290 Chapter 9 TRANSPORTATION RISK MANAGEMENT Learning Objectives ‘After reading this chapter, you should be able to do the following: ‘+ Understand the nature of transportation risk and disruptions Explain the concept of risk management ‘+ Describe the general process for managing transportation risk. ‘+ Identify the primary categories and types of transportation risk + Understand the key factors in risk assessment. ‘© Discuss the four techniques for managing transportation risks ‘Appreciate the challenge of balancing transportation security and global trade efficiency ‘+ Recognize key transportation security regulations and initiativesTransportation Risk Management 291 Transportation Piracy is a Global Issue Profile The 26 Assembly ofthe International Maritime Organization (0) meets her at its head quarters tis week, and piracy stop of mind, In his opening address, Secretay-Ceneral Efthimios Mitropouls said that the ‘alarming escalation in incidents of pracy and armed attacks on merchant ships had been a dominant and unwelcome theme thraughout the past biennium, with the recent upsurge in pirate activity of the coast of Somalia and inthe Gut f Aden, and now beyond the Hor of ‘rica and in the wider expanses ofthe western Indlan Ocean, turing this phenamena ito 4 global issue, “consider it imperative that we, in the martime community, re-double our effets to tomb piracy in all its forms, bearing in ind that tis nota case, but a symptom,” Mito paulos sat In repressing acts of piracy and robbery against ships in the affected waters, IMD has worked closely with the Uited Nations (rluding the Security Counel, the Wo Foo Program and the UN Office on Drags and Crime) and wih various infergovernmental and non- wvemmentl organizations (bth glbal and regional, such as the Afican Union and the League of rab States), as well as with polticl and defense ents (such asthe European Union, NATO andthe Combined Maritime Fores. As rpated in Logistics Management, the numberof reported pracy attacks off East ‘Mica rose astonamically inthe past two years. “Barely a day seared to pass without a new Incident being reprted” nated IMO spokesmen Figures compile by MO show that, in the fist quarter of 2008, there were 1 pracy al- tacks in that region, sing to 23 inthe second quater and racetng to 50 inte third and 51 inthe fourth quarters, making a total of 135 attacks during 2008, resulting in 4 ships having been seized by pirtes and more than 600 seafarers having been kidnapped and held for Ceincidng with ths meeting came an announcement ty CMA CGM that i plans to increase its pracy risk surcharge fr transporting containers though the Gulf of Aden net roth Spokesmen sald thatthe transit of cargo vessels though the Gulf of Aden in both irecions is subject thigh costs caused by the prevaling risks of pracy nthe area Source: Pack se, “nematonal Maire Organization Says Proc isa Gal su,” Logisties Management (ere 24, 2008), Reeves Dacenbar 18, 2008 rom wwalegeesmg near srt! 300/20-eear_ cages logs Inaraterl Martine, Ogehaaton sf, Bae Introduction ‘As strange as it may seem, pirates really do exist in the 21st century. Its a growing pro blem and not merely an action movie genre. As the Transportation Profile highlights, companies are at risk of their freight being stolen or hijacked for ransom as it lows through dangerous trade lanes, In 2008 alone, more than 100 vessels were attacked off292 Chapter 8 the coast of Somalia. Other hot spots include the waters near Indonesia, Malaysia, In- dia, the Philippines, Brazil, and Ecuador. Piracy is just one of the threats that organizations face when moving goods. Major incidents—hurricanes, pandemics, labor unrest, and terrorism—create societal ps blems and significant business challenges. From a transportation standpoint, they are disruptive events that result in supply chain disorder and discontinuity. The outcomes can vary dramatically from minor inconveniences and delivery delays to tremendous problems that threaten a company's image and financial outlook, fompanies cannot idly stand by and hope for the best when they move freight. ‘They must actively work to limit exposure to legitimate hazards. This chapter focuses fon the management of transportation risk and service disruptions. We will discuss the general concepts of disruption, risk, and business continuity, as well as the risk man- agement process, Specific issues related to transportation risk management strategies will be addressed, followed by a discussion of expected outcomes, Throughout the chapter, you will gain an understanding of the true challenges involved in the move- ‘ment of goods as well as the methods available to mitigate transportation risk Risk Concepts Risks an everyday part of fe, Whenever we get behind the whed of our ears, he poten tial exists for us to be involved in an accident, to be delayed due to congestion, or to get lost, Although the likelihood of anything bad happening may be remote, each ofthese risks poses an unpleasant consequence for us—costs, missed appointments, stress, and so on. ‘The same issues arise when companies put freight in a container, railcar or trailer. ‘The freight can potentially be stolen, damaged, lost, or delayed while in motion or at rest in a port, trucking terminal, ail yard, or other intermediate facility, That i, freight is at risk of many disruptions from the time it leaves the origin location until it reaches ite final destination, So what exactly are disruptions and risks? A review of dictionary entries and magazine article descriptions would ereate a dizzying variety of definitions. For the purpose of this chapter, we will use the following characterizations as the foundation of our discussion: Disruption—an event that results in a displacement or discontinuity; the act of causing disorder.” Transportation Disruption—an unplanned or unanticipated event that inter~ rupts the normal flow of goods and materials through the supply chain. These disruptions expose companies within the supply chain to operational and finan- cial risks Risk—a hazard or a source of danger that has a possibility of incurring loss or misfortune? ‘Transportation Risk—a future freight movement event with a probability of occurrence and the potential for impacting supply chain performance. Problems arise when the threat of transportation disruptions and hazards become reality and the supply chain is negatively affected. Unfortunately, these disruptions are