TRANSPORTATION RISK MANAGEMENT

Objectives:

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

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.

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.