An important aspect of any successful international distribution is risk management. The development of a strategic risk management plan will address various types of risk associated with international shipping.
Risk management in international shipping is complex and varied. Managing these risks requires effective and proactive cargo risk management processes. Understanding how multiple exposure points can affect cargo shipment will ensure these risks are effectively identified and mitigated.
This guide to international shipping examines the types of risks small- and medium-sized enterprises (SMEs) face. It will explore how SMEs can use certain risk management processes to better anticipate potential problems, and protect operations and profitability.
Understanding cargo risk
While natural disasters, mechanical failures, and human errors have long been common maritime risk management issues, the growth of international trade, expanding shipping routes, and the rise of automated shipping have increased the need for the identification and management of these new risks.
The diversification of market locations and changing patterns of trade also pose a great risk to international freight forwarders. Greater diversification means longer supply chains. This results in more touchpoints between the point of origin and destination, thereby increasing vulnerability.
There are several risks that can disrupt the flow of trade and affect SMEs and their cargo shipments. Below highlights the five most common risks in international shipping and the countermeasures available to manage these risks.
1. Foreign exchange risks
Potential volatility in exchange rates or unfavorable foreign exchange can undermine the relative value of SME shipments. Because freight rates are fixed in US dollars, SMEs from other countries are exposed to fluctuating exchange rate movements.
This can severely impact profitability and cash flow, limit a company’s margins and overseas growth. To insulate themselves from the impact of exchange rate risk, SMEs must develop a foreign exchange policy that protects against currency liabilities.
SMEs looking to expand overseas will do well to partner with a global payments company to streamline payment infrastructure and provide data protection for any payment rendered. A global payments partner, such as a bank, will provide SMEs with access to hedging like a forward contract.
This will hedge against foreign exchange fluctuations and limit exposure to currency volatility.
2. Intellectual property risks
As the marketplace becomes more globalized and more integrated, there is an increasingly greater value placed on ideas. Intellectual property (IP) provides SMEs with a competitive advantage in today’s globalized market.
But the reality is, all businesses have potential intellectual property exposure. SMEs that participate in international trade will find that defending their intellectual property is more difficult when done remotely.
SMEs can put themselves in the strongest position to prevent IP infringement by using one or more of the following proactive measures:
- Patent, trademark, and copyright proprietary IP
- Research overseas regulatory and litigation risks
- Ensure employees sign non-disclosure agreements to safeguard confidential information and trade secrets
- Proactively monitor the marketplace to enforce any potential infringement on your proprietary IP
3. Credit risks
All SMEs that participate in shipping are exposed to credit risk. Credit or counterparty risk refers to the likelihood that one of the parties agreeing to conduct business defaults on the contractual obligation.
While all forms of shipping carry some credit risk, the risky nature of international shipping and burgeoning global demand have amplified this risk for SMEs.
Several credit management practices that limit this risk include:
- Developing internal credit ratings for customers
- Implementing a credit limit associated with collateral
- Using a standby letter of credit to guarantee creditworthiness
- Negotiating that payments be paid in full before services are rendered
- Considering credit insurance to protect against the risk of non-payment
4. Political risks
Whether it is political embargoes, trade-disrupting sanctions, or war and civil unrest, political challenges are economic threats to SMEs.
To protect exports and ensure trade interests, SMEs should stay abreast of the political risks associated with their destination country. Performing ongoing political risk analysis will insulate SMEs in the country they’re exporting to.
SMEs can also mitigate unexpected political risks through:
- Purchasing cargo insurance
- Diversifying overseas investments and trade routes
- Gaining a regional perspective from local institutions
- Partnering with global payment companies that can manage forex trading and conversions
- Involving key external stakeholders to coordinate political risk responses
5. Operational risks
A breakdown in internal processes must be as carefully managed as external forces to mitigate any unforeseen accidents from occurring. Operational risks will vary according to the SME but can include anything from theft and vandalism to breakage and seizures.
Managing operational risks requires due diligence as well as complete awareness of the company’s end-to-end supply chain. Analyzing production and shipping processes will enable SMEs to improve workflow efficiencies while reducing costs to achieve economies of scale.
SMEs must ensure that the right documentation is in place to be compliant with international regulations. Documents should be accurate, detailed, and filed at the correct time to avoid any additional costs.
SMEs should also be aware of import and export allowances. Certain countries will restrict the import and export of goods. Obtaining this information and providing the appropriate documentation will prevent delays.
Having sufficient cargo insurance will also protect the business when external threats arise.
Other risk management solutions to consider
One important aspect of risk management that cannot be stressed enough is due diligence.
The due diligence period is an important stage in the supply chain process and international trade. Due diligence enables SMEs to assess potential risk factors and confirm regulatory compliance.
Before engaging a carrier for international trade, SMEs should review the carrier’s business history. Information such as years of service, the security of distribution centers, quality of equipment, and the qualifications of personnel will enable SMEs to select the right carrier for their international shipping needs.
SMEs should consult with other customers to confirm a carrier’s handling procedures, logistics process, and inventory management and distribution.
Taking advantage of technological solutions will also help SMEs mitigate risk and increase security for their shipments. Technological tools such as tamper-resistant seals, GPS trackers, and RFID tags will allow SMEs to automatically track shipments at each stage of the shipping process.
Any SME looking to expand their global presence will do well to establish a risk management action plan. Preparing for the possibilities that problems can arise at any point in the supply chain will help SMEs anticipate problems and implement the right loss prevention solution.
Paul Rehmet is the Chief Product Officer for Shipa Freight. He is responsible for translating the company’s vision into an easy-to-use online freight platform for its customers. In his 25-year career, Paul has held various technology leadership positions with early-stage startups and Fortune 500 companies including Unisys, Destiny Web Solutions, and US Airways.