Monday, September 23, 2013

Piracy and international logistics

The trailers promoting the upcoming Tom Hanks film "Captain Phillips" provided fodder for this week's blog post. The movie is an upcoming Hollywood drama/action film retelling the story of the MV Maersk Alabama and her captain, Richard Phillips, who was held for four days by a group of four Somali pirates and ultimately rescued after U.S. Navy Seal snipers killed three of the four pirates and forced the surrender of the last one.

The MV Maersk Alabama
Captain John Phillips

It is rare that a major motion picture detailing an important Supply Chain Management topic should appear, and indeed this particular harrowing incident captured the imagination of many people all over the world, primarily due to the drama and violence inherent in the hostage situation which ended in violence.

However, from the lens of supply chain management and especially the perspective of international supply chain networks, we should ask just where piracy ranks in the continuum of international transportation risks and costs.

According to a report from British insurance and finance firm Catlin Group, more than 800 ships have been attacked by Somali pirates from 2008 to 2012, with 170 successful hijackings and over 3,000 hostages taken (1). A group of researchers known as Oceans Beyond Piracy has estimated that piracy added costs of $6.6 to $6.9 billion in 2011 alone, adding the costs of ransoms as well as opportunity costs of inventory stoppage. (2)

However, the international reporting group Somalia Report has called some of Oceans Beyond Piracy (OBP)'s research methods into question. They note that "much of the report's accounting of insurance costs is based on hypothetical figures. The words 'estimation' and 'hypothetical' overrun the paper." (3)

Somalia Report points to a source of costs that are much less dramatic but cost much more. Specifically, the National Cargo Security Council estimates that cargo loss comprises a total cost of more than $50 billion annually (4). Much of this loss comes in the form of cargo theft from ports, often ports within the United States.

How do we bring all of this together in the context of our study of supply chain management?
First, we should recognize that the landscape of threats to international logistics are constantly changing. Piracy only rose to prominence in the mid 00's and, despite the vivid drama inherent in stories like the Captain Phillips saga, actually comprises a small fraction of the overall costs of international shipping.
Second, we should be aware that, as is the case in so many things, it is often the small and routine threats that comprise the vast majority of the costs in any given scenario.

The question, then, is one of psychology. When considering international supply networks, how do we err in favor of real and pragmatic analysis of costs as opposed to being consumed by the vivid and dramatic stories that grab the attention of the news media?

1- Piracy Today. Catlin Group.

2- Review of Maritime Transport. UN Conference on Trade and Development.

3- Can we ever assess the true cost of piracy? Somalia Report.

4- The Full Cost of Cargo Loss. Inbound Logistics.

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