Transportation Risk Management Defined
The Federal Highway Administration defines risk management as “a process of analytical and management activities that focus on identifying and responding to the inherent uncertainties of managing a complex organization and its assets.” Because there are so many uncertainties and those unknowns change frequently, this process hasn’t always been easy to define, making the U.S. transportation industry among the most risk prone of all industries.
In order to mitigate as much risk as possible, transportation companies strive to execute strong enterprise risk management strategies. These strategies aim to put the company in a better position to effectively respond to risks in real-time before risks cause harm.
Every company faces risk. For transportation companies, the risks typically reside in three areas: fleet integrity and safety, driver safety and retention, and compliance. The first two areas, in particular, are subject to external influences, particularly weather events, natural disasters, traffic and road conditions.
The entire supply chain is dependent on the carrier being able to deliver freight on time and in good condition as each stakeholder depends on receiving and/or shipping parts or products. If the driver has an accident, is stuck in traffic or loses cargo, for instance, or the company has financial issues that limit resources, disruptions to shipments can spell disaster.
Weather and traffic are risk factors we are all familiar with, but more have entered the picture in the past decade or so. According to Risk & Insurance, among the modern risks the transportation industry must manage are advancing technology, cyber exposure and market fluctuations created by international trade disputes. That’s not to say the traditional risks aren’t still present. In fact, some of the common offenders are progressively declining. Risk & Insurance says “a worsening driver shortage, regulatory compliance and the sad state of America’s infrastructure also present persistent challenges.”
The obstacle facing transportation companies is that so many of the risks they face are out of their control. They can’t redirect a storm, but they can reroute a shipment – but only if they have the right data early enough to make the change without impacting delivery commitments. Proactive mitigation gives companies the ability to identify risks early in the process, take steps to lower their risks, and execute on proper response decisions. This is where transportation risk management has the most impact.
Who Needs A Transportation Risk Management Solution?
Any company whose reputation, market share and financial stability can be impacted by their ability to deliver products or services to an end-user needs a transportation risk management solution. The key to minimizing risk impact is to be proactive and that means developing a risk management strategy with clearly defined policies and processes that drive operations. As more companies look to distinguish themselves in a competitive market, verifying your company has an effective shipping protocol in place that considers and plans for risk can be a differentiator. In the end, your customers only want to know that they can depend on you delivering their shipments on time, in full as expected.
Without an effective transportation risk management solution, your employees and customers may get the impression that risk management is not a top priority in your company. This can drive customers, as well as current and potential employees, to your competitors.
Managing risk has become such a critical factor, it’s not uncommon for shippers to ask their carriers what steps they take to reduce the risks that could impact the timing and quality of their shipments. If you’re a carrier, being able to show them that you not only have a defined risk management plan, but you’ve invested in a modern solution to execute that plan can go a long way in justifying your commitment to mitigating risk.
Shippers should also have a transportation risk management solution in place. As a shipper, your main goal is to keep your supply chain running smoothly. Your transportation risk management efforts should include your and your carrier’s insurance coverage and terms, liability at each stage of the supply chain, business continuity plans, the value of shipments per truck, and loss prevention.
Transportation Risk Management in Action
Every company approaches transportation risk management differently, but the Federal Highway Administration provides recommendations any transportation company can follow as part of their plan. These include:
- Developing executive support for risk management
- Defining risk management leadership and organizational responsibilities
- Formalizing risk management approaches using a holistic approach to support decision making and improve successful achievement of strategic goals and objectives
- Using risk management to reexamine existing policies, processes, and standards
- Embed risk management in existing business processes so that when asset, performance, and risk management are combined, successful decision making ensues
- Identifying risk owners and manage risks at the appropriate level
- Using the risk management process to support risk allocation in agency, program, and project delivery decisions
- Using risk management to make the business case for transportation and build trust with stakeholders
- Employing sophisticated risk analysis tools, but communicate results simply
They also say that mature risk management practices include policies and procedures that identify, assess, manage and monitor risks. The Administration identified the following practices among the leading international transportation agencies:
- Risk management supports strategic organizational alignment
- Mature organizations have an explicit risk management structure
- Successful organizations have a culture of risk management
- A wide range of risk management tools are used
- Risk management tools are key for programmatic investment decisions
- A variety of risk management methods are available
- Active risk communication strategies improve decision making
- Risk management enhances knowledge management and workforce development
Implementing Risk Management Tools
One of the most effective ways companies can mature their transportation risk management practices is with the use of modern solutions that empower carriers and shippers to automatically detect and analyze risks and then find alternatives that carry less risk.
