Supply chains are coming under pressure from major geopolitical events, advancements in AI technology and climate change. In this episode of On Aon, experts discuss the steps transportation and logistics businesses can take to improve their supply chain security.
Featured in this episode:
Chris Bhatt, Chief Commercial Officer, Transportation and Logistics
Chris Law, Senior Vice President, Marine Risk Engineering and Loss Control Practice Leader
Jan Steven Kelder, Specialty Leader, Transportation and Logistics, EMEA
Additional Resources:
Transportation and Logistics Industry Overview
Aon Insights: Transportation and Logistics
Tweetables:
Intro:
Hi everyone, and welcome to the award-winning “On Aon” podcast, where we dive into some of the most pressing topics that businesses and organizations around the world are facing. Today, we hear from Chris Law and Jan Steven Kelder for insights on supply chain security in transportation and logistics. Now, please welcome this episode’s host, Chris Bhatt.
Chris Bhatt:
Hi, everyone. My name's Chris Bhatt, and I'm the Chief Commercial Officer for Transportation and Logistics at Aon. In today's On Aon episode, we're discussing supply chain security in transportation and logistics. Now, supply chains are being hit hard by three major trends. Many geopolitical events are impacting supply chains with trade tariffs and sanctions shifting manufacturing bases from, for example, China to Mexico, and regional conflicts in the Red Sea and the Ukraine, which are also causing havoc. In addition, we are rapidly transitioning into the digital technology era with artificial intelligence. So smart telematics and advanced technology are being introduced into almost every facet of the supply chain. Finally, climate is impacting supply chains globally: changes in tropical storm activity and shifting tornado patterns are being seen, and lower water conditions in the Panama Canal and other global inland river systems plus increased severity and frequency of convective storms.
With me today to discuss these is Chris Law, who runs our Risk Engineering and Loss Control Team in the U.S., and Jan Steven Kelder, who leads our Transportation and Logistics business in Europe, the Middle East, and Africa. Thanks both for being here today.
Chris Law:
Thanks for having us, Chris.
Chris Bhatt:
So, in our discussions today, we're going to walk through these three major impacts on supply chain. So why don't we get started? So, my first question is, how would you characterize supply chain security today with geopolitical risks? And maybe Jan Steven, I'll come to you first.
Jan Steven Kelder:
Yeah, thanks Chris. And let me give you two examples. So, to start, my first example is in 2023, Mexico surpassed China as the main import country for the U.S. for the first time in over 30 years. And supply chains from Mexico to the U.S. compared to those from China to the USA have a very different risk profile. As one can imagine, the security risks in Mexico in specific areas are much more severe. So, risk management and insurance solutions need to be aligned with those changes to make sure companies are mitigating and transferring these risks based on these new circumstances.
And let me give you another example, and that is what we see in the Red Sea. So, the war risks there, as we all know, have substantially increased. Yes, it's an option for vessel owners to go around the Cape, but that has various major implications. Therefore, there are still a considerable amount of vessels going through that Red Sea area. Now, there are ways to manage those risks, for example the use of escorts, and are insurance solutions, think about war insurance. The challenge there we see is that those insurance solutions are very dynamic and the pricing of those is very dynamic. Therefore, a strategic approach around buying those war insurance solutions is necessary.
Chris Law:
Yeah. And look, from a loss prevention and risk mitigation perspective, regional movement of manufacturing bases creates a completely new logistics risk profile. And the example of moving manufacturing from China to Mexico, for example, transitions those bases and those logistic profiles from an area with low cargo theft to one with high cargo theft. So irrespective of whether these changes are temporary or permanent, what it does highlight is the critical importance of performing thorough risk assessments of these new logistic profile operations.
