I am getting geared up to teach another round of the core operations class. One of the basic relationships we teach in the class is Little’s Law which, in words, says that the average amount of inventory in the system is equal to the average rate at which units move through the system times the average time a unit spends in the system. The beautiful thing about Little’s Law is that it applies pretty much anywhere so it is handy way of evaluating systems whose performance depends on how much stuff is sitting around and how long stuff sits.
That gets us to pirates.
Reuters reports that Somali pirates have cut their ransom demands so they can avoid costly hostage maintenance and increase through put (Somali pirates cut ransoms to clear hijacked ships, Mar 14).
Abdullahi, another pirate, said any decrease in ransom would be calculated by the ship’s value, its cargo and the length of time it had been held.
“We have changed our previous strategies. We have altered our operations and ransom deals with modern business deals,” he said from the port town of Haradhere.
“We want to free ships within a short period of time instead of keeping them for a long time and incurring more expenses in guarding them. We have to free them at a lower ransom so that we can hijack more ships.”
The article says that at the moment the pirates are holding more than 30 ships and the average ship is held for 150 days. That means they are seizing roughly six ships a month. If cutting ransoms by 20% lowers the time held by 20% (so it would be down to 120 days), they would be able to take 7.5 ships per month — a 25% percent increase and enough to keep their revenues unchanged. But does that increase overall profits? It may depend on whether there are fixed costs to taking a ship and increasing costs to holding one. If there are fixed costs, then upping the throughput rate for the same revenue lowers profits. On the other hand, if costs increase as the longer a ship is held, quickening the release may be profitable even if it lowers revenue.