Tuesday, January 22, 2013

Pirates of the Global Supply Chain


Last week’s article, Stress Test for the Global Supply Chain, focused on how the tsunami in Japan affected Hewlett Packard’s (HP) global supply chain. HP’s computer industry, which depends on Japan for electronic parts and equipment, was hit hard when manufacturing plants shut down for days on end. A report by Zurich Insurance Ltd indicated that global supply chains faced over 2,500 disruptions in the last decade.[1] Disruptions include natural disasters, labor strikes, lead time variability, fires etc. Research then led me to a fascinating report on how Somali piracy was disrupting and threatening supply chain security around the globe. In this week’s blog post, I have decided to focus on this unique problem and its effects on global supply chains.

Piracy in the global supply chain

Hollywood’s rendition of piracy and its romanticized portrayal of pirates is a far cry from reality! Today, Somali piracy is a major scourge is some important trade routes along the Indian Ocean, Gulf of Aden, South China Seas etc.[2] Somali pirates, equipped with potent weapons like AK-47s and hand grenades, attack civilian ships, capture crew members, resell high-value cargo goods and hold hostages for ransom.[3]  In the Horn of Africa alone, piracy has caused losses amounting to almost $6 billion.[4] Piracy not only makes international trade risky, but it also reduces the efficiency and functionality of global supply chains. Some direct effects include:

1. Loss of cargo-- Companies lose cargoes, thereby delaying product deliveries and causing large losses.

2. Rising transportation costs-- To avoid clashes with pirates, several shipping companies have revised transportation routes. Rerouting vessels can have drastic financial impacts. Since these routes require more fuel, they can increase transportation expenses by $15 billion/year.[5]

3. Long lead times-- New, revised routes are usually longer and take more time. In order for goods to arrive safely, transportation could take 3-4 extra weeks. Overall, this makes the supply chain take longer than necessary.

4. Increasing insurance premiums-- Due to higher risk of pirate attacks along shipping routes, shipping companies are paying way more in insurance premiums. Originally, shippers paid $500/voyage age for a vessel as premium. Today, insurance costs have escalated to $20,000/voyage.[6] In order to make up for increased expenses, shipping companies probably charge more, increasing the price of end products.

5. Threat to human life-- Piracy also poses a threat to the labor involved in supply chains. Due to the risks associated with transportation, crew-members are harder to recruit and also charge higher salaries. This in-turn increases the costs associated with shipping.

6. Ransoms-- In addition to increasing shipping rates, piracy has aggravated the effects of the economic crisis on supply chains. The global economic crisis caused a decrease in consumption of goods, which reduced the number of cargo vessels being shipped. This meant that shipping companies had to lower prices to stay competitive. Smaller profits reduced cash flows. To make things worse, shipping companies are required to pay large ransoms to free captured ships. This could bankrupt shipping companies and threaten their very existence, majorly disrupting the supply chain.[7]

As we can see, supply chain piracy poses a very unique problem--one that cannot be solved by a manufacturer, seller, shipper, or even a government. This problem calls for concerted efforts between governments of several countries and even international agencies. To solve this problem in the long term, we will have to address the root cause of this issue: impoverished circumstances that push people to resort to piracy. This may take years and even decades. Manufacturers and shipping companies will continue to lose money if this problem is not addressed soon. Is there a short-term solution to this problem? A quick-fix companies could employ to reduce losses?

[1] Nick Wildgoose, “Avoiding the Pitfalls of Supply Chain Disruptions,” Insights, p 4, 2011, http://www.zurichcanada.com/internet/can/sitecollectiondocuments/documentsforurls/disruptions_happen_the_key_is_how_you_deal_with_them.pdf.
[2] Dr. Risto Talas, Managing Supply Chain Security: The Scourge of Somali Piracy, University of Hull, http://cscmpconference.org/files/Event_PDFs/19566_Event_Info.pdf.
[3] Milena Sterio, The Somali Piracy Problem: A Global Puzzle Necessitating a Global Solution, American University Law Review, June 22, 2010, p 1450, http://www.wcl.american.edu/journal/lawrev/59/5sterio.pdf.

[4] Kamalpreet Badasha, Continued Piracy Could Push Up Supply Chain Costs by 150 Per Cent, Supply Management: The Purchasing and Supply Website,

[5] Milena Sterio, “The Somali Piracy Problem: A Global Puzzle Necessitating a Global Solution.”
[6] Milena Sterio, “The Somali Piracy Problem: A Global Puzzle Necessitating a Global Solution.”
[7] Milena Sterio, “The Somali Piracy Problem: A Global Puzzle Necessitating a Global Solution.”

1 comment:

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