Department of Operations & Supply Chain Management

Perry's Corner: Piracy and Patriots

February 23, 2011

Perry A. Trunick
Associate Editor, Inbound Logistics Magazine
OSM Adjunct Faculty

A logistics professional once told me that logisticians manage alternatives - hundreds of them. That's quite a feat considering how often things have been changing recently.

On the surface, there are plenty of issues that arise in day-to-day supply chain operations that require attention and the application of one of those alternatives. Heavy snows in the Midwest, floods in the South, potential labor actions with a specific carrier - it's easy to start generating lists showing where the next challenge may be developing.

Supply chains can be fragile if they are not designed and constructed of durable network components. That's especially true as we have extended those lines around the globe and into new low-cost sourcing countries. Many of those places are still developing their industrial, economic, and even political foundations from what they see in developed economies.

Often there are gaps between their current state of development and their target. They may not have achieved the "rule of law," or they have no desire to reach the full application of "common law" as it operates in the major developed economies of the world.

This can lead to some serious conflicts and major risks for supply chains. One such case is the Suez route from Asia to Western Europe and the U.S. East Coast.

Piracy along the route has been a long-standing problem that has gained quite a lot of notice in recent years. According to reports, about 500 seafarers were being held by pirates at the end of 2010 and $238 million had already been paid in ransoms. Inflation seems to have hit the region, and the group Oceans Beyond Piracy reported the average vessel ransom had gone up from $150,000 in 2005 to $5.4 million in 2010. Further costs for vessel operators include war risk and kidnap insurance. This adds between $460 million and $3.2 billion per year in premiums for operators passing through the Gulf of Aden region.

Today's vessels carry very small crews-even the largest container ships. That makes them easy targets for a handful of armed pirates. The pirates have no interest in the cargo, so they don't need a major container port-or any port for the vessel.

Recent events in Egypt added to the complexity of this supply chain alternative. The initial protests caused disruptions in services at the port of Suez, though the Suez Canal and adjacent pipelines continued to operate. After running the gauntlet of pirates off the Somali coast, vessel operators faced a new challenge in not knowing how the situation at the canal might change. During the transition of the government, the situation at the canal appears stable, but questions will persist and risk managers are likely to advise their logistics group to exercise those skills of juggling alternatives.

It isn't always bad news that can disrupt supply chains. The absence of port workers in Suez was only temporary, and the long-term result may be very positive, but in the meantime, logistics and supply chain professionals watch, evaluate, and prepare alternative solutions.


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