Executive Briefings

When Pirates Threaten Your Supply Chain

Early in the morning of August 2, the MV Suez, a Panamanian-flag vessel with a crew of 24, was boarded by pirates off the coast of Somalia. Using only a motorized skiff and small arms, the attackers took over the ship in five minutes. One week later, a helicopter from the Navy frigate USS Kauffman was just able to prevent a similar attack on the MV Ice Explorer in the Gulf of Aden. They were only the latest in a rash of incidents to have plagued commercial shipping over the past two years.

The attacks are mostly centered in the Red Sea, Gulf of Aden and off the coast of Somalia, but they're spreading to other areas as well. And unlike the fabled pirates of yore, these modern-day brigands aren't just targeting ships with high-value cargoes. The MV Suez, after all, was reported to be carrying bags of cement. Their goal is the ship and its crew, which they hold for millions of dollars in ransom.

The pirates, who operate with virtual impunity in the vast waters off the east African coast, have made commercial shipping a hazardous affair. According to ICC Commercial Crime Services, the anti-crime arm of the International Chamber of Commerce, 196 incidents of maritime piracy were recorded around the world in the first half of 2010. (That compares with 240 for the same period of 2009.) Of that total, 100 occurred off the coast of Somalia. Those six months saw one crew member killed, 16 injured and 597 taken hostage.

It's hard to imagine how a small motorboat with a handful of pirates can take over a massive vessel in mid-sea. Cyrus Mody, manager of ICC's International Maritime Bureau in London, explains how it works. One or several skiffs will approach their target, firing automatic weapons and sometimes rocket-propelled grenades, to intimidate the ship into stopping or slowing down. The constant firing also keeps the target vessel's crew below bulkheads. The pirates then come alongside, attaching ladders to climb aboard. From there, they make their way to the bridge and take control of the ship.

International navies are on the lookout for the pirates, but they can't be everywhere, and often can't respond to a distress signal within the few minutes it takes for a ship to be commandeered. An obvious counter-measure would be to include armed guards on vessels transiting high-risk areas, but Mody says that tactic is discouraged by the IMB, International Maritime Organization and other elements of the world's shipping community - "basically because there's a very strong fear it will lead to escalation in the violence." Not to mention the danger of firing weapons on loaded tankers, or shooting an innocent fisherman. And would the vessel's master be held responsible for such an act? "The legalities on how that case would move forward [constitute] a very gray and dark area."

What, then, can a ship do to reduce the risk of an attack by pirates? The shipping industry and international navies have formulated a Best Management Practice document, which lays out the steps that should be taken before entering, while transiting and after exiting a dangerous area. Ships passing through the Gulf of Aden are encouraged to use the designated Internationally Recommended Transit Corridor (IRTC), which is relatively well protected by naval ships in the area. Other defensive measures include the maintenance of lookouts, the maneuvering of vessels to create disturbances in the water which make it difficult for skiffs to approach, the use of horns and water sprays, and the application of plywood and razor wire to boarding points. Some vessels barricade their accommodations areas to block access to the bridge and engine room, says Mody. If pirates fail to gain control of a ship within 15 to 30 minutes, they will often break off the attack, he adds.

All sound and logical recommendations, but are they really that helpful? The MV Suez was employing Best Management Practices, including sticking to the IRTC, having barbed wire in place and fire hoses ready. The pirates are resourceful, nimble and extremely violent. They can extend their attacks deep into the open sea with logistical support from mother vessels, such as dhows or fishing boats. International navies have stepped up their resistance, but barring an even greater effort by the maritime community, or the deployment of trained security staff on commercial vessels, the attacks are likely to continue in major shipping lanes for some time to come. For a former fisherman from an impoverished country or region of intense conflict, the lure of a multimillion-dollar payday is too great to resist.

Which brings us to the supply-chain implications of maritime piracy. Obviously, the incidents threaten to increase shipping cost and transit time, jeopardizing the tight schedules that characterize many supply chains today. Now throw in rising insurance premiums for ships passing through high-risk areas. For buyers and suppliers, the dilemma boils down to a difficult question: should you reroute freight to safer waters, guaranteeing a longer and more expensive transit, or risk an attack by pirates on the shorter, faster route?

Jim Lawton, vice president and general manager of D&B Supply Management Solutions, says the question is highly relevant to the issue of supplier stability. A supplier that is in rocky financial shape is more likely to run the risk of routing its products through dangerous waters, to minimize cost. But given the recent actions of insurance companies, that option might not end up saving money after all. So even the threat of piracy could be enough to sink a supplier that is already in dire straits.

Consider, then, some best practices on the supplier-management side. First, says Lawton, understand your exposure to suppliers that might be affected by piracy. Second, identify potential options in routing and supply sourcing, with regard to where you obtain your raw materials, components and finished goods. Then determine just how critical those items are to the stability of your supply chain. Arrange to have alternative vendors standing by. In some cases, that might mean shifting completely away from high-risk shipping routes and figuring in the additional lead time. The ultimate goal, says Lawton, is to avoid "all of the scurrying that comes out of unpredictability, which drives cost."

Business managers can't fix the geopolitical and socioeconomic factors, let alone the flaws in human nature, that breed these pirates. But they can't let their commitment to reliable customer service be undermined, either. Bottom line, they have to run perfect supply chains in an imperfect world. Isn't that what keeps the job interesting?

