Category Archives: Risk Management

Are You Being Hit with the “Double Payment” Problem in Your Shipping?

Logistics Management just ran an excellent article on “Logistics and the Law: Don’t Pay Twice”, by Brent Wm. Primus, J.D. of Primus Law Office that I think is a must read for anyone responsible for global shipping.

When a shipper engages a broker or when a shipper or a broker books a load with a carrier, they expect to be billed and to pay for the charges for moving the freight. What they don’t expect is to have to pay the charges twice. Unfortunately this does happen and, in the last few years, has happened with increasing frequency. This emerging issue is called the double payment problem.

As the article points out, there are three variations of this problem:

  1. The going-out-of-business broker.
    In the last weeks or month of its business life, a broker continues to book loads and collect payment for carrier charges, but fails to pay the carrier.
  2. The double-brokering carrier.
    A load is tendered to a carrier with the understanding that the carrier will be providing the actual transportation, but, instead of providing the transportation itself, the carrier uses its broker authority and tends the load to another carrier, which it fails to pay.
  3. The fraudulent broker.
    A fraudulent broker solicits loads that it then tenders to carriers with every intention of collecting from the shipper but with no intention whatsoever of paying the carrier

With respect to the first two variations of the problem, two competing legal theories have developed. The first theory is the well-established principle that under the traditional bill of lading contract, the consignor has primary liability for payment of the charges on “prepaid” shipments, and if the consignor fails to pay, then the consignee must pay. For “collect” shipments the consignee has primary liability and if the consignee fails to pay, then the consignor has to pay (unless the no-recourse provision of the bill of lading, known as “Section 7”, has been signed).

But what happens when the consignor or consignee has fully paid an entity under a good faith assumption that the entity is the carrier or paying the carrier? In this situation, a legal principle known as “equitable estoppel” has developed and applies in situations where Courts have held that it would not be fair or equitable to ask a party to pay twice. However, there are situations, such as Freight Lines, Inc. v. Sears Roebuck & Co. where the principle, though it had merit, was not applied by the courts.

With respect to the third variation, which has become a more significant problem as of late, typically no money ever reaches the carriers and you, as a shipper, will likely end up with full responsibility for the payment unless you can demonstrate that you had a reasonable expectation that the company was legitimate (and thus use the equitable estoppel argument). This of course means that you have to do your homework, and unless the company in question has hacked US Government Systems to make it look like they are affiliated with reputable companies (like Viacheslav Berkovich and Nicholas Lakes did), it might be hard to demonstrate a reasonable expectation of a reputable enterprise, especially if the broker is relatively new.

So what should you do? Especially when there is no sure fire way to eliminate the risk?

According to Steve Fernlund, the Executive Director of the Freight Transportation Consultants Association (FTCA), always know who you’re doing business with. Check payment practices and credit rating agencies to make sure there is minimal risk that the carrier and/or broker will default on its obligations. Have a standard procedure to qualify carriers and brokers and follow that procedure in every transaction. The latter will help you in the construction of equitable estoppel arguments should you ever find yourself in one of the first two situations, especially if the standard procedures cover everything you can be reasonably expected to do.

Furthermore, as the article points out, you have to monitor the carrier to ensure they are complying with the terms of the contract as some carriers will sign a contract and then ignore the prohibition against tendering to another carrier through their brokering authority. (This includes a spot check of delivery receipts to see if the carrier named as the delivering carrier is the one with whom you have a contract.)

When you’re using a broker, have a written contract that requires the broker have written contracts with its carriers. The broker’s contracts must require that the carrier specifically designates the broker as its agent for collection and that the carrier waives any right to collect from the consignor or consignee if the broker has been paid. Also require that copies of all contracts with all carriers the broker intends to use be forwarded to you for review and confirmation.

And, finally, if you truly want absolute protection, you could require that any broker you do business with post a surety bond greater than the amount of business you expect to do over a six-month time period. However, this will eliminate many brokers from consideration as most sureties require 150% collateral, which many smaller brokers will not have. It may also increase your brokerage fees, as they might insist that you pay the bond premium.

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What’s Really At Risk This Year?

The recent SCMR article on “Supply Chain 2010” addressed the following as what’s at risk in 2010.

  • currency-driven inflation
    Especially for U.S. based companies … because that’s what happens when you start flooding your local economy with government paper.
  • lengthy recovery
    I thought this was pretty much understood … especially with every major publication running a story on the “jobless recovery” on a weekly basis.
  • more financial crises
    The article refers to the large block of bonds, notes, credit lines, and other paper assets scheduled to mature in early 2011. Then you have all of the government debt, including the 56 Billion in Dubai World that just said it needed to delay payments on the 29 Billion of that in Nakheel for at least six months, and potentially worse situations in Greece or Italy.
  • interruption of supply
    the risk that the supplier will go out of business, cut off the buyer’s contract, or simply run out of product is still there
  • “black eye” risk
    is your supplier sustainable, responsible, and fair … or is your supplier producing your products in a sweat-shop in a third world country? (for example)
  • compliance issues
    a government regulator could come knocking down your door if a supplier or manufacturer runs afoul of the law