You can only manage what you can see. Unfortunately, with transportation and logistics, there’s plenty you can’t see. The first step to gaining clarity is to evaluate each shipment and the variables that may impact their delivery along each route. That’s a big job that begs for automated technology. There are simply too many variables and shipments coming and going at different times to expect good results from manual efforts. Everything from inclement weather and extreme temperatures to social hazards, natural disasters, and infrastructure outages are at play and many can happen along any lane and location without warning.
Technology automates this process, providing reliable risk detection in minutes, rather than days. The sooner you have the risks identified, the sooner you can make decisions on how best to mitigate those risks. Early detection is key to a proactive response.
Beyond detecting potential risks, those risks must then be analyzed in order to know their likelihood, severity, geography, and timing. As an example, a predicted ice storm may have a 70 percent chance of hitting a northern state on the shipment route on Tuesday, but if the truck is expected to clear that state on Monday, the shipment can go ahead as scheduled. Alternatively, if the truck isn’t expected to be in that state until Wednesday, there is a more than average chance it will be delayed due to the icy road conditions.
Being able to predict the probability of those identified risks of occurring at a specific point in time is critical before a response plan is launched. Companies waste precious time and money reacting to risks that have a low probability of happening and can miss impending threats if they’re focused on the wrong risks. The biggest threats to the shipment may not be at the pickup or delivery locations but somewhere in between. When you compare all of the shipments with all of the risks along each route, it’s easy to see how technology can bring incredible benefits. Using the risk management technology, you can dramatically improving the accuracy, scale, and speed of discovery – all of which accelerates decisions that can reduce or eliminate risks.
When you combine real-time data with predictive data, you have everything you need to make the best decisions with confidence in the shortest amount of time. Sometimes, the decision is as easy as changing the date or time of a shipment to avoid a weather event. Other times, you may look at the data and realize the entire lane needs to be rerouted to avoid a natural disaster. No matter what the risk, your transportation risk management solution should be able to help you plan for the next best course of action. Even if the threat can’t be avoided, you’ll have the data early enough to set the right expectations with your customers.
This kind of predictive data can help companies save money as well. Reefer trucks, for instance, are expensive. If you know you have an upcoming route where temperatures will remain below a certain threshold, you may be able to decide to forego the reefer truck for a standard truck to avoid the costs while ensuring the integrity and quality of the product.
Choosing The Best Transportation Risk Management Solution
The most critical aspect of a transportation risk management solution is its ability to provide wall-to-wall visibility up and down the supply chain. Whether you are a shipper or a carrier, real-time insight into shipments is the only way to control risks. This includes every truck and its cargo, cargo requirements, available shipping lanes, pickup and delivery commitments and schedules, and of course, all of the risks that could impact those variables.
Weather events, natural disasters, social matters, infrastructure issues, driver health and safety, wildfires and other risks can directly or indirectly impact delivery reliability. You need real-time and predictive data at your fingertips to be able to make decisions ahead of time, setting appropriate expectations with your customers, reducing costs and ensuring shipments are safely transported as expected.
Legacy technology, homemade solutions, and manual efforts cannot handle the amount of data and analysis required to provide this level of visibility. Instead, modern, sophisticated technology that takes advantage of artificial intelligence, cognitive technology, and machine learning is leading the way. Those companies who invest in these technology solutions are poised to gain and retain the competitive advantage.
Before you can choose the right transportation risk management solution for your organization, you must first ask what risks you know about now that could affect your company’s strategic goals and objectives. This is an investment, requiring decisions to be made on how to prioritize a transportation risk management solution. Remember, there is a dollar amount tied to your ability to deliver shipments on time and on budget.
Transportation Risk Management Benefits
No transportation risk management solution can completely eliminate all risks, but it can help your organization detect, analyze and predict potential disruptions so better, faster decisions can be made. The goal is to empower companies to develop dynamic processes and systems that quickly, effectively and reliably respond to changing logistics and transportation issues.
This capability is predicated on one thing: data. With accurate, reliable and comprehensive data, you get a clear picture of supply chain and transportation network vulnerabilities. Without it, you are blind. You play defense instead of offense. Data enables you to be proactive in minimizing the impact of risks or avoiding them altogether. There are no guesses or gut feelings but decisions backed by data so your organization is more resilient to changes and risks.