Logistics is an indispensable part of the modern world. In every aspect of our daily lives, many sectors, from shopping to healthcare, from education to energy, rely on logistics processes. The silent hand that drives trade and commerce, logistics ensures the smooth flow of goods and services from origin to end user. Whether it’s getting a package to your doorstep or delivering vital equipment to a healthcare facility, the role of logistics is undeniably important.
The logistics industry, which is an important link in supply chain management, is currently undergoing a major change, and this change brings with it opportunities as well as risks. New technology, new market entrants, new customer expectations and new business models. Risk management will play an important role in the way we navigate these challenges.
Risks that may be encountered in material procurement, storage, transportation and distribution processes during this change are expected to negatively affect the efficiency and profitability of businesses. In this article, we will discuss the stages of risk management in logistics and share strategies to help businesses manage these risks effectively.
Logistics Industry in Figures
The size of the global logistics market was realized as USD 7.98 trillion in 2022 and is expected to reach USD 18.23 trillion by 2030, with an increase of around 10% between 2023 and 2030.
In Turkey, the share of the logistics sector in gross domestic product is 12 percent. According to the Logistics Performance Index prepared by the World Bank, Turkey has made significant progress, rising from 47th place in 2018 to 38th place in 2023, reinforcing its potential and the importance of its geopolitical position. In 2022, the logistics sector, which contributed 20 billion dollars to our country’s economy, is the second sector that brings in the most foreign currency after tourism. Prof. Dr. Ahmet Bolat, Chairman of the Board of Directors of the Service Exporters’ Association (HIB), states that he has a strong belief that the logistics sector will reach an export figure of 25-30 billion dollars in 2023.
What is Risk Management in Logistics and Why is it Important?
Especially after Covid-19, it was seen that one-dimensional supply chains can collapse under certain conditions in the process from where the product or service is produced to where it is consumed. The weak chain of the link can appear at stages such as material procurement, production, storage, transportation and distribution. For this reason, the importance of identifying, analyzing, evaluating and controlling uncertainties and potential problems is felt more and more.
Risk Management in Logistics: A Basic Necessity
Managing a wide range of sub-headings such as transportation, storage, shipping, customs services, insurance, vehicle repair and maintenance in a wide area such as logistics, which covers land, air and sea, necessitates effective risk management.
The answer to why risk management in logistics is critical lies at the core of logistics operations. Logistics companies operate like a well-oiled machine, where each component affects the other. Any disruption in one direction can create a ripple effect and cause operational disruptions. Therefore, effective corporate risk management in logistics is vital to maintain this smooth synchronization and optimize logistics management. Companies that build the infrastructure to manage operational, financial and tangible risks along the supply chain will keep pace with change and increase their future competitiveness.
Main Risk Types and Impacts in Logistics
Logistics risks are multifaceted and cast a wide net across operational, financial and material areas. An additional critical component is the quality of employees, which is crucial for the smooth running of logistics operations. These risk areas are central to maintaining a stable supply chain, which has become even more evident with the Covid-19 crisis.
The importance of a resilient supply chain has become more evident as businesses need to quickly adjust their processes in the face of the pandemic, highlighting the complex risk environment for logistics companies.
Companies are now more aware of the need to be more vigilant about operational risks arising from factors such as supply chain disruptions, performance of logistics service providers, technological failures and natural disasters, as well as financial risks such as exchange rate fluctuations, changes in interest rates and non-payment by customers. Currently, the level of awareness of common factors in the transportation sector, such as material damage, theft and natural disasters, is sufficient.
However, the deeper you go, the more it becomes necessary to deal with the details. For example, the most common types of loss in cargo transportation include water damage, storage loss and theft. In addition, damage such as scratching, rusting and discoloration may also occur. The most serious cargo losses are usually caused by factors such as accidents, tipping, natural disasters, fire, moisture and contamination. For example, if the driver stops in an unplanned area for any reason, there are unforeseen risks such as theft, parking lot closure, weather.
If we give examples of risk categories in the logistics process such as disruptions, delays, forecasts, inventory and capacity, inventory management risks such as over or under stocking, storage risks such as climate, physical, chemical, biological and functional, transportation risks such as vehicle, driver, loading, waiting, route.
Risk Management Stages in Logistics
To navigate the complex and often uncertain terrain of the logistics industry, businesses must begin the process of identifying, assessing and prioritizing potential risks. Through this systematic method, logistics businesses can strengthen their operations and lay the foundation for an effective risk management strategy.
Identification Uncovering Risks
The first important stage in this process is risk identification. At its core, risk identification is about recognizing potential hazards and their origins before they become more significant problems. In the logistics industry, risk identification involves analyzing every aspect of the business operation. From transportation to warehousing to supply chain management, every element must be assessed for potential hazards.
Sources of risk can be diverse. It could be an interruption in the supply chain due to unforeseen circumstances, a disruption in communication channels, potential cyber threats or fluctuating global market trends.
