Food for thought: top 5 strategic risks for the reefer industry

Professor Garry Honey, founder of reputation risk consultants Chiron reflects on this year’s Cool Logistics Global conference and offers his top 5 risks for the reefer industry

LONDON, 24.10.2016 — As a risk consultant with some experience of supply chain risk across a number of industries, I was recently asked for my views on risk in a growing sector of the container industry, refrigerated containers, commonly known as ‘reefers’. Perishable cargoes which require temperature control include not just foodstuffs but pharmaceuticals also. These containers require a stable power source throughout their journey from producer to consumer. Power outage is a big risk, but not the only one.

Here are my top 5 risks for the reefer industry based on the latest Cool Logistics Global conference in Bremen at the end of September 2016.

1. Disruption risk

Any chain is only as strong as its weakest link. Everybody knows this, but how much attention is given to prioritising it within the industry? There is a temptation to reduce risk where you can control it, not necessarily where it is most critical, especially if it falls outside your immediate control. Supply chain thinking needs to be end to end, from producer to consumer; not starting in the middle — you can’t design a supply chain from the middle, it just won’t work. The reefer industry needs to manage risk inherent in satisfying demands from both ends of the supply chain: producer and consumer.

Loss aversion, exaggerated optimism and cognitive dissonance: three behavioural risks to collective decision making, as discussed by Chiron’s Prof. Garry Honey at Cool Logistics Global 2016

I recently worked with a Housing Association which found itself in the middle of a supply chain. It was contracted by a local council to provide and maintain public housing for tenants so had contractual liability risk in delivering this. The Housing Association had to find reliable and responsible tenants for the council housing to provide revenue for maintenance and development of its housing project: here it had financial risk. In the middle of a supply chain risk exists as your exposure to parties at each end, front and back or input and output.

“In the middle of a supply chain, risk exists as your exposure to parties at each end, front and back or input and output”

2. Anticipation risk

There appears to be a belief that digitalisation, information technology, Big Data, or 4.0 will somehow transform the industry and solve all its problems. It won’t. More information, while useful, will not address underlying problems. As one perishable shipper quoted during the conference said: ‘Don’t give me an App that just tells me how bad my service is’.

TS Eliot put it well: ‘Where is the wisdom we have lost in knowledge? Where is the knowledge we have lost in information?’ More information is no substitute for wisdom. Think smarter and increase wisdom not data.

I also work in a Financial Services sector called Fintech where Big Data is being heralded as a revolutionary concept in transactional services. Distributed Ledger Technology, commonly known as Blockchain, offers digital currency to the unbanked masses of the world. ‘Bitcoins’ have existed for over eight years as crypto-currency in the censorship- resistant world of parallel or shadow banking. There are reasons why Blockchain technology has stalled, it is only as good as the weakest link and this is about control and mutualisation. Don’t rely on 4.0.

3. Damage risk

What does damage look like and who pays if the cargo perishes on route — the carrier or the beneficial cargo owner (BCO)? There is an increasing dependence on legal contracts of liability, but protection of interest is not necessarily the best way forward. A recent case where a leading retailer sued its BCO for perished goods revealed that the cause was down to a change in packaging specification instigated by the retailer, not the BCO. For the reefer industry a key question at each stage is; who is the customer?

In the UK Financial Services sector there has been a move by regulators to improve customer service through Know Your Customer (KYC); this is driven more by regulatory pressure to prevent money laundering and fraud than a genuine desire to understand market demand. Despite this, within the reefer market it is important to know your customer and what they expect of you. Understanding the risk of perishable goods delivery is an important facet of a market in which a third of cargoes perish. How do your customers view waste and what are you prepared to do with them to mitigate against a risk which costs you both in lost revenue and reputation?

“How do your customers view waste and what are you prepared to do with them to mitigate against a risk which costs you both in lost revenue and reputation?”

4. Control risk

The Hanjin bankruptcy has highlighted an unpleasant feature of the industry, namely the uncertainty of who exactly is carrying your cargo. Is the carrier you commissioned actually the one handling your cargo today, or has the consignment been sub-contracted elsewhere to lower cost to increase profit? At the end of September there were 25 container lines at risk of cargo delays through the Hanjin network and up to 7,000 reefers stranded on Hanjin vessels which could not dock for fear of being impounded by the receiver.

In the reefer market it is important to know your customer and appreciate what their priorities are in terms of price, quality and time. As a former buyer with a large retail chain I know only too well the pressures forced on suppliers by those who command access to mass distribution. Every buyer demands goods at the lowest price, highest quality and fastest time. However, all suppliers know this is unachievable, that compromise must be negotiated, and that chasing lowest cost involves sacrificing quality or speed.

5. Value risk

The interests of intermediaries are not always the same as commercial parties within the supply chain: for example state legislators and EU officials whose regulations may be obstructive rather than helpful. Adding costs to protect port-worker safety or reduce power consumption ultimately add costs to the end consumer. Not everyone in the supply chain has the same objective or values as those involved in shipping goods for optimal cost. Planners need many years to approve a new port facility to handle larger container vessels, similarly the landside infrastructure of road and rail can fall behind shipping capacity due to policy lag.

There are many industries where the regulator acts as a brake to commercial or entrepreneurial activity given the remit of the regulator to protect labour resources or the environment against commercial exploitation. In the aim to drive down costs this is a reality that must be faced as regulators invariably have the power or suspend the vital ‘licence to operate’ and thus must be accommodated. For the reefer market this means looking closely at port facilities, road and rail infrastructure and all non-maritime elements of the supply chain.

These are my top 5 risks, but the message is primarily about how risk is perceived, ideally as uncertainty not a threat to business continuity and potential interruption. As uncertainty, risk needs to be embraced as an opportunity for innovation, for necessity is the mother of invention, and the reefer market badly needs some creativity in the face of commercial challenges.

To conclude, I like to remind my audiences of the difference between knowledge and wisdom: Question: What is the difference between knowledge and wisdom?

Answer: ‘Knowledge is recognising that tomato is a fruit, wisdom is leaving it out of a fruit salad!’

Garry Honey is the founder and managing partner of Chiron, a risk and executive education consultancy. He is an author, advisor and lecturer on corporate responsibility, and ‘strategic risk’. His executive education work covers corporate strategy & governance, leadership & change, internal & external communications, and stakeholder engagement risk in complex organisations. Chiron helps clients understand how to protect corporate reputation from accidental or malicious damage, designing predictive models and conducting stakeholder sentiment research so that clients can prepare and protect their reputation.

Cool Logistics Resources provides top-quality business intelligence and networking for supply chain, logistics and transport professionals in the international perishables markets. The annual Cool LogisticsTM Global Conference in Europe connects perishable cargo owners with cold chain logistics and transport professionals from around the world. CLR has also teamed up with Global Produce Events to run Cool LogisticsTM Asia, a one-day high-level forum addressing perishable logistics across Asia, taking place alongside the annual Asia Fruit Logistica in Hong Kong. CLR publishes The Cool Logistician , a monthly curated collection of the best perishable trade and logistics news from across the worldwide web, including expert opinion, analysis and views from the Cool team and guest authors as published on the Cool Logistics blog.