And what do we mean by that? Well, we mean risk assessing the new modes, the new lanes, the new trucking carriers, the new freight brokers, the facilities, potentially the escort and security services that might be available in this new region. But also, and maybe most importantly, we want to understand the theft modus operandi of this new region, because it could be completely different to our originating region and logistics profile. So, we are looking to understand and perform these risk assessments. It might make sense, for example, to retain the expertise of a third-party supply chain security consultant who has specific in-country regional experience and expertise in elements such as time of day when thefts are most committed, commodities that are most targeted, particular highways that are the most targeted as well.
So, once we've performed our assessment and we understand the vulnerabilities, the key then is to developing a holistic layered approach to cargo and supply chain security. And what do we mean by that? Well, we essentially mean not treating elements of the logistic profile individually. We mean essentially bringing all of our stakeholders to layer our security program so that there are no weaknesses or vulnerabilities. So those stakeholders will be our own employees, they would be our facilities, they'd be our drivers, they'd be our trucking operators, they'd be our facilities, they'd be our 3PLs. They may even be our security services providers. But essentially, we need buy-in and implementation of this holistic security plan so that we don't have vulnerabilities in a particular element.
Obviously, once we have that plan in place, again what's critically important is that we have compliance performance monitoring. In other words, we've spent a huge amount of time and investment developing these programs, we want to make sure that they're actually being implemented. Because if they're not, those create vulnerabilities. And what we are seeing increasingly in cargo and supply chain security and theft trends is an increase in sophistication, right? Cargo thieves recognize vulnerabilities quickly. They can exploit those quickly. And again, in the age of social media, it's very easy for these modes and these vulnerabilities to be made known very quickly before we've got a chance and an opportunity to correct that vulnerability or fill that gap.
Chris Bhatt:
Thanks, both. And I think actually maybe moving on to question two, that probably brings to life a bit of that speed of evolution, of sophistication. So, let's shift to AI. Where could it make sense for clients to integrate these innovations into their supply chain security risk management? And if so, what challenges or additional risks would they need to consider? Jan Steven, come to you again.
Jan Steven Kelder:
Yeah. And thanks again, Chris. And I think this is a very interesting one, because focusing on the increased risk due to these developments, the maritime insurance industry unfortunately is struggling to provide sustainable solutions. And so, there's a few examples. Cyber. Cyber has been excluded as a coverage item of most marine insurance solutions over the last couple of years. However, other than maybe a couple of exceptions, there haven't been structural solutions to cover these risks back into the policies despite the fact that actually, as you said, the risk for our clients is increasing due to the increased use of AI.
And to make this very tangible for a lot of our clients, is think about a hack of a container terminal. And due to such a hack, container is rerouted and therefore basically stolen. Well, depending on the circumstances, one could argue that's a cyber risk, which again, depending on the circumstances might not be covered under a lot of today's solutions while there's actually a severe exposure. So, our take on this is more than anything, is insurance offerings will need to be looked at holistically to make sure to get most out of the insurers and also to make sure that we look at those matters from the different solutions we have available.
Chris Law:
Yeah, thanks, Jan. And listen, look, from a theft prevention perspective, I think it's important to note when we talk about use of technology, AI, smart apps in risk mitigation, we have to understand that the thieves themselves are also becoming increasingly organized and sophisticated, and they're also using advanced technology and cyber methods to deceive, to infiltrate, and gain access to cargo. So, when we think about our layered holistic security program that we've just mentioned, the opportunities for application of tech into risk mitigation are quite broad. They're quite exciting. I personally think that the space has evolved and is continuing to evolve very quickly. So, we'll look at some applications that are currently in play and some future potential additional aspects that are in development.
Where does it start? Well, Jan Steven mentioned cybersecurity, right? And I think it's important to recognize that supply chain organizations have just the same vulnerabilities to cybersecurity as any other organization. So, a key element of tech and resilience to organized cargo theft and crime is having resilient cybersecurity policies in place. And really, that starts with the people. How often do we hear of a phishing email where an employee thought a link was safe or responded to an email and didn't notice that there was one digit different? Those vulnerabilities don't exist in our facilities with our employees. If we think about drivers themselves and the onset of use of telematics in the driver cab, well, cyber vulnerabilities exist there too. And are we really confident that our drivers also have awareness of those cybersecurity vulnerabilities and can have the same controls in place that we can control on our main logistics profile?
