The vice president of supply chain for one of the world's largest auto companies was not having a good day. In fact, it had not been a very good year, and the VP was reviewing the litany of recent problems with his operations team. The latest crisis was a go-no-go decision on the site for a new assembly plant long planned for central Texas. The site was ideal, but a final decision was suddenly on hold because of serious concerns about the adequacy of current rail service vital to both inbound and outbound materials movements. Only one weak carrier overwhelmed with operations failures currently served the site. While another carrier was eager to provide additional service, the existing carrier stubbornly refused to grant competitive access to the proposed site. The entire North American strategy for a new line of pickup trucks depended on this project moving ahead on schedule. Now, the project was dead in the water.

"Didn't our general counsel say this was just a formality?" the VP asked his logistics director.
"He's sure changed his tune," replied the operations director, who was especially angry about this glitch that threatened his production strategy. "Now he's trying to get help from some state agencies and anybody else who will listen. He says this will take months to resolve. I don't think he has any idea what to do."

Glad we have such legal geniuses on our team, the supply chain VP thought to himself before moving on to the next issue on the agenda. The plant near Atlanta was just getting back on schedule after weeks of disruptions caused by a disastrous train wreck that had destroyed 10 containers of critical electronic components. The $12m of imported parts had made their way all the way from Japan to within a few hundred miles of the destination plant when the train derailed and all the containers went into an adjacent lake. The loss of the electrical components disrupted production for weeks, and to add insult to injury, the railroad was denying liability for the $12m loss.

"There is no doubt that the railroad is at fault," said the exasperated VP. "How can they possibly decline our claim?"

"I know what you're saying," the logistics director agreed sheepishly, "but the railroad says the bill of lading just makes them agents for the ocean carrier, and their liability is limited to $500 per container. I'll get our lawyers on this as soon as the freight payment debacle gets solved."

Oh, yes, the freight payment debacle. The supply-chain executive had even heard from headquarters in Tokyo about this embarrassing situation. It seems that the third-party the company had entrusted with $3m to pay all of its freight bills mysteriously went out of business before making the payments. Now the company was being sued by all of its carriers to pay the bills again, just because his team picked the wrong third-party. Not only did this mistake make his whole department look incompetent, but also it had put a $3m hole in his budget.

"Don't we have great supply-chain processes, the best technology and terrific suppliers?" the VP asked of no one in particular. "How can a great company like ours have such disruptive problems with basic transportation operations? We've got to get someone on board who knows about this stuff!"

Fortunately, this beleaguered supply-chain executive is fictional. No one deserves this amount of misery. But every one of the issues described above is a real situation that some company has had to wrestle with because of its own ill-informed decisions.

Real Problems
Consider the following real situations that the above fictional examples are based upon.

Toyota has just broken ground on a new $800m assembly plant near San Antonio to build its Tundra pickup truck, but not before going through a difficult situation to gain adequate rail service, which the company apparently thought was a routine matter. The Union Pacific Railroad, however, refused to allow the BNSF to use its lines to access the proposed site, and it was totally within its rights. It took many high-priced lawyers and lobbyists talking to the right powerful politicians to leverage a solution that would save the project without litigation or lengthy delays. The state is providing $15m to help build a new rail line that will connect the BNSF to the site. Everyone is putting on a happy face, but they all know the situation could have ended quite differently.

	"There is a greater need than ever to have people on staff educated in the legal aspects of transportation and logistics." -William Augello, University of Arizona adjunct professor of law

The U.S. Supreme Court just heard a case called Kirby v. Norfolk Southern in which several ocean containers originating in Asia were destroyed in a train wreck on the Norfolk Southern rail lines. The loss amounted to $1.5m. The NS denied full value liability because it claimed that its legal status stated on the shipping documents was as an agent for the foreign ocean carrier, not as a railroad. Domestic common carriers can be liable for the full value of any loss or damage. However, the liability to ocean carriers under the Carriage of Goods by Sea Act (COGSA) is limited to $500 "per package." Depending on the wording of the bill of lading, a carton, a pallet or an entire ocean container can be considered a single package. Needless to say, the difference in liability is huge depending on the legal status of each carrier in the shipment and how the bill of lading is worded.

