Japan - Indonesia Workshop on Estuary and Climate Change 2010 August 8th -10th Surabaya, Indonesia

SUPPLY CHAIN RISK MANAGEMENT STRATEGIES FOR MANAGING MARITIME DISRUPTIONS DUE TO THE EFFECTS OF CLIMATE CHANGE: EVIDENCE FROM THE AUSTRALIANINDONESIAN WHEAT SUPPLY CHAIN SAUT GURNING1), STEPHEN CAHOON2) and KRIYO SAMBODHO3) 1) Department of Maritime and Logistics Management, Australian Maritime College Newnham Drive, Launceston-Tasmania, 7248, Australia. E-mail: [email protected] 2) Department of Maritime and Logistics Management, Australian Maritime College Newnham Drive, Launceston-Tasmania, 7248, Australia. E-mail: [email protected] 3) Department of Ocean Engineering, Institut Teknologi Sepuluh Nopember (ITS) Surabaya Keputih-Sukolilo, Surabaya, 60111, Indonesia. E-mail: [email protected]

Abstract This paper analyses the supply chain risk management framework for managing the effects of severe weather conditions due to climate change and its impact on creating disruptions and unavailability of various maritime services transporting freight. The analysis is conducted within the context of case studies in Indonesia and focuses on the risk profiles that are emerging as a result of the weather factors contributing to disruptions in the maritime domain. This paper suggests that maritime authorities, maritime service operators and users consider a hybrid approach to optimizing management strategies that combines contingency rerouting, inventory strategy and business continuity management The potential benefits of such an approach for managers include an effective approach to minimizing costs yet achieving an acceptable level of time delivery. Keywords: Climate change, maritime disruptions, supply chain risk management, Australia, Indonesia

1. INTRODUCTION In maritime operations, disruptions created by severe weather conditions may occur because of the effects of higher wind speed, higher wave levels, and increased sea and tidal levels on shipping channels (around port gates, river or inland routes) that may result in incidents instigating collisions and pollution accidents along the port and navigational channels (Bearing-Point and Hewlett-Packard 2005). However, it should be noted that one extreme weather event is not indicative of climate change; but groups of such events may be, particularly when they are associated with long term increases in oceanic and air temperature, which provide water vapour generating severe weather (Flannery 2005). In general, maritime disruption due to severe weather is a stage when the unavailability of the services of maritime operations occurs due to instigating factors such as increased wind speed, higher wave levels, increased sea-levels, and higher tidal levels (PIANC 2009). The occurrence of maritime disruptions is now considered by distributors, including maritime operators and users, as major contributors of various interrupting events in the domestic supply chain process. The domestic supply chain process of wheat and flour products in Indonesian wheat supply chain is the context of this paper because it contains the complex logistics and supply chain flow both nationally (domestic) and regionally (West, East and central parts of Indonesia) in terms of the number and interaction of wheat handlers, processors, distribution centres, logistics agents/representatives, wholesalers, and customers.

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In an archipelagic country such as Indonesia, the impact of cyclones in generating disruptive events on maritime operations has been considerable during the period of 2006-2009. Studies on the impact of tropical cyclones in Indonesia show that the abnormality of higher wave levels and strong winds are factors of maritime disruptions (Badan Meteorologi dan Geofisika 2007; Badan Meteorologi dan Geofisika 2008). Table 1 shows the trend of climate change impact on maritime operations during 2006-2009. In 2008, seven navigational warnings (Maklumat Pelayaran in Indonesia) were announced by the Ministry of Transport of Indonesia during 2006-2009. The warnings in 2009 were considerably greater, almost doubling to 12 warnings. Table 1. The climate change impacts on maritime operations YEAR

Maritime operational impacts Navigational warnings Longer lead time for food based products (days) Port closure in four ferry terminals in Java and Bali (hrs) Maximum port closure in two main ports in Java and one port in Sulawesi (days) Ships accident mainly due to higher level of wave Port loss due to service unavailability (%) Increase transport costs and food price (grain based products) ( %)

2006 2 14 8 1 1 2.5 50

2007 3 22 30 4 2 4 100

2008 7 28 50 7 6 5 200

2009 12 30 77 14 9 10 250

In relation to this, significant interruptions of domestic and inter-island distribution systems have occurred, which are essentially supply chain risks on the maritime leg operations. The real economic impacts of distributions were the higher price of food commodities including grain and wheat-based products in the range of 200-250 per cent, and longer lead-time (50 to 70 per cent from the average level) due to unavailability of certain shipping services from three days to two weeks (Gurning and Cahoon 2009). Therefore, as climate change proceeds, the existing maritime transport policy in responding to disruptions due to severe weather consequences no longer appears to be appropriate. A new perspective and a collaborative supply chain risk management strategy is needed in order to prepare for and minimise the impacts of climate change in the maritime leg. In this context, this paper examines the general responses relating to climate in the transport sector and the efficiency of the main instruments of transport policy in managing maritime disruptions related to severe weather conditions. The maritime disruptions in the Australian-Indonesian wheat supply chain are provided as a context for this paper, in particular, the maritime disruptions of basic commodity products including wheat and flour products in Java, Sumatera, Celebes (Sulawesi) and Borneo (Kalimantan).

