessons learned” document. By looking at the “pain points” that your organization encountered during the incident, you have the ability to develop contingency plans. 

What are some  common pain points?

  • Key personnel out of position due to transit delays
  • Inventory shortage levels due to interruption of supply chain
  • Increased costs due to spike in demand
  • Delayed deliveries
  • Decreased cash flow
  • Cancelled orders

I take a rather different approach to developing contingency plans by working backwards from the pain point (impact on the company) to the triggering effect.  So rather than looking at “Volcanic Activity in Iceland” as the starting point, I look at “delayed deliveries”. 

Why are there delays?  when brainstorming the reasons, think globally before locally.  

  • Limited shipping lanes
  • Lack of containers
  • Insufficient inventory
  • Lack of key components

Then ask Why?

Lack of containers -

  • Increase in demand
  • Not located where shipments are happening
  • Not being unloaded

Why?

Not being unloaded -

  • Customer using as free “warehousing space”
  • Dock strike at key receiving port
  • Unexpected inflow at key receiving point
  • Shipments aren’t moving  out of a shipping point

The why question asked 4 - 6 times will typically  drill down to a root cause, and root causes can be addressed by either establishing an alternative, or correcting the challenge to remove the obstacle.  They key is to not drill so deep that a plan must be generated for each possible reason, after all doesn’t a solution for delayed deliveries because of a volcano in Iceland require the same process steps as a dock worker’s strike in Los Angeles?  In both instances you would look at alternative transportation routes (perhaps moving the product from Frankfort to Madrid, depending on how the wind blows, or re-directing the container to Seattle from LA to get product into the country and stores quicker), or services (moving by ocean from Europe vs. air freight, or air freight from China to LA) and measure the cost and service impact against the cost and service impact for waiting out the obstacle.

The important idea here is to have a contingency plan for those items that may have a serious impact to your business, otherwise you may just erupt like Grimsvotn.

When Eyjafjallajokull volcano erupted on April 14th, the sky’s above Europe looked like the US sky’s after 9/11.  No major aircraft flew because of the danger to the aircraft, crews and passengers that may fly into the cloud and have all engines fail.  The result of this was passengers being stranded, product not moving, and the airlines loosing more than $200 million a day.  Who knows what the impact to other businesses was, due to delayed shipments, cancelled meetings, extended stays, and lost productivity to businesses around the globe.

This was the result of a continuity plan that has been put into place and has worked for more than 20 years.  Governments, airlines and aircraft manufacturers have long known what could result in flying a plan through a cloud of volcanic ash.  The engines can temporarily shut down because they are clogged with the material, causing the plane to lose power and potentially crash.   Because of this known hazard, a contingency plan was created that vectored planes around the ash plume to assure safety.  This contingency plan has been very effective, and  perhaps to effective.  According to a report in Bloomberg Businessweek (The Plume and The Planes), Marianne Guffanti, a vulcanologist, is quoted : “That’s kind of biting us in the back right now because the more successful we are the more people think there’s no problem.”  

It seems that these rarely occuring isolated environmental issues become forgotten about as time passes because they are either so monumental and low probablility that the feeling is not to put a lot of time building contingency plans that will never go into place, or the impact cannot be expressed in a way that individuals can comprehend.

Because the program put in place prevents a catastrophic accident, there is no “concrete” view of what could happen.  Any occurrences that have occurred are 30 years ago, and forgotten in almost every one’s mind (how many people not directly affected remember how many days the air space above the US was closed after 9/11?)  The challenge I see is that many corporations and individuals do not see the potential impact to them (from roller coaster like flights to death) and only see the impact that occurs from protecting them from these risks (delayed arrival, broken plans, lost profits and inconvenience).  

There is also a challenge to the airlines and transportation providers as well.  How they handle the flight stoppage will reflect on their reputation and could cause loyal customers to look at alternative carriers in the future.  How would you react to these different vendor scenarios?

The carrier throws their hands in the air and says “The government has closed airspace, there’s nothing I can do, deal with it.” and lets their passengers or customers fend for themselves while waiting for the sky’s to clear may have a significant backlash. 