As it came out in oral argument, the underlying facts in this case are shockingly common. Every year, millions of containers move intermodally into the U.S. via ocean, rail and truck on through bills of lading. More often than not, the legal status of each party to the shipment is not clear because of vague, sloppy or intentionally ambiguous wording on the shipping documents that no one paid much attention to. When a loss occurs, the importer, exporter or the insurance carrier end up battling with the various carriers in court to see who pays and how much.

Over the last several years, many manufacturers and retailers have had to pay freight charges twice because they naively handed over hundreds of millions of dollars to financially shaky, and sometimes unethical, third-party freight bill audit and payment companies. These third-parties went out of business before paying the carriers, so the shippers had to pay again. The most embarrassing example involved a Leominster, Mass.-based third-party freight payment company. The company's high-living owner apparently diverted the clients' funds to his own purposes instead of paying the carriers. Several very large companies that should have known better were left scrambling to satisfy the unpaid bills. Dozens of other freight payment companies have gone out of business in the last several years for different reasons, but the result is the same. The shipper ends up paying twice for not paying closer attention to basic transportation operations and the third-parties that it hires.

Due Diligence Required
Companies are simply not doing the due diligence required to manage their logistics operations properly, according to William Augello, a nationally known transportation lawyer and now an adjunct professor in transportation law at the University of Arizona.

"Most of the people making transportation decisions today are not educated in the legal consequences of their operations," says Augello. "Management has been told that transportation is now totally deregulated, so they don't need highly skilled transportation specialists anymore to deal with carriers and service providers. Anybody could do the job. Management has been misinformed. There is a greater need than ever to have people on staff educated in the legal aspects of transportation and logistics. All the problems we see cropping up are a result of this failure to educate."

Very few companies are in a position to have their own transportation lawyer on staff, but there are more practical options. Augello recommends that every manufacturer, retailer and other company shipping goods have a compliance officer who not only understands transportation and the law but who also has the authority to delve into operations to make sure that contracts are being lived up to and regulatory requirements are being met. Having such a compliance officer will help companies avoid most of the transportation problems that needlessly disrupt supply-chain operations and waste millions of dollars in transportation expenses.

In his new book, Transportation, Logistics and the Law, Augello spells out reasons companies need such transportation expertise on staff, and he provides a complete description of issues that such a person would deal with.

For example, routine less-than-truckload (LTL) shipping poses potential problems, according to Augello, because transportation decision makers do not realize that common carriers still have tariffs that govern the terms and conditions of transportation, as well as the liability of the carrier if things go wrong.

"If shippers are using common carriers for their LTL shipments, they must examine and understand the carrier's tariffs," says Augello. "If they fail to take on this responsibility, I guarantee that problems will occur."

One common problem is cargo insurance coverage. An uninformed operations manager will ask the carrier how much insurance it carries. If that policy amount is at least equal the value of any shipment the company is likely to tender to the carrier, $1m for example, that manager will assume all is in order. What the person should have confirmed by looking at the carrier's tariff is the limit of liability that the carrier's insurance will cover for any single incident. If there is a million-dollar loss, but the tariff limits liability to $100,000, the insurance company will only pay up to that limit. The fact that the company had a million-dollar insurance policy is irrelevant.

"Carriers routinely limit their liability and it's up to the shipper to check this out," says Augello, who recommends that shippers look at the carrier's insurance policy and all endorsements that will list any exclusions. "Don't just look at certificates of insurance."

To avoid these tariff problems all together, Augello recommends that shippers use contracts that do not just refer to a carrier's tariff, but spell out very clearly what the rates, services and liability coverage are for all shipments. Unfortunately, too many shippers use canned contracts, often drafted by the carriers themselves to mirror the terms in the tariff, that fail to provide the desired clarity and protections.

