Incoterms: Safeguarding Assets Through Risk Mitigation

John Vogt, former Halliburton vice president of global logistics and a visiting professor at the University of Houston-Downtown, presents the latest in his long-running 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 some sound advice on how to counter risk relating to operations and natural events.

New installments are published each month on the Breakbulk news page and in our online BreakbulkONE newsletter.


Risk comes in four broad categories; in the previous article I discussed how we can counter those related to technology and socio‑political issues. In this article, we turn to the impact of operations and natural events.


Risk category: Operations

For the logistics professional, operations mean the ability to collect the right goods and to move these goods to the end customer in an agreed service standard which will cover speed as well as a variability. It is pointless to have the fastest speed for 70 percent of the goods but have 30 percent arriving late by a significant period.

Operations is the area most logistics professionals focus on, as it is where they can see competitors offering different value-added services, or where they have improved their own service standard.

We have socio-political corruption which tends to correlate with theft, which is part of operations. Within operations we also need to consider specific issues for logistics such as piracy and constricted shipping lanes. Piracy can be tracked for frequency and location by means of data, but with more than 100 ships attacked every year, this is not an issue to omit from your strategic thoughts.

Constricted lanes range from narrow or shallow areas such as the Malacca Straits near Malaysia and Singapore (good area for piracy as the statistics show), to the Suez and Panama Canals. No one would consider the Suez in its strategy, but when the Ever Given container ship accident closed the canal for six days, this suddenly became an issue.

While there is little one can do to predict such an issue, larger ships are going to be more likely to have these issues, and in this case the vessel was freed for commerce only after more than 100 days. Strategic route choices or use of particular vessel ownership choices may well reduce this risk.

Operating risk may also be within a company, where oversight and focus are lost due to other factors.

BP was involved in the Macondo oil blowout in the Gulf of Mexico where the Deep Water Horizon drilling platform burnt and sank when hydrocarbons erupted from the well. The causes of this have been extensively investigated, and these have no place in this article.

What is more important is that there was a series of issues with BP safety over a period preceding the incident. It is extremely difficult to balance all the shareholder, management, and other pressures as a manager, but there always needs to be a clear focus on operational quality and safety, above other prerequisites. This overriding focus must not be subverted by financial or political necessity but must be absolute.

Where these pre-requisite requirements are shifted only slightly, the consequences may initially be shown only in small incidents, but the eventual issue is a potential disaster. There are safety organizations that track every little potential incident and also larger ones. These are recorded in three levels of incidents: the most frequent but lowest being a potential incident without injury or damage, followed by minor injuries or damage, and then large problems.

Statistics seem to show that for every 100 potential incidents there will be 10 more serious incidents of minor damage or injury, which will result in one major incident. This 100:10:1 rule is the basis of the Iceberg problem, where the causes and indications are hidden below the iceberg and only a tip is shown above water. Beware of ignoring potential problems.


Risk category: Natural Events

Natural disasters are almost impossible to predict by businesses with sufficient time to plan and implement alternative logistics and strategies. Consider the dust in the air from the Iceland volcano eruption which filtered across European airspace causing major disruptions in air traffic. European airspace was shut down for nearly nine days, and intermittent or more local shutdowns occurred as the ash levels changed.

The impact on air movement meant that urgently needed goods were unable to be delivered to or from Europe or moved within Europe. Companies which had the ability to move goods nearer to Europe and use maritime solutions achieved some measure of deliveries, but for many companies this was a disaster. An Iceland natural issue became a European disaster. If strategic planning does not cover this, as it is completely unexpected, two strategic factors enable companies to respond faster than competitors.

The first is the flow of information as the ash cloud was detected and the willingness and capability of the logistics personnel to see this as a potential problem. The second is that the professional logistics personnel had the ability to reroute cargo, or to change the mode once it became apparent the cloud was going to cause an impact. The flow of information and the ability to take decisive actions based on prepared eventuality plans are imperative to logistics success.

Taking this principle of focus on risks further, the issues of risk mitigation in companies are often minimized with the “it hasn’t happened so why are we spending money on it” belief emerging. The problem is that as the focus moves away from the risk, and the spending on people, processes and plant equipment to ensure safety are slightly degraded, the risk potential grows a quantum level.

This is not just about operating disasters, but a simple example of FCPA (Foreign Corrupt Practices Act) exposure could be considered. Postulate the company has not had an FCPA reporting incident for X years, and as budgets are discussed it has become harder to justify the time, money, and effort to ensure no incident occurs.

And then an event occurs, and it has millions of US dollars in consequence which far outweighs the cost of prevention. And prevention is in the hands of the logistics professional who must ensure correct operational behavior by all the logistics service providers.

It is appropriate to introduce the concept that if a risk is identified, clearly understood and the steps needed to mitigate it are recorded and planned, then the resilience of the organization has risen significantly. In truth, the ability to worry about, plan for and mitigate risks is the hallmark of a great leader.

We will wrap up risk and resilience in the next article, but this is a very important issue for setting and maintaining the focus of the company and all its departments.


Do you have an Incoterms experience to share that you'd like John to comment on that could be included in a future article? Submit to Breakbulk's Leslie Meredith at [email protected] and include description, locations (origin and delivery), Incoterm used and lesson learned if applicable.