2. MARITIME DISRUPTIONS AND METHODS TO EXPLORE STRATEGIES IN MANAGING MARITIME DISRUPTIONS DUE TO CLIMATE CHANGE Fundamentally, within the general discussion on uncertainties in the context of the supply chain process, by Craighead et al. (2007) suggested that the internal and external causes of disruptive events of a firm are recognised in terms of its likelihood or probability level which may occur in the supply chain. As Yu and Gi (2004, p.41) explain, disruptions are “various unanticipated events”, while Craighead et al. (2007, p.132) similarly expresses disruptions as being “unplanned events” along a supply chain. In addition to this, various existing research tends to study the occurrences of trade disruptions (both for supply and demand side) from the perspective of supply chain performance, in particular related to the production and inventory process. To explore the impacts of maritime disruptions due to severe weather conditions in Indonesia, a qualitative 2009-2010 maritime disruption study via telephone survey was carried out by the first author of this paper. Through multi-cluster sampling approach, 51 sampled senior managers of major entities in the Australian-Indonesian wheat supply chain was derived whose companies collectively handled 100,000 tons of wheat annually. Two factors are essential to be assessed in this study. Firstly, the previous general risk management including the mitigation plan implemented by

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respondents will be assessed, as the survey has been designed for testing the decision in various internal work settings. Secondly, to examine the views and opinions of entities on factors enabling effective results in managing maritime disruptions when they occur. Realisation of such opinion into real management strategies and measurements is indicated by their mitigation, adaptation, coordination plans, intervention reactions and recovery adjustments upon uncertain maritime disruptive events.

3. THE TREND OF MARITIME DSIRUPTIONS AND CYCLE OF PORT STOPPAGE A response rate of 67 per cent or 34 interviews was achieved with the average interview being 32 minutes with a range of 15 to 90 minutes. Of the remainder, about 16 per cent were unwilling to participate due to potentially sensitive issues about their companies, 12 per cent because they were busy due to the harvesting period, and five per cent provided no reasons. As can be seen from Figure 1 above, through the survey, the disruption cycle of port stoppages due to severe weather factors was identified by some respondents (port and shipping managers). This cycle is explained on an hourly-based period instead of a day by day basis. The cycle starts with the operational delay discovered at the sixth hour after the severe weather occurred in the port of the respondent. Six hours after the delay, according to navigational warnings received by port authority, the port manager found there was a significant deviation of port services resulting in ships and facilities at the ports, including trucks, having to be shifted in order to avoid fatal accidents of ship operations in the port. Further, at the 24th hour, the port authority closed the port and consequently it stopped the port operations of its facilities. As the weather changed over the time, at the 36th hour, the port was initially opened and recovered 30 per cent of their services. Then at the 48th hour the port recovered 60 per cent of its service level and and finally recovered 100 per cent of its services by the 60th hour.

Figure 1. The cases of port stoppages due to severe weather in the study

4. STRATEGIES IN MANAGING MARITIME DISRUPTIONS The importance of effectively managing maritime disruptions as well as the lack of preparedness of most companies was intensively explored by Guerrero et al.’s (2008) study of practices applied by maritime users, and maritime operators and authorities both in the central and provincial offices. In general, maritime disruptions can be costly in supply chain systems and can cause a variety of problems such as long lead-times, stock-outs, inability to meet customer demand and increases in costs. In addition, from the study of maritime disruptions in Indonesia it was found that disruptions in maritime operations can lead to unexpected costs when shipping lead-times are long. It is also

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interesting to note from the empirical study that when disruptions occurred, for example the stoppage of a port, managers in the wheat supply chain tend to handle them as one-time events rather than understanding that they may result from a lack of adequate supply chain risk management. The goal of managing maritime disruption is to alleviate the consequences of disruptions and risks or, simply put, to increase the robustness of a supply chain through the maritime leg. Through the maritime disruption telephone survey, it found that four important strategies were implemented by entities in the wheat supply chain in response to maritime disruptions during three stages namely pre-disruption, ondisruption and post-disruption. The strategies referred to are mitigation, adaptation, coordination and intervention strategies as depicted in Figure 2.