But these are essentially the same risks we saw in 2009. So what should you really be looking out for? I’d start with a focus on these often ignored risks:

  • lack of global trade visibility
    there’s already 106 steps to global trade, it’s only going to get worse before it gets better, and missing even one of them could cost you Millions in fines (especially since we’re now in the penalty phase of 10+2)
  • lack of flexibility
    you need to be demand driven, on short production cycles, and constructing scenario-driven long term plans which you can tweak at least quarterly as it’s likely going to be a long, rocky recovery to the Old Normal
  • lack of education
    to do more with less, your people need to know how to do more with less, and that means they need to be better educated; fortunately, supply chain is the one area where education can deliver returns in excess of 100:1 so make sure your people get at least a week’s worth of education every quarter

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It’s 2010 … Time to Crank The Fear Factor to 11!

Well, it sure didn’t take CNN long to get the 2010 Fear Mongering Bandwagon rolling. Check out The Buzz from January 2 on what could go wrong in 2010. (That’s right, Saturday January 2nd. They couldn’t even wait two days for the first work week to start!)

According to the article,

  • we’re in for part two of the double-dip recession,
  • the US currency is likely to be debased,
  • the housing market could still hit bottom,
  • the market is in for a lacklustre year, and
  • the job situation is not going to improve.

Wouldn’t it be great for a change if the media focussed on the positives and instead of spreading more FUD, talked about the lessons we’ve learned and how we can use them to right the economy?

After all, this is the 2nd major recession in less than a decade, as the the tech bust of 2000 was still a little less than 10 years ago. And a number of other global economies have had similar downfalls in the last 10 years. Should it not be obvious by now that:

  • out-of-control growth will be followed by a rapid contraction,
  • when you flood your country with government paper you decrease the value of your currency value,
  • house prices cannot increase in value at a rate above inflation forever as they quickly reach a point where no one can afford them,
  • high double-digit returns year-after-year-after-year are not sustainable (and anyone who says they are might be another Madoff in the making) in the long term, and
  • it can take a long time to recover from a recession.

Once you’ve learned these lessons and go back to the old-school of business (which takes the long term view that most of Corporate America seems to have forgotten since the turn of the Millennium), where you plan for steady, incremental growth, hire in a controlled fashion, and don’t make, or price, products out of reach, I see no reason that you can’t, once again, do just fine.

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There’s Good Risk Management Advice …

… and then there’s the risk management advice in the Logistics Management version of the “Supply Chain 2010” article. According to this version, you should:

  • get in the habit of much shorter contracts
    … and throw any hope of cooperative innovation right out the window
  • adopt a logically variable cost structure
    … and watch your costs go through the roof every time an index runs wild
  • get in the habit of stress testing your supply chain
    … instead of taking the time to design it properly so that it survives the stress tests

Risk isn’t going away and you have to start managing it better, but don’t make stupid decisions based on the assumption that this transient, lengthy recovery is the way things are going to stay. We’re working our way back to the Old Normal, and as I pointed out in my last post, that requires visibility, flexibility, and education. Don’t forget that.

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Cross-Cultural Risk Factors in Offshore Outsourcing

SourcingMag.com recently ran a decent article on “Cross-Cultural Risk Factors in Offshore Outsourcing” that overviewed three risk factors that can have a serious impact on the success of an offshore outsourcing relationship that are worth a review.

  1. Corporate Culture Differences
    There’s a chance the client’s corporate culture and the vendor’s corporate culture could be at opposite poles. One could be bureaucratic and the other entrepreneurial; one could make decisions top-down and the other on consensus; one could encourage employees to step-up while the other beats them down; etc. A lack of alignment will present serious obstacles in interactions and have significant bottom-line impacts for both organizations.
  2. National Culture Differences
    Cultural conditioning runs deep, especially in countries like China where the roots of their culture stretches back millenniums. Your people could be autonomous while the vendor’s people are group-oriented. Your people could be absolutist in their ethics and conduct and your vendor’s could be situational. You could want results while they want to save face. If you don’t understand these risks, you won’t be ready for the inevitable pitfalls you will encounter.
  3. Cross-Cultural Competencies of Key Players
    A wide range of players is involved in your organization and that of your supplier. Some will work from their domestic base of operations while others will travel or go on expatriate assignments. But all will be neck deep in the challenge of trying to achieve business objectives in a culturally diverse global environment. In addition to the technical, managerial, leadership and interpersonal skills required for their jobs, the people occupying these roles need to have cross-cultural competence if they are to be successful and not put their company at risk.

Thus, before you enter into any outsourcing agreement, you should perform a cross-cultural due diligence. For more on how to carry one out, see the “Cross-Cultural Risk Factors in Offshore Outsourcing” article. For more on the types of cultural differences you may encounter in China, Germany, India, Japan, Korea, Mexico, and Thailand, see the SI series on Overcoming Cultural Differences in International Trade.

Overcoming Cultural Differences in Trade with …

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