How to effectively cut costs

Nov 30 2013

Another in the series of Tanker Operator's successful 'Making money in a tough market' conferences was held in Singapore on the 11th October.

This half day event entitled ‘Improving economic performance – what works and what doesn’t?’ was kicked off by Arvind Sharma, Bernhard Schulte Ship Management’s director of loss prevention and HR (Marine) who addressed the question of costs and how to reduce them.

He said that the major challenge today for a vessel operator was to find a way of cutting costs effectively.

To illustrate what was involved, he gave a breakdown of the three major cost components to running a vessel. These were –

A) Crew Costs

Pre-joining costs, wages, allowances, benefits, victualing, travel, training, crew P&I insurance.

B) Technical Costs

Shipmanagers fees, stores, spares, repairs & maintenance, lubricating oils, drydock, insurance, communication, classification, vetting inspections.

C) Mortgage/Finance Costs

Starting with the highest cost – crewing - the main expenses consist of manning agency costs, seafarers’ wages, travel, training and crew P&I claims.

Breaking these items down Sharma explained that manning agencies usually charge market level manning fees per month.

In case of large operating/managing companies, they may have their own manning office in the crews country.

In both cases, costs savings are possible and BSM has tightened up on the costs of the manning offices in 14 countries by removing duplicate work and reducing numbers where possible. “Similarly, we have reduced costs of supplying overalls, shoes and uniforms by hard negotiation,” he said.

The highest component in crew costs is wages. Ratings wages are dictated by various unions and there is limited potential to save money here.

In contrast, officer wages are dictated by supply/demand. While continuous pumping in of cadets has resulted in some balance in supply/demand of junior officers, due to which he said that BSM was looking to rationalise their wages, there is still a shortage of senior officers, hence there is limited room for reducing costs.

In the case of senior officers, many owners have taken a short term view and shifted to lower cost nationalities. “This may give short term relief, but is destructive in the long term,” he warned. “It causes poaching between companies and wages to spiral up further as shortages increase.”

He also said that it also gave rise to accelerated promotions, which sometimes resulted in incompetent, or inexperienced people in senior positions.

“What about retention? Would you agree that it has serious impact on crew costs?” he asked.

 BSM’s observation was that various benefits and a ‘no blame’ culture helped in retaining and growing talent.

“How about a talent pipeline? Do all companies have structured cadet plans and career development plans in place?” he also asked.

The simple truth is that if your people are happy to work with you, they will not auction themselves to the highest bidder in the market, Sharma advised.

Turning to travel costs, Sharma said these are the necessary cost of doing business. They cannot be done away with, but can be reduced with better planning.

Expenses incurred in carrying out crew changes in faraway ports, having people wait in hotels for days, due to mis-planning are definitely avoidable. “In BSM, in addition to closely focusing on planning, we exclusively use the company’s in-house travel company, whose very existence is offer maximum savings,” he said.


Training questions

As for training, the number of incidents, accidents and damages continue to rise in the shipping industry.

“Is training a cost, or an investment? Is training an option, or a necessity? Are the basic STCW courses, or even additional technical training carried out by some good companies, sufficient?” he queried.

He explained that BSM has performance KPIs for both shore and ship staff and also operates training centres in five locations for continuously training the company’s seafarers One of the company’s key focuses is on soft skill training, dealing with motivation, teamwork, people management and personal pride and responsibility.

Another key focus is development and talent management. For example, not to allow cadets to be left to their own devices on board, not to allow cadets to be used as cheap labour but rather with a focus that they are BSM’s management level officers of tomorrow.


Medical costs

Addressing P&I, Sharma said that the costs of medical treatment and repatriation can add substantial expenses to a company’s opex. It is essential to have reliable, regularly vetted clinics for pre-joining medical examinations, Sharma stressed. It is also necessary to regularly monitor the P&I cases and effect adjustments in medical tests.

BSM has introduced enhanced pre-joining medical examinations. However, continuous training and a robust safety culture on board are invaluable to reducing injuries, he said.

Finally, he advised delegates that shipping companies should have a structured cadet plan and a defined talent pipeline in place. “Have proper planning in place and maintain some flexibility in relief dates to keep travel costs in check,” he said. “Training, or learning, is a necessary and ongoing investment. Focus more on soft skills and motivation. Reduce micro-management from shore and let the seafarers manage their vessels.”

Having motivated and skilled people on board will automatically reduce operational costs and this should be the area of focus.

Regularly review the effectiveness of prejoining medicals and effect changes in tests as found necessary, he concluded.

