Chapter 6

1. Chapter 6 International Logistics, Risk, and Insurance

2. What is Logistics? • The process of planning, implementing, and controlling the flow and storage of materials from the point of origin to the point of consumption.

3. Two Categories of Logistics • Materials management: Timely movement or flow of materials/products from the sources of supply to the point of manufacture, assembly, or distribution (inbound materials). • Physical distribution: Movement of the firm’s product to consumers (outbound materials).

4. Logistics Concepts • The systems approach: This approach puts more emphasis on maximizing the benefits of the corporate system as a whole as opposed to that of individual units. • The total cost approach: Evaluates the total cost implications of various activities • The opportunity cost approach: Considers the trade-off in undertaking certain logistic decisions

5. Importance of Logistics to International Trade • Efficient allocation of resources: Allows countries to export products in which they have a competitive advantage and to import products that are either unavailable at home or produced at a lower cost overseas • Expansion of economic growth and employment: Facilitates international trade and contributes to economic growth and job creation

6. External Influences on Logistics Decisions • Regulations: Export controls, import restrictions, privatization, deregulation, etc. • Competition: The need to reduce inventory, lower overall costs, and develop appropriate logistics networks and delivery systems to retain and enhance customer base • Technology: Technology improvements, added to the deregulation of transportation and communications, have transformed the logistics industry.

7. Logistics Functions • Labeling: Exporters need to be aware of certain labeling requirements to avoid unnecessary delays in shipping. • Packing: The rigors of long-distance transportation of goods require protection of merchandise from possible breakage, moisture, or pilferage.

8. Logistics Functions (cont.) • Traffic management: Selection of mode of transportation carriers, consolidation of small cargo, documentation, and filing of loss and damage claims • Inventory and storage: Important to establish certain guidelines with respect to such issues as maximum holding period, time of shipment of inventories to the supplier, and other related factors

9. Risks in Foreign Trade • Political risks: Wars, revolution, or civil unrest can lead to destruction or confiscation of cargo. A government may impose severe restrictions on export-import trade, such as limitation or control of exports or imports, restrictions of licenses. • Foreign credit risk: Risk of delays in payment or nonpayment could have a crucial effect on cash flow and profits. • Foreign exchange risk: Changes in foreign currency values could either reduce future receipts or increase payments in foreign currency.

10. Insurance Two essential principles: • The principle of insurable interest: The insured must prove the extent of the insurable interest to collect, and recovery is limited by the insured’s interest at the time of loss. 2.. The principle of subrogation: The insurer is subrogated to all the rights of the insured after having indemnified the latter for its loss.

11. Marine Insurance Terms of policy: • Voyage policy: Policy for a single trip or shipment • Time policy: Policy for a specified period • Open policy: Available to exporters/importers with larger shipments Types of policies: • Perils-only policy: Covers extraordinary and unusual perils that are not expected during a voyage • All-risks policy: Provides the broadest level of coverage except for those expressly excluded in the policy

12. Marine Insurance (cont.) Coverage for cargo loss/damage: • With average policy: WA covers total as well as partial losses. Most WA policies limit coverage to those losses that exceed 3 percent of the value of the goods. • Free of particular average policy: In addition to total losses, partial losses from certain specified risks such as stranding or fire are recoverable. General average: Goods sacrificed as part of a general average act or as a cargo owner’s contribution for the general average loss of others.

13. General Average: Illustration A vessel carrying a cargo of copper was stranded, and part of the cargo had to be sacrificed (thrown away) to lighten the vessel. The vessel had sustained damage, and a salvage vessel was employed to refloat it. Adjustment of the general average will be as follows: Value of the cargo (thrown away) less duty and handling charges 10,000 Cost of repairs for vessel (chargeable to general average) 40,000 Services for salvaging vessel 35,000 Disbursement at port and other charges 15,000 Total vessel sacrifice 90,000 Amount to be allowed in general average 100,000 Value of cargo (including sacrifice) 100,000 Value of vessel (including sacrifice) 300,000 Total Contributory Value 400,000 Rate of general average contribution 100,000 25% 400,000 Cargo’s contribution 25% (100,000) = 25,000 Vessel’s contribution 25% (300,000) = 75,000 Cargo owner’s liability = Assigned contribution – value of cargo sacrificed Thus, 25,000 – 10,000 = 15,000 to pay Vessel’s liability = Assigned contribution – vessel’s sacrifice Thus, 75,000 – 90,000 = (15,000) to receive

14. Claims and Procedures Typical claim procedures: • Preliminary notice of claim: The export-import firm (insured) must file a preliminary claim by notifying the carrier of a potential claim as soon as the loss is known or expected. • Formal notice and settlement: The consignee must file a formal claim with the carrier and the insurance company once the damage or loss is ascertained. • Settlement of claim: If the claim is covered by the policy and claims procedures are appropriately followed, the insurance company will pay the insured.