Incoterms: Facing Down Risk

John Vogt, former Halliburton vice president of global logistics, presents the latest in his series on Incoterms, the internationally recognized set of trade rules that sellers and buyers must follow when devising a contract for the shipment of goods. This week, John offers sound advice on how your company can counter technology/infrastructure and socio-political risks.

New installments are published each month in our online BreakbulkONE newsletter.


We need to delve into the risks that an organization can face. Obviously different organizations in different market segments may have variations, but these show the principles. There are four broad categories of risk: Technology and Infrastructure, Socio-Political, Operations and Natural Events. The first two of these are explored in this article, and the remaining two are explored next month.


Risk: Technology and Infrastructure

Technology and Infrastructure is a broad category for any logistics chain, and even more so when international movements are considered as these incorporate a sending country and a receiving country. The estimated 25 entities involved in the international movement between two countries and perhaps a maritime or air move all have different technology, and work with at least two different sets of infrastructure.

Infrastructure restricts any movement to the lowest level the infrastructure can support. A movement from a country with gantry cranes that can easily load and discharge 40-foot containers onto and from a container ship, which has no cranes, cannot deliver goods to a harbor where the shoreside crane is a 6-ton crane, which is woefully undersized for the 40-foot container which can weigh in the order of 32,000 kilos.

In this case, breakbulk will be used, and the infrastructure sets the limits. Physical infrastructure is not the only aspect for strategic consideration as the movement of the goods is dependent on harbor capability and operation, movement modes and information as well as finance flows.

The World Bank publishes a Logistics Performance Index (LPI) which sets out the capability of every country. It considers six factors – or core competencies – for the countries:
 

• Efficiency of Customs Authorities and the overall management of the clearance of the goods into the country; 
• Quality of the trade and movement infrastructure; 
• Ability for the country / port to stage goods in a competitive manner for International trade
• Competence and quality of the logistics capability and services; 
• Track and Trace capability; and
• On time schedule maintenance

The World Bank's latest LPI can be seen here.

This is the comprehensive viewpoint of the world and its ability to move goods. As one is setting a strategy, the choice of harbor, route and movement methods should be considered with this information to hand. Resilience can be built in by choosing different routes which utilize higher ranked LPI ports and movement corridors. This data is available and should be utilized to make better strategic decisions. The use of data to build resilience and remove risk is part of any sensible logistics strategy and inherently considered in the SWOT analysis.


Risk: Socio-political

The risks that should be considered in a strategy and which might influence the choice of routes or of partners will incorporate a range of social and political issues. A country or a region within a country which is known for strikes, lawlessness or similar issues is not conducive to moving goods through if a viable alternative route exists.

This alternative may be more expensive or take longer, but this is balanced against the risk of losing the goods or having them delayed to the point where they are no longer wanted by the buyer. For logistics this means that aspects of social unrest – potential or actual – must be considered when strategically choosing a route.

The level of corruption in a country is a major problem for strategy. A highly corrupt country may taint a foreign company moving goods into, out of, or through the country. It may also add substantial delays or uncertainty. A corruption perception index (CPI) is published by Transparency International, and the consideration of the corruption levels must be a factor in the choice to do business within another country or even in your own country.

The CPI shows some interesting comparisons between countries as to the likelihood of corruption occurring. The lower the score the more likely there is corruption potential. In relative terms a score of 70 percent for a country versus a country score of 35 percent means the latter is far more likely to have corruption. These scores are given by region and country but for comparative purposes a sample of outcomes for the 180 countries measured is as follows:

(Note: Two-thirds of these countries score below 50 percent, corruption issues are more likely to exist than not.)

Region                                                              CPI Factor
Western Europe and European Union              66%
Americas                                                                    43%
Sub-Saharan Africa                                                32%
Eastern Europe and Central Asia                       35%
Asia Pacific                                                                35%
Middle East & North Africa                                   38%
(CPI scores from Transparency International data 2022)

This is data, but countries suffer from many other Socio-Political issues. Elections, strikes and civil unrest remain only part of these issues. They must be considered as logistics moves goods around the world. The advent of terrorism is relevant for many countries, as is the potential for kidnapping of foreign nationals in some countries. Even a country legislature which changes laws without comment by the public sector can add to the risk and issues in logistics.

These topics show just how much thought should be put into the planning for mitigating risk. Many risks can be made to be minor issues by correct planning for the organizations that have prepared; but those who are not prepared may well face major disruption to their business. The next article will address the remaining two major types of risk, being operations and natural events.