Capt KK Mukherjee, general manager (operations) NYK Bulkship (Asia), took a look at the market imbalances, competition, change management and achieving operational excellence.

He said that if shipping companies can sustain their operations during a tough market, such as seen today, then they should be set fair for the market upturn. However, he was slightly concerned as to the number of MR newbuildings being placed at present.

In a wide ranging talk, he described the commercial operations of a vessel being in the hands of the owner/operator with the manager having access to a chartering and operations desks.

On the other side of the fence is the charterer who might have a trading bench and will have chartering and operations desks. There is also the cargo seller and buyer, plus the receiver with the terminal’s interests also taken into account at the loading and discharging functions.

They are all important roles, which have to be co-ordinated in order to conduct a voyage to the satisfaction of all parties and in a mood of mutual co-operational, which in turn will lead to greater efficiency.

Unfortunately, all the stakeholders tend to look at deficiencies with the vessel, rather than with themselves for greater efficiency, he said.

He continued by describing pre-fixture work as probably dealing with Q88, oil major acceptance, terminal questionnaires, load and discharge ports’ acceptance conditions, the charterparties and contracts.


Acceptance variances

Here, the oil majors and terminal operators have different acceptance parameters, which could lead to a tanker being accepted by one, but not the other. “You don’t know why a vessel gets rejected. Sometime it’s just a matter of interpretation,” he remarked. “Looking into each step is a challenge.”

Taking charterpaties as an example, he said that vital clauses could be missing, or wrongly interpreted, which could lead to claims against the owner.

As for the equally important post-fixture work, this could include cargo nominations; stowage plans (tanks); tank cleaning and preparation; voyage dissemination (eg speed and consumption); agency fees and disbursements; cargo carriage; loading/discharging; documents/bill of lading; post voyage calculations, including demurrage; claims recovery; cargo heating management and avoiding claims/loss prevention.

He said that those persons involved in postfixture work sometimes have little knowledge of shipping. Procedures have to be developed, however, he thought that some people had not bought into this route to efficiency. “The critical issue is that each voyage must be analysed,” he said. “How can we do better, in which areas are we going wrong?”

In some cases, cargo nominations were not specified until the last minute making tank cleaning and preparation difficult, which could cost owners money. Loading and discharging should be conducted in a professional manner, he warned.

He also said that some Masters have little business knowledge when confronted with the charter documents, but they should not be blamed. The documents should reflect the clauses on the charterparty, but the Master might not be aware of any differences.

The fundamentals for any shipowner were for the vessels to be on time, the voyage to be undertaken as contracted and as desired by the charterers, plus at minimum costs. There should be a good relationship with the charterers with reasonable co-ordination of projects. “The two must dovetail,” Mukherjee said.

His corporate philosophy is summed by the three ‘i’s’ - innovative, integrity and intensity - while not loosing the competitive edge.

He said that the shipping industry is going through a period of change with both micro and macro developments occurring. “It is the management of change which is the biggest challenge,” he said as companies strive for operational excellence.

The drive for vessel efficiency was one and another was the change in vessel ownership with more independent owners, banks and finance houses becoming involved in shipowning, plus the greater use of pools to commercially operate tankers. In oil supply, there is also the shift away from OPEC producing countries.


Conservative approach

He described NYK as being a bit conservative in its approach to the new systems coming onto the market claiming to enable a vessel to operate with greater efficiency, to save fuel and emissions. Some of the new technologies/equipment available are not mature systems, he claimed.

However, some technologies have been introduced including SCRs, plus electronically controlled main engine and lubrication systems, among others.

The quantifiable operations that can be performed include slow steaming to minimises losses, performance analyses, weather routing and optimisation.

NYK Bulkship is a member of the Maritime Port Authority of Singapore’s Green Ship Programme and has a strict in-house emissions control and energy conservation programme across its diverse fleet.

The company set out to reduce 10% of CO2 emissions by 2013 from a 2006 baseline. The results are that by 2010, the reduction had reached 9.2%, by 2011 it had reached 13.8%, by 2012 it had gone up to 14.6% and thus far this year, the reduction had reached 15.8%.

The target has since been increased by a 10% reduction from fiscal 2010 levels by fiscal 2015. From April 2012 to March 2013 (the fiscal year), the company had saved 205,964 tonnes of fuel, Mukherjee claimed.

NYK has its own vessel recycling policy, which aims to ‘secure stable space for vessel recycling’ and to ‘ensure green demolition’, he said.

