Logistic firms are extending their offering. They now provide end-to-end services, covering the complete logistic cycle: starting with procurement and distribution, transport, delivery to the customer and ending with return logistic. The evolution of the sector and its changing scope has far-reaching impact on logistic firms’ risk exposure.
Expanding service offering
The expansion of logistic services to manage more elements of clients’ supply chains is driven both by clients’ needs and logistic firms’ growth aspirations. Following the rapid growth of e-commerce, logistic clients are requiring tailored, efficient, and comprehensive logistic solutions. This entails end-to-end visibility across the transport life cycle. To persevere in this competitive environment, logistic clients require a wide range of support services, including advisory and supply chain consulting services, reverse logistic, data and analytics capabilities, e-commerce channel management capabilities and even algorithms that match demand and supply. For logistic firms, this offers an opportunity to rethink the scope and end-to-end nature of their services, to integrate more capabilities across the logistic value chain, and to create a deeper, broader, more customer-focused approach to service delivery.
For logistic firms it is often easier to expand or diversify their services by acquiring a business that already delivers the products or services required. However, this brings a measure of risk associated with integration, including culture, financial parity for employees, legacy claims, or other contractual exposures.
Lockton’s Risk Control Services have provided risk management advice to logistic firms in the process of expanding their service offering via acquisition. For example, a logistic firm took over some operations from a UK based malting company which produces malt for whisky distilling and brewing. The logistic firm extended operations to include grain storage and are now working with farmers to supply grain for the core business, creating a “field to glass” model. Advantages include enhancing the traceability of the product and, by working with farmers, aligning the strategy with sustainability goals. Perhaps most importantly, by overseeing and combining grain storage and supply, the logistic firm is making a vital element of the supply chain easier and more efficient. However, the strategic move is also transferring new risks to the logistic firm with potential exposures; including the unavailability of product if there is a disruption and susceptibility to severe weather events affecting harvests.
In another instance, a logistic firm acquired a UK provider of major infrastructure engineering services to enhance service capabilities. During the process, the logistic firm encountered integration challenges. With hindsight, the business noted that it should have had greater confidence in its core management structures and focused on defined strategic goals to better manage the integration instead of relying on some of the expertise coming from within the acquired company.
In the US, logistic firms are taking on more cargo operations. A widespread risk sweeping across the industry is cargo theft through fictitious pickup. Thieves gather enough information on a shipment awaiting pickup and send an impostor trucker to pick up the load before the legitimate carrier. As the carrier did not collect the load, the full value falls upon the freight broker and their insurers for liability.
Furthermore, some US logistic companies are acting in the capacity of freight broker. The risk of nuclear verdicts in the highway accident space creates the need for Contingent Auto insurance. This protects the broker against third party suits claiming vicarious liability or contributory negligence despite the broker being at arms-length to the carrier.
One note to add is that many logistic providers will develop their own software to best fit client needs and, in many cases, will provide this software as a service to clients. While Software as a Service can represent a great business opportunity, it also adds new risks to logistic firms. Cyber Liability, Technology Professional Liability, and legal compliance are areas that require added focus with this new endeavour.
Risk management recommendations
Logistic firms expanding into new areas need to conduct a thorough risk analysis of the new business to understand the risk environment they will be entering. This is necessary not only to identify potential challenges but also to develop solutions to mitigate against them. Areas of focus that may need to be understood include:
An unfamiliar regulatory environment
Potential financial exposures – including contractual penalties, adverse terms, hidden costs etc.
Market constraints and trends including the competitive landscape
Furthermore, logistic businesses will need to evaluate the extent to which a new enterprise is aligned with core strategic values and objectives. This includes evaluating the extent to which the planned expansion is within the organisation’s current risk appetite and risk tolerance.
The logistic firm will also need to decide if it has the technical skills and knowledge to oversee the new enterprise and deliver anticipated outcomes. If wholly reliant on the expertise within the new entity, this could present an unacceptable exposure.
Finally, bringing previously outsourced services and products inhouse can increase supply chain risks and reduce the organisation’s resilience. At the same time, having a single internal source to maintain strong relationships as opposed to multiple external suppliers can also be advantageous.
For further information, please contact the author or your Lockton representative.