"Despite what a carrier might tell you, there is no standard contract that fits every situation and every shipper," says Augello. "Each contract must be tailored to specific needs of the shipper in terms of service levels, liability protection, and so on. Don't sign something just because it is called a contract. Have a real transportation lawyer prepare what is right for you."

Augello is especially critical of the so-called model motor carrier contract form that the American Trucking Association (ATA) and the National Industrial Transportation League (NITL) have jointly produced in an attempt to create a standard for the industry. He believes the NITL, which is supposed to protect the shipper's interests, gave away too much to carrier interests.

For example, Augello points out that the ATA/NITL contract prohibits shippers from offsetting loss and damage claims against what is owed to the carrier. Normally these offsets are permissible. The model contract allows carriers to impose service charges of any amount for late payment. Courts otherwise will often disallow such charges if they are too high. The contract prohibits shippers from signing the so-called no-recourse section of a bill of lading (Section Seven); so in effect, the shipper guarantees payment to the carrier, even on collect shipments if the other party refuses to pay.

"This so-called model contract is full of things that are not good for shippers and were inserted by the carriers," he says.

Global Shipping
Today's global supply chains pose a number of potential problems that many companies are unaware of until it is too late. While ships and airplanes routinely carry freight around the world, there is no single, global set of rules governing these shipments. A wide variety of treaties and conventions, each with their own terms, conditions and rules for liability, apply to transportation between different countries.

For example, in the case of airfreight, the Warsaw Convention was drafted in the 1920s and ratified by most countries to protect the fledging airline industry, much of which was government owned at the time. It significantly limited the liability of air carriers for injury and death to passengers and loss and damage to cargo. That limitation lives on today, but in the form of various revisions and newly drafted conventions. Not all countries have ratified the same agreements, and this lack of standardization is where the problems come in, as illustrated in a recent case before the U.S. Court of Appeals for the Second Circuit called Chubb v. Asiana Airlines. Samsung, the South Korean high-tech company, shipped computer chips to the U.S. with a Korean air carrier. The chips disappeared, and a suit was filed against the carrier for the half-million-dollar loss. The problem the courts had was the fact that the U.S. was a party to the original Warsaw Convention, while Korea was a party to a later treaty called the Hague Convention. Each treaty had different standards for liability. A lower court tried to piece together similar provisions of each treaty to arrive at a compromise, but the appeals court disallowed this approach. When dealing with international treaties, the court held that parties must be covered by the same treaty for any of the terms to apply. Since the parties in this case were not covered by the same treaty, some other body of law has to be applied. Ultimately the airline had to pay up based on basic contract law.

"The Chubb case created chaos, which is good for lawyers but bad for businesses," says Gordon D. McAuley, an attorney specializing in passenger and air cargo matters with San Francisco firm Hanson Bridgett Marcus Vlahos & Rud.

Since that time, the U.S. has ratified a new treaty known as Montreal 1999 that sets airfreight liability at the equivalent of about $25 per kilo, but again, not all countries have joined. India, for example, is still covered by the Hague Convention.

"If an air shipment from India to the U.S. is involved in a cargo loss, there is no common convention and there is going to be a problem resolving it," says McAuley.

"Before shippers start airfreighting things internationally, they have to determine which conventions the countries involved have adopted. Definitely make sure cargo insurance will apply no matter what the situation is. Ignorance is not bliss when it comes to global shipping."

The Capacity Crisis
The need for better understanding of transportation issues goes beyond transactional issues such as contracts, bills of lading and claims, according to Michael F McBride, an attorney with Washington, D.C. firm LeBoeuf Lamb Greene & MacRae LLP. He says that the most important strategic logistics issue on the horizon today is how to deal with capacity constraints that are increasingly constricting all modes, especially domestic trucking and rail transportation.