In summary, Mukherjee said that his own wish list included –

  • Better co-ordination.
  • A more professional outlook.
  •  Even standards of terminal/oil majors/ charterers.
  • Clarity in charterparties.
  •  Mechanism of freight rates – matching market economy.
  • SOP for traders/brokers/charterers –settling claims & payments to owners.
  • Serious & committed owners.
  • Soft landing of regulations.

He also said we also need to do away with the notion; “It’s not my problem, it’s somebody else’s problem.”


Addressing MLC

Changing the subject completely, Chris Metcalf, partner with Clyde & Co, gave a talk on ‘getting to grips with the Maritime Labour Convention (MLC)’. Singapore is already a signatory to the Convention.

He explained that fundamentally, the MLC involved any person who is engaged in, or works in any capacity on board a vessel.

It also applies to a shipowner, or another organisation, such as manager, agent, or bareboat charterer, who has assumed the responsibility of the ship from the owner and who has agreed to take on the duties and responsibilities under MLC, he explained.

MLC’s minimum requirements covers conditions of employment, vessel accommodation, recreation, food and medical requirements, plus others. It also covers financial security in the case of abandonment, injury, or death.

In order to be in compliance, those with responsibilities should check that all the documentation is in order, including the certification for the flag state, an effective complaints procedure is in place and that the charterparty terms have been checked where relevant.

He gave an example of a timecharter under a Shelltime 4 form under the clause –

SEAWORTHINESS - Owners obligation - (absolute, or due diligence) to provide a seaworthy vessel. eg SHELLTIME 4: 1(c) ; 1(g) “1(g) she shall have on board all certificates, documents and equipment required from time to time by any applicable law to enable her to perform the charter service without delay;…”

DEFICIENCY OF CREW - Owners obligation to provide full compliment of officers and crew: eg SHELLTIME 4: “2. (a) At the date of delivery of the vessel under this charter and throughout the charter period: (i) she shall have a full and efficient complement of master, officers and crew for a vessel of her tonnage, who shall in any event be not less than the number required by the laws of the flag state and who shall be trained to operate the vessel and her equipment competently and safely;…”

Failing either of these clauses could lead to reduced hire under clause 3(b).

Under the DUTY TO MAINTAIN VESSEL clause Due Diligence 3(c) - Charterers notice in writing; 30 days to remedy, or off hire 3(d) – If the vessel fails a Port State Control (PSC) inspection, owners must notify charterers 3(e) - If the problem prevents normal commercial operations, the vessel could again be offhire.

Under TERMINATION again eg SHELLTIME 4: “3(f) Furthermore, at any time while the vessel is offhire under this Clause 3 (with the exception of Clause 3(e)(ii)), Charterers have the option to terminate this charter by giving notice in writing…” TIME ADDED TO CP PERIOD, eg SHELLTIME 4: “4(b) Any time during which the vessel is offhire under this charter may be added to the charter period in charterers’ option…” And clause 21 (e).

Turning of voyage charters, Metcalf said that in the Seaworthiness clause, owners were under the same obligations to make the vessel seaworthy. He pointed out that any demurrage due will not be paid if the delay is due to the fault of the shipowner – eg for failing a PSC inspection.

Tackling the issue of who pays, he said that the direct costs of implementing MLC comes in the form of management time, additional crew if needed on better terms, additional insurance, etc.

Under existing charterparties, the owner cannot increase a vessel’s hire, while there is a threat of fines, delays and detentions and there is the threat of damages caused by a charterparty breach, for example offhire, while charterparties can be terminated, or even extended at owners’ cost.

A shipowner is the party ultimately responsible for MLC compliance but what if a fine, detention, etc is due to charterers’ employees, or servants? For example, the act of stevedores, pilots, surveyors and/or supernumeraries.

A possible solution is change the flag state to one, which has not ratified the convention. Metcalf warned that under the principal of ‘no more favourable treatment’ adopted by PSC, a vessel owner should say “NO” to this option.

Another solution is to amend the charterparty to allocate the risk. Here, concerns have already been expressed to BIMCO, particularly over the MLC definition of a ‘seafarer’.

In turn, BIMCO has formed a working group and new recommended clauses were published in June of this year.

In its SUPPLYTIME form, BIMCO defines the MLC and defines the charterers’ personnel. Other changes include –

  •  Owners are to provide a copy of DMLC Pt 1 to the charterers.
  •  Charterers responsible for ensuring compliance as applicable to the vessel and as it may apply to the charterers’ personnel.
  • Charterers on request to provide evidence of compliance.
  • Charterers indemnify owners.

Although designed for the offshore sector, this charterparty containing these clauses can be adapted, or BIMCO ISP wording can be used, Metcalf advised.

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