Being aware of these risks requires an understanding of both internal processes and external factors. By doing so, businesses can build a comprehensive picture of the risk environment they face. The purpose of a risk profile is to identify where the greatest vulnerabilities lie (supply, demand, process, control, environmental impacts) and what the likelihood is that the chain will be disrupted or disrupted.
For example, an exporter may face serious delays due to a change in customs regulations. Such delays can disrupt deliveries, negatively impact customer satisfaction and cause additional costs. At the risk identification stage, logistics companies can identify such changes and their potential impact on their operations in advance.
One of the competitive advantages for businesses today is supply chain management performance. Therefore, businesses should create a risk profile to pay attention to potential risks in the supply chain.
Assessment: Determining Magnitude and Impacts
Once potential risks have been identified, the next step is to quantify their magnitude and potential impact on business operations. Risk assessment is an evaluative process that determines the severity of the identified risks and their potential impact on the organization’s functionality.
Logistics companies need to weigh the potential damage these risks could cause against their operational capacity, resources and strategic objectives. This assessment ensures that businesses are aware not only of the imminent threats they face, but also of their potential impact. It thus becomes an integral part of the risk management process, providing valuable insights.
Factors such as the focus on efficiency instead of effectiveness, globalization, centralized distribution, outsourcing tendency, and a decreasing supplier base can all contribute to logistics processes becoming more vulnerable.
For example, during the global pandemic, there were many disruptions in the supply chain. In such a situation, the risk assessment process can help predict the likely impact of such an event on the company’s business operations. The company can create a range of scenarios, including options to find alternative suppliers or re-evaluate warehousing strategies, especially if there are problems sourcing a particular product from a particular region.
Prioritization: Strategically Ranking Risks
After risk assessment, businesses need to strategically prioritize these risks. Given that resources to address risks are often limited, companies need to rank risks according to their potential impact and the organization’s capacity to respond to them.
Prioritizing risks enables logistics businesses to allocate their resources and efforts more efficiently. The most critical or damaging risks should be addressed first, enabling businesses to mitigate significant threats before dealing with less impactful ones. This strategic sequencing is crucial to direct the focus to the risks that can most significantly impact business operations.
For example, when a logistics company assesses potential supply chain disruptions and changes in customs regulations, as mentioned above, it can prioritize these risks to determine which risk will have the greatest impact. If a company’s customers are mostly dependent on a specific set of products and these products are sourced from a specific region, supply chain disruptions may be considered a higher priority risk than changes in customs regulations. This prioritization allows the company to direct its resources and efforts to the right places.
In summary, the process of identifying, assessing and prioritizing risks is a sound way for logistics businesses to mitigate potential hazards. This comprehensive approach allows companies to better understand their risk environment, anticipate potential problems and develop effective strategies to counter them. This provides a solid foundation for effective risk management in logistics.
Risk Mitigation and Prevention Strategies: Applications in Logistics
Risk Mitigation Strategy: This strategy focuses on developing plans to reduce the impact of identified and prioritized risks. Risk mitigation may include increasing security measures, improving communication processes or diversifying supply chains to avoid disruption. It can also include assessing cost-effectiveness, measuring the success of route optimization strategies, and examining loading and unloading processes. In addition, businesses can work to strengthen employee skills to reduce operational risks or take out and sign insurance policies to manage financial risks.
Many factors can be examined to reduce risk. Compliance with local and international safety regulations, environmental guidelines, labor laws, as well as laws, regulations and standards, such as the Road Transport Regulation, the Maritime Labor Convention, should be examined to mitigate financial and reputational risks. Investigations such as financial records, fraud measures, freight invoices, fuel consumption claims checks, etc. can also be included in this scope.
Risk Prevention Strategy: It aims to prevent a particular risk from occurring. These strategies involve taking proactive measures to prevent risks from occurring. For example, the business can use quality packaging materials to prevent material damage.
The length of the supply chain increases exposure to risks.
Other managerial practices that can increase supply chain vulnerability relate to single or multiple sourcing. Single sourcing can provide significant benefits in terms of establishing and managing relationships with suppliers, but can have devastating effects in the event of failure. Many people remember the fire in Albuquerque, New Mexico, which disrupted the supply of microchips and drove cell phone manufacturer Ericsson into bankruptcy. In contrast, Nokia, using the same supplier, survived because its supply chain was structured to best respond to these accidents. In particular, changes in product design and the creation of additional sources of supply were cited as the basis for replacing the ill-fated supplier and resuming mobile phone production.
Likewise, the length of the supply chain also increases exposure to risks. Industry professionals have a rule of thumb: Freight at rest is freight at risk. In essence, the longer the transportation distance that needs to be covered, the higher the number of risks encountered in the various links, and the longer the order lead time in case the cargo is lost and needs to be reordered. For example, many companies have experienced and continue to experience the effects of the Suez Canal accident in March 2021, when the Ever Given, carrying 18,000 TEU (six meters equivalent units) of containers, was pushed by strong winds and its bow and stern became wedged against the canal banks, completely blocking passage.