For example, trucking is being hit simultaneously by high fuel costs, driver shortages and hours of service rules. The intermodal alternative for moving trailers and containers is not relieving the pressure because it is severely hindered by the even more serious constraints choking the railroads. The situation is so bad on many of the railroads today that coal shipments to utilities have been cut back to as little as 60 percent of contracted amounts.

According to McBride, who primarily represents coal companies and utilities in transportation matters, the normal stockpiles for the winter are non-existent. There is serious concern among many of his clients about the ability to have enough coal to meet the increased winter electricity demand.

"I don't think most companies appreciate the seriousness of these constraints on the future of their supply chains," says McBride. "Railroads will have to carry twice as much freight in 20 years as they do today, essentially on the same infrastructure. That is going to be very difficult to accomplish."

From a supply-chain planning perspective, companies can no longer assume that their transportation needs are going to be met just by working with the right carrier. All carriers and all modes will face similar constraints.

"Top executives should be focusing on how this worsening situation can gum up their strategic plans," says McBride. "Containerized imports are already feeling the brunt, but this is just a hint of what the future may hold."

This lack of understanding by corporate management is a problem in itself, according to McBride, who speculates that the reason for this blind spot is the absence of the right expertise. McBride says companies need transportation professionals who not only understand their own company's needs, but who understand the long term needs of the transportation industry and who can communicate these needs to the highest levels in their organization.

Long-term Issues
Such expertise does not exist at most companies because there was no perceived need, according to McBride. Over the last 40 years, U.S. industry has enjoyed excess rail and truck capacity. As long as there was excess capacity, there really wasn't much pressure on companies to have skilled transportation professionals on staff who could deal with the really difficult, long-term logistics issues. It was a buyer's market centered on negotiating price. Not any longer.

McBride paints a grim landscape of issues facing all companies with supply chains dependent on rail and intermodal. For example, if railroads can't deliver enough coal, which is very profitable traffic, then the less profitable intermodal traffic carrying Asian imports is going to be given a lower priority. The railroads can no longer allow low-rated traffic to crowd out high-rated and high priority traffic such as coal for utilities, perishable farm products and chemicals to support major manufacturing industries.

"Intermodal shippers must understand that government priority will be on keeping enough coal to serve power plants," says McBride. "There is also tremendous political pressure to move farmers' grain and raw materials for chemical plants. Companies depending on intermodal are going to be holding the short straw."

Transportation Logistics and the Law

If you are among the majority of supply-chain executives who have been told that freight transportation is no longer a big issue because it's deregulated, a book from one of the most prominent transportation attorneys in the U.S. will open your eyes. William J. Augello's book Transportation, Logistics and the Law (Second editor, 2004), reveals the legal risks, costs and other traps for the unwary that threaten the smooth operation of every supply chain. More important, this text explains in very clear language how to prevent many of these problems and what to do if your company is involved in any of the myriad legal hassles that are extremely common when moving freight today. While the various federal, state and international agencies that regulated freight transportation for decades have ebbed away since the 1980s, even more complex and arcane bodies of law have stepped in to deal with the challenges that are inevitable with movement of goods. Problems with freight loss, damage, pricing, payment, service levels, insurance and security are as prevalent now as they ever have been. Augello's book clearly explains which bodies of law and regulation now apply to each type of transportation activity and how to resolve such issues. The book is divided into four major sections. The first, and most important, is Augello's narrative explaining the law and regulations covering every aspect of transportation, including: • Federal jurisdiction • Regulation of the railroads, motor carriers, airlines and ocean carriers • Regulation of intermediaries to include brokers, forwarders and 3PLs • Multimodal shipping • Principles of contract law for transportation • Liability for loss and damage • Cargo insurance • Shippers' and carriers' duties and responsibilities • Importing and exporting • Terms of sale • International laws and treaties • Hazardous materials laws and regulations Two large appendices contain the actual text of carefully selected statutes and regulations covering the most common problem areas impacting users of transportation. Approximately 30 small appendices follow, and include very handy tables, check lists, sample agreements, documents, glossaries and otherwise hard-to-find information that makes Augello's book an everyday reference source. Augello served for nearly 30 years as head of the Transportation Consumers Protection Council, which helps companies deal with basic issues such as freight claims for loss and damage and transportation pricing. His book devotes a significant amount of attention to such transactional issues, which high-level supply-chain executives may consider relatively minor issues. As Augello points out, however, a company with a net profit margin of one percent must sell $100,000 of its products to make up for a $1,000 unrecoverable loss. "Management may increase its attention and allocation of resources to its logistical operations when it realizes this [impact on its bottom line]," says Augello. One intent of the book is to make management take notice of the need for more attention to transportation, which he correctly labels as a "quasi-legal subject that requires paralegal training for all of the persons charged with responsibility for any segment of the supply chain." The primary intent of the book is to help the practitioner who wants to establish a compliance program for his company to prevent problems before they occur. It is organized to serve as an integral part of a corporation's operating manual. More than likely, nearly every logistics manager reading this book will find that some important aspects of his company's supply-chain operations are vulnerable to serious legal problems. Augello's book is an easy way to correct transportation procedures that can cripple a company's entire supply chain. For more information, go to www.transportlawtexts.com