Figure 2. The structure of maritime disruption risk management

Mitigation involves responses that minimise the likelihood of maritime disruptions whilst adaptation is employed in order to reduce the consequences of maritime disruptions. Mitigation accordingly includes reactions before the disruptive events occur (pre-disruption), and adaptation on the other hand may include reactions implemented in the pre, during, and post disruption stage. The mitigation strategy in the pre-disruption implies actions such contingency plan which principally consists of supply flexibility and insurance management (generally for marine cargo insurance). This may be achieved through transferring risk or risk-sharing decision methods such as insurance plans and outsourcing strategies. The entities along the chain may also use reserved maritime routes, providing strategic stock (through agency service) including providing back-up systems and optimum ordering policies in their contingency plans for responding to worst case scenarios of maritime disruptions. During the disruption stage, adaptation strategies implemented by entities when maritime disruptions occur include inventory polling at ports, various changing of working practices, and applying the impact monitoring programs. Inventory pooling at ports is selected when the following occur - the shortage of ships, the closure of unloading ports for various reasons, and the payment delay of cargoes at unloading ports. The other essential strategies implemented as adaptation strategies during the disruption stage are to implement impact monitoring action. This response monitors the extent of the consequences of various maritime disruptions in terms of commercial impacts. In relation to the intervention strategies, maritime authorities received navigational warnings from maritime climate and meteorology offices. The maritime authority persistently applies deterrent reactions including random checking for ships and cargoes ensuring the seaworthiness standard is fulfilled, particularly in relation to stability issues of the ships. This response was supported with active route observation, limiting the voyage of small vessels (wooden boat shipping or commonly called pelayaran rakyat) and the delivery of marine notices to prohibit the operations of fiberglass ships during the period of severe weather condition. Further responses taken in this stage were continuous monitoring and active coordination with ship agency and inland transport operators such as hauliers or truck operators. Whilst in the disruption stage, authorities mainly focused on proposing a broad business continuity reaction which employed three main responses such as closing ports (port stoppage), prohibiting ships to sail during severe weather situations, and minimizing the impact of congestion in the terminal, including the monitoring of implications of port and shipping services being terminated due to severe weather situation such as tropical cyclones. In the post disruptions phase, the current study found that actions to recover from disruptive events may include prioritising

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ships carrying nine basic commodities for inter-island shipping operations and preventing unseaworthy ships from voyages until some modification has been undertaken. Seeking collaboration with other players involved in the maritime disruptions was seen as a way of mitigating various maritime related services and was also considered as enabling concrete efforts to limit the consequences of maritime disruptive risks along their cargo supply chain. Establishing coordinating links within the bulk operations including at grain terminal and millers were important opinions of the entities in managing maritime disruptions if disruptive events occur in the wheat supply chain. Coordination to the wider community, which is not directly involved in the wheat supply chain, was mentioned by respondents as other responses to prevent interruptive consequences in the maritime operations. This action was particularly well articulated by port and terminal operators. The table in the appendix further provides a general reference of 12 responses in detail that may be applied with direct objectives for maritime users, operators, and authorities in maritime disruptions including the practical mechanism and supporting considerations. In this table, it shows that strategies in relation to flexible inventory and sourcing mitigation is focused on providing short term open storage for inventory purposes in an emergency situation. 5. CONCLUSIONS Through the study of maritime disruptions in the case of the Australian- Indonesian wheat supply chain, both maritime users, operators and authorities in Indonesia recognise the impact of marine climate change and are taking many steps to respond to these vulnerabilities. Four major responses based on mitigation, adaptation, coordination, and intervention actions are indentified as supply chain risk management strategies implemented by entities. However, those four strategies still reflect the concept of three essential factors in supply chain risk management as suggested by the literature such as contingency rerouting, inventory strategy and business continuity management and considered by survey respondents as effective measures in managing maritime disruptions. 6. REFERENCES Bearing-Point & Hewlett-Packard. (2008.), Impacts of major disruptions on the maritime industry, http://www.bearingpoint.com/portal/site/bearingpoint/menuitem.5a42edeee4908885f7a4c810224 041a0/?vgnextoid=1ea093beec68f010VgnVCM1000005816600aRCRD&vgnextchannel=7a2d4a 9d0b0ce010VgnVCM1000003264a8c0RCRD accessed 20 June 2008. Badan Meteorologi Kilmatologi dan Geofisika, BMKG. (2007-2008). Laporan maritim: Daerah gelombang tinggi, BMKG, http://www.bmg.go.id/daerah-gelombangtinggi.bmg?Jenis=URL&IDS=5765606163342513107, accessed 12 March 2007 – 2 September 2008. Craighead, C., Jennifer, B., Rungtusanatham, M. J. and Robert, B. H. (2007). The severity of supply chain disruptions: Design characteristics and mitigation capabilities. Decision Sciences, 38(1), 131-157. Flannery, T. (2005). The weather makers: How man is changing the climate and what it means for life on earth, 1st edn, Grove, New York, USA. Guerrero, H., Murray, D. and Flood, R. (2008). A model for supply chain and vessel traffic restoration in then event of a catastrophic port closure. Journal of Transport Security. 1(2), 71-80. Gurning, S. and Cahoon, S. (2009). Analysis of random disruptive events in shipping and port operations. Proceedings of International Forum on Shipping, Ports, and Airports, 24-27 May 2009, Hong Kong. Pargal, S. and Heil, M. (2000). Reducing air pollution from urban passenger transport : A framework for policy analysis. Journal of Environmental Planning and Management. 43(5), 665-688. The World Association for Waterborne Transport Infrastructure, PIANC (2009). Waterborne transport, ports and waterways: A review of climate change drivers, impacts, responses and mitigation, PIANC. Brussels, Belgium Yu, G. & Qi, X. (2004). Disruption management, 1st edn, World Scientific Publishing Co. Pte. Ltd, New York, USA.

