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Many companies whether they be manufacturers, distributors, wholesalers or service providers are continually failing to grasp an important aspect of their supply chain – transportation and the liabilities / risks involved.  It no longer matters if you are shipping domestically or internationally one should not ignore the risk of not managing the transportation aspect of your organization.   To paraphrase an old football adage; “the defensive opponent may know what’s coming, but with correct offensive execution they can’t stop the play”.  Proper due diligence on all carriers involved is the correct offensive weapon.  In enacting the due diligence companies must understand and acknowledge where the risk are:

  • What is my exposure to liability in the event of a catastrophic accident?
  • What is my loss exposure in the event of theft or damage?
  • How am I liable when a third party contracts with an unreliable and unqualified carrier for me?
  • What happens if my carrier becomes insolvent or bankrupt?

Once these questions are satisfactorily researched and answered then select the carrier or carriers.

To assist firms in their quest to find qualified carriers the Federal Motor Carrier Safety Administration (FMCSA) established the Comprehensive Safety and Accountability procedure or scorekeeping on carriers.  As all things government issued there ensued debate between all parties involved – companies, the carriers, and attorney.  Failure to check CSA scores might subject a company to litigation if a particular carrier did not meet the score thresholds.  Of course, there are those that argue that the CSA program is deeply flawed and thus the scores are suspect.

Regardless of where you stand on the CSA debate is that checking the CSA scores is just a starting point.  Many corporate executives manage risks with suppliers and within their business processes well but do not apply the same level of importance to their transportation partners.  When contracting with shippers and brokers far too much emphasis is put on cost and service as opposed to the need to protect their firms with investigation of carriers and brokers.

The diagrams on the next page clearly show the results of lack of due diligence and the potential costs involved.


Assumption Cases

From 1984 through 2008, 21 cases have been brought

against a shipper/broker. One case in 2001 yielded a

$55M judgment.9

  •   30% of the 21 cases

were found in favor of

the shipper/broker


  •   70% of the 21 cases

were found in favor of

the plaintiff.



Contractual Assumption Cases

From 1984 through 2008, 21 cases have been brought

against a shipper/broker. One case in 2001 yielded a

$55M judgment.9

  •   30% of the 21 cases

were found in favor of

the shipper/broker


  •   70% of the 21 cases

were found in favor of


To help alleviate the debate on the scoring threshold the CSA implemented the Safety Measurement System or SMS.  This was meant to quantify the safety performance of individual carriers:

  • Identify entities for intercessions
  • Determine the specific safety problems a company shows
  • Monitor safety problems throughout the intercession process
  • Support FMCSA’s proposed Safety Fitness Determination process

The SMS results are listed demonstrating the worst safety performance of carriers involved in this process.  That being said, it is a volunteer process.  The SMS only is measuring about 17% of active carriers.  While this system is a useful measurement it is not sufficient unto itself.  In fact, on the SMS website there is a full disclaimer stating in detail what I have posted in a short statement.

To those that believe this disclaimer helps protect them from litigation, need to re-think your process. Most carriers are only required to carry at least $750,000 in insurance. If there is an accident that causes fatalities the $750,000 will not cover. 

The Safety Fitness Determination (SFD) ratings will red-flag those carriers your firm should not engage. The Safety Measurement System (SMS) scores will highlight issues that need follow up. With all of your transportation partners, should develop a discovery and validation process; communicate with those partners when an unfavorable score appears.  Included in this validation process there should be an internal procedure to determine cancellation or continuation of service with this carrier.  A sampling of the criteria is the following:

  • Is the issue real
  • Is the issue being addressed
  • Is there immediate corrective action that needs to be taken
  • What are the interim steps that need to be implemented while corrective action is being taken

In some instances the carrier may have implemented corrective actions based upon a report issued to them by the SFD.  But your own investigation must determine whether or not to continue the relationship with this particular carrier.  However, day-to-day operations ought not to be the only time to employ the SFD/SMS data – use data for pre-evaluation on a bid from a carrier.

To protect your organization and manage the risk effectively must adopt a complete “snapshot” program. A fir m needs to evaluate the carrier contracts, your carrier’s operating authority, insurance coverage, financial stability, understand how liability attaches to your firm (firm’s reputation at stake) and potential product damage.  The following two examples focus in on the impact of ignoring this aspect of your company’s business:

  • A $5 million product loss resulting from a stolen trailer of pharmaceuticals turned into a $26 million loss for the shipper when the FDA forced a recall of all outstanding inventory of that particular product. 
  • We all remember the bankruptcy of Consolidated Freightways and the ensuing disruptions it caused those who had freight-in-transit when they closed their doors.  Consolidated stopped paying claims 60 days prior to closure and those who were paying on time and not netting claims against payments lost the entire value of outstanding claims.

