Consulting » That sinking feeling, supply chains at risk on the high seas

That sinking feeling, supply chains at risk on the high seas

From corruption and storms to the threat of piracy, securing your supply chain is anything but plain sailing

Every year, 6.8 billion tonnes of goods are moved by sea in a global trade
cycle worth $7.4 trillion. With the rise of China to its position as the factory
of the world, this is set to grow.

Up to 90% of global trade travels, at some point, by ship. But how much do we
know about the maritime industry, one which is riddled with corruption and where
transparency is, in some areas, non-existent?.

According to the CIA World Factbook, the Central American state of
Panama has a merchant marine consisting of 5,005 vessels. Yet 4,388 of these are
foreign-owned. The civil war-torn African nation of Liberia has 1,465 vessels,
yet all but 73 of these are foreign-owned.

In fact, Liberia, as a maritime registration entity at least, is operated
from an office in Vienna, Virginia, while the Bahamas flag registry is operated
from an office in Aldgate, London. In many cases, a vessel’s complex ownership
trail will lead the curious back to nothing more than a brass plaque screwed to
an obscure building in Liberia, Panama, Malta or the Bahamas.

Regardless, these same vessels are being used in a relentless supply chain
conveyer belt where, as Daryl Williamson, business development director at
Lloyd’s Marine Intelligence Unit, puts it, they operate as the “warehouses of
the just-in-time manufacturing system”. Should a link in a company’s supply
chain fail, the just-in-time system will grind to a shuddering halt, with
potentially disastrous results.

Ford model

The just-in-time manufacturing model was thought to have been invented by
Henry Ford as long ago as the 1920s, but it really came into its own during the
1960s when the Japanese car manufacturer, Toyota, perfected the system to
counter the difficulty it was experiencing with a lack of storage space. Since
then, it has become the de facto method of doing business, but its
success relies on the supply chain running like a well-oiled machine – any dis
ruption can result in huge problems.

The ships that circumvent the globe today are a far cry from the rusty hulks
of half a century ago, however, making the system feasible. “With
containerisation, some of these vessels can now sail at up to 22 to 23 knots
(about 28mph),” says Rupert Herbert-Burns, marine security intelligence manager
at Lloyd’s MIU. “So these vessels are fast and they are also getting larger.”
The captains of these ships are under increasing pressure to stick to tight
schedules. Once they set sail and reach full steam there is very little anyone
can do to persuade them to slow down or alter course. Time is money, and ship
management companies are under their own set of pressures to deliver on time.

But despite the huge strides the shipping industry has made on safety and
reliability, crossing the Atlantic in a severe storm will always be fraught with
danger – even more so if the ownership of a vessel is unclear and the managing
company’s safety credentials unknown.

Williamson highlights the problem well. “There’s the vessels themselves and
then there’s the ownership of those vessels,” he says. “Now, you have the
registered owner of a vessel and you can trace it back and you’ll find perhaps a
brass plaque on a building somewhere in Monrovia. And the law allows that sort
of thing to go on.” To contain risk, owners of large fleets of ships will often
divide the ownership of those vessels into individually-registered companies, so
that a single vessel has a single registered owner – in effect, a special
purpose vehicle. Not surprisingly, it makes the governance of the shipping world
very troublesome indeed.

Herbert-Burns backs this up. “It’s a strange industry,” he says. “The world
needs to monitor shipping, yet it’s an industry, which inherently – by the way
it’s structured – doesn’t lend itself to transparency. In fact, maintaining
surveillance on around 90,000 vessels around the planet is quite a problematic
thing to do. Industry and business needs to understand where things are.” And he
should know. His company maintains the largest database of shipping information
in the world.

Convenience law

This enormously difficult task is becoming even more difficult thanks to the
‘flags of convenience’ approach to registration that began during the early days
of the Second World War, when the US Navy used the system to get around its own
neutrality laws, so that it could deliver supplies to the British Army without
being dragged into the conflict.

Since then, the use of flags of convenience has been taken on by the
commercial shipping world to such an extent that the number of ships registered
under them now outnumbers those registered to their own nationalities. The UK,
for example, has 429 registered ships, but a further 446 registered in other
countries. The US has 486 vessels registered to its own shores and 680
registered elsewhere. Greece has 861 ships under its own flag, but a massive
2,208 registered in other countries.

The system allows ship operators to circumvent huge amounts of troublesome
regulation, employ less expensive staff from other nations and, according to
some, limit their many responsibilities, financial or otherwise. William
Langewiesche, author of The Outlaw Sea: Chaos and crime on the world’s
, goes one step further and describes merchant ships as “possibly the
most independent objects on earth”.

