Pirates Get It. Do You?

Your firm may not take ownership of your inbound materials--in a financial or legal sense--until the goods reach your nearest port or even your company's receiving dock. But those materials are worth their weight in gold.

And that intrinsic value is much higher than the dollar figure you see listed on your bill of materials (BOM). Pirates in the Indian Ocean understand this concept. It is why they continue to hijack cargo ships (not just oil tankers) and demand astounding ransoms for the release of the ships.

What if, for example, a shipment of your critical components is delayed, lost or destroyed? Sure, your shipment is probably insured. But what good will an insurance payment do you if, in the short term, your sales organization can't deliver on a promised order? The opportunity cost of a delayed or lost sale is easily greater than the value of your finished goods. And it's many times greater than the costs associated with actively monitoring your supply chain.

If you think this argument is overstated, then answer this question: how sure are you that your inbound materials are being delivered in a manner that ensures the security of your supply chain at the lowest total cost?

Unless you're paying dearly for air freight with a carrier that allows you to track your goods, you probably don't really know where or how secure your shipment happens to be.

The recent spate of piracy on the high seas ought to be a reminder of two things:

1. Most buyers that rely on offshore supplier have very little visibility into the transportation links of their supply chain; and
2. Supply-chain risk management should not be solely focused on supplier stability or activities that occur at suppliers' factories.

How often do you ask your supplier about the specific route your shipment of materials will take, the specific carrier that will bear your shipment, the nationality of the flag under which the carrier will travel? Should you be concerned that a shipment from one of your suppliers may be heading through "piracy-prone areas"?

With nearly 10% of global trade passing through the Gulf of Aden--an area that has been hit hard in the last few months by piracy--there's a decent chance your supply chain can be at risk--you'll want to begin paying greater attention to these issues.

As more firms adopt just-in-time (JIT) and other lean manufacturing practices, a huge percentage of the value in the supply chain is tied up on the trucks, ships and planes that carry inbound materials to final-assembly locations.

What can you do? Well, for starters groups such as the International Maritime Bureau (IMB) have been tracking piracy activity for quite some time and offer real-time updates on piracy activities. But realistically you don't have the time and resources to assess the security of your logistics, not to mention continually tracking other risks to your supply chain such as weather patterns, natural disasters, port strikes.

Developing and implementing a supply-chain risk-assessment program and identifying alternative logistics models that may provide a greater sense of security are just a couple of ways to give you and your organization greater peace of mind.