Importers around the world are facing soaring freight costs amid a global shipping crisis that may last months. A shortage of empty shipping containers in Asia and bottlenecks at sea ports are behind the problems, in addition to increased demand created through online orders due to pandemic lock downs around the globe.

We were paying $2000 per container in November, this month we've been quoted over $12,000 . quotes from many importers around the world

Container shipment prices have reached a tipping point where there are not enough containers to support demand causing a six-fold price hike. But not only are importers facing a significant price hike for their shipments, finding a container available for shipment is nearly impossible, causing additional delays and interruptions.

But what is the real cost of supply chain interruptions? As an extreme example - U.S. automakers were among the major businesses that temporarily shut their factory doors after the Sepetember 11 attacks. As air shipments of needed parts were grounded, many of their plants had to shut down for days. As a result, fourth-quarter earnings in 2001 for these automakers dropped considerably. So the cost of cargo delivery interruptions does not amount to the missing batch of $50,000 parts needed for continuous factory production, but rather can have severe impact on total output and business viability.

Container shipping is closely correlated with developments and changes in the world economy, manufacturing, and consumption. As the world is becoming more interconnected, shipping availability and costs may vary extremely with crisis situations becoming more prevalent. While it is impossible to avoid paying high market prices for cargo shipments, emphasis can be focused on ensuring assets get from point A to point B safely and intactly, becoming one of the most important objectives for companies dependent on supply chains for business viability.

The Complexity of Recovering Cargo Loss Real Costs

What are the elements of Cargo loss?

Cargo loss has more hidden consequences to shipping bottom line than one might realize. It is not just the loss of the cargo you need to account for, but also the cost of supply chain interruptions, extra customer contact and service, criminal investigations, expedited deliveries for replacement shipments, rising insurance rates and even lost business.

Extrapolating from the National Cargo Security Council (NCSC) estimates, the global financial impact of cargo loss exceeds $150 billion annually in 2019. This is a high price to pass on to your customers.

Determining Your Expected Value of Loss (EV)

A good place to start for evaluating the importance of uninterrupted cargo delivery is by calculating expected value of cargo loss based on historical data. For example, a typical large producer may have a total of 5,000 annual shipments, for the sake of this example let’s assume 100 loads were compromised, this equals a 2.0 percent probability that a load was lost.

For this large producer, a typical load value is $50,000. But the cost of the load does not encapsulate the entire loss value.

To calculate the total cost of cargo loss these additional costs need to be added:

• Additional manufacturing costs and freight charges for replacement cargo
• Lost revenues from cancelled deliveries
• Costs for additional sales calls and customer support costs
• Criminal investigation costs
• Insurance costs due to higher claim loss experience

Research shows that the actual cost of lost cargo is about five times as high as the actual lost value; so if you lose $1 million in products, you’ve lost $5 million in economic value. As shown, the compounding effect comes from the cost of the additional costs specified above.

To continue our example of the large producer with a load value of $50,000, the overall cost of loss will total $250,000. Taking the 2.0 percent probability of compromise, this producer is losing $5,000 of economic value for every load that leaves dock on lost cargo, totaling $25 Million loss annually.

Keep in mind that these total cost calculations can vary extremely with changing conditions. We can see that recently with the rise in eCommerce shopping during COVID-19 has put significantly more pressure on last-mile deliveries, which have become a target for opportunistic package thieves and hijackers, driven largely by convenience of accessability and economic need. In this case, the pandemic has triggered a notable rise in attacks on secondary distribution and last-mile transportation particularly small trucks delivering products to convenience stores or pharmacies. Opportunists have applied various methods, including hijacking, slashing truck tires, or simply breaking and entering, to attack delivery trucks and get smaller portions of the product.

Cargo Insurance Claims

One channel for recovering cargo loss costs is through cargo insurance. Cargo insurance is a complex topic with many legal issues concerning coverage extent, responsible party, valuation of a cargo in the case of damage/non-delivery and much more . For example, even one insurance option with the expensive All-Risk Coverage insurance option still has many limitations. All-risk coverage, as its name suggests, offers financial protection in the event of most events leading to cargo damage or loss. However, even all-risk insurance is typically subject to some exclusions, such as:

• Negligence on the part of the importer/exporter

• Customs rejections or delays

• Loss or damage arising from war, strikes, riots, or civil unrest (WSRCC)

• Damage or loss as a result of acts of God (earthquakes, for example)

• Failure of customer to pay, or of the seller to collect payment

In addition to these exemptions, an additional complexity exists with determining the market value of the lost goods. All these complexities cause cargo shipments to be extremely under-insured.

The Cost of Supply Chain Interruptions Require Rethinking the Whole Strategy

Prevention and resilience will be key performance indicators for many organizations evaluating supply chain plans in the years to come.

To prepare, now is the time to capture all the data you need to monitor and calculate your company's true financial exposure due to cargo loss. For instance, by performing geographical analysis of where your cargo losses are occurring, controlling and determining supply chain routes. In addition, by analysing the risk of stopping points when the cargo is necessarily at rest, and thus at risk for theft.

By focusing on the Economic Value of Loss you bring attention and transparently to and expose the extent of cargo loss to your company's bottom line. This will provide support and justification for upper management to endorse programs aimed to reduce cargo theft and crime, one of the major causes for cargo loss.

The ability to consistently and predictably deliver cargo is critical for today's business environment. Current conditions of rising prices, shipments and container scarcity, force shippers to try and reduce loss. There is much less room for mistakes and uncertainty. The sooner businesses internalize and invest in securing cargo delivery, the better prepared they will be to come up on top during the next crises.