The best method to evaluate contracts and insurance is to employ experts in transportation insurance and contract law who will completely evaluate policies and agreements.  Merely having a Certificate of Insurance is not enough – cargo loss and damage limits, terms and conditions and any exclusion. To evaluate any existing claims can obtain a copy of Insurance Company’s loss run. 

While there are people who believe brokers are a safer bet because there is layer of insulation between shipper and carrier, be forewarned.  If the broker chooses an unqualified carrier and the shipper consigns their goods without inspection, the shipper can be liable under “negligent entrustment” in case of unforeseen event.  Thus, if choosing brokers please follow these risk guidelines:

  • Select brokers that can prove due diligence in sourcing on your behalf
  • Ensue your broker indemnifies you for losses caused by their selected carriers
  • Beware of co-brokerage arrangements.

Transportation risk management is too important to your firm’s financial solvency to be made vulnerable by passivity. Operations become so busy with last minute dispatching of day-to-day shipments that transportation risk management is ignored and is seen as counterproductive.

If your carrier is a trusted partner, then don’t immediately punish the score or measurement. Instead, with a policy of collaboration investigate, take corrective action and continue the business ties. However, if a carrier poses a significant threat to your business then ties must be dissolved.   Must involve all stakeholders in these decisions.  The organization must include everyone whom risk is important to ensure transportation operations do not ignore these risks while managing other tasks.

It is a known fact that we are in a new ‘world economy’, not through governments but on the level of common businesses.  Many small and mid-size companies need a how-to course on interacting with larger businesses.  Of course doing business in such a diverse environment is a trial unto itself – a major US economic collapse and or a 100% rise in oil prices. 

Does this observation make you realize the role that Geopolitical instability plays on our supply chains? Many companies are acknowledging this and putting it under risk preparedness for their supply chains.  However, it is more far reaching than merely our supply chains. It ties into the physical and political requirements of a particular region. 

For example we see the supply chain of oil in the Middle East.  Please review chart below.



See all the United States flags that are dotted across the region. These are all the Middle East nations where the US has bases.  Despite the fact that, per our President, we are trying to move out of the region it remains a powder keg.



Now let’s take a look at the next chart:



This chart gives a clear indication of US oil imports by geopolitical region.  Per the chart the US imports almost half of its oil from the Middle East and North Africa. Any instability in these regions will most assuredly affect the oil pipelines and the supply.  The question that should be on the tip of everyone’s tongue is – What is the US doing to assuage the risk?  I’m sure I don’t know the answer but the point is that an item as important to the world economy as oil can be disrupted at the slightest provocation.

Internally economic or accounting experts from each company must team with their supply chain risk counterparts to explore long term strategies.  For example:  how will the company handle its risk if all suppliers from one region take such a blow?

Companies must devise a global strategy to withstand regional unrest and ensure continuous of supply chains.  Prior to this global economic depression many supply chain strategies were based upon JIT (Just-in-Time).  But as credit markets and manufacturing dried up the lack of suppleness in the supply chains became apparent.  In addition, mergers and acquisitions are forcing companies to procure raw materials from the same region.

  Each region of the world has its own geopolitical challenges tied to global trends. It is the responsibility of the supply chain management to learn about the geopolitical issues in the regions they are operating in

Tension can have an impact on raw material process and the supply chain even if there is not a direct threat.  Let’s bear in mind the Iranian situation.  While Iran has not closed the Straits of Hormuse, the idea that Iran might and the accompanying fear of oil producers causes spikes in prices and the corresponding spike in demand and supply.

A good deal of geopolitical understanding will go a long way to ensure a complete risk contingency program that will transport product to your markets.

OIL PRICES will SHAKE the Supply Chain



From the 1990’s through today many firms attempted to lessen production costs while building a sinewy supply chain. This was accomplished through manufacturing downsizing, offshoring, outsourcing, redesigning of plants and consolidation of duplicate facilities. The basic rationale for these movements was the goal of cheap oil. With this ‘new’ availability of cheap oil transportation cost became a secondary thought. The primary emphasis was directed towards reducing manufacturing costs, resizing plants to increase space utilization, consolidate duplicate facilities to reduce labor manpower and inventory levels.

