All About B2B

On Tuesday, the UN Security Council voted unanimously to authorize land and air attacks on pirate bases on the coast of Somalia.  There have been approximately 100 incidents of pirate attacks off the Somalian coast in 2008.  In fact, just earlier today there was a report that 4 different ships were attacked by pirates including a Turkish container ship.  The Somalian pirates, which have been named the “Oceanic Mafia,” have used both armed assaults and false distress calls to seize cargo and crew of major commercial vessels.  There are over 1,000 pirates, which operate in a highly centralized network.  Armed teams with rocket propelled grenade launchers are dispatched from a mother ship stationed at sea.  The pirates have their own media spokesperson and even more significantly a Wikipedia page.  See MSNBC’s map of pirate attacks in 2008 below. 

Most of the news coverage has been focused on the political and military response to the pirate activities.  However, there has been little coverage of the economic and international trade issues.  So I thought I would focus this post on the implications to the supply chain.

Until recently piracy would rank low on the list of international trade risks that most corporations were considering.  However, pirates have been a significant inhibitor to supply chains over the past few centuries.  For example, there was a great article in the Wall Street Journal earlier this month that described how US supply chains were hindered by the Barbary pirates in the late 18th century.  The pirates based in North Africa preyed on American supply ships capturing cargoes and kidnapping crews.  Without a Navy, the US was forced to pay "tributes" to the pirates amounting to 20% of its Federal income in the 1790s.

If the frequency of pirate attacks continues at its current rate of growth it could pose a formidable challenge to international trade in 2009.  The highest profile pirate attacks have been on targets which command a very high ransom such as military equipment and oil tankers.  However, traditional commercial goods have been targets as well.  Pirates attacked a Hong-Kong based cargo ship carrying 36000 tons of wheat to Iran.  They even attempted to attack an American Naval supply ship in the area.

Pirates threaten the Supply Chain

The East African coast is host to a key international trade lane between Asia and Europe as it is the entry path to the Suez Canal.  The ramifications of a slowdown in commercial transportation through the Suez are significant both to European and American interests.  A number of US firms have begun to carry goods from India and Southeast Asia through the Suez en route to East Coast ports.  American importers view the trade lane as a strategic means of diversifying   to avoid the challenges of labor contracts and congestion at West Coast ports.  See my post on Port Diversification discussion at the NRF show this year.  The piracy threat has led major shipping firms to switch routes from Suez Canal to divert cargo vessels around Southern Africa instead.  A significant elongation of international trade routes could result in shipment delays and out-of-stocks as well as potentially increased pricing of goods.

How can B2B e-Commerce help with Piracy?

Unfortunately, B2B technologies cannot do much to prevent pirate attacks.  Most Supply Chain Visibility and Logistics Visibility applications only track a marine vessels departure from and arrival at a port.  Data from visibility applications could be utilized to identify potential ships at risk and the value of on-board cargo.   However, I am not aware of any visibility applications that use GPS-based links or other tracking means to identify the status of ocean carriers en route.  Some B2B service providers offer telex and fax products to communicate with ocean freight containers at sea.  For example, EasyLink offered a service called Ocean-Connect gFax that used satellite communications to route messages from ship-to-shore.

In addition to the risk of shipment delays and price increases caused by the blockage of trade lanes, there are a number of commercial trade issues introduced by the growing incidence of piracy.

Cargo Insurance

It is very common for either an importer or exporter to purchase cargo insurance for goods transported via ocean freight.  An insurance policy provides financial reimbursement in the event of a loss or damage to goods caused by collision, sinking, explosion, acts of war, heavy weather and, of course, piracy.  There are specific EDI documents such as the ANSI 362 and EDIFACT IFTICL which are utilized to request cargo insurance policies and submit claims between importer-exporters, transportation carriers and insurance underwriters.  But the point of mentioning this is that the increasing threat of piracy will likely impact the costs of cargo insurance for ocean freight traveling through the Suez Canal.

In-Transit Inventory Financing

The concept of Supply Chain Finance has been of growing interest to importers and exporters due to heightened working capital challenges.  Most of the Supply Chain Finance programs offered by financial institutions today are limited to post-export financing.   A seller can receive an early payment for goods or services rendered once the buyer has approved an invoice.  However, there is significant market demand for financing earlier in the supply chain.  Importers and exporters want to finance inventory that is in-transit, especially during ocean transport.  Financial institutions have been reluctant to offer in-transit financing due to the risk associated with loss or damage to ocean freight.  The increasing threat of pirates holding cargo hostage will likely further dampen enthusiasm for these innovative new types of supply chain finance.

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