It is not the most ideal foundation on which to base such a hugely important
component of society and one of the most central cogs of modern commerce and
business. David Tyler group finance director of GUS, which owns the Argos Retail
Group, is a case in point. He says that the retailer sources about 50% of its
products from China – all of which must travel by sea. “Shipping capacity has
had to increase to meet the additional demand – massive amounts of shipping,” he
says. “We are always trying to buy from the most economic source and, increas
ingly, that’s been China in the past five or 10 years.”

But even for an organisation with the buying power of GUS, a company may not
know what kind of vessels are being used to transport its goods. Making a risk
assessment is, therefore, almost impossible. “Risk in the maritime world is an
interesting thing, because when businesses are looking at risk from a
terrestrial point of view they’re often familiar with it,” says Herbert-Burns.
“But with shipping risk, people are making a risk appreciation when their goods
and assets are essentially beyond visual range. You may have something crossing
the Pacific, but on what? Who’s managing her? Who’s operating her?”

Every year, around 100 large ships are lost at sea (with many more smaller
vessels) and 10,000 containers swept overboard. While this may seem relatively
insignificant, considering the world’s fleet consists of around 90,000 vessels
(of which about 40,000 are considered to be the workhorses of international
trade), hundreds of mariners are killed and many more injured every year.

“These are dangerous places to be,” says Herbert-Burns. “Ships get lost at
sea, men get injured, ships have fires on board and no one’s going to come to
your aid – you have to deal with it yourselves. These are things that happen at
sea, thousands of miles away, so you never really get to know about it because
it’s a small team of men in a hostile environment.” In many ways, Herbert-Burns
sums up the common perception of shipping risk with the statement above, but, in
reality, the dangers of sinking ships, men overboard, pirate attacks (see box
below), lost cargo and collisions do not happen all that often. There are other
significant risks, though.

On the docks

One of the most high-profile shipping incidents of modern times occurred
towards the end of September 2002 on the west coast of America, when a trade
dispute between port workers and port operators almost brought the US to a
standstill. For an economy such as America’s, which hungrily adopted the
just-in-time model, any interruption to the supply chain can have disastrous

The union of port workers, the ILWU, was well aware of this and would have
used the fact in its negotiations with the Pacific Maritime Association (PMA),
the group of west coast port operators and shipping owners, which, with dubious
wisdom, locked workers out and stopped them from working after they had
threatened to strike in response to planned redundancies.

Within ten days, and despite some ships taking corrective action and heading
for alternative ports, there were more than 200 ships moored off the west coast,
unable to dock and unload their cargoes. President Bush became personally
involved by invoking a little known piece of legislation from the 1940s to get
the port workers back to work.

Opinions vary widely on the effect the dispute had on the US economy. While
press reports at the time were quoting analysts as claiming that $1bn was being
lost a day due to the ports’ closure, this figure seems a little over the top.

Consultants at the Anderson Economic Group took a more reserved approach to
their calculations and concluded that, had the dispute lasted as long as four
weeks, the loss to the US economy would have been $4.7bn, while exporting
economies would have lost $1bn.

At the time, the dispute, falling as it did just before the Christmas period,
had retailers panicking about severe disruption to their just-in-time models and
pressure on both the PMA and the Bush administration did not take long to mount.

“The day before Bush announced he would intervene, Robin Lanier, director of
the West Coast Waterfront Coalition – a trade group representing major
importers, including Wal- Mart, Kmart, Home Depot, Toyota and Panasonic – told
the Los Angeles Times that her members were ‘extremely disappointed’ by
the administration’s hesitancy,” wrote Ivan Osorio, editor of
LabourWatch – a publication of the well-respected Capital Research

Economic shutdown

In a second publication by the same organisation, Osorio summed up the havoc
that disruption to shipping, and therefore the just-in-time model, had caused.
“Whatever the overall economic cost, the shutdown’s impact on specific
businesses was clear and sharp. A week into the 11-day shutdown, beef, pork and
poultry products sat in storage facilities unable to be exported. Auto plants –
including a Toyota/General Motors plant in Fremont, California, a Honda plant in
East Liberty, Ohio and a Mitsubishi plant in Illinois – were forced to cease
operations pending a resumption of shipments. Other manufacturers – including
defence contractors – said they would be forced to halt production pending a
resumption of parts shipments. And retailers feared they would be unable to
stock their shelves in time for the Christmas season.”

