International Logistics, Risk,

and Insurance
Logistics
Risks in foreign trade
Insurance
What is Logistics?
 The process of planning,
implementing, and
controlling the flow and
storage of materials from
the point of origin to the
point of consumption.
Dịch vụ Logistics là hoạt động thương mại, theo đó
thương nhân tổ chức thực hiện một hoặc nhiều
công đoạn bao gồm nhận hàng, vận chuyển, lưu
kho, lưu bãi, làm thủ tục hải quan, các thủ tục giấy
tờ khác, tư vấn khách hàng, đóng gói bao bì, ghi ký
mã hiệu, giao hàng hoặc các dịch vụ khác có liên
quan tới hàng hóa theo thỏa thuận với khách hàng
để hưởng thù lao.
 Two Categories of Logistics

1. Materials Management: Timely movement or flow of

materials/products from the sources of supply to the
point of manufacture, assembly, or distribution
(inbound materials).

2. Physical Distribution: Movement of the firm’s product

to consumers (outbound materials).
 Logistics Functions

 Labeling: Exporters need to be aware of certain labeling

requirements to avoid unnecessary delays in shipping.
 Packing: The rigors of long–distance transportation of

goods require protection of merchandise from possible

breakage, moisture, or pilferage.
 Traffic management: Selection of mode of

transportation carriers, consolidation of small cargo,

documentation, and filing of loss and damage claims.
 Inventory and storage: Important to establish certain

guidelines with respect to such issues as maximum

holding period, time of shipment of inventories to the
supplier, and other related factors.
 Logistics Concepts
 The systems approach: This approach puts more
emphasis on maximizing the benefits of the corporate
system as a whole as opposed to that of individual
units.

 The total cost approach: Evaluates the total cost

implications of various activities.

 The opportunity cost approach: Considers the trade–

off in undertaking certain logistic decisions.
 Importance of Logistics
to International Trade
 Efficient allocation of resources: Allows countries to
export products in which they have a competitive
advantage and import products that are either
unavailable at home or produced at a lower cost
overseas.

 Expansion of economic growth and employment:

Facilitates international trade and contributes to
economic growth and job creation.
 External Influences
on Logistics Decisions

 Regulations: Export controls, import restrictions,

privatization, deregulation etc.

 Competition: The need to reduce inventory, lower overall

costs, and develop appropriate logistics networks and
delivery systems to retain and enhance customer base.

 Technology: Technology improvements, added to the

deregulation of transportation and communications, have
transformed the logistics industry.
  Example
A U.S.–owned export firm in Bangor, Maine, serves a narrow product line in eastern Canada

from two distribution centers located in Montreal and Toronto. The company began to reexamine

its logistical infrastructure in response to its loss of profits and market share to competitors. It

increased the number of branch warehouses and level of fast–moving inventory while reducing

the market area served by each warehouse. It also extended its product line. In spite of the

additional expenses incurred, the company began to see a marked increase in its profits and sales

volume.
 Risks in Foreign Trade
 Political risks: Wars, revolution, or civil unrest can lead to destruction
or confiscation of cargo. A government may impose severe restrictions
on export–import trade, such as limitation or control of exports or
imports, restrictions of licenses.

 Foreign credit risk: Risk of delays in payment or nonpayment could

have a crucial effect on cash flow and profits.

 Foreign exchange risk: Changes in foreign currency values could

either reduce future receipts or increase payments in foreign currency.

 Transportation risks
 Political risk: Monitoring political
developments, taking insurance against
political risks

 Foreign credit risk: Appropriate credit

management through current and reliable
information, requiring letters of credit,
insuring against credit risks

 Foreign exchange risks: spot and

forward market hedging etc.

 Transportation risks
 Insurance
Two essential principles:
1. The principle of insurable interest: The insured must
prove the extent of the insurable interest to collect, and
recovery is limited by the insured’s interest at the time
of loss.

2. The principle of subrogation: The insurer is subrogated

to all the rights of the insured after having indemnified
the insured (the latter) for its loss.
 Marine cargo insurance: Cargo insurance caters
specifically to the cargo of the ship and also pertains to
the belongings of a ship’s voyagers.

 Hull insurance: Hull insurance mainly caters to the

torso and hull of the vessel along with all the articles and
pieces of furniture in the ship.
 Liability Insurance: Liability insurance is that type of
marine insurance where compensation is sought to be
provided to any liability occurring on account of a ship
crashing or colliding and on account of any other induced
attacks.