The carrier that apologizes, and looks for ways to ease the burden (hotel and meal vouchers, establishing update phone numbers and web sites, offering assistance, etc.) or looks for ways to get the product shipped (alternative movement to an unrestricted area and then flying out from that location). will have customer coming back for more.

In my mind it’s pretty simple.  The supplier who works with you and shows an appreciation for your business and concern for your inconvenience will continually maintain my business over one who shows disinterest.

If you are moving product from one location to another with a freight company do you know the amount of risk  associated with this movement?  In most cases the freight is protected from loss or damage to some extent, but the amount of protection can be dependent on how you negotiate the transportation contract or the freight classification that is assigned to the shipment.

In nearly all shipments a standard release rate is provided that establishes a reimbursement to the owner of the goods based on the weight of the shipment, or a standard amount per shipment.  In the case of UPS, the standard release rate is $100.00 per shipment.  In standard tariff the amount can be $50.00 per shipment or $0.50 per lb per article up to the cost of the product. 

Carriers are required to provide an option to allow for greater coverage up to the cost of the goods.  They can do this several different ways including:

  • Establishing a full valuation tariff, typically at a higher cost per cwt. 
  • Provide “additional valuation” at a set rate for every $100 of declared value. 
  • Provide a one time insurance policy through an insurance company (not the carrier) for the value of the shipment. 

Needless to say these and other options will all have specific exclusions on what does and doesn’t constitute a claim.  You should read your contract carefully to fully understand your duties and rights for coverage.

So, what options are best?  It depends on several factors but primarily the cost of the goods, the loss ratio, and your appetite for risk.

Let’s work through an easy example to identify on how these three items work together:

You are a furniture e-tailer that ships a bedroom set of furniture from the distributor to your customer.  You have negotiated a good contract with the carrier with a standard release rate of $0.60 per lb per article.  You have shipped a 5 piece shipment to your customer with a total weight of 400 lbs (2 items at 60 lbs, 1 item at 80 lbs. and 2 items at 100 lbs.) with a wholesale cost of the goods shipped at $1500.00.  Unfortunately, the shipment is not delivered and after a short time, the carrier declares it lost and indicates you should file a claim for the missing product.   The wholesale cost of the shipment is $1500.00. 

The carrier provides an option to ship the product with full coverage at an additional cost of $1.25 for every $100.00 of declared value.  The cost of this shipment would be $18.75.

Now we look at the company’s tolerance for risk:

  • If you are have a very low tolerance for risk, you would probably choose to include full coverage on every shipment.  It will assure payment in full on any loss or damage that is related to improper handling by the carrier. 
  • If you have a high tolerance for risk, you would not even consider choosing the full valuation option. 
  • If you are somewhere in the middle, then you will want to review historical data and determine what the “tipping point” is where the cost of risk is greater than the actual cost of protection.  Once this is determined, you may take several different steps such as purchasing the additional coverage from the carrier, or establishing an accrual account based on estimated costs and debit against this account.

The loss ratio with the carrier is 0.5% or 1 shipment lost for every 200 shipments.  When we compare the cost for full replacement coverage against the retained loss for the shipment, we see that 67 shipments at $18.75 per shipment would need to be covered to equal the retained loss, or the equivalent of a lost shipment ratio of 1.49%.

  Rate Extended Amt
Cost of product   $1500.00
Maximum allowance on std release rate $0.60 per 100 lb $ 240.00
Retained $ Loss   $1260.00
Cost of Additional coverage $1.25 per $100 $  18.75
Number of shipments to equal $ loss* $1260.00 / $18.75 67
Loss incident ratio to equal cost of coverage   1.49%
Current loss incident ratio   0.50%
* based on similar declared value

With a lost incident ratio of 0.50%, the retained loss amount is $6.30 per shipment (based on all shipments being $1500.00 value) or $0.42 per $100 of your cost. 

Naturally this is a very simple example and does not factor into consideration all the shipments and claims processed and looks only at a lost shipment, not a damaged shipment which could have a lower retained expense, but it does provide you with some thoughts on how to look at the potential claim costs associated with your products while in transit.