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Appendix. Supply chain risk management strategies in maritime disruptions due to severe weather conditions. Adapted from Pargal and Heil (2000) Characteristic

Direct objectives

Policy instruments

Practical mechanism

Supporting considerations

Flexible inventory and sourcing mitigation

Provide short-term yard for emergency inventory purposes

Yard expansion program for short storage services

Area pricing; inventory control Flexible source intake

Flexible sources may minimise the interruptions of domestic commodity distribution

Contingency rerouting

Provide back up terminal and alternatives of loading /unloading points

Apply more fuel quotas for ship operators

Freight pricing; route efficiency Buffer loading/unloading ports

Rerouting initiates the function of close ports or terminal as loading/unloading points

Business continuity planning

Achieve minimum and acceptable consequences

Mandate less than 60 hours Navigational warnings; open and close port service tropical cyclones emergency plan

The active involvement of meteorological agency needs to be disributed in real time The awareness of public / maritime community will impact the effectiveness of responses

Maritime facility planning

Minimise the destruction of port and navigational facilities

Promote the new proper building and port facilities

Technical standards; freight, port dues/fees

Proper technical parameters needs to be based on future trends of climate change in Indonesia

Vessel design and operation

Increase the seaworthiness of ships for higher sea state

Mandated statutorial and national standards Lower freight tax

Classification, SOLAS, and national standards; freight level

Larger ships'length and width will influence the stability of ships in the higher sea level

Random checking for ships and cargoes

Lower unseaworthy ships in operations

Mandated seaworthiness and safety procedures

SOLAS, ISM Code, Marpol, national safety standards

Standards may stimulate operators to follow the safety and operational procedures

Congestion

Control traffic flows from and to ports

Restrict the truck / car zones at ports

Public transport; traffic control road capacity

Prioritise commodities or points for inter-islands trade will reduce the flow of truck and cargo traffic

Implication monitoring

Control the larger implications of disruptions beyond maritime operations

Commercial risk incentives Consequences control; Supply intervention for nine the flow of domestic distribution basic commodities

The involvement of third parties such as insurance company may distribute the risks and allocate the consequences in minimum

Collaboration

Encourage inter and intra cooperations in the disruptions

Risk managament in the maritime community scale

Common accessibility and facility; specific service costs

Inter supply chain entities may enhance the collaborative responses

Coordination

Improve quick information Strengthen relationships sharing and colaborative actions among maritime associations / community

Emergency response standards in maritime community scale

Similar service institutions in one association may support the effectiveness of coordination effort in managing maritime disruptions

Quantity of available ships

Ensure sufficient transport

Promote new fleets

People shipping ; inter-island

The seasonal factors should be considered

carrying capacity level

Lower ownership fees

shipping; market and freight

as it will increase the demand of transport service

Gradually reduce emissions from port and ship operations

Apply emissions tax and permits

Emission standards (Marpol and national regulations)

The emission reduction may promote new technology and less fuel consumptions

Reduce gas emission of ship and port operations

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