Risk Transfer Strategy: In some cases, businesses may decide to transfer risks, especially when they do not have the capacity to mitigate them internally. This may involve outsourcing certain operations, entering into partnerships or purchasing insurance policies to cover potential losses.
Based on the first steps of identification and assessment, logistics businesses can develop targeted strategies for risk mitigation. This is where the potential for gaining competitive advantage lies. Clever strategies can help prevent operational disruptions and maintain service quality, increasing operational efficiency and profitability.
Risk management can significantly reduce the additional costs incurred when shipments are delayed or lost, products are damaged, suppliers go out of business or quality is not acceptable.
In addition to the known cost-reducing effects, research shows that companies that implement sound risk management strategies are able to gain a competitive advantage and thereby consolidate their market leadership position. Nokia’s quick response when its microchip supplier in New Mexico was forced to stop production is a clear example of how organizations that can manage their risks can turn challenges into opportunities, for example gaining market share when competitors go bankrupt.
Outsourcing and globalization can increase the vulnerability of supply chains to unexpected risks or disruptions.
In the face of risk and uncertainty, supply chains should be structured to balance performance with the costs of risk prevention and mitigation measures. Here are a few potential applications suggested by research:
Reduce the number of stop points in transportation. Standing cargo is cargo at risk, especially at risk of theft or hijacking. Security risks increase when cargo stops at a port, terminal, gas station for refueling, or on the side of the road while the driver rests. By minimizing these stopping points, a transport planner can organize the transport route in a preventive way.
Perform geographic analysis. Since it is difficult to relocate factories or logistics operations, it can be traded for the benefits of reducing or eliminating certain risks.
Build flexibility and redundancy. Flexibility can also be integrated into transportation by designing alternative routes or into production by enabling factories to reorganize their production lines to double production where possible.
Take advantage of buffers. Buffers can increase capacity to hold more inventory than needed or serve as time buffers at intermodal terminals to ensure optimal modal shift.
Manage relationships. The type of relationship established with a supplier will determine the degree of transparency of its operations and financial health.
Promote business continuity/resilience. Planning and putting processes in place to ensure that businesses can respond quickly and prevent escalation is of paramount importance.
Implement information systems seriously. Today, IT solutions are available to monitor suppliers and cargo flows during transportation in real time, collecting real-time information on weather forecasts and events such as natural hazards, traffic conditions, congestion at terminals, etc.
Monitoring, Control and Continuous Improvement for Risk Management in Logistics
Risk management is an ongoing process, not a one-off exercise. Regular monitoring and control mechanisms and a commitment to continuous improvement are crucial for sustainable risk management. Looking to the future, the logistics risk landscape will continue to evolve, influenced by technological developments, regulatory changes and shifts in global trade dynamics.
As leaders of the logistics industry, it is up to you to navigate this complex risk landscape. It is your responsibility to steer your organizations towards a future of resilience and prosperity. To do this, you need to stay one step ahead of risks, understand their impact and develop effective management strategies. Only then can logistics businesses truly unlock their potential for operational efficiency and success.
Risk Monitoring Strategy: The risk management process is ongoing and needs to be reviewed regularly. Businesses need to continuously monitor their risk environment as external and internal factors change. This strategy ensures that the risk management plan remains effective and can be adapted as new risks emerge or existing risks evolve.
Business Continuity Planning: This strategy involves establishing procedures to ensure that operations can continue during a crisis or disruptive event. Business continuity plans typically include backup suppliers, emergency response procedures and recovery plans to restore normal operations as quickly as possible.
Risk Communication Strategy: It is critical to ensure that all stakeholders, including employees, customers and suppliers, understand the risks. This strategy involves communicating clearly about identified risks, their potential impact and the steps being taken to manage them.
Continuous Improvement Strategy: As part of the ongoing risk management process, businesses should always seek to improve their strategy. This may involve using data analytics to learn about risk trends, reviewing risk management practices or providing training for employees to improve their risk management skills.
When implemented effectively, these strategies can significantly improve risk management in logistics businesses. By identifying, assessing and prioritizing risks and then implementing appropriate strategies, logistics businesses can overcome potential pitfalls, improve operational efficiency and build resilience in a dynamic risk environment.
Companies with sound risk management strategies can gain competitive advantage and thus solidify their market leadership position.
Another potential benefit of having an excellent risk management plan in place is the opportunity to enter riskier businesses. While a risk-taking attitude can bring companies greater rewards, risk management plans can help control risks and mitigate their consequences.
If you are a logistics business and would like to improve your operational efficiency by implementing risk management strategies, contact us. We can help you properly identify and manage the risks your business faces.
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