Managing Risk in Shipping

When the term ‘risk management’ is used in shipping most people immediately refer to the Incoterms but it is often misunderstood. Incoterms do not refer to risk in all the definitions so how do you define the risk? The transfer of risk comes from the transfer in responsibility. Incoterms outline who is responsible for each stage of the shipping process – once the responsibly shifts from the seller to the buyer so does the risk. 

So what are the risks?

There are two mains types of risk in international shipping: physical and financial

Physical risk:

• Loss of the shipment (all or part)
• Damage

Financial risks:

• Unexpected costs such as storage or terminal handling fees
• Loss of earning due to delay
• Contractual penalties
• Customer unable to pay for goods

Of course both can be linked such as losing money due to a machine being offline waiting on a part, which is delayed or lost. Managing your risk can help keep these eventualities to a minimum.

How to Manage the Risks

Financial risk

This should be assessed before the shipment is prepared. Use services such as credit checks and independent trade references. This will give you the information to establish if you should offer a credit account, proforma invoice or collect payment via a secure third party such as a letter of credit to collect payment from the customer.

If you entering into a contract:

• Examine any penalty clauses thoroughly to see if they are practical and achievable. I have seen some clauses such as ‘obtain a sea worthiness certificate for the shipping vessel’ – you should check if such information is available; do not assume it is a standard request. 

Double-check the agreed Incoterms:

• Be aware of when the responsibility and risk passes from seller to buyer for the agreed incoterm you are using and discuss the options. Is your buyer aware of their responsibilities once the shipment arrives?

• Use your location with the incoterm to make it specific.CPT Englandis too vague if the shipment arrives in Dover and is required in Birmingham.

Shipping method:

• Review the shipping route – a direct flight would have less risk of damage and loss compared to multiple changes. The more times the shipment is handled the higher the risk.
• Review the time frame – will a shipment arrive over holidays and incur storage fees?

Review all documentation required before shipping:

• Will you need specialised paperwork such as a certificate of origin for customs clearance? This is an extra cost and takes time to organise, which could delays and storage.
• Check if export licenses are required including goods that fall into dual-use or controlled.

Insurance / Enhanced Liability

• Consider separate insurance – Incoterms 2010 CIP and CIF specify the inclusion of insurance but only at a minimum cover

Physical risk

• Are you shipping high value goods that can be clearly identified from the packaging? Consider black security shrink film to disguise and hide the contents or consider plain packaging to minimise the risk of being pilfered.
• Will the goods be packed securely? You may need to arrange specialist handling and packing for large, dense or oversized shipments
• Check packing requirements for the destination county such as IPPC regulations for wooden packaging
• Have you checked the destination weather? If you have ever shipped to India during monsoon season you will realise why I bring this up. Check if you need to add extra weather proofing such as additional plastic wrapping to the pallets or extra waterproof / humidity protection to the goods.

Reviewing your supply chain and shipping processes regularly is all part of monitoring and managing risk. Openly discussing the options with your shipping agents, suppliers and customers can often expose any potential risks and then you can take action to minimise them. Taking the time to look at them beforehand can save you a headache later on!