- Robert J. Bowman, SupplyChainBrain

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Early in the morning of August 2, the MV Suez, a Panamanian-flag vessel with a crew of 24, was boarded by pirates off the coast of Somalia. Using only a motorized skiff and small arms, the attackers took over the ship in five minutes. One week later, a helicopter from the Navy frigate USS Kauffman was just able to prevent a similar attack on the MV Ice Explorer in the Gulf of Aden. They were only the latest in a rash of incidents to have plagued commercial shipping over the past two years.

The attacks are mostly centered in the Red Sea, Gulf of Aden and off the coast of Somalia, but they're spreading to other areas as well. And unlike the fabled pirates of yore, these modern-day brigands aren't just targeting ships with high-value cargoes. The MV Suez, after all, was reported to be carrying bags of cement. Their goal is the ship and its crew, which they hold for millions of dollars in ransom.

The pirates, who operate with virtual impunity in the vast waters off the east African coast, have made commercial shipping a hazardous affair. According to ICC Commercial Crime Services, the anti-crime arm of the International Chamber of Commerce, 196 incidents of maritime piracy were recorded around the world in the first half of 2010. (That compares with 240 for the same period of 2009.) Of that total, 100 occurred off the coast of Somalia. Those six months saw one crew member killed, 16 injured and 597 taken hostage.

It's hard to imagine how a small motorboat with a handful of pirates can take over a massive vessel in mid-sea. Cyrus Mody, manager of ICC's International Maritime Bureau in London, explains how it works. One or several skiffs will approach their target, firing automatic weapons and sometimes rocket-propelled grenades, to intimidate the ship into stopping or slowing down. The constant firing also keeps the target vessel's crew below bulkheads. The pirates then come alongside, attaching ladders to climb aboard. From there, they make their way to the bridge and take control of the ship.

International navies are on the lookout for the pirates, but they can't be everywhere, and often can't respond to a distress signal within the few minutes it takes for a ship to be commandeered. An obvious counter-measure would be to include armed guards on vessels transiting high-risk areas, but Mody says that tactic is discouraged by the IMB, International Maritime Organization and other elements of the world's shipping community - "basically because there's a very strong fear it will lead to escalation in the violence." Not to mention the danger of firing weapons on loaded tankers, or shooting an innocent fisherman. And would the vessel's master be held responsible for such an act? "The legalities on how that case would move forward [constitute] a very gray and dark area."

What, then, can a ship do to reduce the risk of an attack by pirates? The shipping industry and international navies have formulated a Best Management Practice document, which lays out the steps that should be taken before entering, while transiting and after exiting a dangerous area. Ships passing through the Gulf of Aden are encouraged to use the designated Internationally Recommended Transit Corridor (IRTC), which is relatively well protected by naval ships in the area. Other defensive measures include the maintenance of lookouts, the maneuvering of vessels to create disturbances in the water which make it difficult for skiffs to approach, the use of horns and water sprays, and the application of plywood and razor wire to boarding points. Some vessels barricade their accommodations areas to block access to the bridge and engine room, says Mody. If pirates fail to gain control of a ship within 15 to 30 minutes, they will often break off the attack, he adds.

All sound and logical recommendations, but are they really that helpful? The MV Suez was employing Best Management Practices, including sticking to the IRTC, having barbed wire in place and fire hoses ready. The pirates are resourceful, nimble and extremely violent. They can extend their attacks deep into the open sea with logistical support from mother vessels, such as dhows or fishing boats. International navies have stepped up their resistance, but barring an even greater effort by the maritime community, or the deployment of trained security staff on commercial vessels, the attacks are likely to continue in major shipping lanes for some time to come. For a former fisherman from an impoverished country or region of intense conflict, the lure of a multimillion-dollar payday is too great to resist.

Which brings us to the supply-chain implications of maritime piracy. Obviously, the incidents threaten to increase shipping cost and transit time, jeopardizing the tight schedules that characterize many supply chains today. Now throw in rising insurance premiums for ships passing through high-risk areas. For buyers and suppliers, the dilemma boils down to a difficult question: should you reroute freight to safer waters, guaranteeing a longer and more expensive transit, or risk an attack by pirates on the shorter, faster route?

Jim Lawton, vice president and general manager of D&B Supply Management Solutions, says the question is highly relevant to the issue of supplier stability. A supplier that is in rocky financial shape is more likely to run the risk of routing its products through dangerous waters, to minimize cost. But given the recent actions of insurance companies, that option might not end up saving money after all. So even the threat of piracy could be enough to sink a supplier that is already in dire straits.

Consider, then, some best practices on the supplier-management side. First, says Lawton, understand your exposure to suppliers that might be affected by piracy. Second, identify potential options in routing and supply sourcing, with regard to where you obtain your raw materials, components and finished goods. Then determine just how critical those items are to the stability of your supply chain. Arrange to have alternative vendors standing by. In some cases, that might mean shifting completely away from high-risk shipping routes and figuring in the additional lead time. The ultimate goal, says Lawton, is to avoid "all of the scurrying that comes out of unpredictability, which drives cost."

Business managers can't fix the geopolitical and socioeconomic factors, let alone the flaws in human nature, that breed these pirates. But they can't let their commitment to reliable customer service be undermined, either. Bottom line, they have to run perfect supply chains in an imperfect world. Isn't that what keeps the job interesting?

- Robert J. Bowman, SupplyChainBrain

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