Global Sourcing Logistics: How to Manage Risk and Gain Competitive Advantage in a Worldwide Marketplace

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

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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

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