Chris Bhatt:
Thanks, Chris. A lot to take in there, I think. And having looked at geopolitical and AI, now let's turn to the last of our highlighted issues, which is climate risks. So how should clients prepare for climate risks on their supply chain security? And what would you say the opportunities are for risk improvement through adaptation and change? And maybe Chris, I'll come to you first on this one.
Chris Law:
Well, let's set the scene here a little bit, Chris. I think what's interesting is, and it's important to state climate impacts in themselves are not new. Right? But I think what is new is the change in trends that we're seeing, so the increase in frequency of events, the increase in severity of events, the changing in geography. In the U.S., for example, we talk about the shift of Tornado Alley away from the plains just east of the Rockies, now shifting more towards Mississippi Valley. That's a recent climate-driven change. We're also seeing climate stress, so low water for example in the Panama Canal that's caused reductions in transits of vessels and reduction in draft of vessels.
What does that do? Well, it drives a need for change in logistics profiles to adapt to those changes. Interestingly, in the U.S. for example, some stats on the cost of climate impacts, in 2023, $93 billion of damage from climate and severe weather instances. What was interesting to me is that of that $93 billion, $54 billion was due to severe weather events, i.e., non-hurricanes. But the single most expensive event in 2023, that was $14.5 billion, and that was the Southern or Midwest drought and severe heatwave.
So, I think in summary, just to open this, all of these impacts can drive shifts in patterns to our trade and force us to review, assess, and implement new logistics profiles.
Chris Bhatt:
Jan, what do you think about that?
Jan Steven Kelder:
Yeah. Look, at the end of the day, rerouting of cargo, irrespective of the cause, means you have to reassess the security risk of your supply chains. And climate can be one of those causes and is one of those causes. And from that point, focusing a bit on the insurance solutions, they need to be reviewed. So, think about the example you gave on the Panama Canal and the water challenges there, but the same would apply to the inland waterways in Europe. So instead of having a vessel with your cargoes going via the Panama Canal, you might find your cargo now on a slow-moving train going coast to coast over the U.S. And that causes completely different challenges depending on the type of cargo you have.
And it's not just even the conveyance itself, it's also where do you store your cargoes? How does that work? What are the exposures there? Maybe now you have to use that railway, to use as an example in the U.S. But then again, you are facing Tornado Alley. Well, actually the infrastructure, a lot of the warehouses in Tornado Alley were of course built for that exposure. But in the new kind of areas where we might see tornadoes popping up, the infrastructure might not be up to speed. And your insurers might struggle with that or you might face implications with that. So, at the end of the day, I think the key takeaway from an insurance perspective is you have to make sure that your risk transfer solutions are always aligned with today's changing and complex supply chains. And that is more important than it's ever been.
Chris Bhatt:
A lot to digest, and I know we will be discussing this in more detail specifically for the trucking and logistics industry at our trucking symposium in Dallas on the 4th and 5th of November. But for today, Jan Steven, Chris Law, thanks for joining us.
That's our show for today. Thank you all for listening. In the coming months we'll have episodes on workforce resilience, risk transfer, and much more. So, until next time, goodbye.
Outro:
Thanks for tuning in to the latest episode of “On Aon” with our episode host, Chris Bhatt and today’s experts, Chris Law and Jan Steven Kelder, for a discussion on transportation and logistics. If you enjoyed this episode, don’t forget to subscribe wherever you get your podcasts, and stay tuned for our next conversation featuring industry experts bringing you the latest on topics, including climate risk, workforce wellbeing, ESG trends, and much more. Be sure to check out our show notes and visit our website at Aon dot com to learn more about Aon.