The episode went a long way to show how a manufacturing and accounting system
adopted and perfected in Japan, and now used the world over, has had such a huge
impact on the global shipping industry. It also goes some way to explain the
reluctance of the US – however misguided – to sanction a $6.8bn deal between
British-owned P&O and Dubai Ports World for control of six of the US’s
largest ports.
Since the terrorist attacks on 11 September 2001 in the US, the Bush
administration has been aware that shipping, containers and ports could be a
weak link in the security chain and has stepped up surveillance. Ultimately,
this may have little effect, due to the sheer volume of freight and sea traffic.
As Langewiesche says: “The Coast Guard has been aware of the maritime domain for
years and, for better or worse, it understands that as it pushes the horizon out
into it, it is pushing into anarchy.”

Box: Pirates’ sea

On 22 January 2006, a group of heavily armed men boarded and hijacked the
general cargo ship Al Manara off the notorious coast of Somalia, taking
its entire crew of 20 sailors hostage.

The attack was not unique. It brought the total number of sailors being held
hostage by pirates off the coast of Somalia to 100. Some had been held captive
for as long as four months. Some earlier hijacked vessels have still not been

It may seem strange to think that pirates are alive and well in the 21st
Century, but alive they are. And although there was a peak in 2000, the general
trend is that pirates are becoming increasingly active.

A well-publicised attack on the cruise ship Seabourn Spirit in
November last year, again off the coast of Somalia, made headlines around the
world. The pirates were getting bolder, attacking a passenger cruise liner with
shoulder-mounted rocket propelled grenades and automatic weapons.

Rupert Herbert-Burns, marine security intelligence officer at Lloyd’s Marine
Intelligence Unit, takes a cautious view. “Piracy is maritime crime,” he says.
“That’s what it is – it has to be kept in perspective.” He refers to the amount
of trade that gets interrupted by acts of piracy as being “miniscule” when
compared to the amount of trade that successfully arrives at its destination.
“It’s something which needs to be handled with a lot of responsibility because
the insurance market reacts to this based on the best information it has,” he

Tackling piracy

Despite Herbert-Burns’ cautious views, the maritime world takes the problem
extremely seriously. A 20-page circular published and distributed in 2002 by the
International Maritime Organisation (IMO), entitled Piracy and Armed Robbery
against Ships
, provides testament to this. In the case of the Seabourn
, good training could well have proved the difference – the ship’s
captain repelled its attackers with a “sonic boom” and outran the pirates to
dock safely in the Seychelles.

“They [the vessels] have their protocols,” says Herbert-Burns, himself a
Royal Navy veteran. “When they enter waters which are more prone to piracy the
ship and crew will have a standard of drills and precautionary measures which
they will adopt, such as locking down the accommodation spaces in the super
structure, putting watches on the weather deck, in high-risk waters mounting
fire hoses on the upper deck to repel pirates and maintaining a vigilant radar

The total number of attacks reported to the IMO has now reached 3,991, of
which 58 occurred during the fourth quarter of 2005. But despite this,
Herbert-Burns is clear on its overall significance. “Compared to the amount of
tonnage that gets through safely, it’s a tiny amount,” he reiterates.

Piracy is also localised – there are a handful of hotspots around the world,
Somalia being one and the West coast of Africa being another. But perhaps the
most fraught is the Malacca Strait – a thin stretch of water 550 miles long
flanked by the Indonesian island of Sumatra on the west and Malaysia and
Singapore on the east. Around 50,000 vessels pass through this narrow channel
every year.

Hostage peril

On 12 March 2005, 30 armed pirates attacked the tanker Tri Samudra,
which was carrying a cargo of methane gas bound for Belawan. The vessel’s master
and chief engineer were taken hostage and a ransom of 2bn Indonesian rupiah
(£121,000) demanded. The fate of the two officers, and whether the ransom was
paid, is still not known.

Two days later, the Japanese-owned tug boat Idaten was attacked in
the Malacca Strait northeast of the Malaysian Island of Pulau-Berhala. Three
hostages were taken captive, but released six days later when the vessel owner
agreed to pay a ransom of ¥50m (£264,000).

Herbert-Burns says that the latter example is revealing because of the speed
of completion and the international dimension of the operation – it involved a
multinational crew, a Japanese shipping company and Malaysian negotiators and
law enforcement officials. “Only a group of experienced operators with
sophisticated international support and good negotiating skills, to say nothing
of having the tactical awareness to change their location through international
waters and into different sovereign waters, could have executed such an
operation successfully,” he says.

After the peak in 2000, the IMO Safety Committee issued a statement, which
invited “all governments (of flag, port and coastal states) and the industry to
intensify their efforts to eradicate these unlawful acts”. The 12-month period
in question, noted the IMO, saw 72 crew members killed, 129 injured, five
reported missing, one ship destroyed, two hijacked, three had gone missing and,
on three occasions, the attackers had used explosive devices.

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