Warehousing always has been a risky business. In our present-day global economy, the risks are more diverse and more plentiful than ever before.
Categories of risk
A first step in risk management is to determine what risks we face in a global economy.
As part of the process, management should grade each potential disaster according to both probability and severity. For example, the risk of flood in your community may be rare, but if it happens the severity may be great. Other risks, such as civil disturbance, are likely events in some nations, but rare in the USA.
The grading process for both probability and severity will differ, depending on the operation and its location. Each user must grade the events according to the individual risks that might apply to each particular warehouse.
Managing the risk
These are the three ways to control the risk of any loss:
- Insurance
- Loss prevention
- Contingency planning
Nearly every warehouse operator has insurance. You need to recognize the significant differences in liability among logistics service providers, common carriers and wholesale distributors.
In the U.S., and most nations having English common law as the basis of their legal codes, the service provider is a bailee for hire, and therefore is not responsible for cargo losses unless caused by operator negligence. This law also governs parking garages and dry cleaners. If your product is lost due to "acts of God" or another disaster, your own insurance coverage must pay for the loss.
In contrast, the common carrier must insure the cargo. Wholesalers own the products they store so they must insure them. Because rules are different overseas, users of logistics service firms need to understand the local legal system.
Leading property insurance carriers, such as Factory Mutual, insist on comprehensive loss prevention programs from their customers. They provide their own inspection services, and demand the right to make unannounced examinations of warehouse operations in order to check on the readiness of fire protection equipment and the capability of plant emergency organizations. The customer is encouraged to study the latest loss prevention techniques, and to appoint and train a team to provide early response in the event of fire or other disaster.
Contingency planning is a longer range approach for addressing the unexpected. The process consists of asking, and then answering, a long list of "what if" questions, such as these:
- What if our top four executives were wiped out in a plane crash?
- What if our largest customer goes bankrupt?
- What if we receive a million dollar fine from OSHA as the result of a fatal accident in the warehouse?
- What if our most important supplier is crippled by a strike?
Contingency plans provide a comprehensive approach for addressing every conceivable disruption.
Remaining resilient
Corporations survive through redundancy or flexibility. Redundancy may include a deliberate gathering of excess inventory, or excess capacity. Flexibility is gained through postponement and interchangeability.
For example, one of the worst fire disasters in American history destroyed an eastern Pennsylvania retail distribution center. Because the chain retailer had several other distribution centers that were not operating at capacity, supply to stores in the region was maintained by shifting the tasks to other distribution centers.
For the warehouse operator, postponement usually involves packaging, branding or final assembly at the distribution center. If the manufacturer has dual capabilities for completing the job at either the factory or the distribution center, the flexibility should allow the company to survive if one of these locations is destroyed by disaster.
What are others doing?
Most firms give more attention to loss prevention than to risk transfer through insurance. They recognize that it is difficult, or impossible, to insure against every disaster. Insurance will not fully compensate most companies for all of the losses associated with a disaster.
Furthermore, frequent insurance claims will result in raised costs of the coverage or, even worse, loss of the insurance policy. For these reasons, most managers prefer to avoid disruptions, rather than to rely on insurance alone.
Currently, the two fastest growing business risks are government or regulatory sanctions, and competitive threats.
If a competitor were to acquire an inexpensive but serviceable warehouse building in your neighborhood, could a price war be introduced that results in a loss of customers to the new company? Competitive risks are even greater in information technology and transportation, two closely related logistics services.
Too many eggs ...
A leading cause of failure among public warehouse operators and wholesalers is overdependence on one or a few customers. When the basket breaks and the customer leaves, the operator cannot replace the loss of revenue quickly enough to remain solvent.
Yet, this is a risk that is not insurable. It is avoided by marketing aggressively to eliminate overdependance, or refusing to work with a customer who is promoting such risk. Retail distribution and auto manufacturing always have been noted for creating dependency situations. Prudent managers must recognize the challenge of too many eggs in one basket, before the situation becomes difficult or painful to correct.
Organizational change
Warehouse operators frequently build their marketing efforts on relationships. However, in the corporate world, these relationships change when key people retire, or are reassigned to a new job. The new manager may not have the same personality as the predecesor, which leads to a change in the relationship. Eventually, the result is a change of suppliers.
Obstacles to risk management
Perhaps the biggest road block to addressing risk is the optimism that is a hallmark of a successful business leader. Because contemplation of disaster is naturally unpleasant, if not depressing, the active manager tends to avoid the process.
Managers who devote ample time to risk management, and who reassess those risks frequently, are likely to ultimately gain a competitive advantage.
Consider the consequences of doing nothing until a major disruption occurs. One business analyst reported that the average life of a corporation is shorter than the life of a dog. If you are concerned about the longevity of your enterprise, risk management should be moved to the top of your task list.
