Dead Cats And Pirates

June 30, 2006
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As one of West Michigan's largest companies recently learned, offshore sourcing can make for some unhappy surprises. In the course of two weeks this spring, the retailer lost a pair of 40-foot shipping containers — one to the sea and another to contamination when it arrived in West Michigan with several stowaway cats dead inside.

Following a horrendous 2004 and 2005, this year already looks to be a bad one for marine insurers. The 2005 hurricane season was the worst on record, with 14 hurricanes causing upwards of $50 billion in insured losses and around three million claims, all record highs. Insurers paid out a then-record $42 billion for the 2004 season.

There was also a tsunami in Southeast Asia during this period, and a renewed emergence of piracy. According to the International Chamber of Commerce, a total of 23 ships were hijacked worldwide in 2005, the most in four years, and 440 crewmembers were taken hostage, the highest total the chamber has recorded. Total attacks did drop from 329 in 2004 to 276 last year.

In March of this year, a blaze aboard the cargo ship Hyundai Fortune set the stage for history's largest cargo insurance claim, an estimated $300 million. That insurer's loss will likely impact the ordinarily low premiums created by higher international shipping volume.

"I would imagine the risk of damage in transit is proportional to the distance that you're traveling," said David Hemmings, president of Grand Rapids-based importer Pacific Rim Alliance Ltd. "But shipping is a very, very safe way of moving around these days. Ships tend not to bump into each other and when they do, tend not to run aground."

Long before telecommunications and air freight, globalization was a function of the sea. Almost every threat facing ocean transport has been around for centuries, noted Hemmings, and today's transporters are much more adept at dealing with everything from pirates to typhoons.

"With that said, stuff happens. Ships sink and merchandise is lost," he said. "But in general terms, a ship is likely to make it to dock. It's when it does that problems occur."

In Hemmings' experience, a container is much less likely to be damaged on a ship or any other mode of transport than when it is being loaded or unloaded. He has a series of mishap photos he shows to clients to lighten the mood when a shipment is delayed. A container falling on a truck, a row of containers tipped like dominos, others thrown into the ocean. He has only one that shows a damaged ship: a freighter run aground on a sandbar.

Through all the disasters of the past two years, container ships were relatively safe on the water. Hundred-million dollar vessels with half-billion dollar cargoes simply rolled and yawed as the tsunami swept past.

It's an entirely different story when the ship is anchored. And there is a staggering number of places in which a container and the merchandise inside can be dropped, flipped, stolen, sunk or contaminated. Beginning when the container is hand-loaded at the source, it next moves onto a truck or a train to a dock. It then is lifted via a crane onto a ship, and later is lifted off by another crane an ocean away, where it is placed again on a train or a truck. Then it is on its way to its final destination — if by train, it is offloaded again to a truck somewhere along the way — where it is unloaded by hand.

In 34 years, local Scandinavian furniture importer Design Quest has never lost a container in transit. A container was once thought lost and turned up four months later erroneously unloaded on the east coast, a month after the claim was paid.

While the cargo has always arrived at Design Quest's Grand Rapids headquarters, the journey is not without potential delays and damage.

"If you do it regularly, it is usually relatively minor," said Design Quest owner Jorgen Sorensen. "Some of the latest things are the disruptions created by Homeland Security."

Increased port security is a source of chronic disruption for importers. Point-of-origin loading has increased by days at most ports worldwide, including the U.S.

Here, a Department of Homeland Security inspection becomes an out-of-pocket expense. All searches are conducted at the cost of the importer, who must pay for X-ray fees, when applicable, and man-hours for the loading and unloading of the merchandise.

"They're not as careful as the people who do it regularly," Sorensen said. "So there is often quite a bit of damage."

Plus, the inspectors are often not able to load all the merchandise back into the container. The balance is shipped separately to its destination, at cost to the importer.

Rare as it might be, cargo is still occasionally lost at sea. Earlier this month, a ship loaded with more than 400 tons of cargo sank in the East China Sea when it collided with another container vessel.

"This is a peculiar area (of business)," said John Toles, managing partner of Supply Chain Shipping, a primarily Asia-to-U.S. logistics firm based in Grand Rapids that counts Steelcase Inc. and Haworth Inc. as clients. "The liability is different than with, say, a trucking company. You're pretty much done after a $500 bill."

Dating back to 1906, shipping companies have been heavily protected against cargo liability, paying only the first $500 in most cases. Importers have the ability to purchase insurance themselves or through shippers, or place the burden on the source. Because of the rarity of claims, some companies forgo insurance entirely.

"We recommend to our clients that they retain control of their own destiny," said Randy Amyuni, vice president of risk management for The Campbell Group in ByronCenter. "It's easier to place the burden on the shipper or seller, until you have a claim — then you'll regret it because you're at their mercy."

Insurance is not available for most of the disruption that can be caused by delays or the myriad quality issues that may arise with offshore sourcing.

"The real problem overseas is that you've created a longer supply chain," Toles said. "You're subject to these constraints overseas."

A growing problem Toles cited was the willingness of Chinese suppliers to substitute lesser quality materials at their convenience and to bump scheduled transit or production capacity for "a dollar more."    

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