The Downside of Lean Logistics

Risks related to international transport and logistics have continued to rise in the current economic recession, adding pressure on exporters and importers to set up formal risk management procedures, according to a new research report by Drewry Supply Chain Advisors.

"Lean logistics," is also brought into question.

In a serious recession, the probability of company failures among transport and logistics vendors is heightened, as is the threat of cargo theft, while moving products from offshore locations to final markets continues to create specific business risks, according to the recetnly-published report, “Risk Management in International Transport and Logistics - Key Issues and Best Practices for Senior Management and Logistics Service Buyers."

Drewry believes that the risk of systemic failure of international shipping companies and the consequence of goods seized by creditors while in transit, in particular, should be heeded.

“There is a plethora of strategic and operational risks related to transport and logistics and in the current economic recession those risks are even more pronounced,” said Dr Andrew Traill, policy director of the European Shippers’ Council, who co-authored the Drewry report.

Typical transport and logistics risks include:
• Lack of inventory
• Carrier delays and non-performance
• Transport and logistics cost volatility
• Transport congestion
• New environmental legislation affecting logistics
• Mergers and acquisitions among service providers
• Cargo theft
• Liability for loss or delays
• Bankruptcy of transport provider
• Fines for non-compliance, sometimes running into millions of dollars.

While logistics service buyers and managers in charge of organising transport and distribution have a functional responsibility to manage risks within their department and their area of specialisation, companies also face higher-level risks (corporate governance, compliance with regulations) where responsibility for risks is mandated at senior board level. Yet, in many companies, there are formal procedures to manage some of these risks, but many other risks are not part of any formal risk management policy.

“Drewry argues that international sourcing has introduced in global business more and higher risks related to transport and logistics, and that these risks are often more complex and more significant than in the past but are still misunderstood,” said Philip Damas, director of Drewry Supply Chain Advisors.

“This report advocates a systematic methodology to identifying and assessing the many, varied and growing number of risks that could affect the supply chain and potentially bring a business to its knees,” Dr. Traill said.

In the report, Drewry identifies the risk categories and detailed risks in transport and logistics, provides tools on how to assess risks, and offers proven methods and guidance on how to respond to the different types of risks. The report includes findings from a survey of international shippers about how they rate different risks, ranging from business process risks to terrorism and climate change risks, and some of the discussions of a round-table on risk management organized in 2008. Contrary to many reports and academic studies into supply chain risk management, Drewry’s report does not look specifically at the risks of procuring and sourcing raw materials and finished products, but at the risks involved in purchasing and managing international logistics and transport, and associated risks on availability and control of inventory.

The report attempts to provide guidance on corporate strategic risk issues influenced by transport and logistics, as well as advice on best practices, key performance indicators, contract terms and due diligence tools to help mitigate risks.

For example, the dilemma with lean international supply chains, coupled to lean manufacturing, is that they can become more vulnerable to risk factors. If the supply chain becomes longer (due to outsourcing the supply or manufacture) this vulnerability can increase. Vulnerabilities commonly would include stock-outs when lead times become extended to such a degree that variations in the supply and demand that are unpredicted (perhaps due to deficiencies in the demand and supply forecasts), cannot be accommodated without building into the supply chain some slack – or buffer inventory – which is in itself an anathema to the “lean” ethos. However, the report offers logistics techniques to reduce or cope with demand uncertainty for products shipped across continents.

A major aerospace shipper who attended the Drewry Supply Chain Advisors/Shippers’ Voice round-table on risk management said: “The leaner you are, the bigger the inventory risk.”