So why is this trend slowly in a reverse mode?  The answer is simple: higher oil prices.  As the prices of oil have increased we see now the attention being shifted to the cost saving of transportation.  Transportation has always been important and directly related to the location of inventories, production facilities and overhead costs.  With the increase in prices other options has emerged:

  1. Sourcing and production closer to demand:  As cheaper manufacturing costs are continually offset by the increase in transportation costs there is a trend occurring now called nearshoring.  The results of this will be less landed costs, transportation costs, inventory and handling costs, import duties and taxation.
  2. Regional distribution centers: As oil prices raise transportation costs become more expensive.  As a result it will become vital to shorten distances between facilities and the final destination.
  3. Supply chain flexibility becomes the focus of the firm: Dedicated manufacturing must cease as oil prices and volatility increase. It will become important to serve the customer from the closest production plant.

It is true that with this flexibility will come increased production costs due to frequent set ups but it will reduce the transportation costs.

The higher the price of oil the more important a flexible strategy appears and must consider the impact this increase will have on transportation, supply chain strategies and the debate between offshoring versus nearshoring.

Impact on Transportation

Recent transportation strategies such as just-in-time delivery, quick and frequent shipments and a dedicated fleet are all based upon cheap oil prices. Quick and frequent delivery was designed to lessen inventory stock levels to increase the number of deliveries. However, as the reverse trend in prices starting taking place companies began to look for alternatives to save transportation costs. The three approaches that come to mind are the following:

  1. From just-in-time delivery to transportation capacity:  Larger lot sizes are moved less frequently and improved packaging techniques improve truckload spacing.
  2. Change from quick delivery to slower transportation modes: Shipments have been moved from air to ground or rail to reduce fuel usage and other transportation costs.
  3. Shifting from dedicated resources to shared resources: Due to price increases we have seen a corresponding increase in the use of third party logistics carriers and consolidated warehouses.

Impact on Supply Chain Strategies

Besides the effect on transportation oil prices affect other areas of company such as business strategy and the supply chain. Let’s see how.

Inventory or rather the increase in inventory levels will be affected by oil prices. Safety stock will be increased due to the need for more regional warehouses and lot sizes. At the same time less frequent deliveries will increase inventory levels or at the minimum keep them the same.

This is where the discussion of “push’ vs. “pull” comes into play.  “Push” or “pull” depends on a number of drivers; least of all is the type of product.  However, the most important to this discussion is economies of scale. The more importance that economies of scale are in an organization and the more value place on cumulative demands the more vital it becomes to manage the supply chain on a “push” model.  Of course, “push” may not be suitable for all types of industries. Each company must consider extenuating circumstances such as:

  1. Inventory position: Trade-offs between inventory and transportation weigh even more heavily on company. Positioning can have a dramatic impact on logistic costs. Take a hub-and-spoke network, items are moved from the manufacturing plant to a primary warehouse then to a secondary warehouse even before it gets to the customer. For this system to work must place high volume; low cost products at the secondary warehouse due to economies of scale. 
  2. Better service: Need to expedite items across your distribution channels due to poor service levels. 
  3. Supply chain integration: As oil prices rise it is necessary to reduce the supply chain variability. This can be accomplished by reducing lead times, shared information across the supply chain facilities and vendor-managed inventory.

Offshoring versus Nearshoring

The goal of this section is to pinpoint the particular product characteristics that will stimulate companies to relocate manufacturing to “nearshore” locales. Must determine the cost of moving infrastructure, manufacturing and assembly. In this determination or calculation should include the product’s bulkiness, cost to transport, the ratio of selling price to transportation cost and delivery time cost to the customers.

Another driver to add into the ‘moving’ calculation is changes in labor costs within different countries.  Over the last few years labor costs in China have sharply risen, much quicker than the rise in the USA or Mexico.  Due to these changes it may force some companies to open more distribution centers, each dedicated to a local region.  Other types of manufacturers may need to “redo” their manufacturing strategy and open plants closer to United States.

In general the oil price volatility will affect four areas: business, consumers, the environment and technology. Rising oil prices are forcing businesses to rethink their strategies like indiscriminate manufacturing and static supply chains. Supply chains must be monitored and evaluated on an on-going basis.  With these price increases come the realization to help alleviate the carbon footprint through cube utilization, decreased fuel consumption.  Lastly, the search is on for new technologies to enable industry to reduce consumption and costs. Some of these new technologies are the following: global positioning systems which allows for real time monitoring of vehicle use, aerodynamic trailers, automated tire inflators and single wide tires.

These increases in oil prices have caused a change in company culture and or strategies – implementing operational improvements and investing in environmentally sound technologies.