McBride says that rail shippers are in for some substantial rate increases, even if they already have long-term contracts in place with very low rates. Shippers unwilling to grant rate increases will simply not receive the service levels they expected.

"They will have to decide which is more important - good service or low rates," he says. "Companies not under contract with railroads will see real service problems."

He also sees rail carriers taking a tougher line of contract terms other than rates. Demurrage charges are likely to help reduce congestion and equipment problems. Since few railroads are now in a position to invest heavily in their operations, the large rail customers are increasingly going to be asked to take on more of the financing in terms of buying their own cars, and even locomotives. Chemical companies and utilities have been in this mode for years, and the practice will spread to other types of rail shippers, even intermodal customers.

"Railroads have long wanted to shift more of the capital burdens to big shippers, and now they have the leverage of a capacity crunch on the highways and the rails," says McBride. "This trend puts the shipper in the business of managing its fleet and making sure the railroads are turning the equipment around. That is probably an unwelcome responsibility that not many companies have experience with."

In essence, the new marketing strategy will no longer be growing volume regardless of profitability, but instead, selectively focusing on traffic that offers good returns and shared risk.

"Shippers are being divided into the haves with long term contracts backed up with big investments, and the have-nots served with common carriage and no relationship with their carriers," says McBride. "They probably will be unable to get adequate service."

This bleak outlook makes it more important than ever to align supply-chain strategies with transportation realities. Production and key distribution facilities must be located where good transportation is accessible, and where backup options using other modes of transportation can be quickly implemented.

McBride makes his living from litigating transportation disputes, but ironically, he says filing lawsuits and complaints for federal agencies should be the last resort.

"My advice was to have a very capable transportation manager educate their CEO about the long and short-term transportation issues and have them talk directly to carrier CEOs," says McBride. "I have seen problems resolved at that level because the carrier CEO can effect changes. Dealing at an operational level with the carrier marketing contacts is like pushing on a string. Nothing is going to happen."

The key is providing the shipper CEO with a full and timely picture that takes in both the company's supply-chain issues and the carrier's situation. McBride offers a suggestion for gathering such information. He is also the current president of the Association for Transportation Law, Logistics and Policy, based in Annapolis, Md. The membership includes most of the leading transportation lawyers in the U.S. and Canada, as well as a number of transportation executives for major manufacturers.

"Our members deal with these issues every day, so they are aware of these impending problems long before most companies ever hear about them," says McBride. "We keep each other informed. Having such well informed transportation experts on staff or available as counsel is the best way to prepare. Companies that wait until a problem occurs in their organization have waited too long."