 Freight Insurance: Freight insurance offers and provides

protection to merchant vessels’ corporations which stand
a chance of losing money in the form of freight in case the
cargo is lost due to the ship meeting with an accident.
 Marine Insurance

Terms of policy:
 Voyage policy: Policy for a single trip or shipment
 Time policy: Policy for a specified period
 Open policy: Policy for an indefinite period

Types of policies:
 Perils-only policy: covers extraordinary and unusual
perils that are not expected during a voyage.
 All-risks policy: provides the broadest level of coverage
except for those expressly excluded in the policy.
Coverage for cargo loss/damage:
 Perils only policy: generally covers extraordinary and
unusual perils that are not expected during the voyage
(fire, explosion, sinking…)

 With average policy: WA covers total as well as partial

losses. Most WA policies limit coverage to those losses
that exceed 3 percent of the value of the goods.

 Free of particular average policy: In addition to total

losses, partial losses from certain specified risks such as
stranding or fire are recoverable.

 All risks policy: Broad coverage except for those

expressly excluded.
 General average: Goods sacrificed as part of a general
average act or as a cargo owner’s contribution for the
general average loss of others.

Types of losses:
 Total loss: Actual total loss; constructive total loss

 Partial loss: General average loss, particular charges,

particular average loss.

 A vessel carrying a cargo of copper was stranded and part of the cargo had to be sacrificial (thrown away) to
lighten the vessel. The vessel had sustained certain damage and a salvage vessel was employed to refloat it.
Adjustment of the general average will be as follows:
 Value of the Cargo (thrown away) less duty and handling charges 10,000

 Cost of repairs for vessel
 (chargeable to general average) 40,000
 Services for salvaging vessel 35,000
 Disbursement at port and other charges 15,000
 Total “vessel” Sacrifice 90,000


 Amount to be allowed in general average 100,000

 Value of cargo (including sacrifice) 100,000

 Value of vessel (including sacrifice) 300,000

 Total Contributory Value 400,000

 Rate of general average contribution 100,000

 400,000
 Cargo’s contribution 25% (100,000) = 25,000
 Vessel’s contribution 25% (300,000) = 75,000
 Cargo owner’s liability = Assigned contribution – value of cargo sacrificed
 Thus, 25,000 – 10,000 = 15,000
 Vessel’s liability = Assigned contribution – vessel’s sacrifice
 Thus, 75,000 – 90,000 = (30,000) to receive
 Claims and Procedures
Typical claim procedures:
 Preliminary notice of claim: The export–import firm

(insured) must file a preliminary claim by notifying the carrier

of a potential claim as soon as the loss is known or expected.

 Formal notice and settlement: The consignee must file a

formal claim with the carrier and the insurance company once
the damage or loss is ascertained.

 Settlement of claim: If the claim is covered by the policy and

claims procedures are appropriately followed, the insurance
company will pay the insured.
 Chapter Summary
Logistics 2 categories of logistics:
-Material management
-Physical distribution

Logistics concept;
-System approach
-The total cost approach
-The opportunity cost approach

Importance of logistics to international trade

- Efficient allocation of resources.
-Expansion of economic growth and employment.

External influences on logistics decisions:

 Regulations, Competition, Technology 

Logistics functions: Labeling, packing, traffic

management, inventory, and storage.
 Chapter Summary (Con’t)
Risks in Foreign 1. Political risks: Actions of government authorities,
Trade war, revolution, terrorism, strikes.
Managing political risk: Monitoring political
developments, insuring against political risks.

2. Foreign credit risk: Risks of buyer’s default or

delay in payment.
Managing foreign credit risk: Appropriate credit
management, letter of credit and other conditions,
insurance.

3. Foreign exchange risk: Changes in currency values

that could reduce future exporter’s receipts or
increase importer’s payments in foreign currency.
Managing foreign exchange risk: Shifting the risk
to the other party or to third parties.

4. Transportation risk: Loss or damage to

merchandise during transit.
 Chapter Summary (Con’t)
Insurance Two essential principles:
-The principle of insurable interest
-The principle of subrogation

Marine insurance Term of policy: 

1. Voyage policy: Policy for a single trip
2. Time policy: Policy for a specified trip
3. Open policy: Policy for an indefinite period of time
 
Policies for cargo loss/damage: 
1. Free of particular average: Policy covers total loss
and partial loss from certain specified risks insured
against.
2. Within average policy: Policy covers total loss and
partial losses
greater than a given percentage and insurer liable
for the total amount lost.
Claim and
Procedures
1. What is logistics?
2. What is Material management and Physical
distribution?
3. Please indicate main functions of logistics.
What does “traffic management” mean?
4. What is the difference between Foreign
credit risk and Foreign exchange risk?
5. Please indicate 2 essential principles in
Insurance and explain the meaning of these
2 principles.
6. Regarding to terms of insurance policy, how
many types of insurance are there? Please
identify the meaning of each type.
7. Please indicate 3 typical steps in claiming
procedures in insurance.