Exporting Exposures

As an important link in the global supply chain, exporters face many exposures

Small and midsize U.S. companies are sharply increasing their exports, encouraged by falling trade barriers, a weakening dollar that makes their goods and services more affordable to overseas buyers, and by the ease of e-commerce and international travel.

U.S. exports rose 12.2 percent last year to a record $1.6 trillion, or 11.9 percent of the nation’s economy. Moreover, 97 percent of exporters were small or midsize firms, many with fewer than 50 employees. Their ranks ranged from manufacturers, distributors and engineering companies to law firms, accountants, insurance agents and consultants.

Exporters entering the international business arena are just one more link in an ever-expanding global supply chain of producers, sellers and buyers. As such, they may lack the kind of control they are accustomed to over other players in their network.

In addition, the sheer geographic distances these business transactions may traverse present even more obstacles in transporting ingredients, components or unfinished products from one place to another.

Although expanding supply chains bring additional exposures that impact companies of all sizes, small or midsize companies can be at greater risk. They may have less experience or lack the financial wherewithal to deal with problems on an international basis, especially if they haven’t anticipated them. This gives them fewer alternatives when things go wrong. The sudden loss of a much-needed alpaca wool supplier in Peru, for instance, could leave a midsize U.S. clothing manufacturer scrambling to find another source with deadlines to fill orders for the following season.

Strengthening the Chain

An emerging exporter faces several key areas of concern when putting together a network of sourcing, production and sales on a global scale. The longer the chain — both in terms of the number of links and the distance between them — the larger the business risk for the company.

When exporters first assess a new marketplace, reputable, proven local sources and contacts can be an important source of guidance and support. Local resources can provide insights into the cultural aspects of transactions and help reinforce an exporter’s understanding of business and cultural norms in the country. Relationships matter a great deal and help form the foundation of any business partnership or engagement. Investing time building relationships upfront, before signing contracts, is time well spent.

Despite the need to focus on relationship building, good business basics remain as important as ever. One rule of thumb for expanding business owners is to continue with the same practical business practices and due diligence they engage in while doing business in their home country. The rigor of strong business fundamentals will not insult or put off qualified potential business opportunities. In the long run, exporters will be glad they maintained good process.

Businesses should also know their partners well and ensure that expectations are clearly set for the relationship. This includes both the quality of the materials they are purchasing or sourcing as well as creating clear service-level agreements for production, process or logistics.

They should establish a means for regular and documented quality control over all aspects of the operation to ensure that standards and agreements are being kept. Many U.S. businesses have little knowledge of quality control organizations overseas. Therefore, there is always a danger that certificates of acceptance, which are issued by a testing organization to a supplier to affirm that its products or components meet certain criteria, could be fraudulent. If testing must be performed abroad, U.S.-based firms will want to ensure that reputable organizations conduct the tests and the paperwork is in order. Additional testing should be done once the components arrive on U.S. soil.

Emerging exporters need to spend time to plan out options, alternatives and secondary sources for raw materials and processing. Deadlines and agreements/contracts made with buyers may not have leeway to allow for delays or gaps in production. Exporters should be sure they have people accountable for various aspects of managing the supply chain and that the process and accountabilities are documented and shared.

Businesses would be wise to confer with loss control experts who will be able to identify any deficiencies in their supply chain and make recommendations. Could the company continue to operate if some element of the supply chain failed? If so, then what would the back-up procedures or manufacturing capability be?

The Right Protection

Many emerging U.S. exporters assume their standard domestic insurance policies will respond to their foreign exposures, but often this is not the case. Any company having goods, services or people traveling outside the United States may need a more specialized international product. There are a variety of products that would benefit the exporter, but the one most common to exporters that do not have physical premises abroad would be exporters insurance.

Small to midsize companies might be surprised at how reasonable the cost is for exporters insurance. The primary components of exporters insurance are foreign voluntary workers’ compensation and general liability insurance. Other available components run from commercial automobile liability or blanket accident insurance for travel outside the United States and Canada, to political risk insurance in the event that a foreign government seizes an exporter’s assets.

These types of insurance protection address an array of risks. For example, the business traveler whose laptop is stolen in Italy is protected if his firm has personal property coverage. A U.S. manufacturer is protected by ocean cargo insurance if thieves in Croatia steal the van containing his recently delivered supply of linens, valued at $110,000. Then, too, a commercial automobile liability component would prove valuable if an American salesman driving a rental car in Germany has an accident on the autobahn.

Small Company, Great Exposure

As businesses continue to grow their foreign operations, small and midsize companies are more likely to experience a loss to corporate assets outside the United States or Canada than larger companies, according to Chubb’s 2008 Multinational Risk Survey. Compared to companies with annual revenues of more than $1 billion, smaller companies experienced at least a 50 percent higher frequency of foreign losses during 2007 for liability lawsuits, theft of intellectual property/piracy and theft of goods in transit, according to the survey. The survey also showed that smaller companies experienced at least a 35 percent higher frequency of losses for crimes against and injuries to American and Canadian employees traveling or working overseas.

Larger companies often have the resources needed to take the global patchwork of different laws and languages, currencies and styles of conducting business and create corporate risk management standards throughout the world. Small and midsize companies that do business overseas need to look to their business partners to help them create standards that will help reduce foreign property and liability losses, injuries to employees and losses related to supply-chain failure.

Topics USA Canada Manufacturing