W
hen a company chooses to operate in foreign markets,
it has various insurance exposures it must entertain.
This chapter identifies the various exposures, categorizing
them and offering risk management strategies to eliminate
or mitigate.
Just as a company would not build a facility today with-
out a sprinkler and alarm system to manage the risks of fire
and burglary, a company should not source from overseas
suppliers without building in risk management and loss con-
trol features. This chapter outlines ways to reduce risks and
minimize loss in the global supply chain.
Insurance Exposures
Sourcing product from overseas creates liability expo-
sures for a company. Purchases may be made, for example,
via the Internet, having personnel travel overseas, or by in-
vesting, entering into a joint venture or partnership, or out-
sourcing to third parties.
These liability exposures are potentially no different
from those involved in business operation in the United
135
chapter five
Risk Management
and Insurance
States—Workers’ Compensation, benefits, product liability,
property loss or damage, goods as work-in-process or in
transit, and so on.
However, there also can be marked differences, depend-
ing, for example, on the country in which a company con-
ducts business, the nature of the agreements and contracts,
the details of the supply chain, and local laws and insurance
regulations.
Most corporations have staff risk managers to handle
these exposures in the United States and abroad. Most risk
managers arrange insurance programs through specialized
insurance brokers and companies that have the required ex-
pertise in international business.
Supply chain professionals, logistics managers, purchas-
ing executives, import specialists, chief financial officers, and
all others involved in the supply chain who are making con-
tracts, agreeing to various inbound options, making freight
and warehousing arrangements, working with international
communication sales terminology (INCO Terms), and so on,
need to understand that they are directly affecting the risks
and exposures of the company and therefore need to be edu-
cated in this regard and work within the company’s estab-
lished risk management guidelines. If no guidelines exist—it
is critical to establish them. Consider the following example.
A purchasing manager acquires goods from a new sup-
plier in Thailand. He makes the purchase on FCA Bangkok
terms, prepaid. The purchasing manager releases invoiced
funds before receiving the merchandise and takes insurance
responsibility once the carrier nominated by him in
Bangkok receives the goods. Thus the risk of loss and dam-
age during international transit is now in the hands of the
purchaser. Has marine cargo insurance been arranged?
What are the terms? Are the limits enough? Is the coverage
appropriate for the mode, conveyance, and actual details of
the transportation process? These questions should have
been reviewed in great detail and answered before the deal
was finalized and the goods shipped.
136 GLOBAL SOURCING LOGISTICS
What if the policy limit is $500,000 USD but the value of
this shipment is $780,000 USD? Or the policy covers air
freight by commercial carriers, but the goods were shipped
by parcel post, which bears the low limit of $500? Or the
shipment arrives, but concealed damage is found? The pol-
icy requires that evidence be shown, before a claim is paid,
whether the loss has occurred from physical loss or damage
from an external cause during transit. There is no way the
purchasing manager can prove this. Would the claim be
honored? The reality is that a loss would occur and proba-
bly there would be no coverage in place to indemnify the fi-
nancial exposure. Corporate personnel involved in the
global supply chain need to be proactive in identifying these
risks and taking steps to manage, eliminate, mitigate, or
transfer to a third party.
Consider another example: A company sold $800,000 of
used farm equipment to dealers in Russia. They had a 2-year
track record of payment, but so far, letters of credit or sight
drafts had collateralized the previous transactions. The con-
signee in this transaction requested 60-day terms, based on
prior history. The financial department approved the trans-
action but required an advance payment of 10 percent on
purchase order acceptance and wire transfer of the funds.
The Russian consignee complied, and the goods were
shipped. The customer paid in the 60-day period in rubles
through its state banking system. The U.S. company’s bank
advised that the funds had not been converted to U.S. dol-
lars and are detained in the foreign banking system await-
ing currency convertibility. So, the customer has paid but
because of the imbalance of trade, the Russian bank is un-
able to prioritize payment on this transaction.
This exposure is known as currency inconvertibility and
is a serious risk in more than 100 countries that have such
significant imbalances of trade that they have difficulty
meeting their international financial obligations. As a re-
sult, these state banking systems prioritize payments, based
upon political and economic factors. They pay for priority
CHAPTER 5 137

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